Federal Income Taxes
Components of the consolidated provision for federal income taxes are as follows for the years ended December 31: |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Currently payable | $ | 180 |
| | $ | 2,630 |
| | $ | 1,596 |
|
Deferred expense (benefit) | 2,836 |
| | (282 | ) | | 1,692 |
|
Income tax expense | $ | 3,016 |
| | $ | 2,348 |
| | $ | 3,288 |
|
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 new law establishes a flat corporate federal statutory income tax rate of 21% and eliminates the corporate alternative minimum tax which will be carried forward and used to reduce future income tax. The new tax law provides for a wide array of changes, only some of which will have a direct impact on our future federal income tax expense. Some of these changes include, 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 is 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 34% of income before federal income tax expense is as follows for the year ended December 31: |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income taxes at 34% statutory rate | $ | 5,526 |
| | $ | 5,490 |
| | $ | 6,262 |
|
Effect of nontaxable income | | | | | |
Interest income on tax exempt municipal securities | (1,889 | ) | | (1,938 | ) | | (2,026 | ) |
Earnings on corporate owned life insurance policies | (247 | ) | | (419 | ) | | (262 | ) |
Deferred tax adjustment resulting from the statutory rate reduction pursuant to the Tax Act | 319 |
| | — |
| | — |
|
Other | 34 |
| | (154 | ) | | (88 | ) |
Total effect of nontaxable income | (1,783 | ) | | (2,511 | ) | | (2,376 | ) |
Effect of nondeductible expenses | 149 |
| | 143 |
| | 157 |
|
Effect of tax credits | (876 | ) | | (774 | ) | | (755 | ) |
Federal income tax expense | $ | 3,016 |
| | $ | 2,348 |
| | $ | 3,288 |
|
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, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31: |
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Allowance for loan losses | $ | 1,076 |
| | $ | 1,576 |
|
Deferred directors’ fees | 1,758 |
| | 2,758 |
|
Employee benefit plans | 70 |
| | 115 |
|
Core deposit premium and acquisition expenses | 733 |
| | 1,157 |
|
Net unrecognized actuarial losses on pension plan | 857 |
| | 1,531 |
|
Life insurance death benefit payable | 497 |
| | 804 |
|
Alternative minimum tax | 1,463 |
| | 717 |
|
Other | 607 |
| | 618 |
|
Total deferred tax assets | 7,061 |
| | 9,276 |
|
Deferred tax liabilities | | | |
Prepaid pension cost | 455 |
| | 809 |
|
Premises and equipment | 1,728 |
| | 115 |
|
Accretion on securities | 40 |
| | 58 |
|
Core deposit premium and acquisition expenses | 909 |
| | 1,403 |
|
Net unrealized gains on available-for-sale securities | 204 |
| | 418 |
|
Net unrealized gains on derivative instruments | 61 |
| | 84 |
|
Other | 1,684 |
| | 1,502 |
|
Total deferred tax liabilities | 5,081 |
| | 4,389 |
|
Net deferred tax assets | $ | 1,980 |
| | $ | 4,887 |
|
We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2014. 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, 2017 and 2016 and we are not aware of any claims for such amounts by federal income tax authorities.