INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:



	Years Ended December 31,
	2019			2018			2017
Current
Federal	$	4,234		$	2,810		$	5,584
State	2,179			1,653			1,686
	6,413			4,463			7,270

Deferred
Federal	(547		)	(202		)	1,894
State	(201		)	(88		)	(7		)
	(748		)	(290		)	1,887

Income tax expense	$	5,665		$	4,173		$	9,157

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:



	2019					2018					2017
	Amount			Percent of Pre-Tax Income		Amount			Percent of Pre-Tax Income		Amount			Percent of Pre-Tax Income
Expected income tax expense at federal tax rate	$	4,397		21.00	%	$	3,234		21.00	%	$	5,728		35.00	%
State taxes net of federal benefit	1,745			8.33	%	1,281			8.32	%	1,096			6.70	%
Nondeductible expenses	103			0.49	%	85			0.55	%	255			1.56	%
Nontaxable income	(277		)	(1.31	%)	(248		)	(1.61	%)	(376		)	(2.30	%)
Provisional deferred tax adjustment related to reduction in U.S. federal statutory income tax rate	—			0.00	%	—			—	%	2,740			16.74	%
Other	(303		)	(1.45	%)	(179		)	(1.16	%)	(286		)	(1.75	%)
	$	5,665		27.06	%	$	4,173		27.10	%	$	9,157		55.95	%

Income tax expense for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, we recognized a provisional net tax expense of $2.7 million.

The net deferred tax assets in the accompanying balance sheets include the following components:



	2019		2018
Deferred tax assets
Allowance for loan losses	$	3,011	$	3,020
Deferred compensation	3,239		2,676
Lease liability	2,338		—
OREO valuation allowance & expenses	457		355
Unrealized loss on investment securities	—		724
Depreciation	50		—
Other	189		144
	9,284		6,919
Deferred tax liabilities
Fair value adjustments for acquired assets and liabilities	115		65
FHLB stock dividends	109		109
Unrealized gain on investment securities	585		—
Right of use asset	2,307		—
Depreciation	—		52
	3,116		226

	$	6,168	$	6,693

The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the law (i) established a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminated the corporate alternative minimum tax and allowed the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limited the deduction for net interest expense incurred by U.S. corporations, (iv) allowed businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminated or reduced certain deductions related to meals and entertainment expenses, (vi) modified the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limited the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changed U.S. tax law related to foreign operations, however, such changes do not currently impact the Company.

As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, we calculated deferred tax assets and liabilities based upon the U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. We analyzed certain aspects of the new law and refined our calculations based on this analysis and tax positions taken, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. We recognized a provisional net tax expense related to the calculation of our deferred tax assets and liabilities totaling $2.7 million.

The FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income,” which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from AOCI to retained earnings. The Company early adopted this standard for the quarter ended December 31, 2017. See Notes 1 and 12 for further information.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118). SAB 118 indicated that a reporting entity must record a reasonable estimate in the first period in which it is possible to determine a reasonable estimate. Under SAB 118, reasonable estimates are considered “provisional amounts” that have to be updated when additional information becomes available and the evaluation and computation of the additional information is complete. A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed one year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined. See Note 1 for further information.

Retained earnings at December 31, 2019 and 2018 included approximately $1.2 million of bad debt deductions allowed for federal income tax purposes (the “base year tax reserve”) for which no deferred income tax has been recognized. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, it would create income for tax purposes only and income taxes would be imposed at the then prevailing rates. The unrecorded income tax liability on the above amount was approximately $330,000 at December 31, 2019 and 2018.

The Company does not have uncertain tax positions that are deemed material and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes as a component of tax expense. The Company is no longer subject to U.S. Federal tax examinations by tax authorities for years before 2016.