INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes consists of:



Years ended September 30,	2016			2015			2014
	(Dollars in Thousands)
Federal:
Current	$	4,410		$	4,217		$	3,787
Deferred	(440		)	(3,896		)	(1,765		)
	3,970			321			2,022

State:
Current	1,422			1,048			874
Deferred	210			(1		)	10
	1,632			1,047			884

Income tax expense	$	5,602		$	1,368		$	2,906

Total income tax expense differs from the statutory federal income tax rate as follows:



Years ended September 30,	2016			2015			2014
	(Dollars in Thousands)

Income tax expense at federal tax rate	$	13,588		$	6,798		$	6,517
Increase (decrease) resulting from:
State income taxes net of federal benefit	933			692			575
Nontaxable buildup in cash surrender value	(580		)	(711		)	(399		)
Incentive stock option expense	(66		)	(37		)	(187		)
Tax exempt income	(8,257		)	(5,230		)	(3,594		)
Nondeductible expenses	196			188			120
Other, net	(212		)	(332		)	(126		)
Total income tax expense	$	5,602		$	1,368		$	2,906

The components of the net deferred tax asset (liability) at September 30, 2016 and 2015 are:



September 30,	2016			2015
	(Dollars in Thousands)
Deferred tax assets:
Bad debts	$	2,044		$	2,286
Deferred compensation	1,345			1,040
Stock based compensation	165			235
Operational reserve	540			453
AMT Credit	5,563			4,490
Intangibles	393			573
Indirect tax benefits of unrecognized tax positions	216			384
Other assets	1,462			1,293
	11,728			10,754

Deferred tax liabilities:
FHLB stock dividend	(411		)	(414		)
Premises and equipment	(1,913		)	(1,222		)
Patents	(988		)	(967		)
Prepaid expenses	(668		)	(633		)
Net unrealized gains on securities available for sale	(12,348		)	(521		)
	(16,328		)	(3,757		)

Net deferred tax assets (liabilities)	$	(4,600	)	$	6,997

As of September 30, 2016 and 2015, the Company had a gross deferred tax asset of $921,000 and $829,000, respectively, for separate company state cumulative net operating loss carryforwards, which was fully reserved for as the Company does not anticipate any state taxable income at the holding company level in future periods.

Finally, management believes that the realization of its deferred tax assets is more likely than not based on the expectations as to future taxable income; therefore, there was no deferred tax valuation allowance at September 30, 2016, and 2015 with the exception of the state cumulative net operating loss carryforwards discussed above.

Federal income tax laws provided savings banks with additional bad debt deductions through September 30, 1987, totaling 6.7 million for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total approximately $2.3 million at September 30, 2016 and 2015. If the Bank were to be liquidated or otherwise cease to be a bank, or if tax laws were to change, the $2.3 million would be recorded as expense.

The provisions of ASC 740, Income Taxes, address the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740, the Company recognizes the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination, with a tax examination being presumed to occur, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances surrounding a tax issue, and (ii) any difference from the Company’s tax position as recorded in the consolidated financial statements and the final resolution of a tax issue during the period.

The tax years ended September 30, 2013 and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended September 30, 2013 and later remain open for examination, with few exceptions.

A reconciliation of the beginning and ending balances for liabilities associated with unrecognized tax benefits for the years ended September 30, 2016, and 2015 follows:



September 30,	2016			2015
	(Dollars in Thousands)
Balance at beginning of year	$	974		$	983
Additions for tax positions related to the current year	63			49
Additions for tax positions related to the prior years	—			4
Reductions for tax positions due to settlement with taxing authorities	(372		)	(62		)
Reductions for tax positions related to prior years	(140		)	—
Balance at end of year	$	525		$	974

The total amount of unrecognized tax benefits that, if recognized, would impact the effective rate was $347,000 as of September 30, 2016. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was $110,000 as of September 30, 2016. The Company does not anticipate any significant change in the total amount of unrecognized tax benefits within the next 12 months.