Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

9.   Income Taxes

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

	Years Ended December 31,
	2021		2020
Current expense:
Federal	$	2,042	$	3,078
State		284		12
Total current expense		2,326		3,090
Deferred expense (benefit):
Federal		1,107		(1,531)
State		1,306		(558)
Change in valuation allowance		(1,306)		558
Total deferred expense (benefit)		1,107		(1,531)
Total provision for income taxes	$	3,433	$	1,559

The following is a reconciliation between the expected federal statutory income tax rate of 21% (2021 and 2020) and the Company’s actual income tax expense and rate:

	Years ended December 31,
	2021				2020
Provision at statutory rate	$	3,148	21.00	%	$	1,570	21.00	%
Tax exempt income		(125)	(0.83)	%		(79)	(1.06)	%
State income taxes, net of federal income tax benefit		192	1.28	%		12	0.16	%
Other, net		218	1.45	%		56	0.75	%
Effective income tax and rate	$	3,433	22.90	%	$	1,559	20.85	%

Provision for income taxes directly reflects the expected tax associated with the pre-tax income generated for the given year and certain regulatory requirements.  The effective tax rate was 22.90% and 20.85% for the years ended December 31, 2021 and 2020, respectively.  The statutory tax rate is impacted by the benefits derived from tax-exempt bond income and income received on the bank owned life insurance to arrive at the effective tax rate.

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented below:

	December 31,
	2021		2020
Deferred tax assets:
Allowance for loan losses	$	2,041	$	3,141
Deferred expenses		39		47
Deferred compensation		1,538		1,271
Unrecognized pension liability		1,037		1,272
Postretirement liability		920		954
Deferred loss on OREO		—		83
Deferred loan fees		—		158
Unrealized loss on securities		727		—
State tax NOLs		—		990
Other		431		324
Gross deferred tax assets		6,733		8,240
Deferred tax liabilities:
Prepaid expenses		(262)		(217)
Prepaid pension		(1,275)		(1,276)
Deferred loan fees		(154)		—
Depreciation and amortization		(525)		(375)
Unrealized gain on securities		—		(264)
Mortgage servicing rights		(711)		(645)
Gross deferred tax liabilities		(2,927)		(2,777)
Net deferred tax asset		3,806		5,463
Deferred tax valuation allowance		(454)		(1,760)
Deferred tax assets, net of allowance	$	3,352	$	3,703

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 relative federal or state tax law to the taxable income determined. 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 the 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 or benefit results from changes in deferred tax assets (“DTAs”) and liabilities between periods. DTAs are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

New York State (“NYS”) tax law provides for a permanent deduction of income from “qualified” loans for community banks. Accordingly, the Company has generally incurred NYS taxable losses and incurred minimal NYS income tax liability. As the Company has not established a history of strong NYS taxable income, the Company has established a full valuation allowance against the NYS deferred tax asset.

Retained earnings at December 31, 2021 and 2020 include a contingency reserve for loan losses of $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 $414 at December 31, 2021 and $414 at December 31, 2020 have not been recognized.

The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2018 through 2021. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2018 are open.