Entity information:
10.
Income Taxes
 
The benefit for income taxes for the years ended
December 31,
201
7,
2016,
and
2015
consists of the following:
 
(dollars in thousands)
  
201
7
    
20
1
6
    
20
1
5
  
Current
                        
Federal
   $
2,137
     $
261
     $
58
  
State
    
-
      
-
      
-
  
Deferred
    
(5,056
 )    
(380
 )    
(84
 )
Total benefit for income taxes
   $
(2,919
 )   $
(119
 )   $
(26
 )
 
The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of
35.0%
for the years ended
December 31,
201
7,
2016,
and
2015.
 
(dollars in thousands)
  
201
7
    
20
1
6
    
20
1
5
  
Tax
provision computed at statutory rate
   $
2,095
     $
1,689
     $
843
  
Tax exempt interest
    
(573
 )    
(582
 )    
(394
 )
Effect of change in tax rate
    
7,661
      
-
      
-
  
Deferred tax asset valuation allowance
adjustment
    
(12,214
 )    
(1,508
 )    
(937
 )
Other
    
112
      
282
      
462
  
Total benefit for income taxes
   $
(2,919
 )   $
(119
 )   $
(26
 )
 
The significant components of the Company
’s net deferred tax asset as of
December 31, 2017
and
2016
are as follows:
 
(dollars in thousands)
  
201
7
    
201
6
  
Deferred tax assets
  
 
 
 
  
 
 
 
Allowance for loan losses
   $
2,047
     $
3,288
  
Deferred compensation
    
557
      
824
  
Unrealized losses on securities available for sale
    
2,789
      
4,087
  
Realized losses in other than temporary impairment charge
    
65
      
336
  
Foreclosed real estate write-downs
    
1,468
      
2,377
  
Interest income on non-accrual loans
    
525
      
1,425
  
Net operating loss carryforward
    
5,549
      
8,896
  
Other
    
1,266
      
2,001
  
Total deferred tax assets
    
14,266
      
23,234
  
Deferred tax liabilities
  
 
 
 
  
 
 
 
Deferred loan costs
    
998
      
1,313
  
Other
    
553
      
528
  
Total deferred tax liabilities
    
1,551
      
1,841
  
Net deferred tax asset before valuation allowance
    
12,715
      
21,393
  
Less: valuation allowance
    
-
      
(12,214
 )
Net deferred tax asset
   $
12,715
     $
9,179
  
 
The Company
’s net deferred tax asset before the consideration of a valuation allowance decreased to
$12.7
million at
December 31, 2017
compared to
$21.4
million at
December 31, 2016.
This decrease was primarily driven by the impact of the “Tax Cuts and Jobs Act” which was signed into law in
December 2017.
It included a reduction in the corporate income tax rate from
35%
to
21%.
The Company’s deferred tax asset balances have historically been calculated using a federal tax rate of
35%.
As a result of the change in the tax rate, the value of the Company’s existing deferred tax assets permanently decreased by
$7.7
million to
$12.7
million at
December 31, 2017.
Therefore, a charge of
$7.7
million was recorded to income tax expense in the
fourth
quarter of
2017
to reflect the reduction in value.
 
The $
12.7
million net deferred tax asset as of
December 31, 2017
is comprised of
$5.5
million currently recognizable through net operating loss carryforwards (“NOLs”) and
$7.2
million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company’s largest future reversal relates to its unrealized losses on securities available for sale, which totaled
$2.8
million as of
December 31, 2017.
 
The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary
, in accordance with the guidance provided in ASC
740,
in particular, applying the criteria set forth therein to determine whether it is more likely than
not
(i.e. a likelihood of more than
50%
) that some portion, or all, of the deferred tax asset will
not
be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than
not
that some portion or all of the deferred tax assets will
not
be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.
 
In conducting the deferred tax asset analysis, the Company believes it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered
for bank holding companies like the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back
two
years and carried forward for a period of
twenty
years, for NOLs created prior to January
1,
2018.
The Company has a federal NOL in the amount of
$24.4
million which will begin to expire after
December 31, 2030
through
December 31, 2031
if
not
utilized prior to that date. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
 
In assessing the need for a valuation allowance, we carefully weighed both positive and negative
evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
 
Positive evidence evaluated when considering the need for a valuation allowance included:
 
 
●
the improvement in earnin
gs during the
three
year period ended
December 31, 2017
 
 
●
continued growth in interest-earning assets is expected and supported by the capital raise completed during
the
fourth
quarter of
2016;
 
 
●
deposit
growth in each of the stores opened since the inception of the growth and expansion strategy in
2014
has met or exceeded expectations;
 
 
●
loan growth during
2017
was greater than
20%;
 
 
●
the acquisition of a
residential mortgage lending team (Oak Mortgage Company) completed in
July 2016
continues to supplement earnings growth;
 
 
●
two
of the
Company’s largest non-performing assets have been resolved in
2017;
and
 
 
●
a cumulative loss has
not
been recorded in recent years.
 
Negative evidence evaluated when considerin
g the need for a valuation allowance included:
 
 
●
profitability metrics for return on assets and return on equity remain below industry standards
; and
 
 
●
past earnings have been
heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors.
 
The ongoing success of the Company
’s growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put the Company in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets. Based on the guidance provided in FASB Accounting Standards Codification Topic
740
(ASC
740
), the Company believed that the positive evidence considered at
December 31, 2017
outweighed the negative evidence and that it was more likely than
not
that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was
not
required at
December 31, 2017
and a
$10.6
million benefit for income taxes was recorded in the
fourth
quarter of
2017
to reflect the reversal of the valuation allowance.
 
The net deferred tax asset balance before consideration of a valuation allowance
was
$12.7
million as of
December 31, 2017
and
$21.4
million as of
December 31, 2016. T
he Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of
$12.2
million as of
December 31, 2016.
 
The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting reali
zability.
 
The Company
accounts for uncertain tax positions if it is more likely than
not,
based on the technical merits, that the tax position will be realized or sustained upon examination. The Company has
not
identified any uncertain tax position as of
December 31, 2017.
No
interest or penalties have been recorded for the years ended
December 31, 2017,
2016,
and
2015.
The Internal Revenue Service has completed its audits of the Company’s federal tax returns for all tax years through
December 31, 2013.
The Pennsylvania Department of Revenue is
not
currently conducting any income tax audits. The Company’s federal income tax returns filed subsequent to
2014
remain subject to examination by the Internal Revenue Service.