Income Taxes

12 Months Ended

Dec. 31, 2018

The current and deferred components of income tax expense (benefit) were as follows:



For the years ended December 31,	2018			2017		2016
Federal income tax
Current	$	4,407,000		$	4,184,000	$	6,276,000
Deferred	(492,000		)	2,083,000		(139,000		)
	3,915,000			6,267,000		6,137,000
State franchise tax	391,000			345,000		317,000
	$	4,306,000		$	6,612,000	$	6,454,000

The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows:



For the years ended December 31,	2018			2017			2016
Expected tax expense	$	5,847,000		$	9,170,000		$	8,562,000
Non-taxable income	(1,699,000		)	(2,625,000		)	(2,176,000		)
State franchise tax, net of federal tax benefit	309,000			224,000			206,000
Equity compensation	(55,000		)	(83,000		)	—
Tax credits, net of amortization	(85,000		)	(88,000		)	(105,000		)
Change in federal tax rate	—			134,000			—
Other	(11,000		)	(120,000		)	(33,000		)
	$	4,306,000		$	6,612,000		$	6,454,000

Deferred tax assets and liabilities are recognized at the expected future tax rate. On December 22, 2017, the federal tax rate decreased from 35% to 21% effective January 1, 2018. Accordingly, deferred tax assets and liabilities were revalued at December 31, 2017 to reflect the 21% tax rate.

Deferred tax assets and liabilities are classified in other assets and other liabilities in the consolidated balance sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2018 and 2017 are as follows:



	2018			2017
Allowance for loan losses	$	2,359,000		$	2,253,000
OREO	—			11,000
Accrued pension and post-retirement	955,000			1,036,000
Unrealized loss on securities transferred from available for sale to held to maturity	52,000			46,000
Unrealized loss on securities available for sale	1,343,000			772,000
Restricted stock grants	170,000			173,000
Core deposit intangible	18,000			15,000
Investment in flow through entities	31,000			22,000
Other assets	24,000			28,000
Total deferred tax asset	4,952,000			4,356,000
Net deferred loan costs	(1,504,000		)	(1,313,000		)
Depreciation	(1,300,000		)	(1,306,000		)
Goodwill	(80,000		)	(39,000		)
Mortgage servicing rights	(284,000		)	(266,000		)
Unrealized gain on derivative instruments	(382,000		)	(410,000		)
Prepaid expense	(159,000		)	(821,000		)
Total deferred tax liability	(3,709,000		)	(4,155,000		)
Net deferred tax asset	$	1,243,000		$	201,000

At December 31, 2018, the Company held investments in three limited partnerships with related low income housing tax credits compared to two at December 31, 2017. The investments are carried at cost and amortized on the effective yield method as they were entered into prior to 2015. The tax credits from the investments are estimated at $210,000 and $204,000 for the years ended December 31, 2018 and 2017, respectively, and are recorded as a reduction of income tax expense. Amortization of the investment in the limited partnership totaled $186,000 and $178,000 for the years ended December 31, 2018 and 2017, respectively, and is recognized as a component of income tax expense in the consolidated statements of income. The carrying value of these investments was $1,408,000 and at December 31, 2018 and 2017, and is recorded in other assets. The Company's total exposure to the limited partnerships was $1,408,000 at December 31, 2018 and 2017, which is comprised of the Company's equity investment in the limited partnerships.

FASB ASC Topic 740, "Income Taxes," defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2015 through 2018.