Note 12. Federal Income Taxes

The temporary differences which give rise to significant portions of deferred tax assets and liabilities at December 31 are as follows:


(Dollars in thousands)
Deferred Tax Assets	2017		2016
Allowance for loan losses	$	2,476	$	3,766
Deferred compensation		676		986
Purchase accounting		16		23
Deferred loan fees and costs, net		99		160
Capital loss carryover		173		280
Other than temporary impairment of investments		124		260
Accumulated other comprehensive loss		1,603		2,171
Depreciation		—		45
Other		2,191		561
		7,358		8,252
Valuation allowance		(297)		(467)
Total gross deferred tax assets		7,061		7,785

Deferred Tax Liabilities
Depreciation		162		—
Joint ventures and partnerships		28		36
Pension		1,068		1,886
Mortgage servicing rights		—		19
Total gross deferred tax liabilities		1,258		1,941
Net deferred tax asset	$	5,803	$	5,844

In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, Management believes it is more likely than not that the Bank will realize the benefits of these deferred tax assets other than those for which a valuation allowance has been recorded.

The components of the provision for Federal income taxes attributable to income from operations were as follows:


	For the Years Ended December 31
(Dollars in thousands)	2017		2016		2015
Current tax expense	$	4,396	$	2,134	$	2,382
Deferred tax expense (benefit)		(831)		(832)		(111)
Income tax provision	$	3,565	$	1,302	$	2,271

For the years ended December 31, 2017, 2016, and 2015, the income tax provisions are different from the tax expense which would be computed by applying the Federal statutory rate to pretax operating earnings. A reconciliation between the tax provision at the statutory rate and the tax provision at the effective tax rate is as follows:


	For the Years Ended December 31
(Dollars in thousands)	2017		2016		2015
Tax provision at statutory rate (34%)	$	3,252	$	3,192	$	4,241
Income on tax-exempt loans and securities		(2,056)		(1,751)		(1,566)
Nondeductible interest expense relating to carrying tax-exempt obligations		32		24		22
Revaluation of deferred tax assets		2,291		—		—
Dividends received exclusion		—		—		(2)
Income from bank owned life insurance		(171)		(210)		(182)
Life insurance proceeds		—		—		(35)
Change in valuation allowance		—		—		(200)
Stock option compensation		55		30		25
Other, net		162		17		(32)
Income tax provision	$	3,565	$	1,302	$	2,271

Effective income tax rate		62.1%		13.9%		18.2%

In 2017, income tax expense and the effective tax rate increased due to the write-down of net deferred tax assets as a result of the passage of the Tax Cuts and Jobs Act of 2017 (the Act). The Act reduced the federal corporate income tax rate to 21%, effective January 1, 2018, from the Corporation’s statutory rate of 34% in prior periods. With the passage of the Act, net deferred tax assets were required to be revalued using the new rate of 21%. The Corporation recorded additional income tax expense of $2.3 million in 2017 as a result of the revaluation of net deferred tax assets. The Corporation has determined that the accounting for the Tax Cuts and Jobs Act is final as of December 31, 2017.

At December 31, 2017, the Corporation had a capital loss carryover of $823 thousand, with $663 thousand expiring in 2018. This loss carryover can only be offset with capital gains for federal income tax purposes. The tax benefit of this carryover is $173 thousand, and the Corporation has recorded a valuation allowance of $173 thousand against the capital loss carryover.

The Corporation recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense for all periods presented. No penalties or interest were recognized in 2017, 2016 or 2015. The Corporation has no uncertain tax positions at December 31, 2017. The Corporation is no longer subject to U.S. Federal examinations by tax authorities for the years before 2014.