Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

8.   Income Taxes

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

	Years Ended December 31,
	2023		2022
Current expense:
Federal	$	1,314	$	1,621
State		257		264
Total current expense		1,571		1,885
Deferred expense:
Federal		(352)		14
State		(148)		4
Change in valuation allowance		148		(4)
Total deferred expense		(352)		14
Total provision for income taxes	$	1,219	$	1,899

The following is a reconciliation between the expected federal statutory income tax rate of 21% (2023 and 2022) and the Company’s actual income tax expense and rate:

	Years ended December 31,
	2023				2022
Provision at statutory rate	$	1,179	21.00	%	$	1,868	21.00	%
Tax exempt income		(192)	(3.42)	%		(145)	(1.63)	%
State income taxes, net of federal income tax benefit		213	3.79	%		209	2.35	%
Other, net		19	0.34	%		(33)	(0.37)	%
Effective income tax and rate	$	1,219	21.71	%	$	1,899	21.35	%

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 21.71% and 21.35% for the years ended December 31, 2023 and 2022, 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, 2023 and 2022 are presented below:

	December 31,
	2023		2022
Deferred tax assets:
Allowance for credit losses	$	2,263	$	2,145
Deferred expenses		18		28
Deferred compensation		1,652		1,493
Unrecognized pension liability		910		1,063
Postretirement liability		1,002		975
Unrealized loss on securities		6,932		7,494
Other		658		576
Gross deferred tax assets		13,435		13,774
Deferred tax liabilities:
Prepaid expenses		(515)		(467)
Prepaid pension		(1,222)		(1,304)
Deferred loan fees		(154)		(209)
Depreciation and amortization		(476)		(563)
Mortgage servicing rights		(534)		(650)
Gross deferred tax liabilities		(2,901)		(3,193)
Net deferred tax asset		10,534		10,581
Deferred tax valuation allowance		(598)		(450)
Deferred tax assets, net of allowance	$	9,936	$	10,131

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, 2023 and 2022 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, 2023 and $414 at December 31, 2022 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, 2020 through 2023. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2020 are open.