|
9. |
INCOME TAXES |
The provision for income taxes consists of (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
837 |
|
|
$ |
3,456 |
|
|
$ |
2,154 |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
Total current taxes |
|
|
837 |
|
|
|
3,456 |
|
|
|
2,170 |
|
|
Deferred income tax benefit |
|
|
754 |
|
|
|
(873 |
) |
|
|
784 |
|
|
Total income tax provision |
|
$ |
1,591 |
|
|
$ |
2,583 |
|
|
$ |
2,954 |
|
The tax effects of deductible and taxable temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
3,184 |
|
|
$ |
3,079 |
|
|
Adjustment to record funded status of pension plan |
|
|
324 |
|
|
|
3,134 |
|
|
Investment losses subject to Section 382 limitation |
|
|
4,562 |
|
|
|
5,018 |
|
|
Purchase accounting adjustment |
|
|
341 |
|
|
|
49 |
|
|
Net unrealized loss on securities |
|
|
478 |
|
|
|
— |
|
|
Deferred compensation |
|
|
631 |
|
|
|
643 |
|
|
Other real estate owned |
|
|
273 |
|
|
|
293 |
|
|
Nonaccrual interest |
|
|
223 |
|
|
|
332 |
|
|
Other |
|
|
3,385 |
|
|
|
3,669 |
|
|
Total gross deferred tax assets |
|
|
13,401 |
|
|
|
16,217 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Pension plan |
|
|
924 |
|
|
|
998 |
|
|
Net unrealized gain on securities |
|
|
— |
|
|
|
2,036 |
|
|
Mortgage servicing rights |
|
|
80 |
|
|
|
93 |
|
|
Premises and equipment |
|
|
12 |
|
|
|
218 |
|
|
Net unrealized gain on derivatives |
|
|
413 |
|
|
|
102 |
|
|
Other |
|
|
1,550 |
|
|
|
885 |
|
|
Total gross deferred tax liabilities |
|
|
2,979 |
|
|
|
4,332 |
|
|
Net deferred tax assets |
|
$ |
10,422 |
|
|
$ |
11,885 |
|
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 carryback to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income.
Accounting principles prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
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 Statement of Income. The Company’s federal and state income tax returns for taxable years through 2012 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
The reconciliation of the federal statutory rate and the Company’s effective income tax rate is as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||
|
|
|
Amount |
|
|
% of Pretax Income |
|
|
Amount |
|
|
% of Pretax Income |
|
|
Amount |
|
|
% of Pretax Income |
|
||||||
|
Provision at statutory rate |
|
$ |
3,036 |
|
|
|
34.0 |
% |
|
$ |
3,505 |
|
|
|
34.0 |
% |
|
$ |
4,333 |
|
|
|
34.0 |
% |
|
Income from bank-owned life insurance |
|
|
(351 |
) |
|
|
(3.9 |
) |
|
|
(319 |
) |
|
|
(3.1 |
) |
|
|
(318 |
) |
|
|
(2.5 |
) |
|
Tax-exempt income |
|
|
(843 |
) |
|
|
(9.5 |
) |
|
|
(826 |
) |
|
|
(8.0 |
) |
|
|
(752 |
) |
|
|
(5.9 |
) |
|
Low-income housing credits |
|
|
(197 |
) |
|
|
(2.2 |
) |
|
|
(226 |
) |
|
|
(2.2 |
) |
|
|
(254 |
) |
|
|
(2.0 |
) |
|
Nondeductible merger expenses |
|
|
— |
|
|
|
— |
|
|
|
89 |
|
|
|
0.9 |
|
|
|
21 |
|
|
|
0.2 |
|
|
Other, net |
|
|
(54 |
) |
|
|
(0.6 |
) |
|
|
360 |
|
|
|
3.5 |
|
|
|
(76 |
) |
|
|
(0.6 |
) |
|
Actual tax expense and effective rate |
|
$ |
1,591 |
|
|
|
17.8 |
% |
|
$ |
2,583 |
|
|
|
25.1 |
% |
|
$ |
2,954 |
|
|
|
23.2 |
% |
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax that is calculated at 11.5 percent of earnings based on U.S. generally accepted accounting principles with certain adjustments.
Retained earnings include $4.6 million at September 30, 2017, for which no provision for federal income tax has been made. This amount represents deductions for bad debt reserves for tax purposes, which were only allowed to savings institutions that met certain definitional tests prescribed by the Internal Revenue Code of 1986, as amended. The Small Business Job Protection Act of 1996 eliminated the special bad debt deduction granted solely to thrifts. Under the terms of the Act, there would be no recapture of the pre-1988 (base year) reserves. However, these pre-1988 reserves would be subject to recapture under the rules of the Internal Revenue Code if the Bank itself pays a cash dividend in excess of earnings and profits or liquidates. The Act also provides for the recapture of deductions arising from the Bank’s applicable excess reserve, which is defined as the total amount of reserve over the base year reserve. The Bank’s total reserve exceeds the base year reserve, and deferred taxes have been provided for this excess.