Note 10 - Income Taxes

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

10.  Income Taxes

The provision (benefit) for income taxes for the years ended December 31, 2020, 2019, and 2018 consists of the following:

(dollars in thousands)	2020			2019			2018
Current
Federal	$	810		$	394		$	-
State		1,490			-			51
Deferred
Federal		417			(1,524	)		2,006
State		(1,327	)		(220	)		(479	)
Total provision (benefit) for income taxes	$	1,390		$	(1,350	)	$	1,578

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, 2020, 21.0% for the year ended December 31, 2019 and 21.0% for the year ended December 31, 2018.

(dollars in thousands)	2020			2019			2018
Tax provision computed at federal statutory rate	$	1,353		$	(1,018	)	$	2,143
State income tax, net of federal benefit		360			(260	)		(340	)
Tax exempt interest		(461	)		(425	)		(430	)
Deferred tax only items		-			-			199
Other		138			353			6
Total provision (benefit) for income taxes	$	1,390		$	(1,350	)	$	1,578

Reclassifications

A reclassification has been made to 2019 information to conform to the 2020 presentation in the table below. The reclassification had no effect on the results of operations or shareholders’ equity. In 2019, deferred tax assets pertaining to stock option expense of $1.4 million were reclassed from other deferred tax assets.

The significant components of the Company’s net deferred tax asset as of December 31, 2020 and 2019 are as follows:

(dollars in thousands)	2020		2019
Deferred tax assets
Allowance for loan losses	$	3,291	$	2,351
Deferred compensation		641		620
Unrealized losses on securities available for sale		960		2,495
Deferred fees on PPP loans		3,737		-
Foreclosed real estate write-downs		985		996
Interest income on non-accrual loans		706		541
Stock option expense		1,780		1,413
Goodwill		890		-
Net operating loss carryforward		-		5,123
Other		1,033		850
Total deferred tax assets		14,023		14,389
Deferred tax liabilities
Deferred loan costs		1,818		1,138
Premises and equipment		191		612
Total deferred tax liabilities		2,009		1,750
Net deferred tax asset	$	12,014	$	12,639

The Company’s net deferred tax asset decreased to $12.0 million at December 31, 2020 compared to $12.6 million at December 31, 2019. The effective tax rates for the years ended December 31, 2020 and 2019 were 22% and (28%), respectively.

The $12.0 million net deferred tax asset as of December 31, 2020 is comprised of $3.7 million attributable to deferred fees on PPP Loans which are expected to reverse in the coming year and $8.3 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 next largest future reversal relates to unrealized losses on the loan portfolio, which totaled $3.3 million as of December 31, 2020.

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.

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 three 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 during 2020. 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 thirteen store locations in the past four 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 strategy, combined with the stabilization of interest rates and continued loan growth are expected to continue to support improvement in profitability going forward. As of December 31, 2020, the Company has no federal NOLs to carry forward which could expire in the future.

Conversely, the Company’s net interest margin declined during 2020 as a result of the challenging interest rate environment which appears to be consistent across the financial services industry. The effects of the COVID-19 pandemic to the local and global economy may result in a significant increase in future loan loss provisions and charge-offs. 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, 2020 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, 2020.

The net deferred tax asset balance was $12.0 million as of December 31, 2020 and $12.6 million as of December 31, 2019. 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, 2020. No interest or penalties have been recorded for the years ended December 31, 2020, 2019, and 2018. The Internal Revenue Service has completed its audits of the Company’s federal tax returns for all tax years through December 31, 2016. The Pennsylvania Department of Revenue is not currently conducting any income tax audits. The Company’s federal income tax returns filed subsequent to 2017 remain subject to examination by the Internal Revenue Service.