10.	Income Taxes

The benefit for income taxes for the years ended

December 31,

201

2016,

and

2015

consists of the following:

(dollars in thousands)	201 7			20 1 6			20 1 5
Current
Federal	$	2,137		$	261		$	58
State		-			-			-
Deferred		(5,056	)		(380	)		(84	)
Total benefit for income taxes	$	(2,919	)	$	(119	)	$	(26	)

The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of

35.0%

for the years ended

December 31,

201

2016,

and

2015.

(dollars in thousands)	201 7			20 1 6			20 1 5
Tax provision computed at statutory rate	$	2,095		$	1,689		$	843
Tax exempt interest		(573	)		(582	)		(394	)
Effect of change in tax rate		7,661			-			-
Deferred tax asset valuation allowance adjustment		(12,214	)		(1,508	)		(937	)
Other		112			282			462
Total benefit for income taxes	$	(2,919	)	$	(119	)	$	(26	)

The significant components of the Company

’s net deferred tax asset as of

December 31, 2017

and

2016

are as follows:

(dollars in thousands)	201 7		201 6
Deferred tax assets
Allowance for loan losses	$	2,047	$	3,288
Deferred compensation		557		824
Unrealized losses on securities available for sale		2,789		4,087
Realized losses in other than temporary impairment charge		65		336
Foreclosed real estate write-downs		1,468		2,377
Interest income on non-accrual loans		525		1,425
Net operating loss carryforward		5,549		8,896
Other		1,266		2,001
Total deferred tax assets		14,266		23,234
Deferred tax liabilities
Deferred loan costs		998		1,313
Other		553		528
Total deferred tax liabilities		1,551		1,841
Net deferred tax asset before valuation allowance		12,715		21,393
Less: valuation allowance		-		(12,214	)
Net deferred tax asset	$	12,715	$	9,179

The Company

’s net deferred tax asset before the consideration of a valuation allowance decreased to

$12.7

million at

December 31, 2017

compared to

$21.4

million at

December 31, 2016.

This decrease was primarily driven by the impact of the “Tax Cuts and Jobs Act” which was signed into law in

December 2017.

It included a reduction in the corporate income tax rate from

35%

21%.

The Company’s deferred tax asset balances have historically been calculated using a federal tax rate of

35%.

As a result of the change in the tax rate, the value of the Company’s existing deferred tax assets permanently decreased by

$7.7

million to

$12.7

million at

December 31, 2017.

Therefore, a charge of

$7.7

million was recorded to income tax expense in the

fourth

quarter of

2017

to reflect the reduction in value.

The $

12.7

million net deferred tax asset as of

December 31, 2017

is comprised of

$5.5

million currently recognizable through net operating loss carryforwards (“NOLs”) and

$7.2

million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company’s largest future reversal relates to its unrealized losses on securities available for sale, which totaled

$2.8

million as of

December 31, 2017.

The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary

, in accordance with the guidance provided in ASC

740,

in particular, applying the criteria set forth therein to determine whether it is more likely than

not

(i.e. a likelihood of more than

50%

) that some portion, or all, of the deferred tax asset will

not

be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, the Company believes it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered

for bank holding companies like the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back

two

years and carried forward for a period of

twenty

years, for NOLs created prior to January

2018.

The Company has a federal NOL in the amount of

$24.4

million which will begin to expire after

December 31, 2030

through

December 31, 2031

not

utilized prior to that date. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.

In assessing the need for a valuation allowance, we carefully weighed both positive and negative

evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

Positive evidence evaluated when considering the need for a valuation allowance included:

●

the improvement in earnin

gs during the

three

year period ended

December 31, 2017

●

continued growth in interest-earning assets is expected and supported by the capital raise completed during

the

fourth

quarter of

2016;

●

deposit

growth in each of the stores opened since the inception of the growth and expansion strategy in

2014

has met or exceeded expectations;

●

loan growth during

2017

was greater than

20%;

●

the acquisition of a

residential mortgage lending team (Oak Mortgage Company) completed in

July 2016

continues to supplement earnings growth;

●

two

of the

Company’s largest non-performing assets have been resolved in

2017;

and

●

a cumulative loss has

not

been recorded in recent years.

Negative evidence evaluated when considerin

g the need for a valuation allowance included:

●

profitability metrics for return on assets and return on equity remain below industry standards

; and

●

past earnings have been

heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors.

The ongoing success of the Company

’s growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put the Company in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets. Based on the guidance provided in FASB Accounting Standards Codification Topic

740

(ASC

740

), the Company believed that the positive evidence considered at

December 31, 2017

outweighed the negative evidence and that it was more likely than

not

that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was

not

required at

December 31, 2017

and a

$10.6

million benefit for income taxes was recorded in the

fourth

quarter of

2017

to reflect the reversal of the valuation allowance.

The net deferred tax asset balance before consideration of a valuation allowance

was

$12.7

million as of

December 31, 2017

and

$21.4

million as of

December 31, 2016. T

he Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of

$12.2

million as of

December 31, 2016.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting reali

zability.

The Company

accounts for uncertain tax positions if it is more likely than

not,

based on the technical merits, that the tax position will be realized or sustained upon examination. The Company has

not

identified any uncertain tax position as of

December 31, 2017.

interest or penalties have been recorded for the years ended

December 31, 2017,

2016,

and

2015.

The Internal Revenue Service has completed its audits of the Company’s federal tax returns for all tax years through

December 31, 2013.

The Pennsylvania Department of Revenue is

not

currently conducting any income tax audits. The Company’s federal income tax returns filed subsequent to

2014

remain subject to examination by the Internal Revenue Service.