Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

(17) Income Taxes

Significant components of the Corporation’s net deferred tax asset at December 31, 2021 and 2020 are shown below.

(Dollars in thousands)	2021			2020
Deferred tax assets:
Allowance for loan and lease losses	$	3,065		$	2,810
Loan fees		1,409			1,908
Deferred compensation		2,661			722
Benefit plans		98			68
Unrealized loss on securities		63			—
Lease adjustments		485			219
Business combination adjustments		4,067			148
Acquired NOL, Section 1231, and charitable contribution carryforwards		745			91
Acquired AMT carryforward		777			—
Other		1,038			101
		14,408			6,067
Deferred tax liabilities:
Depreciation		(843	)		(394	)
Bond accretion		(39	)		(30	)
Goodwill and intangibles		(364	)		(359	)
Prepaid expenses		(706	)		(474	)
Business combination adjustments		(547	)		(641	)
Benefit plans		(1,130	)		(549	)
Unrealized gain on securities		—			(1	)
		(3,629	)		(2,448	)
Deferred tax asset, net	$	10,779		$	3,619

In assessing the Corporation’s ability to realize deferred federal tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and prudent, feasible and permissible as well as available tax planning strategies in making this assessment.  At December 31, 2021, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Mid Penn will realize the benefits of these deferred tax assets and has no valuation allowances recorded against any components of its deferred tax asset, including the carryforward balances related to net operating losses (NOL), Section 1231 losses, and charitable contribution carryforwards.

At December 31, 2021 Mid Penn had net operating loss (“NOL”) carryforwards of $622,000 resulting from the November 30, 2021 acquisition of Riverview.  These NOLs were assumed by Riverview in a previous acquisition and were generated during the tax years ended December 31, 2013, 2014, and 2015 and begin to expire in 2032.  At December 31, 2020 Mid Penn had NOL carryforwards of $119,000 resulting from the 2018 acquisitions First Priority and Scottdale which were utilized and exhausted as of December 31, 2021.  The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, signed into law on March 27, 2020 to mitigate the economic effects of the COVID-19 pandemic, implemented a five-year carryback period for NOLs generated in tax years beginning in 2018, 2019, or 2020.  As a result of this CARES Act provision, during the year ended December 31, 2020, Mid Penn filed the required federal tax returns to carryback NOLs to the 2017 tax year, comprised of (i) $1,238,000 of NOLs generated in 2018 and acquired from Scottdale, and (ii) $1,214,000 of NOLs generated in 2018 and acquired from First Priority.  The carryback of these NOLs to the 2017 tax year when the tax rate was 34 percent (versus 21 percent in 2018) generated a federal tax benefit of $318,000 recorded in the provision for income taxes on the Consolidated Statements of Income for the year ended December 31, 2020.  The remaining NOL balance of $119,000 at December 31, 2020 was generated in the 2012 tax year, was acquired from First Priority, and expires in 2032. Mid Penn is limited to a deduction of the lesser of the available NOL carryforward or 80 percent of pre-NOL taxable income in a single tax year as set forth in the Tax Cuts and Jobs Act.    

At December 31, 2021, Mid Penn had $57,000 of charitable contribution carryforwards which were acquired from Riverview, while at December 31, 2020, Mid Penn had no charitable contribution carryforwards.   During the years ended December 31, 2021 and 2020, Mid Penn generated sufficient taxable income to utilize all charitable contribution carryforwards.  During 2019, $211,000 of charitable contribution carryforwards were written off, resulting in $44,000 of additional tax expense recorded upon the filing of the final 2018 tax return during the third quarter of 2019.  Mid Penn expects to generate sufficient taxable income to utilize all charitable contribution carryforwards in the future.

The CARES Act also updated Alternative Minimum Tax (“AMT”) credit rules to permit AMT credit to be 100 percent refundable in the 2018 tax year.  As a result, during the year ended December 31, 2020, Mid Penn filed the required federal tax returns to request a full refund of the AMT credits that had been acquired from First Priority and Scottdale.  During 2021, and as a result of the Riverview acquisition, Mid Penn assumed $777,000 of AMT credits to be used on future tax returns.

Acquired Section 1231 losses totaling $314,000 were recorded as a result of filing the final First Priority return in 2019 and expire in 2022.

The annual usage of acquired NOL, charitable contribution carryforwards, and Section 1231 losses is limited by IRS Section 382 regulations.  These limitations are calculated separately for each acquisition as the federal long-term tax-exempt rate at the date of acquisition multiplied by the valuation of the selling company as calculated in accordance with GAAP.  As a result, the usage of acquired NOLs, charitable contribution carryforwards, AMT carryforwards, and Section 1231 losses to offset taxable income related to the Riverview acquisition is limited to $2,002,000 per year and $1,854,000 per year for the First Priority acquisition.  All contribution carryforwards related to the Scottdale acquisition have been utilized as of December 31, 2021.

The provision for income taxes consists of the following:

(Dollars in thousands)	2021		2020			2019
Current tax provision
Federal	$	6,178	$	6,340		$	2,875
State		70		157			185
Total current tax provision		6,248		6,497			3,060
Deferred tax expense (benefit)
Federal	$	484		(1,367	)	$	665
State		—		—			—
Total deferred tax expense	$	484		(1,367	)		665
Total provision for income taxes	$	6,732	$	5,130		$	3,725

A reconciliation of the federal income tax provision at the statutory rate of 21% for 2021, 2020 and 2019 to Mid Penn's actual federal income tax provision at its effective rate is as follows:

(Dollars in thousands)	2021			2020			2019
Provision at the expected statutory rate	$	7,571		$	6,581		$	4,499
Effect of tax-exempt income		(477	)		(499	)		(683	)
Effect of investment in life insurance		(75	)		(63	)		(66	)
State income taxes, net of federal tax benefit		55			124			146.0
Nondeductible interest		14			26			59
Low income housing partnership tax credits		(853	)		(861	)		(83	)
Nondeductible merger and acquisition expense		364			—			—
Other items		133			(178	)		(147	)
Provision for income taxes	$	6,732		$	5,130		$	3,725

Mid Penn has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.  Mid Penn does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

No amounts for interest and penalties were recorded in income tax expense in the consolidated statement of income for the years ended December 31, 2021, 2020, or 2019.  There were no amounts accrued for interest and penalties at December 31, 2021 or 2020.

Mid Penn and its subsidiaries are subject to U.S. federal income tax and income tax for the states of Pennsylvania, New Jersey, and Maryland.  With limited exceptions, Mid Penn is no longer subject to examination by taxing authorities for years before 2017.