Note

14.

Income Taxes

Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the

three

-year period ended

December

31,

2020.

(In thousands)	Year Ended December 31,
	2020			2019			2018
Current:
Federal	$	(100	)	$	88		$	447
State		86			149			708
		(14	)		237			1,155

Deferred:
Federal		(2,448	)		(698	)		148
State		2,125			(438	)		(413	)
		(323	)		(1,136	)		(265	)

Income tax (benefit) expense	$	(337	)	$	(899	)	$	890

For each of the years in the

three

-year period ended

December

31,

2020,

the difference between the federal statutory income tax rate and Patriot's effective income tax rate reconciles as follows:

(In thousands)	Year Ended December 31,
	2020			2019			2018

Income taxes at statutory Federal rate	$	(873	)	$	(780	)	$	858
State taxes, net of Federal benefit		(191	)		(228	)		233
Deferred tax valuation allowance		1,938			-			-
Reversal UTP on Federal DTA		(1,132	)		-			-
Nondeductible expenses		8			14			15
Benefit of change in Sec 382 classification		-			-			(500	)
Deferred tax adjustment resulting from tax rate change		-			-			198
Other		(87	)		95			86
Income tax (benefit) expense	$	(337	)	$	(899	)	$	890

The effective tax rate for the years ended

December

31,

2020,

2019

and

2018

was

8.1%,

24.2%,

and

21.8%,

respectively.

The decrease in the effective tax rate for

2020

was primarily due to the recoding of a deferred tax asset valuation allowance. There were

significant changes to the effective tax rate for

2019

and

2018.

The effective tax rate for

2018

was impacted by the reduction in the statutory Federal corporate tax rate to

21%

from

34%

that was effective

January 1, 2018.

Deferred Tax Assets and Liabilities

The significant components of Patriot's net deferred tax assets at

December

31,

2020

and

2019

are presented below.

(In thousands)	December 31,
	2020			2019
Deferred tax assets:
Federal NOL carryforward benefit	$	4,576		$	4,759
NOL write-off for Sec 382 Limit		(3,258	)		(3,258	)
Capitalized cost temporary item		3,627			3,929
State NOL carryforward benefit		3,306			3,341
Allowance for loan loss		3,869			2,718
Lease liabilities		775			882
Non-accrual interest		558			335
Merger and acquisition		204			220
Accrued expenses		201			114
Unrealized loss AFS securities		180			140
Share based compensation		8			13
Other		15			-
Gross deferred tax assets		14,061			13,193
Less deferred taxasset valuation allowance		(1,937	)		-
Total deferred tax assets		12,124			13,193

Deferred tax liabilities:
UTP (NOLs used)		-			(1,132	)
Right-of-Use assets		(736	)		(849	)
Goodwill and intangible		170			(40	)
Depreciation of premises and equipment		(32	)		(34	)
Other		(30	)		(5	)
Gross deferred tax liabilities		(628	)		(2,060	)

Net deferred tax asset		11,496			11,133

As of

December

31,

2020,

Patriot had available approximately

$21.8

million of Federal net operating loss carryforwards (“NOL”) that is offset by

$15.5

million in

§382

limitations imposed by the Internal Revenue Code. Of the NOL of

$21.8

million, approximately

$20.2

million will expire between

2030

and

2033

and

$1.6

million which do

not

expire.

Patriot has approximately

$55.8

million of NOLs available for Connecticut tax purposes at

December

31,

2020,

which

may

be used to offset up to

50%

of taxable income in any year. The NOLs expire between

2030

and

2039.

Valuation Allowance Against Net Deferred Tax Assets

Patriot uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than

not

expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and prudent and feasible tax planning strategies. The Company's judgments regarding future profitability

may

change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed. The valuation allowance at

December 31, 2020

was primarily related to state net operating losses. Patriot will continue to evaluate the need for valuation allowances for its deferred tax assets.

During

December 31, 2020,

Patriot recorded a partial valuation allowance of

$1.9

million primarily against its deferred tax asset related to state net operating loss carryforwards. For the year ended

December 31, 2020

Patriot was in a cumulative loss position. In order to overcome this negative evidence Patriot reviewed its accumulated pre-tax income(loss) for the current and prior

two

- and

three

-year periods and adjusted for non-recurring items. After the adjustments, Patriot was

longer in a cumulative loss position. Patriot used the average adjusted pre-tax income for the current and prior

three

years as the basis for objectively estimating future taxable income. Secondly, Patriot has a tax planning strategy available under ASC

740

that would be implemented to prevent a carry-forward state net operating losses from expiring. The strategy consists of capitalizing loan costs to increase income and avoid state net operating losses from expiring unused.

As deferred tax assets associated with NOL carryforwards are already a direct reduction to Tier

Capital, the valuation allowance at

December 31, 2020

had

impact on the Bank's regulatory capital position.

Unrecognized tax benefits

Patriot recognizes a benefit from its tax positions only if it is more likely than

not

that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than

50%

likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

As of

December

31,

2020

and

2019,

the Bank recorded an uncertain tax position related to the utilization of certain federal net operating losses of

and

$1.2

million, respectively. At

December 31, 2020

Patriot

longer has a liability for unrecognized tax benefits. Additionally, Patriot has

pending or on-going audits in any tax jurisdiction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(In thousands)	Year Ended December 31,
	2020			2019		2018
Balance, beginning of year	$	1,220		$	1,132	$	-
Increases due to tax positions related to a prior year		65			88		1,132
Decreases to tax positions as a result of a lapse of statute		(1,285	)		-		-
Balance, end of year	$	-		$	1,220	$	1,132

The Company's policy is to recognize interest and penalties related to income tax matters in income tax expense.

Patriot's returns for tax years

2017

through

2020

are subject to examination by the IRS for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.