Income Taxes

12 Months Ended

Dec. 31, 2019

The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:


	For the Years Ended December 31,
(Dollars in thousands)	2019		2018		2017
Current:
Federal	$	15,043	$	9,770	$	9,273
State	1,098		972		961
Deferred:
Federal	(1,068)		(862)		7,350
State	(739)		263		133
	$	14,334	$	10,143	$	17,717

The provision for income taxes differs from the expected statutory provision as follows:


	For the Years Ended December 31,
	2019		2018		2017
Expected provision at statutory rate	21.0	%	21.0	%	35.0	%
Difference resulting from:
Tax exempt interest income, net of disallowance	(3.2)		(4.0)		(6.1)
Increase in value of bank owned life insurance assets	(0.8)		(1.1)		(2.2)
Stock-based compensation	—		(0.2)		(1.0)

State income taxes, net of federal benefits	0.4		1.6		1.2
Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates	—		(0.5)		1.7
Changes in valuation allowance	0.2		0.1		0.5
Other	0.3		(0.2)		(0.4)
Effective tax rate	17.9	%	16.7	%	28.7	%

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (TCJA), was signed into law. The TCJA includes many provisions that affected the Corporation's income tax expense, including reducing the Corporation's federal tax rate from 35% to 21% effective January 1, 2018. As a result of the rate reduction, the Corporation was required to re-measure the deferred tax assets and liabilities using the enacted rate at which they were expected to be recovered or settled. The re-measurement of the Corporation's net deferred tax asset resulted in additional 2017 income tax expense of $1.1 million.

Also, on December 22, 2017, the U.S. Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 118 (SAB 118) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the TCJA in situations where a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allowed for a measurement period not to extend beyond one year from the TCJA's enactment date to complete the necessary accounting. The Corporation completed the calculations of the provisional items with the completion of the 2017 tax returns. The impact of the completed calculations to the re-measurement of the Corporation's net deferred tax asset resulted in an income tax benefit of $300 thousand which the Corporation recorded in 2018.

Based on SAB 118, the Corporation recorded provisional amounts of deferred income taxes using reasonable estimates in four areas where information necessary to complete the accounting was not available, prepared or analyzed: (1) The Corporation's deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under the TCJA which allows for full expensing of qualified property purchased and placed in service after September 27, 2017. (2) The Corporation's deferred tax asset for temporary differences associated with accrued compensation was awaiting final determinations of amounts that will be paid and deducted on the 2017 income tax returns. (3) The Corporation's deferred tax liability for temporary differences associated with equity investments in partnerships was awaiting receipt of Schedules K-1 from outside preparers, which was necessary to determine the 2017 tax impact from these investments. (4) The Corporation's deferred tax liability for temporary differences related to its qualified pension plan is based upon actuarial reports from the Corporation's third party provider. However, the Corporation was still in the process of determining if a contribution related to the 2017 plan year was going to be made.

The Corporation did not make any adjustments to deferred tax assets, representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain employees to $1.0 million.

Retained earnings include $6.0 million at December 31, 2019, 2018 and 2017, which was originally generated by Fox Chase Bank (acquired in 2016), 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 criteria 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 Small Business Job Protection 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 Corporation pays a cash dividend in excess of cumulative retained earnings or liquidates.

At December 31, 2019 and 2018, the Corporation had no material unrecognized tax benefits or accrued interest and penalties recorded. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. Interest and penalties are recorded in noninterest expense in the year they are assessed. For tax purposes, interest is treated as a deductible expense and penalties are treated as a non-deductible expense.

The Corporation and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Pennsylvania and various other state and local jurisdictions. The Corporation and its subsidiaries are generally no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2016.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred state taxes are combined with federal deferred taxes (net of the impact of deferred state tax on the deferred federal tax) and are shown in the table below by major category.

The Corporation has a state net operating loss carry-forward of $64.3 million which will begin to expire after 2020 if not utilized. A valuation allowance at December 31, 2019 and 2018 was attributable to deferred tax assets generated in certain state jurisdictions for which management believes it is more likely than not that such deferred tax assets will not be realized. Other than the valuation allowance on certain state deferred tax assets, management has determined that no additional valuation allowance is necessary for deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. The Corporation will continue to review the criteria related to the recognition of deferred tax assets on a regular basis.

The assets and liabilities giving rise to the Corporation’s deferred tax assets and liabilities are as follows:


	At December 31,
(Dollars in thousands)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	7,680	$	6,410
Deferred compensation	1,834		1,734
Actuarial adjustments on retirement benefits*	4,868		4,592
State net operating losses	5,071		4,730
Other-than-temporary impairments on equity securities	151		148

Net unrealized holding losses on securities available-for-sale and swaps*	915		2,968
Lease liability	8,177		—
Other deferred tax assets	1,146		1,368
Gross deferred tax assets	29,842		21,950
Valuation allowance	(4,284)		(3,830)
Total deferred tax assets, net of valuation allowance	25,558		18,120
Deferred tax liabilities:
Mortgage servicing rights	1,404		1,463

Retirement plans	5,299		5,263
Deferred loan fees and costs	1,330		1,163
Acquisition-related fair value adjustments	1,515		1,605
Intangible assets	1,956		1,987
Accounting method change adjustment	768		1,154
Depreciation	1,137		937
Right of use asset	7,481		—

Other deferred tax liabilities	1,053		963
Total deferred tax liabilities	21,943		14,535
Net deferred tax assets	$	3,615	$	3,585

*Represents the amount of deferred taxes recorded in accumulated other comprehensive income.