INCOME TAXES

Income taxes, computed on the separate return basis with the benefit of filing a consolidated return being recorded at the holding company, include Federal and state income taxes and are based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable (permanent differences). Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established, when deemed necessary, to reduce deferred tax assets to the amount expected to be realized.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. Among other things, the TCJA permanently lowered the federal corporate income tax rate to 21% from the prior maximum rate of 35%, effective January 1, 2018. As a result of the reduction of the federal corporate income tax rate, ASC 740 - Income Taxes, required us to remeasure our deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income, as of the date of TCJA’s enactment and record the effects as income tax expense in the reporting period of enactment.

We remeasured our deferred tax assets and deferred tax liabilities as of December 22, 2017, at the new federal corporate income tax rate of 21%, and recorded additional deferred federal income tax expense of $3.5 million to reduce our net deferred tax assets.

A tax position that meets a "probable recognition threshold" for the benefit of the uncertain tax position is recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a current or deferred tax asset or receivable, or recording a current or deferred tax liability. We concluded that there were no significant uncertain tax positions requiring recognition in the consolidated financial statements. The evaluation was performed for the years ended 2016 through 2019, the tax years which remain subject to examination by major tax jurisdictions.

The components of applicable income tax expense for the years ended December 31, 2019, 2018 and 2017, are as follows:



Dollars in thousands	2019		2018			2017
Current
Federal	$	6,676	$	6,400		$	5,092
State	938		973			496
	7,614		7,373			5,588
Deferred
Federal	88		(304		)	4,027
State	15		(45		)	49
	103		(349		)	4,076
Total	$	7,717	$	7,024		$	9,664

Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2019, 2018 and 2017 is as follows:



	2019					2018					2017
Dollars in thousands	Amount			Percent		Amount			Percent		Amount			Percent
Computed tax at applicable statutory rate	$	8,313		21		$	7,370		21		$	7,553		35
Increase (decrease) in taxes
resulting from:
Tax-exempt interest
and dividends, net	(728		)	(2	)	(1,011		)	(3	)	(1,569		)	(7	)
Non-deductible merger-related expenses	—			—		—			—		—			—
Low-income housing and rehabilitation tax credits	(177		)	—		(286		)	(1	)	(247		)	(1	)
Impact of enacted income tax rate change	—			—		—			—		3,461			16
State income taxes, net
of Federal income tax benefit	753			2		734			2		354			2
Other, net	(444		)	(1	)	217			1		112			—
Applicable income taxes	$	7,717		20		$	7,024		20		$	9,664		45

Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled.

The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2019 and 2018, are as follows:



Dollars in thousands	2019		2018
Deferred tax assets
Allowance for loan losses	$	3,017	$	2,921
Depreciation	29		405
Foreclosed properties	2,659		2,951
Deferred revenue	—		18
Deferred compensation	3,296		2,490
Other deferred costs and accrued expenses	534		645
Net unrealized loss on securities available for sale	—		265
Net unrealized loss on interest rate swaps	163		99
Capital loss carryforwards	—		166
Total	9,698		9,960
Deferred tax liabilities
Accretion on tax-exempt securities	62		29
Net unrealized gain on securities available for sale	994		—
Other post-retirement benefits	15		44
Purchase accounting adjustments and goodwill	2,099		2,253
Total	3,170		2,326
Net deferred tax assets	$	6,528	$	7,634

We may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments are estimated to be minimal and immaterial. To the extent we have received an assessment for interest and/or penalties; it has been classified in the consolidated statements of income as a component of other noninterest expense.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2016 through 2018. Tax years 2017 through 2018 remain subject to West Virginia State examination.