Quarterly report pursuant to Section 13 or 15(d)

FEDERAL INCOME TAXES

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FEDERAL INCOME TAXES
 9 Months Ended
Sep. 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
September 30,
2018
    
Three Months
Ended
September 30,
2017
    
Nine Months
Ended
September 30,
2018
    
Nine Months
Ended
September 30,
2017
  
Current
  
$
1,432
    
$
2,261
    
$
3,663
    
$
4,004
  
Deferred
    
138
      
(104
)
    
565
      
2,249
  
   
$
1,570
    
$
2,157
    
$
4,228
    
$
6,253
  

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
September 30,
2018
    
Three Months
Ended
September 30,
2017
    
Nine Months
Ended
September 30,
2018
    
Nine Months
Ended
September 30,
2017
  
Statutory rate
    
21
%
    
35
%
    
21
%
    
35
%
Statutory rate applied to income before taxes
  
$
1,769
    
$
2,461
    
$
4,948
    
$
7,123
  
Deduct
                                
Tax-exempt interest income
    
(171
)
    
(195
)
    
(533
)
    
(564
)
Bank-owned life insurance
    
(50
)
    
(88
)
    
(150
)
    
(256
)
Other, net
    
22

   
(21
)
    
(37
)
    
(50
)
   
$
1,570
    
$
2,157
    
$
4,228
    
$
6,253
  

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 September 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.
 
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
 
September 30,
2018
   
December 31,
2017
Deferred tax assets
            
Allowance for loan losses
  
$
3,529
    
$
3,486
  
Nonaccrual loan interest
    
277
      
346
  
Valuation allowance on other real estate owned
    
162
      
708
  
Unrealized loss on securities available for sale
    
1,193
      
417
  
Other
    
253
      
229
  
Gross deferred tax assets
    
5,414
      
5,186
  
Valuation allowance
    
---
      
---
  
Total net deferred tax assets
    
5,414
      
5,186
  
                 
Deferred tax liabilities
                
Depreciation
    
(996
)
    
(977
)
Prepaid expenses
    
(163
)
    
(183
)
Other
    
(259
)
    
(241
)
Gross deferred tax liabilities
    
(1,418
)
    
(1,401
)
Net deferred tax asset
  
$
3,996
    
$
3,785
  
 
There were no unrecognized tax benefits at September 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.