Income Taxes

12 Months Ended

Dec. 31, 2020

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


	For the Years Ended December 31,
(Dollars in thousands)	2020		2019		2018
Current:
Federal	$	18,498	$	15,043	$	9,770
State	1,337		1,098		972
Deferred:
Federal	(9,288)		(1,068)		(862)
State	(566)		(739)		263
	$	9,981	$	14,334	$	10,143

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


	For the Years Ended December 31,
	2020		2019		2018
Expected provision at statutory rate	21.0	%	21.0	%	21.0	%
Difference resulting from:
Tax exempt interest income, net of disallowance	(3.8)		(3.2)		(4.0)
Increase in value of bank owned life insurance assets	(1.1)		(0.8)		(1.1)
Stock-based compensation	0.2		—		(0.2)

State income taxes, net of federal benefits	1.1		0.4		1.6
Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates	—		—		(0.5)
Changes in valuation allowance	0.2		0.2		0.1
Other	(0.1)		0.3		(0.2)
Effective tax rate	17.5	%	17.9	%	16.7	%

On March 27, 2020, the CARES Act was enacted into law in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as enhanced interest deductibility, repeal of the 80% limitation with respect to net operating losses arising in taxable years 2018, 2019 and 2020, and additional depreciation deductions related to qualified improvement property. The Corporation has concluded its analysis of these provisions as of December 31, 2020 and determined they did not have a material impact on the Corporation's income taxes for 2020.

On December 22, 2017, the 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 Tax Cuts and Jobs Act ("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. The Corporation concluded its analysis and determined that no adjustments were necessary 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 included $6.0 million at December 31, 2020, 2019 and 2018, 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 (the "Act") 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, 2020 and 2019, 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, 2017.

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 $71.2 million which will begin to expire in 2021 if not utilized. A valuation allowance at December 31, 2020 and 2019 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)	2020		2019
Deferred tax assets:
Allowance for credit losses, loans and leases	$	18,113	$	7,680
Deferred compensation	1,625		1,834
Actuarial adjustments on retirement benefits*	5,408		4,868
State net operating losses	5,621		5,071
Other-than-temporary impairments on equity securities	151		151

Net unrealized holding losses on securities available-for-sale and swaps*	483		915
Lease liability	8,227		8,177
Deferred loan fees and costs	583		—
Other deferred tax assets	2,148		1,146
Gross deferred tax assets	42,359		29,842
Valuation allowance	(4,766)		(4,284)
Total deferred tax assets, net of valuation allowance	37,593		25,558
Deferred tax liabilities:
Mortgage servicing rights	1,370		1,404

Retirement plans	5,309		5,299
Deferred loan fees and costs	—		1,330
Acquisition-related fair value adjustments	1,236		1,515
Intangible assets	2,580		1,956
Accounting method change adjustment	385		768
Depreciation	888		1,137
Right of use asset	7,491		7,481

Other deferred tax liabilities	1,820		1,053
Total deferred tax liabilities	21,079		21,943
Net deferred tax assets	$	16,514	$	3,615

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

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details