INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES [Abstract]

INCOME TAXES

12.         INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Net deferred tax assets at December 31, 2019 and 2018 consist primarily of the following (in thousands):

	2019		2018
Deferred tax assets:
Allowance for loan losses	$	2,235	$	2,686
Unearned loan fees and other		1,064		1,058
Other real estate owned write-downs		748		783
Lease liability		1,829		—
Other than temporary impairment charge		229		232
Net unrealized loss on investment securities available for sale		—		694
Purchase accounting		949		1,909
Federal and state net operating loss carryforward		—		762
Federal AMT credit carryforward		1,137		1,137
Federal low income housing credit carryforward		3,226		2,887
Deferred compensation		1,573		1,390
Depreciation		218		—
Other		511		729
Total deferred tax assets		13,719		14,267
Deferred tax liabilities:
FDIC indemnification asset		—		140
Right-of-use assets		1,731		—
Net unrealized gain on investment securities available for sale		200		—
Depreciation		—		23
Total deferred tax liabilities		1,931		163
Net deferred tax assets	$	11,788	$	14,104

No valuation allowance was deemed necessary on deferred tax assets in 2019 or 2018. Management believes that the realization of the deferred tax assets is more likely than not based on the expectation that Southern National will generate the necessary taxable income in future periods.

We have no unrecognized tax benefits and do not anticipate any increase in unrecognized tax benefits during the next twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed as of December 31, 2019, 2018 or 2017. Southern National and its subsidiaries file a consolidated U.S. federal income tax return, and Southern National files a Virginia state income tax return. Sonabank files a Maryland state income tax return. These returns are subject to examination by taxing authorities for all years after 2015.

The provision for income taxes consists of the following for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019		2018		2017
Current tax expense
Federal	$	4,429	$	6,244	$	3,145
State		228		249		316
Total current tax expense		4,657		6,493		3,461
Deferred tax expense (benefit)
Federal		1,350		2,692		10,234
State		70		429		(548)
Total deferred tax expense		1,420		3,121		9,686
Total income tax expense	$	6,077	$	9,614	$	13,147

The income tax expense differed from the amount of income tax determined by applying the U.S. Federal income tax rate of 21% to pretax income for the years ended December 31, 2019 and 2018 and 34% to pretax income for the year ended December 31, 2017 due to the following (in thousands):

	2019		2018		2017
Computed expected tax expense at statutory rate	$	8,241	$	9,094	$	5,294
Increase (decrease) in tax expense resulting from:
Remeasurement of deferred tax assets and liabilities		(1,659)		1,130		—
Low income housing tax credits, net of amortization		(255)		(502)		—
Income from bank-owned life insurance		(357)		(416)		(316)
Other, net		107		308		234
Transaction costs		—		—		724
Tax adjustment related to reduction in U.S. federal statutory income tax rate		—		—		7,211
Income tax expense	$	6,077	$	9,614	$	13,147

During 2018, the Company determined that certain net operating loss carryforwards were impaired due to Section 382 limitations. During 2019, the Company completed its formal assessment of the Section 382 limitation and rebooked $1.2 million deferred tax asset stemming from a $5.5 million acquired net operating loss carryforward that was written off in the fourth quarter of 2018. Additionally, the Company remeasured the depreciation deferred tax liability by $0.6 million, net, to reflect a 2018 adjustment to the assets held for sale not previously included.

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 Tax Cuts and Jobs Act, we recognized additional income tax expense totaling $7.2 million in 2017, as reported in the rate change line item in the table above. Accounting for the Tax Act was completed during the fourth quarter of 2018 with no material changes.