Entity information:
11. INCOME TAXES

 

The Company files a consolidated federal income tax return. The Company uses the specific charge-off method for computing reserves for bad debts. Generally this method allows the Company to deduct an annual addition to the reserve for bad debt equal to its net charge-offs.

 

The provision for income taxes for the years ended September 30, consists of the following:

 

    Year Ended September 30,  
    2017     2016     2015  
    (Dollars in Thousands)  
                   
Current:                        
Federal expense   $ 801     $ 1,275     $ 461  
Total current taxes     801       1,275       461  
                         
Deferred income tax (benefit) expense     140       (16 )     (345 )
Total income tax provision   $ 941     $ 1,259     $ 116  

 

Items that gave rise to significant portions of deferred income taxes are as follows:

 

    September 30,  
    2017     2016  
    (Dollars in Thousands)  
Deferred tax assets:                
Allowance for loan losses   $ 1,675     $ 1,289  
Non-accrual interest     349       163  
Accrued vacation     12       13  
Capital loss carryforward     476       378  
Post-retirement benefit plans     98       96  
Split dollar life insurance     15       18  
Unrealized losses on available for sale securities     569       -  
Unrealized losses on interest rate swaps     -       69  
Deferred compensation     1,439       -  
Goodwill     148       -  
Purchase accounting adjustments     731       -  
Other     254       -  
Employee benefit plans     90       434  
Total deferred tax assets     5,856       2,460  
Valuation allowance     (378 )     (378 )
Total deferred  tax assets, net of valuation allowance     5,478       2,082  
                 
Deferred tax liabilities:                
Property     332       423  
Unrealized gains on available for sale securities     -       500  
Unrealized gains on interest rate swaps     171       -  
481(a)Adjustment     -       12  
Deferred loan fees     884       578  
Total deferred tax liabilities     1,387       1,513  
Net deferred tax asset   $ 4,091     $ 569  

 

 

The Company establishes a valuation allowance for deferred tax assets when management believes that the deferred tax assets are not likely to be realized either through a carry back to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income.  The valuation allowance totaled $378,000 at both September 30, 2017 and 2016. The gross deferred tax assets related to capital loss carryforwards increased in the aggregate by $98 thousand during the year ended September 30, 2017, primarily due to the sale of AFS investment securities acquired from the Polonia Bancorp acquisition.

 

The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:

 

    2017     2016     2015  
          Percentage           Percentage           Percentage  
          of Pretax           of Pretax           of Pretax  
    Amount     Income     Amount     Income     Amount     Income (Loss)  
    (Dollars in Thousands)  
Tax at statutory rate   $ 1,265       34.0 %   $ 1,353       34.0 %   $ 798       34.0 %
Adjustments resulting from:                                                
Valuation allowance     -       -       (156 )     (3.9 )     (677 )     (28.8 )
Tax exempt income     (109 )     (2.9 )     -       -       -       -  
Nondeductible merger expenses     80       2.1       -       -       -       -  
Income from bank owned life insurance     (230 )     (6.2 )     (113 )     (2.8 )     (117 )     (5.0 )
Employee benefit  plans     (39 )     (1.1 )     151       3.8       126       5.4  
Other     (26 )     (0.6 )     24       0.5       (14 )     (0.6 )
                                                 
Income tax expense   $ 941       25.3 %   $ 1,259       31.6 %   $ 116       5.0 %

 

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Operations as a component of income tax expense.  During fiscal 2017, the Internal Revenue Service conducted an audit of the Company’s tax returns for the year ended September 30, 2014, and no adverse findings were reported. The Company’s federal and state income tax returns for taxable years through September 30, 2014 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.