Federal Income Taxes

Components of the consolidated provision for federal income taxes are as follows for the years ended December 31:



	2018		2017		2016
Currently payable	$	1,088	$	180	$	2,630
Deferred expense (benefit)	275		2,836		(282		)
Income tax expense	$	1,363	$	3,016	$	2,348

In 2017 we implemented tax strategies which resulted in changes to our federal income tax components, as illustrated above. These strategies, which were primarily related to premises and equipment, significantly decreased our taxes currently payable and led to an increase in our level of alternative minimum tax. Changes in these deferred tax components are displayed in the deferred tax assets and liabilities table on the following page.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The law established a flat corporate federal statutory income tax rate of 21% and eliminated the corporate alternative minimum tax which can be carried forward and used to reduce future income tax. The tax law provided for a wide array of changes, only some of which had a direct impact on our federal income tax expense. Some of these changes included, but are not limited to, the following items: limits to the deduction for net interest expense; immediate expense (for tax purposes) for certain qualified depreciable assets; elimination or reduction of certain deductions related to meals and entertainment expenses; and limits to the deductibility of deposit insurance premiums.

In accordance with ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes are recognized as a component of income tax expense related to continuing operations in the period in which the law was enacted. As such, federal income tax expense for the year ended December 31, 2017 reflects the effect of the tax rate change on net deferred tax assets and liabilities. This requirement also applies to items initially recognized in other comprehensive income. In January 2018, FASB issued ASU 2018-02 which allowed for the "stranded" tax effects in AOCI to be reclassified to retained earnings rather than income tax expense. We early adopted this guidance and applied this accounting alternative in our consolidated statements of changes in shareholders equity as of December 31, 2017.

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of income before federal income tax expense is as follows for the year ended December 31:



	2018			2017			2016
Income taxes at statutory rate (21% in 2018 and 34% in 2017 and 2016)	$	3,231		$	5,526		$	5,490
Effect of nontaxable income
Interest income on tax exempt municipal securities	(1,106		)	(1,889		)	(1,938		)
Earnings on corporate owned life insurance policies	(148		)	(247		)	(419		)
Deferred tax adjustment resulting from the statutory rate reduction pursuant to the Tax Act	—			319			—
Other	231			34			(154		)
Total effect of nontaxable income	(1,023		)	(1,783		)	(2,511		)
Effect of nondeductible expenses	113			149			143
Effect of tax credits	(958		)	(876		)	(774		)
Federal income tax expense	$	1,363		$	3,016		$	2,348

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:



	2018		2017
Deferred tax assets
Allowance for loan losses	$	1,304	$	1,076
Deferred directors’ fees	1,667		1,758
Employee benefit plans	81		70
Core deposit premium and acquisition expenses	752		733
Net unrecognized actuarial losses on pension plan	729		857
Net unrealized losses on available-for-sale securities	1,211		—
Life insurance death benefit payable	497		497
Alternative minimum tax	710		1,463
Other	716		607
Total deferred tax assets	7,667		7,061
Deferred tax liabilities
Prepaid pension cost	383		455
Premises and equipment	1,548		1,728
Accretion on securities	41		40
Core deposit premium and acquisition expenses	946		909
Net unrealized gains on available-for-sale securities	—		204
Net unrealized gains on derivative instruments	68		61
Other	1,696		1,684
Total deferred tax liabilities	4,682		5,081
Net deferred tax assets	$	2,985	$	1,980

We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2015. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2018 and 2017 and we are not aware of any claims for such amounts by federal income tax authorities.