INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 10 INCOME TAXES

The Tax Cuts and Jobs Act (“TCJA”) was signed into law by the President on December 22, 2017. The TCJA includes the reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%, changes in business deductions, and many international provisions. The reduction in the corporate tax rate resulted in a $4.0 million adjustment to our deferred tax assets in December 2017. 

The source of pre-tax book income is summarized as follows for the years ended December 31: 

(Dollars are in thousands)	2018		2017
Pre-tax book income
Domestic	$	1,068	$	3,238
Total pre-tax book income	$	1,068	$	3,238

Income tax expense (benefit) is summarized as follows for the years ended December 31: 

(Dollars are in thousands)		2018		2017
Current income tax expense (benefit)
Federal	$	(45)	$	337
State	-		(7)
Total current income tax expense (benefit)		(45)		337

Deferred income tax expense (benefit)
Federal		194		(193)
State	-		-
Total deferred income tax expense		194		(193)
Income tax expense (benefit)	$	149	$	144

The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% and 34% for years ending December 31, 2018 and 2017, respectively:

(Dollars are in thousands)	2018			2017
Income tax expense (benefit) at the applicable federal rate	$	224		$	1,101
Permanent differences resulting from:
Nondeductible expenses		5			15
Tax exempt interest income		(17	)		(35	)
Bank owned life insurance		(12	)		(39	)
Remeasurement of deferred taxes under TCJA		—			4,046
Deferred tax valuation allowance change, net		—			(5,317	)
Penalty on surrender of bank owned life insurance		—			318
Other adjustments		(51	)		55
Income tax expense (benefit)	$	149		$	144

The net deferred tax assets and liabilities resulting from temporary differences as of December 31 are summarized as follows:

(Dollars are in thousands)		2018		2017
Deferred Tax Assets
Allowance for loan losses	$	1,121	$	1,301
Deferred compensation		90	89
Nonaccrual loan interest		464	504
Other real estate owned		340	264
Repossessed assets		-	-
Amortization of core deposits		40	51
Amortization of goodwill		202	260
Capitalized interest and repair expense		24	25
Net operating loss carryforward		3,730	3,444
AMT carryforward		339	339
Unrealized loss on securities available for sale		328	158
Total Assets, gross		6,678		6,435
Valuation allowance		-		-
Total Assets, net		6,678		6,435
Deferred Tax Liabilities
Accelerated depreciation		878	607
Accrued employee benefits		(6)	38
Prepaid expenses		15	20
Deferred loan costs		315	271
Total Liabilities, gross		1,202		936
Net Deferred Tax Asset	$	5,476	$	5,499

Deferred tax assets represent the future tax benefit of future deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. As a result, the Company reversed the valuation allowance of $5.3 million that existed as of December 31, 2016 during 2017. Accordingly, the Company has not included a valuation allowance against its deferred tax assets as of December 31, 2017 or as of December 31, 2018.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $4.0 million increase in income tax expense for the year ended December 31, 2017 and a corresponding $4.0 million decrease in net deferred tax assets as of December 31, 2017.

Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense.

As of December 31, 2018, the Company had Federal and state net operating loss carryforward amounts of approximately $17.2 million and $1.1 million, respectively. These amounts are not limited pursuant to IRC Section 382. The Company is subject to examination in the United States and multiple state jurisdictions. Years prior to 2015 are no longer subject to examination by taxing authorities.