10.	Income Taxes

The provision (benefit) for income taxes for the years ended

December 31, 2019,

2018,

and

2017

consists of the following:

(dollars in thousands)	201 9			201 8			201 7
Current
Federal	$	394		$	-		$	2,137
State		-			51			-
Deferred
Federal		(1,524	)		2,006			(5,056	)
State		(220	)		(479	)		-
Total provision (benefit) for income taxes	$	(1,350	)	$	1,578		$	(2,919	)

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

21.0%

for the year ended

December 31, 2019,

21.0%

for the year ended

December 31, 2018

and

35.0%

for the year ended

December 31, 2017.

(dollars in thousands)	201 9			201 8			201 7
Tax provision computed at federal statutory rate	$	(1,018	)	$	2,143		$	2,095
State income tax, net of federal benefit		(260	)		(340	)		-
Tax exempt interest		(425	)		(430	)		(573	)
Deferred tax only items		-			199			-
Effect of change in tax rate		-			-			7,661
Deferred tax asset valuation allowance adjustment		-			-			(12,214	)
Other		353			6			112
Total provision (benefit) for income taxes	$	(1,350	)	$	1,578		$	(2,919	)

The significant components of the Company’s net deferred tax asset as of

December 31, 2019

and

2018

are as follows:

(dollars in thousands)	201 9		201 8
Deferred tax assets
Allowance for loan losses	$	2,351	$	2,185
Deferred compensation		620		591
Unrealized losses on securities available for sale		2,495		3,935
Foreclosed real estate write-downs		996		2,351
Interest income on non-accrual loans		541		615
Net operating loss carryforward		5,123		3,541
Other		2,263		1,472
Total deferred tax assets		14,389		14,690
Deferred tax liabilities
Deferred loan costs		1,138		1,103
Premises and equipment		612		634
Other		-		619
Total deferred tax liabilities		1,750		2,356
Net deferred tax asset	$	12,639	$	12,334

The Company’s net deferred tax asset increased to

$12.6

million at

December 31, 2019

compared to

$12.3

million at

December 31, 2018.

The Company began recognizing an increased provision for federal and state income taxes during the

first

quarter of

2018

after reversing our deferred tax asset valuation allowance during the

fourth

quarter of

2017.

The company initially recorded a deferred tax asset valuation allowance in

2011

and continued to carry this allowance after determining that some portion of the deferred tax asset balance

may

not

be realized within its life cycle based on the weight of available evidence. Adjustments to the valuation allowance resulted in the recognition of a minimal provision for income taxes in each period until its reversal in

2017.

The effective tax rates for the years ended

December 31, 2019

and

2018

were (

28%

) and

15%,

respectively.

The

$12.6

million net deferred tax asset as of

December 31, 2019

is comprised of

$5.1

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

$7.5

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

$2.5

million as of

December 31, 2019.

The Company evaluates the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in FASB Accounting Standards Codification Topic

740

(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.

The Company has a federal NOL in the amount of

$17.2

million which will begin to expire after

December 31, 2031

not

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

$6.9

million NOL generated in

2019

will

not

expire.

In assessing the need for a valuation allowance, the Company 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.

The Company is in a

-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets is expected to continue and is supported by the capital raise completed at the end of

2016.

The ratio of non-performing assets to total assets along with other credit quality metrics continue to improve. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. The Company has added

store locations in the past

years and since the inception of the growth and expansion strategy in

2014

almost every new store location has met or exceeded expectations. The success of the expansion into New York, combined with the stabilization of interest rates and continued loan growth are expected to improve profitability going forward.

Conversely, the Company generated a loss in the current year when factoring in pre-tax GAAP income and permanent book/tax differences. The Bank’s net interest margin declined during

2019

as a result of the challenging interest rate environment which appears to be consistent across the financial services industry. Non-accrual loans increased by

$2.1

million during

2019

although the ratio of non-performing loans to total loans decreased slightly. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations.

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, 2019

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, 2019.

The net deferred tax asset balance was

$12.6

million as of

December 31, 2019,

$12.3

million as of

December 31, 2018,

and

$12.7

million as of

December 31, 2017.

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

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, 2019.

interest or penalties have been recorded for the years ended

December 31, 2019,

2018,

and

2017.

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

December 31, 2015.

The Pennsylvania Department of Revenue is

not

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

2016

remain subject to examination by the Internal Revenue Service.