NOTE

Income Taxes

Income tax expense for the years ended

December 31, 2019,

2018

and

2017

is as follows:

(Dollars in thousands)	2019		2018		2017
Current:
Federal	$	2,141		1,690		2,287
State		687		115		10
Total current		2,828		1,805		2,297
Deferred:
Federal		256		234		1,412
State		240		849		693
Total deferred		496		1,083		2,105
Income tax expense	$	3,324		2,888		4,402

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

21%

2019

and

2018,

and

34%

2017

and the actual income tax expense are as follows:

(Dollars in thousands)	2019		2018			2017
Expected federal income tax expense	$	2,334		2,336			2,994
Items affecting federal income tax:
State income taxes, net of federal income tax deduction		852		559			529
Change in federal tax rate		0		0			1,062
Other, net		138		(7	)		(183	)
Income tax expense	$	3,324		2,888			4,402

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)	201 9		2018
Deferred tax assets:
Allowances for loan losses	$	2,394		2,428
Deferred compensation costs		158		154
Deferred ESOP loan asset		453		473
Nonaccruing loan interest		78		185
State net operating loss carryforward		42		160
Alternative minimum tax credit carryforward		0		208
Net unrealized loss on securities available for sale		0		426
Other		140		91
Total gross deferred tax assets		3,265		4,125

Deferred tax liabilities:
Deferred loan costs		344		367
Premises and equipment basis difference		526		509
Originated mortgage servicing rights		607		519
Federal tax liability on state net operating loss carryforwards		9		34
Net unrealized gain on securities available for sale		18		0
Other		59		54
Total gross deferred tax liabilities		1,563		1,483
Net deferred tax assets	$	1,702		2,642

The Company has

federal and

$0.8

million of state net operating loss carryforwards at

December 31, 2019.

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 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, 2019

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, 2019

and

2018.