Note 13. Income Taxes

The provision for income taxes consists of the following for the years ended June 30, 2019 and 2018:

(In thousands)	2019			2018
Current expense:
Federal	$	4,028		$	3,819
State		481			220
Total current expense		4,509			4,039
Deferred (benefit) expense		(967	)		56
Total provision for income taxes	$	3,542		$	4,095

The effective tax rate differs from the federal statutory rate as follows for the years ended June 30, 2019 and 2018:

	2019			2018
Tax based on federal statutory rate		21.00	%		28.10	%
State income taxes, net of federal benefit		0.80			0.49
Tax-exempt income		(5.74	)		(7.03	)
Captive insurance premium income		(1.35	)		(1.78	)
Other, net		2.14			2.35
Total income tax expense		16.85	%		22.13	%

The components of the deferred tax assets and liabilities at June 30 were as follows:

(In thousands)	2019		2018
Deferred tax assets:
Allowance for loan losses	$	3,450	$	3,142
Pension benefits		190		146
Other benefit plans		2,454		1,388
Total deferred tax assets		6,094		4,676

Deferred tax liabilities:
Depreciation		903		919
Loan costs		831		763
Real estate investment trust income		2,553		2,253
Unrealized gains on securities		345		3
Other		204		189
Total deferred tax liabilities		4,836		4,127
Net deferred tax asset included in prepaid expenses and other assets	$	1,258	$	549

Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of June 30, the reduced corporate tax rate will result in the application of a blended federal statutory tax rate for its fiscal year 2018 and then a flat 21% thereafter. See the effective tax rate table above.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As a result of the reduction in the corporate income tax rate under the Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. These re-measurements resulted in a discrete tax benefit of $251,000 that was recognized during the three months ended December 31, 2017. The Company’s revaluation of its deferred tax assets and liabilities is subject to further clarification of the Tax Act and refinements of its estimates. As a result, the actual impact on the deferred tax assets and liabilities and income tax expense due to the Tax Act may vary from the amounts estimated.

The Company accounts for uncertain tax positions if it is more likely than not, based on technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgments.

The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.

As of June 30, 2019 and 2018, the Company did not have any uncertain tax positions. The Company does not expect to have any changes in unrecognized tax benefits as a result of settlements with taxing authorities during the next twelve months. At June 30, 2019, The Bank of Greene County had an unrecaptured pre-1988 Federal bad debt reserve of approximately $1.8 million for which no Federal income tax provision has been made. A deferred tax liability has not been provided on this amount as management does not intend to redeem stock, make distributions or take other actions that would result in recapture of the reserve. As of June 30, 2019, tax years ended June 30, 2016 through June 30, 2018, remain open and are subject to Federal and New York State taxing authority examination.