Federal Income Taxes

12 Months Ended

Dec. 31, 2016

(12) FEDERAL INCOME TAXES

Income tax expense was comprised of the following:



	Year Ended
	December 31
(Dollars in thousands)	2016		2015
Current tax expense:
Federal	$	1,515	$	1,581
State		10		10
Deferred income tax (benefit) expense:
Federal		344		(88)
Income tax expense	$	1,869	$	1,503

The effective income tax rates of 27.3% for 2016 and 22.6% for 2015 were different than the applicable statutory Federal income tax rate of 34%. The reason for these differences follows:



	Year Ended
	December 31
(Dollars in thousands)	2016		2015
Federal income taxes at statutory rate	$	2,328	$	2,258
Decrease resulting from:
Tax-exempt interest and dividend preference		(643)		(640)
Bank owned life insurance		(77)		(78)
Other, net (decrease) increase		261		(37)
Income tax expense	$	1,869	$	1,503

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:



	December 31
(Dollars in thousands)	2016		2015
Deferred tax assets:
Allowance for credit losses	$	1,827	$	1,677
Unrealized losses on securities		560		402
Unrealized losses on reclassified securities		2		6
Unrealized loss on pension obligation		609		616
Capital loss disallowance		4		1
State net operating losses		620		528
Unvested stock awards		103		147
Deferred compensation (SERP)		680		732
Nonqualified stock options		48		59
Depreciation		123		-
Pension		6		-
Non-accrued interest		661		468
Provision for unfunded loans		117		64
OREO write-downs		52		52
Core deposit intangible		16		14
Accrued expenses		165		57
Purchase accounting loan general credit mark		1,482		-
Purchase accounting loan specific credit mark		273		-
Purchase accounting loan interest rate mark		96		-
Purchase accounting CD rate mark		236		-
Purchase accounting term FHLBP advances		163		-
Organization costs		23		-
Other reserves - reserve for unfunded		29		-
Total gross deferred tax assets		7,895		4,823
Deferred tax liabilities:
Depreciation		-		(31)
Pension expense		-		(27)
Bank shares tax credit		(204)		(199)
Prepaid expenses		(313)		(219)
Mortgage servicing rights		(44)		(44)
Deferred gain from insurance proceeds		(401)		(41)
Bad debt reserve		(241)		-
Market discount accretion		(18)		-
Purchase accounting core deposit intangible		(165)		-
Prepaid expenses (acquired)		(23)		-
Purchase accounting deferred loan fees		(615)		-
Total gross deferred tax liabilities		(2,024)		(561)
Valuation allowance		(621)		(529)
Net deferred tax asset	$	5,250	$	3,733

As of December 31, 2016, DNB had no material unrecognized tax benefits or accrued interest and penalties. It is DNB’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Federal and state tax years 2013 through 2015 were open for examination as of December 31, 2016.

DNB had net state operating loss carryovers with the Commonwealth of Pennsylvania of $8.7 million and $7.4 million at December 31, 2016 and 2015, respectively for which a full valuation allowance has been established. These carryovers will begin to expire in 2021.