Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

Note 9. Income Taxes

The following summarizes the tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31, 2021 and 2020 (in thousands):

	2021		2020
Deferred tax assets
Net operating loss carryforward	$	—	$	217
Capital loss carryforward		25		25
Allowance for loan losses		719		834
Deferred Cost, net of fees		91		430
Unrealized loss on available for sale securities		190		—
Interest on nonaccrual loans		18		18
Expenses and writedowns related to foreclosed property		—		66
Stock compensation		37		34
Employee benefits		810		794
Pension expense		—		3
Depreciation		27		31
Lease obligation		3		3
Other, net		48		26
Total deferred tax assets		1,968		2,481
Deferred tax liabilities
Unrealized gain on available for sale securities		—		124
Pension expense		1		—
Total deferred tax liabilities		1		124
Net deferred tax asset	$	1,967	$	2,357

The net deferred tax asset is included in other assets on the consolidated balance sheet. ASC Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting realization.

In assessing the Company’s ability to realize its net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be realized. The Company’s ultimate realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of net deferred taxes recognized could be impacted by changes to any of these variables.

Each quarter, the Company weighs both the positive and negative information with respect to realization of the net deferred tax asset and analyzes its position as to whether or not a valuation allowance is required.

Given the consistent earnings and stable asset quality, the Company’s analysis concluded that, it is more likely than not that the Company will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax asset.

The income tax expense charged to operations for the years ended December 31, 2021 and 2020 consists of the following (in thousands):

	2021		2020
Current tax expense	$	2,721	$	92
Deferred tax expense		699		2,393
Provision for income taxes	$	3,420	$	2,485

A reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes is as follows for the years ended December 31, 2021 and 2020 (in thousands):

	2021		2020
Net income before income taxes	$	15,873	$	11,039
Computed "expected" tax expense	$	3,333	$	2,318
State taxes, net of federal		173		201
Cash surrender value of life insurance		(59)		(41)
Other		(27)		7
Provision for income taxes	$	3,420	$	2,485

Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded franchise tax expense, within other operating expense, of approximately $519,000 and $439,000 for the years ended December 31, 2021 and 2020, respectively. With few exceptions, the Company is no longer subject to U.S. Federal, State, or local income tax examinations by tax authorities for years prior to 2018.