NOTE 13 – INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:

	2019			2018			2017
Current	$	6,476		$	5,782		$	7,809
Write-off of deferred tax asset related to 2017 Tax Cuts and Jobs Act.		-			-			145
Deferred		563			120			637
Change in valuation allowance		(14	)		(4	)		16
Provision for income taxes	$	7,025		$	5,898		$	8,607

The Company’s deferred tax assets and liabilities at December 31 are shown below.

	2019			2018
Deferred tax assets
Allowance for loan losses	$	2,969		$	2,884
Purchase accounting adjustments		605			963
Net operating loss carryforward		453			333
Alternative minimum tax credit carryforward		3			125
Write-downs of other real estate owned		374			235
Taxable income on non-accrual loans		981			896
Accrued expenses		278			235
Unrealized loss on investment securities		-			1,024
Other		16			15
Total deferred tax assets		5,679			6,710

Deferred tax liabilities
Amortization of intangibles	$	(3,072	)	$	(3,063	)
Depreciation		(1,320	)		(1,106	)
Federal Home Loan Bank dividends		(267	)		(224	)
Deferred loan fees		(588	)		(499	)
Unrealized gain on investment securities		(984	)		-
Other		(101	)		(105	)
Total deferred tax liabilities		(6,332	)		(4,997	)

Valuation allowance on deferred tax assets		(158	)		(172	)
Net deferred taxes	$	(811	)	$	1,541

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected 2017 and 2018, including, but not limited to, accelerated depreciation that allows for full expensing of qualified property. The Tax Act also established new tax laws that affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%. As a result of the reduction of the federal corporate income tax rate beginning in 2018, the Company revalued its net deferred tax asset, excluding after tax credits, as of December 31, 2017 using the lower corporate income tax rate. Based on the revaluation, $145 of additional income tax expense was recorded for the year ended December 31, 2017 to reduce the net deferred tax asset balance as of that date.

The adjustments to deferred tax assets and liabilities were provisional amounts estimated based on information available as of December 31, 2017. These amounts were subject to change as management obtained information necessary to complete the calculations. However, no additional changes to the provisional amounts were recognized as management refined the estimates of the cumulative temporary differences.

At December 31, 2019 the Company had federal net operating loss carryforwards of $1,407, a federal alternative minimum tax credit carryforward of $3, and various state net operating loss carryforwards of $2,425 which begin to expire in 2022. The deductibility of these net operating losses is limited under IRC Sec. 382.

A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

At both December 31, 2019 and 2018, the Company maintains a valuation allowance of $158 and $172 against the portion of its District of Columbia net operating loss carryforward that is not expected to be utilized before expiration due to separate company limitations. All other deferred tax assets are more likely than not to be utilized; therefore, no additional valuation allowance is needed.

An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:

	2019					2018					2017
U.S. federal income tax rate	$	6,556		21.0	%	$	5,474		21.0	%	$	8,200		35.0	%
Changes from the statutory rate
Change in deferred taxes related to decrease in future federal tax rate		-		-			-		-			145		0.6
State income taxes, net		693		2.2			518		2.0			503		2.1
Tax-exempt interest income		(163	)	(0.5	)		(143	)	(0.5	)		(239	)	(1.0	)
Non-deductible interest expense related to carrying tax-exempt interest earning assets		15		0.0			11		0.0			13		0.1
Non-deductible stock compensation expense, net		28		0.1			12		0.0			(35	)	(0.2	)
Tax credits, net		(134	)	(0.4	)		(71	)	(0.3	)		(42	)	(0.2	)
Change in valuation allowance		14		0.0			4		0.0			16		0.1
Other		16		0.1			93		0.4			46		0.2
	$	7,025		22.5	%	$	5,898		22.6	%	$	8,607		36.7	%

Unrecognized Tax Benefits: The Company does not have any beginning or ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the years ended December 31, 2019, 2018, and 2017 related to unrecognized tax benefits.

The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a combined return in the state of West Virginia and the District of Columbia. The Company also files a corporate income tax return in the state of Kentucky and Maryland. The Company is no longer subject to examination by taxing authorities for years before 2016.