Arrow Financial Corporation

INCOME TAXES (Dollars In Thousands)

The provision for income taxes is summarized below:



Current Tax Expense:	2017			2016			2015
Federal	$	11,142		$	10,496		$	8,570
State	917			1,002			1,004
Total Current Tax Expense	12,059			11,498			9,574
Deferred Tax Expense (Benefit):
Federal	(1,453		)	(69		)	860
State	(77		)	(214		)	176
Total Deferred Tax Expense (Benefit)	(1,530		)	(283		)	1,036

Total Provision for Income Taxes	$	10,529		$	11,215		$	10,610

The provisions for income taxes differed from the amounts computed by applying the U.S. Federal Income Tax Rate of 35% for 2017, 2016 and 2015 to pre-tax income as a result of the following:



	2017			2016			2015
Computed Tax Expense at Statutory Rate	$	13,949		$	13,212		$	12,345
Increase (Decrease) in Income Taxes Resulting From:
Tax Cuts and Jobs Act impact on deferred remeasurement	(1,116		)	—			—
Tax-Exempt Income	(2,537		)	(2,437		)	(2,292		)
Nondeductible Interest Expense	52			40			36
State Taxes, Net of Federal Income Tax Benefit	698			554			805
Tax benefit from stock based compensation	(134		)	—			—
Other Items, Net	(383		)	(154		)	(284		)
Total Provision for Income Taxes	$	10,529		$	11,215		$	10,610

The Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, among other changes. Accordingly, we have remeasured our deferred taxes as of December 22, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized, which resulted in a deferred tax benefit of $1.1 million to reflect the reduced U.S. tax rate.

Interest and penalties are recorded as a component of the provision for income taxes, if any. There are no current examinations of our Federal or state income tax returns, nor have we been notified of any up-coming examinations. Tax years 2014 through 2017 are subject to Federal and New York State examination. Management annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of December 31, 2017.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are calculated using the U.S. Federal Income Tax Rate of 21% and 35% at December 31, 2017 and 2016, respectively and are presented below:



	2017		2016
Deferred Tax Assets:
Allowance for Loan Losses	$	4,730	$	6,609
Pension and Deferred Compensation Plans	2,595		3,961
Pension Liability Included in Accumulated Other Comprehensive Income	2,475		4,023
Other	357		502
Net Unrealized Losses on Securities Available-for-Sale Included in Accumulated Other Comprehensive Income	426		239
Total Gross Deferred Tax Assets	10,583		15,334
Valuation Allowance for Deferred Tax Assets	—		—
Total Gross Deferred Tax Assets, Net of Valuation Allowance	$	10,583	$	15,334
Deferred Tax Liabilities:
Pension Plans	$	5,487	$	8,399
Depreciation	955		1,430
Deferred Income	2,779		4,199
Goodwill	3,566		5,324
Total Gross Deferred Tax Liabilities	$	12,787	$	19,352

Management believes that the realization of the recognized gross deferred tax assets at December 31, 2017 and 2016 is more likely than not, based on historic earnings and expectations as to future taxable income.