NOTE

- INCOME TAXES

December 22, 2017,

H.R.1,

commonly known as the Tax Cuts and Jobs Act (the Act) was signed into law. Among other things, the Act reduced the Corporation’s federal tax rate from

34%

21%

effective

January 1, 2018.

As a result, the Corporation was required to re-measure, through the provision for income taxes, its deferred tax assets and liabilities using the enacted rate at which they are expected be recovered or settled. The re-measurement of the net deferred tax asset resulted in an additional provision for income taxes of

$1,136,000

for the year ended

December 31, 2017.

The provision for income taxes for the years ended

December 31, 2019,

2018

and

2017

consist of the following:

	(in thousands)
	2019		2018			2017
Current	$	1,086	$	(211	)	$	219
Deferred		529		1,740			1,524
Enactment of federal tax reform		-		-			1,136
Total provision for income taxes	$	1,615	$	1,529		$	2,879

The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of

21%

2019

and

2018,

and

34%

2017

, to income before income taxes as a result of the following:

	(in thousands)
	2019			2018			2017
Expected tax using statutory tax rate	$	2,578		$	2,047		$	2,287
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and political subdivision loans		(386	)		(358	)		(572	)
Tax-exempt income on life insurance contracts		(82	)		(83	)		(135	)
Deductible dividends paid to United
Bancshares, Inc. ESOP		(42	)		(37	)		(57	)
Tax-exempt settlement		(416	)		-			-
Non-deductible merger and acquisition costs		-			-			117
Enactment of federal tax reform		-			-			1,136
Other, net		(37	)		(40	)		103
Total provision for income taxes	$	1,615		$	1,529		$	2,879

The deferred income tax provision

$529,000

2019

$1.7

million in

2018

, and

$2.7

million in

2017

resulted from the tax effects of temporary differences.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at

December 31, 2019

and

2018

are presented below:

	(in thousands)
	2019			2018
Deferred tax assets:
Allowance for loan losses	$	868		$	760
Deferred compensation		312			301
Alternative minimum tax credits		-			46
Nonaccrual loan interest		212			256
Deferred loan fees		130			139
Accrued vacation expense		96			91
Accrued profit sharing		123			108
Loans fair value adjustments		421			531
Unrealized loss on securities available-for sale		-			469
Other		124			132
Net operating loss carryforwards		1,285			1,718
Total deferred tax assets		3,571			4,551
Deferred tax liabilities:
Federal Home Loan Bank stock dividends		526			526
Unrealized gain on securities available for sale		764			-
Capitalized mortgage servicing rights		223			276
Fixed asset depreciation		424			337
Acquisition intangibles		1,907			1,881
Trust preferred fair value adjustment		77			109
Other		67			77
Total deferred tax liabilities		3,988			3,206
Net deferred tax assets (liabilities)	$	(417	)	$	1,345

Net deferred tax assets (liabilities) at

December 31, 2019

and

2018

are included in other assets (liabilities) in the consolidated balance sheets.

The Corporation acquired

$15.0

million in federal loss carryforwards with the

2014

acquisition of OSB, which losses expire in years ranging from

2029

2033.

Since the use of these losses is limited to

$126,000

per year under Section

382

of the Internal Revenue

Code, the Corporation recorded in deferred tax assets at the time of acquisition the tax benefit of only

$2.5

million of the losses that were deemed more likely than

not

to be utilized before expiration. At

December 31, 2019

, the benefit of

$1.7

million of these losses is reflected in deferred tax assets.

The Corporation acquired

$8.9

million in federal loss carryforwards with the

2017

acquisition of Benchmark, which losses expire in years ranging from

2029

2036.

Under Section

382

of the Internal Revenue Code, the annual limitation on the use of these losses is

$652,000

subject to other adjustments, including the impact of the tax liability adjustment described in Note

December 31, 2019

$4.4

million of the loss carryforwards remain; the benefit of which is reflected in deferred tax assets.

Management believes it is more likely than

not

that the benefit of recorded deferred tax assets will be realized. Consequently,

valuation allowance for deferred tax assets is deemed necessary as of

December 31, 2019

and

2018

Unrecognized Tax Benefits

The Corporation had

unrecognized tax benefits at

December 31, 2019

and

2018

. The Corporation does

not

expect the total amount of unrecognized tax benefits to significantly change in the next

twelve

months.

There was

accrued interest related to uncertain tax positions at

December 31, 2019

and

December 31, 2018

The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation and its subsidiaries are

longer subject to examination by taxing authorities for years before

2016.

There are

current federal examinations of the Corporation’s open tax years.