Entity information:
Note
19
– Income Taxes
 
A.
Components of Net Deferred Tax Asset:
 
   
December 31,
  
(dollars in thousands)
  
2017
    
2016
  
Deferred tax assets:
                
Loan and lease loss reserve
   $
3,948
     $
6,492
  
Other reserves
    
3,169
      
3,611
  
Net operating loss carry-forward
    
11,113
      
471
  
Alternative minimum tax credits
    
1,116
      
567
  
Unrealized
depreciation of available for sale securities
   
761
      
663
  
Defined benefit plans
    
1,361
      
2,068
  
RBPI Merger Fair Values
    
4,726
      
—
  
Total deferred tax asset
   $
26,194
     $
13,872
  
Deferred tax liabilities:
                
Other reserves
   $
19
     $
52
  
Originated MSRs
    
1,253
      
1,969
  
Amortizing fair value adjustments
    
970
      
1,336
  
Other
    
53
      
—
  
Total deferred tax liability
   $
2,295
     $
3,357
  
Total net deferred tax asset
   $
23,899
     $
10,515
  
 
Not
included in the table above
are deferred tax assets for state net operating losses and unrealized capital losses for partnership investments and their respective valuation allowance of
$211
 thousand and
$445
 thousand. The state net operating losses of our leasing subsidiary as of
December 31, 2017
will expire between
2023
and
2036.
 
As a result of the RBPI Merger, deferred tax assets were initially increased
by
$33.1
 million related to purchase accounting adjustments and net deferred tax assets carried over from RBPI.
 
B. The provision
(benefit)
for income taxes consists of the following:
 
   
December 31,
  
(dollars in thousands)
  
2017
    
2016
    
2015
  
Current
   $
13,812
     $
16,492
     $
12,006
  
Deferred
    
20,418
      
1,676
      
(2,834
)
Total
   $
34,230
     $
18,168
     $
9,172
  
 
C. Applicable income taxes differed from the amount derived by applying the statutory federal tax rate to income as follows:
 
(dollars in thousands)
  
2017
    
Tax
Rate
    
2016
    
Tax
Rate
    
2015
    
Tax
Rate
  
Computed tax expense at statutory 
federal rate
  $
20,036
      
35.0
%
   $
18,972
      
35.0
%
   $
9,074
      
35.0
%
Tax-exempt income
    
(600
 )    
(1.0
 )    
(758
)
    
(1.4
)
    
(622
)
    
(2.4
)
State tax (net of federal tax benefit)
    
303
      
0.5
      
425
      
0.8
      
299
      
1.2
  
Non-deductible merger expense
    
455
      
0.8
      
—
      
—
      
105
      
0.4
  
Excess tax benefit
– stock based compensation
    
(1,049
 )    
(1.8
 )    
(565
)
    
(1.0
 )    
—
      
—
  
Adjustment to net deferred tax assets for enacted changes in tax laws and rates
    
15,193
      
26.5
      
—
      
—
      
—
      
—
  
Other, net
    
(108
 )    
(0.2
 )    
94
      
0.1
      
316
      
1.2
  
Total income tax expense
   $
34,230
      
59.8
%
   $
18,168
      
33.5
%
   $
9,172
      
35.4
%
 
D. Tax Law Changes
– Impact to Tax Expense
 
With the enactment of the Tax Cuts and Jobs Act (“
Tax Reform” or the “Tax Act”) on
December 22, 2017,
the federal corporate income tax rate was reduced from
35%
to
21%
effective
January 1, 2018.
The Corporation's
2017
financial results included a charge of
$15.2
million to income tax expense, primarily resulting from re-measuring the Corporation's net deferred tax assets to reflect the recently enacted lower tax rate effective
January 1, 2018.
 
Under ASC
740,
Income Taxes, the effect of income tax law cha
nges on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies
not
only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income. As a result of the reduction in the U.S. federal statutory income tax rate, we recognized a net income tax expense totaling
$15.2
million, determined as follows:
 
Components of Provi
sional Tax Expense Related to Tax Law Changes
           
(dollars in thousands)
          
Deferred taxes related to items recognized in continuing operations
   $
14,410
    
Deferred taxes on net actuarial loss on defined benefit post-retirement benefit plans
    
275
    
Deferred taxes on net unrealized losses on available for sale investment securities
    
507
    
    $
15,192
    
 
Because ASC
740
requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations rather than backward tracing the adjustment through the accumulated other comprehensive
income component of shareholders' equity, the net adjustment to deferred taxes detailed above included a net expense totaling
$782
thousand related to items recognized in other comprehensive income.
 
E. Other Income Tax Information
 
In accordance with the provisions of ASC
740,
“
Accounting for Uncertainty in Income Taxes”, management recognizes the financial statement benefit of a tax position only after determining that the Corporation would more likely than
not
sustain the position following an examination. For tax positions meeting the more-likely-than-
not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50
 percent likelihood of being realized upon settlement with the relevant tax authority. Management applied these criteria to tax positions for which the statute of limitations remained open.
 
There were
no
reserves for uncertain tax positions recorded during the
twelve
months ended
December 31, 2017,
2016
or
2015.
 
The Corpor
ation is subject to income taxes in the U.S. federal jurisdiction, and in multiple state jurisdictions. The Corporation is
no
longer subject to U.S. federal income tax examination by tax authorities for the years before
2014.
 
The Corporation
’s policy is to record interest and penalties on uncertain tax positions as income tax expense.
No
interest or penalties were accrued in
2017.
 
As of
December 31, 2017,
the Corporation has net operating loss (“
NOL”) carry-forwards for federal income tax purposes of
$52.9
million, of which approximately
$40
thousand was related to the
2010
merger with First Keystone Financial, Inc. (“FKF”) and is available to offset future federal taxable income through
2030.
The remaining
$52.9
million of federal net operating loss carry-forwards are a result of the RBPI Merger which are subject to an annual usage limitation of approximately
$2.7
million. Management estimates it will be able to utilize an additional
$6.0
million per year of the NOLs acquired in the RBPI Merger for a
five
-year period subsequent to
December 15, 2017
due to the existence of net unrealized built-in gains (“NUBIG”) under IRC Section
382,
these NOLs will begin to expire in
2030.
In addition, the Corporation has alternative minimum tax (“AMT”) credits of
$1.1
million, approximately
$548
thousand of which are related to the RBPI Merger. The credit amounts do
not
expire. The amount of AMT credits that can be used per year are limited under IRC section
383.
The Corporation has determined that it is more likely than
not
that the results of future operations will generate sufficient taxable income to realize the deferred tax asset related to these amounts.
 
As a result of the
July 1, 2010
merger with FKF, the Corporation succeeded to
$2.5
million of tax bad debt reserves that existed at FKF as of
June 30, 2010.
As of
December 31, 2017,
the Corporation h
as
not
recognized a deferred income tax liability with respect to these reserves. These reserves could be recognized as taxable income and create a current and/or deferred tax liability at the income tax rates then in effect if
one
of the following conditions occurs: (
1
) the Bank’s retained earnings represented by this reserve are used for distributions, in liquidation, or for any other purpose other than to absorb losses from bad debts; (
2
) the Bank fails to qualify as a bank, as provided by the Internal Revenue Code; or (
3
) there is a change in federal tax law.