Income Taxes

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The components of the provision for income taxes are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(unaudited)						(unaudited)
Current expense (benefit):
Federal	$	89		$	831		$	550		$	1,408
State		(6	)		(89	)		7			(71	)
Total		83			742			557			1,337
Deferred (benefit) expense:
Federal		183			12			(12	)		134
State		-			-			-			-
Total		183			12			(12	)		134
Total provision for income taxes	$	266		$	754		$	545		$	1,471

The following is a reconciliation between the expected federal statutory income tax rate of 21% (2018) and 34% (2017) and the Company’s actual income tax expense and rate:

	Three months ended September 30,										Nine months ended September 30,
	2018					2017					2018					2017
	(unaudited)										(unaudited)
Provision at statutory rate	$	468		21	%	$	1,148		34	%	$	778		21	%	$	1,940		34	%
Tax exempt income		(22	)	-1	%		(41	)	-1	%		(70	)	-2	%		(129	)	-2	%
State income taxes, net of federal income tax benefit		24		1	%		6		0	%		14		0	%		17		0	%
Tax basis difference on sale of B&N		-		0	%		(296	)	-9	%		-		0	%		(296	)	-5	%
Other, net		(204	)	-5	%		(63	)	-1	%		(177	)	-4	%		(61	)	-1	%
Effective income tax and rate	$	266		16	%	$	754		23	%	$	545		15	%	$	1,471		26	%

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at September 30, 2018 and December 31, 2017:

	September 30,			December 31,
	2018			2017
	(unaudited)
Deferred tax assets:
Allowance for loan losses	$	1,704		$	1,473
Deferred expenses		767			717
Depreciation and amortization		79			105
Unrecognized pension liability		1,019			1,232
Postretirement liability		919			901
Deferred loss on OREO		187			83
Unrealized loss on securities		1,128			617
State tax NOLs		647			647
Other		198			232
Gross deferred tax assets		6,648			6,007
Deferred tax liabilities:
Prepaid expenses		(277	)		(181	)
Prepaid pension		(1,304	)		(1,148	)
Deferred loan fees		(135	)		(65	)
Mortgage servicing rights		(615	)		(610	)
Gross deferred tax liabilities		(2,331	)		(2,004	)
Net deferred tax asset		4,317			4,003
Deferred tax valuation allowance		(985	)		(982	)
Deferred tax assets, net of allowance	$	3,332		$	3,021

The 2015-16 New York Tax State (“NYS”) Budget enacted on March 31, 2015 contained a significant reform of NYS’s corporate tax system (Part A of Chapter 59 of the Laws of 2015). The budget enacted on April 13, 2016 presented technical and clarifying amendments to the previously enacted tax reform statutes (Part T of Chapter 59 of the Laws of 2016) which were effective for tax years effective on or after January 1, 2016.

Among the many changes related to the Company, the separate tax article 32 that used to apply to financial institutions became no longer applicable and the Company was required to file as a general business corporation (Article 9-A) starting in 2015. The new tax law provided for a permanent deduction of income from “qualified” loans from taxable income for community banks. As such, management determined that the Company would most likely not pay any income tax but rather generate New York net operating losses (“NOLs”) for the foreseeable future. The Company would likely pay the NYS capital based tax until the phase out of that tax which is scheduled for the year ended December 31, 2020. While the change was positive for the Company (it would likely pay less cash taxes in future years due to the permanent deduction afforded), one immediate negative impact was the reduced value of the Company’s NYS deferred tax assets (“DTAs”).

In management’s opinion, it is expected that in future years there will be no opportunity to reverse the NYS DTAs to provide for a reduction in NYS income taxes. Therefore, at year end 2015 management established a full valuation allowance to recognize the fully diminished value of these DTAs.

Retained earnings at September 30, 2018 and December 31, 2017 and 2016 include a contingency reserve for loan losses of approximately $1,534 which represents the tax reserve balance existing at December 31, 1987 and is maintained in accordance with provisions of the Internal Revenue Code applicable to mutual savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income and, if the reserve is used for purposes other than to absorb losses on loans, a federal income tax liability could be incurred. It is not anticipated that the Company will incur a federal income tax liability relating to this reserve balance and accordingly, deferred income taxes of approximately $414 at September 30, 2018 and $614 at December 31, 2017 and 2016 have not been recognized.