NOTE 15 – INCOME TAXES

The provision (benefit) for income taxes for the years ended December 31, 2016 and 2015, includes these components:

	Years Ended December 31,
	2016		2015
Current
Federal	$	329,732	$	20,000
State		55,836		-
Net operating loss benefits		(343,588)		-
Deferred expense		(4,213,570)		-

Provision (benefit) for income taxes	$	(4,171,590)	$	20,000

Federal income tax (benefit) expense for the years ended December 31, 2016 and 2015 was ($4.2 million) and $20,000, respectfully. The 2015 tax expense was solely due to the alternative minimum tax. The income tax expense for all periods presented differs from the amounts computed by applying the federal income tax rate of 34% to earnings before federal income tax expense. These differences are primarily caused by the valuation allowance reversal in 2016, expenses that are not deductible for tax purposes and tax adjustments related to prior federal income tax returns.

A reconciliation of income tax expense at the Federal statutory rate to the Company’s actual income tax expense for all periods presented is shown below:

	Years Ended December 31,
	2016		2015

Federal tax at the statutory rate (34%)	$	382,003	$	115,809
Benefit from permanent differences:
State income taxes, net of Federal tax benefit		(311,126)		(107,109)
Bank-owned life insurance		(60,839)		(61,622)
Change in valuation allowance		(4,081,718)		(138,703)
Other, net		(99,910)		211,625

Provision (benefit) for income taxes	$	(4,171,590)	$	20,000

The tax effects of temporary differences related to deferred taxes were:

	As of December 31,
	2016		2015
Deferred tax assets:
Allowance for loan losses	$	850,277	$	472,681
Unrealized losses on AFS securities		170,450		-
Board of Directors retirement plan		316,823		309,462
Tax credits		91,688		46,869
Other		637,497		623,368
Deferred compensation		202,418		143,825
Purchase accounting		38,668		52,967
Organizational costs		169,772		204,024
Net operating loss carryforwards		2,456,793		2,783,762
Total deferred tax assets		4,934,386		4,636,958

Deferred tax liabilities:
FHLB stock dividends		(27,820)		(22,445)
Depreciation and amortization		(449,312)		(439,734)
Loan origination costs		(140,237)		(83,889)
Other		-		(9,172)
Total deferred tax liabilities		(617,369)		(555,240)

Net deferred tax asset before valuation allowance		4,317,017		4,081,718

Valuation allowance:
Beginning balance		(4,081,718)		(4,856,546)
Decrease/(Increase) due to merger/prior adjustments		-		636,125
Decrease/(Increase) during the period		-		138,703
Reversal of valuation allowance		4,081,718		-
Ending balance		-		(4,081,718)

Net deferred tax asset	$	4,317,017	$	-

A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, NOL carry-back potential, and tax planning strategies in making this assessment at December 31, 2016. Based upon the Company’s assessment of all available evidence, management determined it was more-likely-than-not that the net deferred tax asset would be realized. Therefore, at December 31, 2016, the Company released its $4.1 million valuation allowance against the net deferred tax asset resulting in a credit to income tax (benefit) expense.

At December 31, 2016, the Company had federal operating loss carry-forwards of approximately $6.7 million. At December 31, 2014, Bank 34 acquired net operating loss carryforwards of approximately $11.0 million. The acquired losses are subject to IRC 382 limitations, which limit the annual use of acquired losses to $250,000 per year, and begin to expire in 2027. As such, as of December 31, 2016, Bank 34 has recorded deferred tax assets for $1.5 million related to the merger. The remaining loss carryforwards are not subject to the same limitations and begin to expire in 2032.

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2016, 2015 and 2014, there were no material uncertain tax positions related to federal and state income tax matters. The Company does not expect the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months.

The Company files consolidated U.S. federal and various state income/franchise tax returns.