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INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Note 15—INCOME TAXES

Income tax expense for the years ended December 31, 2019, 2018 and 2017 consists of the following:

		Year ended December 31
(Dollars in thousands)		2019				2018				2017
Current
Federal		$	2,299			$	2,244			$	1,665
State			541				351				92
			2,840				2,595				1,757
Deferred
Federal			18				99				1,573
State			—				—				—
			18				99				1,573
Income tax expense		$	2,858			$	2,694			$	3,330

Reconciliation from expected federal tax expense to effective income tax expense (benefit) for the periods indicated are as follows:

		Year ended December 31
(Dollars in thousands)		2019				2018				2017
Expected federal income tax expense		$	2,904			$	2,924			$	3,109
State income tax net of federal benefit			427				277				61
Tax exempt interest			(293	)			(353	)			(593	)
Increase in cash surrender value life insurance			(144	)			(152	)			(212	)
Valuation allowance			52				68				216
Merger expenses			—				—				92
Low income housing tax credits			—				—				(186	)
Excess tax benefit of stock compensation			(56	)			(12	)			(197	)
Deferred tax adjustment resulting from tax rate change			—				—				1,247
Other			(32	)			(58	)			(207	)
		$	2,858			$	2,694			$	3,330

The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities:

		December 31,
(Dollars in thousands)		2019				2018
Assets:
Allowance for loan losses		$	1,426			$	1,353
Excess tax basis of deductible intangible assets			261				391
Excess tax basis of assets acquired			—				8
Net operating loss carry forward			794				852
Unrealized loss on available-for-sale securities			—				471
Compensation expense deferred for tax purposes			1,054				1,015
Deferred loss on other-than-temporary-impairment charges			5				5
Tax credit carry-forwards			74				4
Other			397				438
Total deferred tax asset			4,011				4,537
Valuation reserve			825				773
Total deferred tax asset net of valuation reserve			3,186				3,764
Liabilities:
Tax depreciation in excess of book depreciation			303				310
Excess financial reporting basis of assets acquired			1,057				1,139
Unrealized gain on available-for-sale securities			811				—
Total deferred tax liabilities			2,171				1,449
Net deferred tax asset recognized		$	1,015			$	2,315

At December 31, 2019 the Company has approximately $18.3 million in State net operating losses. A valuation allowance is established to fully offset the deferred tax asset related to these net operating losses of the holding company. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additional amounts of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The net deferred asset is included in other assets on the consolidated balance sheets.

On December 22, 2017, the Tax Act was signed into law. The Tax Act reduced the corporate tax rate to 21% from 35%, effective for 2018, among other things. As a result of the change in tax rates, we revalued our deferred tax assets and liabilities to reflect realization at the lower rate effective December 22, 2017, the date the law was enacted. The impact of this adjustment was to increase our deferred tax expense by approximately $1.2 million for the year ended December 31, 2017. The lower tax rate decreased the overall tax rate in 2018.

A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available-for-sale. The change in the tax expense related to the change in unrealized losses on these securities of $1.3 million has been recorded directly to shareholders’ equity. The balance in the change in net deferred tax asset results from the current period deferred tax expense of $18 thousand. At December 31, 2019, the Company had a federal net operating loss carryforward in the amount of $331 thousand acquired in the Cornerstone transaction. There are statutory limitations on the amount that can be utilized in each year. It is anticipated that all of the net operating loss will be utilized prior to expiration.

Tax returns for 2016 and subsequent years are subject to examination by taxing authorities.

As of December 31, 2019, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.