Entity information:

Note 12 - Income Taxes

 

In accordance with ASC Topic 740, the Company evaluates on a quarterly basis, all evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for DTAs is needed. In conducting this evaluation, management explores all possible sources of taxable income available under existing tax laws to realize the net deferred tax asset beginning with the most objectively verifiable evidence first, including available carry back claims and viable tax planning strategies. If needed, management will look to future taxable income as a potential source. Management reviews the Company’s current financial position and its results of operations for the current and preceding years. That historical information is supplemented by all currently available information about future years. The Company understands that projections about future performance are subjective.

 

Deferred income taxes at September 30, 2017 and 2016 were as follows:

 

    September 30,  
    2017     2016  
    (In thousands)  
Deferred Tax Assets:                
Allowance for loan losses     4,279       3,299  
Non-accrual interest     16       56  
Alternative minimum tax (AMT) credit carryover     526       287  
Low-income housing tax credit carryover     217       217  
Supplement Employer Retirement Plan     386       412  
Charitable contributions     —       61  
Depreciation     146       60  
Federal net operating loss     935       4,344  
Unrealized loss on investments available-for-sale     96       —  
Other     388       651  
Total Deferred Tax Assets     6,989       9,387  
Valuation allowance for DTA     —       (61 )
Total Deferred Tax Assets, Net of Valuation Allowance   $ 6,989     $ 9,326  
Deferred Tax Liabilities:                
Unrealized gain on investments available-for-sale     —       (152 )
Mortgage servicing rights     (89 )     (112 )
Other     (229 )     (235 )
Total Deferred Tax Liabilities     (318 )     (499 )
Deferred Tax Assets, Net   $ 6,671     $ 8,827  

 

Of these DTA, the carryforward periods for certain tax attributes are as follows:

 

  • Gross federal net operating loss carryforwards of $2.9 million (net DTA of $1.0 million) to expire in the fiscal year ending September 30, 2031;

 

  • Low income housing credit carryforwards of $217,000 to expire in the fiscal years ending September 30, 2030 and 2031;

 

  • AMT credit carryforward has no expiration date; and

  

Income tax expense (benefit) for the years ended September 30, 2017, 2016 and 2015 was comprised of the following:

 

    September 30,  
    2017     2016     2015  
    (In thousands)  
Federal:                        
Current   $ 404     $ 142     $ 65  
Deferred     2,092       (6,316 )     (1,035 )
      2,496       (6,174 )     (970 )
State, current:     426       -       -  
                         
    $ 2,922     $ (6,174 )   $ (970 )

 

The following reconciliation between federal income tax at the statutory rate of 34% and the actual income tax expense (benefit) recorded on income before income taxes for the years ended September 30, 2017, 2016 and 2015:

 

    September 30,  
    2017     2016     2015  
    (Dollars in thousands)  
At federal statutory rate at 34%   $ 2,971     $ 2,032     $ 1,257  
Adjustments resulting from:                        
State tax, net of federal benefit     281       -       -  
Tax-exempt interest     (161 )     (265 )     (186 )
Earnings on bank-owned life insurance     (172 )     (176 )     (231 )
DTA valuation allowance     -       (8,007 )     (2,031 )
Other     3       242       221  
    $ 2,922     $ (6,174 )   $ (970 )
Effective tax rate     33.4 %     (103.3 )%     (26.2 )%

 

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more like than not to be sustained upon examination by tax authorities. As of September 30, 2017 and 2016, there were no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitation by the Internal Revenue Service and state taxing authorities for the years ended September 30, 2014 to September 30, 2017.

 

The Small Business Job Protection Act of 1996 provides for the repeal of the tax bad debt deduction computed under the percentage-of-taxable-income method. Upon repeal, the Company was required to recapture into income, over a six-year period, the portion of its tax bad debt reserves that exceeds its base year reserves (i.e., tax reserves

for tax years beginning before 1988). The base year tax reserves, which may be subject to recapture if the Company ceases to qualify as a bank for federal income tax purposes, are restricted with respect to certain distributions and have been treated as a permanent tax difference.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. We are in the process of analyzing the Act and its possible effects on the Company and the Bank.  The Act reduces the corporate tax rate to 21 percent from 35 percent, among other things. It could also require us to write down our deferred tax assets, which would reduce our net income during the first quarter of fiscal 2018. We cannot determine at this time the amount of any such write down, or the full effects of the Act on our business and financial results.