The tax effects of d

ductible and taxable temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities, respectively, are as follows:


(In Thousands)	June 30 , 2021			December 31, 2020
Deferred tax assets:
Allowance for loan losses	$	1,008		$	877
Fair value adjustment on acquired loans		515			535
Alternative minimum tax credit		98			98
Net operating loss carryforwards		1,665			1,872
Other		(253	)		(240	)

Total gross deferred tax assets before valuation allowance		3,033			3,142

Valuation allowance		—			(3,044	)

Net deferred tax assets	$	3,033		$	98

In assessing the realizability of deferred tax assets, management considers whether it is more-likely-

than-not

that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and

tax-planning

strategies in making this assessment. The amount of the deferred tax asset considered realizable, however, could change in the near term if estimates of future taxable income during the carry forward period change and the deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. During formation year for the Company of 2018, the Company generated a

pre-tax

loss and since there was no verifiable evidence that the Company would be profitable in the near future, a full deferred tax asset valuation allowance was established at December 31, 2018 and had been maintained through December 31, 2020.

At March 31, 2021, Management updated its realizability analysis over the deferred tax asset and reached the determination that it is more likely than not that the deferred tax asset will be realized in future periods. As such, the Company recorded a complete reversal of the deferred tax asset valuation allowance as of March 31, 2021. The Company considered all available evidence and applied judgment in determining the effect of positive and negative evidence and the weight that should be given to that evidence based on its ability to objectively verify it. In the assessing and weighing the positive evidence against the negative evidence, Management determined that more weight could be placed on the positive evidence while the context surrounding the accumulated losses allowed the Company to place a slightly lower weight on the negative evidence. The only piece of negative evidence that management identified was the cumulative loss that the Company has incurred from its inception in October 2018 through March 31, 2021. While ASC

740-10-30-21

states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years, management also notes that ASC

740-10-30-17

states, “Sometimes, however, historical information may not be available (for example,

start-up

operations) or it may not be as relevant (for example, if there has been a significant, recent change in circumstances) and special attention is required.” Management notes that the Company’s circumstances apply to ASC

740-10-30-17.

Through March 31, 2020, the Company had an accumulated loss of $11.2 million, which is the result of incurring

start-up

costs, increased costs associated with remediating the regulatory consent order that the bank was under at the time that the Company purchased the bank charter out of bankruptcy, and costs associated with the establishment of sound banking processes and procedures. Strong positive evidence that can overcome such negative evidence, however, is a recent history of sustainable

pre-tax

income. The Company achieved positive

pre-tax

income, excluding merger costs in its four most recent quarters as of March 31, 2021. As a result of this recent profitability, the Company utilized $284 thousand of net operating losses in 2020. The Company achieved the transition from

pre-tax

losses to

pre-tax

income through organic growth. Since December 31, 2018 through March 31, 2021, the Company grew its interest earning assets from $79.9 million to $405.7 million, which represents a compounded annual growth rate of approximately 106

%. Our improvements in operating profitability has been driven by the Company’s rapid growth since inception and its ability to generate revenue producing assets to a level that sufficiently covers our funding costs and direct operating costs along with our corporate overhead. The Company’s primary business is driven by our net interest spread which is generated through monthly recurring interest income earned on loans reduced by the cost of deposits and borrowings. During 2020, the U.S. economy was negatively affected on a significant level as a result of the COVID 19 global pandemic yet during 2020, the Company grew its net interest spread in comparison to 2019 and during the first quarter of 2021, we further grew our net interest spread despite the continued low interest rate environment in our markets and in the U.S. This was achieved because our Company continues to evolve from a de novo institution to a more mature financial institution and as part of that evolution, we have been able to generate a greater amount of lower cost deposits as we build customer relationships which allows us to place less reliance on

non-core,

higher cost funding options. This growth as a Company helps support the assumption that our

pre-tax

income growth is sustainable and reasonable.

With respect to the material assumptions underlying the

Company’s determination of the expected U.S.

pre-

tax

income needed to realize its deferred tax assets, it understands that forecasts are inherently sub

ective and that it is generally preferred that the source of positive evidence for the utilization of the deferred tax assets comes from what has already been de

onstrated or is otherwise objectively verifiable. Accordingly, the foundation of the projection process is the amount and trend of

pre-tax

income during the past year because this evidence is typically the most objective indicator available. At the end of 2020, the Company prepared a forecast of

pre-tax

income, exclusive of merger expenses, for 2021 based on the existing loan and deposit portfolios along with growth projections. The Company’s

pre-tax

income for the quarter ending March 31, 2021 yielded annualized results of an assumed full year

pre-tax

income of approximately $

800

thousand, which is relatively consistent with the forecast of

pre-tax

income prepared for 2021.

At June 30, 2021, Management updated the aforementioned March 31, 2021 analysis and continues to conclude that it is more likely than not that the deferred tax asset will be realized in future periods.

As of

June

, 2021, the Company had federal net operating loss carry forwards of $7,930. Approximately $489 of these net operating loss carryforwards are subject to Section 382 limitations.