Federal Income Taxes

12 Months Ended

Dec. 31, 2016

Note 12. Federal Income Taxes

The temporary differences which give rise to significant portions of deferred tax assets and liabilities are as follows:



(Dollars in thousands)	December 31
Deferred Tax Assets	2016		2015
Allowance for loan losses	$	3,766	$	3,429
Deferred compensation		986		1,017
Purchase accounting		23		22
Deferred loan fees and costs, net		160		160
Capital loss carryover		280		813
Other than temporary impairment of investments		260		376
Accumulated other comprehensive loss		2,171		1,917
AMT Credit		-		192
Depreciation		45		-
Other		561		423
		8,252		8,349
Valuation allowance		(467)		(1,000)
Total gross deferred tax assets		7,785		7,349

Deferred Tax Liabilities
Depreciation		-		334
Joint ventures and partnerships		36		21
Pension		1,886		2,199
Mortgage servicing rights		19		37
Total gross deferred tax liabilities		1,941		2,591
Net deferred tax asset	$	5,844	$	4,758

In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that 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 tax planning strategies in making this assessment. 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 the Bank will realize the benefits of these deferred tax assets other than those for which a valuation allowance has been recorded.

The components of the provision for Federal income taxes attributable to income from operations were as follows:



	For the Years Ended December 31
(Dollars in thousands)	2016		2015		2014
Current tax expense	$	2,134	$	2,382	$	1,712
Deferred tax expense (benefit)		(832)		(111)		294
Income tax provision	$	1,302	$	2,271	$	2,006

For the years ended December 31, 2016, 2015, and 2014, the income tax provisions are different from the tax expense which would be computed by applying the Federal statutory rate to pretax operating earnings. A reconciliation between the tax provision at the statutory rate and the tax provision at the effective tax rate is as follows:



	For the Years Ended December 31
(Dollars in thousands)	2016		2015		2014
Tax provision at statutory rate (34%)	$	3,192	$	4,241	$	3,539
Income on tax-exempt loans and securities		(1,751)		(1,566)		(1,466)
Nondeductible interest expense relating to carrying tax-exempt obligations		24		22		28
Dividends received exclusion		-		(2)		(7)
Income from bank owned life insurance		(210)		(182)		(163)
Life insurance proceeds		-		(35)		-
Change in valuation allowance		-		(200)		-
Stock option compensation		30		25		-
Other, net		17		(32)		75
Income tax provision	$	1,302	$	2,271	$	2,006

Effective income tax rate		13.9%		18.2%		19.3%

At December 31, 2016, the Corporation had a capital loss carryover of $824 thousand. This loss carryover can only be offset with capital gains for federal income tax purposes. The tax benefit of this carryover is $280 thousand, expiring in 2018, and the Corporation has recorded a valuation allowance of $280 thousand against the capital loss carryover.

The Corporation recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense for all periods presented. No penalties or interest were recognized in 2016, 2015 or 2014. The Corporation has no uncertain tax positions at December 31, 2016. The Corporation is no longer subject to U.S. Federal examinations by tax authorities for the years before 2013.