Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

9.   Income Taxes

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

	Years Ended December 31,
	2022		2021
Current expense:
Federal	$	1,621	$	2,042
State		264		284
Total current expense		1,885		2,326
Deferred expense:
Federal		14		1,107
State		4		1,306
Change in valuation allowance		(4)		(1,306)
Total deferred expense		14		1,107
Total provision for income taxes	$	1,899	$	3,433

The following is a reconciliation between the expected federal statutory income tax rate of 21% (2022 and 2021) and the Company’s actual income tax expense and rate:

	Years ended December 31,
	2022				2021
Provision at statutory rate	$	1,868	21.00	%	$	3,148	21.00	%
Tax exempt income		(145)	(1.63)	%		(125)	(0.83)	%
State income taxes, net of federal income tax benefit		209	2.35	%		192	1.28	%
Other, net		(33)	(0.37)	%		218	1.45	%
Effective income tax and rate	$	1,899	21.35	%	$	3,433	22.90	%

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 21.35% and 22.90% for the years ended December 31, 2022 and 2021, respectively.  The statutory tax rate is impacted by the benefits derived mainly 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, 2022 and 2021 are presented below:

	December 31,
	2022		2021
Deferred tax assets:
Allowance for loan losses	$	2,145	$	2,041
Deferred expenses		28		39
Deferred compensation		1,493		1,538
Unrecognized pension liability		1,063		1,037
Postretirement liability		975		920
Unrealized loss on securities		7,494		727
Other		576		431
Gross deferred tax assets		13,774		6,733
Deferred tax liabilities:
Prepaid expenses		(467)		(262)
Prepaid pension		(1,304)		(1,275)
Deferred loan fees		(209)		(154)
Depreciation and amortization		(563)		(525)
Mortgage servicing rights		(650)		(711)
Gross deferred tax liabilities		(3,193)		(2,927)
Net deferred tax asset		10,581		3,806
Deferred tax valuation allowance		(450)		(454)
Deferred tax assets, net of allowance	$	10,131	$	3,352

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, 2022 and 2021 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, 2022 and $414 at December 31, 2021 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, 2019 through 2022. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2019 are open.