NOTE

– INCOME TAXES

The provision

(benefit) for income taxes for the years ended

December 31, 2017

and

2016,

includes these components:

	Years Ended December 31,
	2017			2016
Current
Federal	$	(109,214	)	$	329,732
State		13,194			55,836
Net operating loss benefits		-			(343,588	)
Deferred expense & change in valuation allowance		914,130			(4,213,570	)
Net deferred tax asset revaluation adjustment		1,150,318			-
Provision (benefit) for income taxes	$	1,968,428		$	(4,171,590	)

December 22, 2017,

the President signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes a number of changes in existing tax law impacting

businesses including, among other things, a permanent reduction in the corporate income tax rate to

21%

from

34%

The rate reduction took effect on

January 1, 2018.

As a result of the lower corporate tax rate, the Company has recorded a revaluation adjustment of

$1.2

million to reduce its deferred tax assets

effective

December 31, 2017,

with a corresponding charge to income tax expense. The revaluation and related charge remain subject to adjustment in future periods, and the final impact of the Act

may

differ due to, among other things, changes in interpretations and assumptions made by the Company, additional guidance that

may

be issued by the U.S. Department of the Treasury, and actions that the Company

may

take.

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

and net deferred tax asset revaluation adjustment in

2017,

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,
	2017			2016

Federal tax at the statutory rate (34%)	$	791,867		$	382,003
Benefit from permanent differences:					-
State income taxes, net of Federal tax benefit		73,896			(311,126	)
Bank-owned life insurance		(74,019	)		(60,839	)
Change in valuation allowance					(4,081,718	)
Net deferred tax asset revaluation adjustment		1,150,318			-
Other, net		26,366			(99,910	)

Provision (benefit) for income taxes	$	1,968,428		$	(4,171,590	)

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

	As of December 31,
	2017			2016
Deferred tax assets:
Allowance for loan losses	$	720,047		$	850,277
Unrealized losses on AFS securities		77,931			170,450
Board of Directors retirement plan		232,748			316,823
Tax credits		-			91,688
Other		413,927			637,497
Deferred compensation		183,155			202,418
Purchase accounting		4,325			38,668
Organizational costs		93,404			169,772
Net operating loss carryforwards		1,014,199			2,456,793
Total deferred tax assets		2,739,736			4,934,386

Deferred tax liabilities:
FHLB stock dividends		(32,412	)		(27,820	)
Depreciation and amortization		(336,613	)		(449,312	)
Loan origination costs		(179,185	)		(140,237	)
Total deferred tax liabilities		(548,210	)		(617,369.0	)

Net deferred tax asset before valuation allowance		2,191,526			4,317,017

Valuation allowance:
Beginning balance		-			(4,081,718	)
Reversal of valuation allowance		-			4,081,718
Ending balance		-			-

Net deferred tax asset	$	2,191,526		$	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. Based upon the Company’s assessment of all available evidence as of

December 31, 2017,

management determined it was more-likely-than-

not

that the net deferred tax asset would be fully realized in the future

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.

December 31, 2017,

the Company had federal operating loss carry-forwards of approximately

$4.6

million. At

December 31, 2014,

Bank

acquired net operating loss carryforwards of approximately

$11.0

million. The acquired losses are subject to Internal Revenue Code (“IRC”) Section

382

limitations, which limit the annual use of acquired losses to

$250,000

per year, and begin to expire in

2028.

As such, as of

December 31, 2017,

the Company has recorded deferred tax assets of

$893,000

related to the merger. The remaining held loss carryforwards are

not

subject to the same limitations and begin to expire in

2034.

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, 2017,

2016

and

2015,

there were

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

months.

The Company files consolidated U.S. federal

and various state income/franchise tax returns. The Company is

longer subject to examination by U.S. federal taxing authorities for years before

2014

and is

longer subject to examination by state taxing authorities for years before

2013

2014.

Our federal and state tax returns have

not

been audited for the past

five

years.