NOTE

Income Taxes

Income tax expense for the years ended

December 31, 2018,

2017

and

2016

is as follows:

(Dollars in thousands)	2018		2017		2016
Current:
Federal	$	1,690		2,287		939
State		115		10		55
Total current		1,805		2,297		994
Deferred:
Federal		234		1,412		2,322
State		849		693		806
Total deferred		1,083		2,105		3,128
Income tax expense	$	2,888		4,402		4,122

The reasons for the difference between the expected income tax expense utilizing the federal corporate tax rate of

21%

2018,

and

34%

2017

and

2016

and the actual income tax expense are as follows:

(Dollars in thousands)	2018			2017			2016
Expected federal income tax expense	$	2,336			2,994			3,560
Items affecting federal income tax:
State income taxes, net of federal income tax deduction		559			529			622
Tax exempt interest		(11	)		(16	)		(16	)
Change in federal tax rate		0			1,062			0
Other, net		4			(167	)		(44	)
Income tax expense	$	2,888			4,402			4,122

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at

December 31:

(Dollars in thousands)	2018		2017
Deferred tax assets:
Allowances for loan and real estate losses	$	2,428		2,602
Deferred compensation costs		154		166
Deferred ESOP loan asset		473		487
Nonaccruing loan interest		185		221
State net operating loss carryforward		160		824
Alternative minimum tax credit carryforward		208		175
Net unrealized loss on securities available for sale		426		372
Other		91		92
Total gross deferred tax assets		4,125		4,939

Deferred tax liabilities:
Deferred loan costs		367		37
Premises and equipment basis difference		509		380
Originated mortgage servicing rights		519		482
Federal tax liability on state net operating loss carryforwards		34		280
Other		54		88
Total gross deferred tax liabilities		1,483		1,267
Net deferred tax assets	$	2,642		3,672

The Company has

federal net operating loss carryforwards and

$1.8

million of state net operating loss carryforwards at

December 31, 2018

that expire beginning in

2023.

December 22, 2017

the Tax Cuts and Jobs Act became law. Among other things, this law reduced the corporate tax rate for the Company from

34%

21%

effective

January 1, 2018.

In accordance with current accounting guidelines, this change in the tax rate was reflected as an adjustment to the Company’s deferred tax items at

December 31, 2017.

The net result of this adjustment was to reduce the Company’s net deferred tax asset by

$1.1

million with a corresponding increase to income tax expense in the

fourth

quarter of

2017.

Retained earnings at

December 31, 2018

included approximately

$8.8

million for which

provision for income taxes was made. This amount represents allocations of income to bad debt deductions for tax purposes. Reduction of amounts so allocated for purposes other than absorbing losses will create income for tax purposes, which will be subject to the then-current corporate income tax rate.

The Company considers the determination of the deferred tax asset amount and the need for any valuation reserve to be a critical accounting policy that requires significant judgment. The Company has, in its judgment, made reasonable assumptions and considered both positive and negative evidence relating to the ultimate realization of deferred tax assets. Positive evidence includes the cumulative net income generated over the prior

three

year period and the probability that taxable income will be generated in future periods. The Company could

not

currently identify any negative evidence. Based upon this evaluation, the Company determined that

valuation allowance was required with respect to the net deferred tax assets at

December 31, 2018

and

2017.