Income Taxes

Current income tax expense represents the amounts expected to be reported on the Corporation’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation made key changes to U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018.

The Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Corporation revalued its ending net deferred tax assets at December 31, 2017, and recognized a provisional $3.5 million tax expense in the Corporation’s consolidated statement of income for the year ended December 31, 2017. We are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. The Corporation's evaluation of the impact of the Tax Reform Act is subject to refinement for up to one year after the enactment per the guidance under ASC 740, Accounting for Uncertainty in Income Taxes, and SAB 118.

Net deferred tax assets consisted of the following components as of December 31, 2017 and 2016:



	December 31,
	2017		2016
	(In Thousands)
Deferred tax assets:
Allowance for loan losses	$	3,446	$	5,760
Deferred fees	682		857
Allowance for loan losses on mortgage loans sold	339		557
Allowance for off balance sheet losses	174		270
Stock options	44		79
Securities available for sale	617		869
Fair value adjustment for acquired assets/liabilities	698		—
Acquisition accounting adjustments	6,008		—
Other	144		197
	$	12,152	$	8,589
Deferred tax liability:
Depreciation	$	347	$	147
Acquisition accounting adjustments	6,067		—
Other	192		88
	$	6,606	$	235
Net deferred tax assets included in other assets	$	5,546	$	8,354

The provision for income taxes charged to operations for the years ended December 31, 2017, 2016, and 2015 consisted of the following:



	Year Ended December 31,
	2017		2016			2015
	(In Thousands)
Current tax expense	$	2,980	$	9,898		$	8,711
Deferred tax (benefit)	8,997		(698		)	(534		)
	$	11,977	$	9,200		$	8,177

The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for the years ended December 31, 2017, 2016, and 2015 as follows:



	Year Ended December 31,
	2017			2016			2015
	(In Thousands)
Computed "expected" tax expense	$	9,967		$	8,961		$	8,259
Increase (decrease) in income taxes resulting from:
Tax reform	3,524			—			—
State income taxes, net of federal benefit	127			117			92
Tax exempt income and interest	(1,305		)	(409		)	(257		)
Merger related expenses, nondeductible	550			344			—
Low income housing tax credits	(586		)	—			—
Other	(300		)	187			83
	$	11,977		$	9,200		$	8,177

As of December 31, 2017 and 2016, the Corporation did not have any unrecognized tax benefits. The Corporation does not expect a significant increase or decrease in the next 12 months of unrecognized tax benefits. The Corporation recognizes interest and penalties related to unrecognized tax benefits as Interest Expense and Other Noninterest Expense, respectively, and not as part of the tax provision. The Corporation did not recognize a material amount of interest expense or penalties for the years ended December 31, 2017, 2016, and 2015. In addition, there were no interest or penalties accrued at December 31, 2017 or 2016. The Corporation is no longer subject to examination for federal and state purposes for tax years prior to 2014.