17.Income Taxes

The provision for income taxes consists of the following for the years ended December 31, 2017 and 2016:





The reconciliation between the statutory federal income tax rate and effective income tax rate for the years ended December 31, 2017 and 2016 is as follows:



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s temporary differences as of December 31, 2017 and 2016 are as follows:



The Tax Cuts and Jobs Act was enacted on December 22, 2017 and, among things, reduces the U.S. federal income tax rate for C Corporations from 35% to 21%. 



As described below, the Corporation has made a reasonable estimate of the effects on its existing net deferred tax assets as of December 31, 2017.  The Corporation revalued all of its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future.  The Corporation recognized a tax expense of $3.2 million in its tax provision for the year ended December 31, 2017 as a result of adjusting its deferred tax balance to reflect the new corporate income tax rate.



Deferred tax assets and liabilities related to available for sale securities gains/(losses), pension and SERP, and interest rate SWAPs that were evaluated as of December 31, 2017 noted above created a “stranded tax effect” in Accumulated Other Comprehensive Loss (“AOCL”) due to the enactment of the Tax Act.  The issue arose due to the nature of GAAP recognition of tax rate change effects on the AFS (DTA/DTL) revaluation as an adjustment to income tax provision.  In February 2018, FASB issued ASU 2018-02 – Income Statement – Reporting Comprehensive Income (Topic 220).  The Corporation early adopted the provisions of ASU 2018-02 and recorded a one-time reclassification of $4.4 million from AOCL to retained earnings for the stranded tax effects resulting from the newly enacted tax rate.  The amount of the reclassification was the difference between the 35 percent historical corporate tax rate and the newly enacted 21 percent corporate tax rate.  See Statement of Changes in Shareholders’ Equity for details of the reclassification.



In assessing the ability to realize deferred tax assets, management considers whether 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 is dependent upon the generation of future taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry-back or carry-forward period available under the tax law during the periods in which temporary differences are deductible.  The Corporation has considered future market growth, forecasted earnings, future taxable income, and feasible and permissible tax planning strategies in determining whether it will be able to realize the deferred tax asset. If the Corporation were to determine that it will not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made.  Conversely, if the Corporation were to make a determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.

At December 31, 2017, the Corporation had federal net operating losses (“NOLs”) of approximately $3.8 million and West Virginia NOLs of approximately $3.9 million for which deferred tax assets of $.8 million and $.2 million, respectively, have been recorded at December 31, 2017.   The federal NOLs were created in 2014 and 2016 and will begin to expire in 2037. West Virginia NOLs were created in 2010, 2012, 2014 and 2016 and will begin to expire in 2031. Management has determined that a deferred tax valuation allowance for these NOLs is not required for 2017 because management believes it is more likely than not (defined a level of likelihood that is more than 50%) that these deferred tax assets will be realized prior to the expiration of their carry-forward periods. 



At December 31, 2017, the Corporation had Maryland NOLs of $39.5 million for which a deferred tax asset of $2.4 million has been recorded.  There has been and continues to be a full valuation allowance on these NOLs based on the fact that management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation files a separate Maryland income tax return, the Corporation has recurring tax losses, and management believes the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs.  The valuation allowance of $2.4 million at December 31, 2017 reflects an increase of $.5 million from the level at December 31, 2016.