Quarterly report pursuant to Section 13 or 15(d)

FEDERAL INCOME TAXES

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FEDERAL INCOME TAXES
6 Months Ended
Jun. 30, 2018
FEDERAL INCOME TAXES [Abstract]  
FEDERAL INCOME TAXES
NOTE 9 - FEDERAL INCOME TAXES

Income tax expense was as follows (dollars in thousands):
 
   
Three Months
Ended
June 30,
2018
   
Three Months
Ended
June 30,
2017
   
Six Months
Ended
June 30,
2018
   
Six Months
Ended
June 30,
2017
 
Current
 
$
1,294
   
$
(62
)
 
$
2,232
   
$
1,742
 
Deferred
   
140
     
2,191
     
427
     
2,353
 
   
$
1,434
   
$
2,129
   
$
2,659
   
$
4,095
 

The difference between the financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax income was reconciled as follows (dollars in thousands):

   
Three Months
Ended
June 30,
2018
   
Three Months
Ended
June 30,
2017
   
Six Months
Ended
June 30,
2018
   
Six Months
Ended
June 30,
2017
 
Statutory rate
   
21
%
   
35
%
   
21
%
   
35
%
Statutory rate applied to income before taxes
 
$
1,714
   
$
2,412
   
$
3,180
   
$
4,661
 
Deduct
                               
Tax-exempt interest income
   
(183
)
   
(186
)
   
(362
)
   
(369
)
Bank-owned life insurance
   
(50
)
   
(85
)
   
(100
)
   
(168
)
Other, net
   
(47
)
   
(12
)
   
(59
)
   
(29
)
   
$
1,434
   
$
2,129
   
$
2,659
   
$
4,095
 

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.  No valuation allowance was necessary at June 30, 2018 or December 31, 2017.

Legislation H.R. 1, formerly known as “Tax Cuts and Jobs Act” (the Tax Reform Act”) was enacted on December 22, 2017.  The Tax Reform Act reduced the corporate income tax rate to 21% effective January 1, 2018 and changed certain other provisions.  Accounting guidance requires the Company to remeasure its deferred tax assets and deferred tax liabilities on the date of enactment using the new enacted tax rate of 21%.  The Company recorded additional expense of $2.5 million in the fourth quarter of 2017 to reflect changes that resulted from the enactment of the Tax Reform Act.

Concurrent with the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the new law over a period of up to 12 months in the reporting period in which the adjustment is identified. The Company will apply SAB 118 and continue to refine the measurement of its net deferred tax balance on December 22, 2017 during the preparation of its 2017 tax return as additional guidance and information becomes available.

The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
 
   
June 30,
2018
   
December 31,
2017
 
Deferred tax assets
           
Allowance for loan losses
 
$
3,506
   
$
3,486
 
Nonaccrual loan interest
   
301
     
346
 
Valuation allowance on other real estate owned
   
243
     
708
 
Unrealized loss on securities available for sale
   
1,020
     
417
 
Other
   
271
     
229
 
Gross deferred tax assets
   
5,341
     
5,186
 
Valuation allowance
   
---
     
---
 
Total net deferred tax assets
   
5,341
     
5,186
 
                 
Deferred tax liabilities
               
Depreciation
   
(949
)
   
(977
)
Prepaid expenses
   
(183
)
   
(183
)
Other
   
(249
)
   
(241
)
Gross deferred tax liabilities
   
(1,381
)
   
(1,401
)
Net deferred tax asset
 
$
3,960
   
$
3,785
 

There were no unrecognized tax benefits at June 30, 2018 or December 31, 2017 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2014.