Income Taxes

The following is a summary of income tax expense for the years ended December 31, 2018, 2017, and 2016:



	2018			2017		2016
Current – federal	$	7,520		$	8,978	$	6,181
Current – state	66			29		(33		)
Deferred – federal	(1,076		)	376		1,023
Deferred tax adjustment related to reduction in U.S. federal statutory income tax rate	0			3,009		0
Income tax expense	$	6,510		$	12,392	$	7,171

The reconciliation of income tax attributable to pre-tax income at the federal statutory tax rates to income tax expense is as follows:



	2018			%		2017			%		2016			%
Tax at statutory rate	$	8,448		21.0		$	12,688		35.0		$	9,699		35.0
Tax exempt income, net	(1,403		)	(3.5	)	(1,899		)	(5.2	)	(2,054		)	(7.4	)
Deferred tax adjustment related to reduction in U.S. federal statutory income tax rate	0			0.0		3,009			8.3		0			0.0
Bank owned life insurance	(296		)	(0.7	)	(581		)	(1.6	)	(379		)	(1.3	)
Merger costs	0			0.0		0			0.0		170			0.6
Other	(239		)	(0.6	)	(825		)	(2.3	)	(265		)	(1.0	)
Income tax expense	$	6,510		16.2		$	12,392		34.2		$	7,171		25.9

Income tax expense for the year ended December 31, 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017. Accordingly, the Corporation recognized additional tax expense totaling $3,009 in 2017, as detailed in the table above.

The following table sets forth deferred taxes as of December 31, 2018 and 2017. As a result of the Tax Cuts and Jobs Act (discussed below), deferred taxes as of December 31, 2018 and 2017 are based on the enacted U.S. statutory federal income tax rate of 21%.



	2018		2017
Deferred tax assets:
Allowance for loan losses	$	3,088	$	2,840
Fair value adjustments – business combination	966		1,135
Deferred compensation	2,056		1,903
Net operating loss carryover	0		71
Post-retirement benefits	836		892
Unrealized loss on interest rate swap	42		34
Nonaccrual loan interest	589		390
Accrued expenses	1,254		699
Deferred fees and costs	588		598
Unrealized loss on securities available for sale	940		0
Other	366		344
	10,725		8,906
Deferred tax liabilities:
Unrealized gain on securities available for sale	0		126
Premises and equipment	1,459		1,413
Unrealized gain on trading securities	63		156
Intangibles – section 197	2,414		2,593
Mortgage servicing rights	314		291
Other	178		78
	4,428		4,657
Net deferred tax asset	$	6,297	$	4,249

At December 31, 2018 and 2017, the Corporation had no unrecognized tax benefits. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Corporation recognizes interest and/or penalties related to income tax matters as part of income tax expense. At December 31, 2018 and 2017, there were no amounts accrued for interest and/or penalties and no amounts recorded as expense for the years ending December 31, 2018, 2017, and 2016.

The Corporation and its subsidiaries are subject to U.S. federal income tax, as well as various filing various state returns. The Corporation is no longer subject to examination by the taxing authorities for years prior to 2015. Tax years 2015 through 2018 are open to examination.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact the Corporation.