Entity information:

8. INCOME TAXES

 

The following are components of income tax expense for the years ended June 30:

 

    2017     2016  
    (In thousands)  
Current:            
Federal   $ 152     $ 104  
State     1       1  
Total current     153       105  
Deferred:                
Federal     669       134  
State     -       -  
Total deferred     669       134  
                 
Income tax expense   $ 822     $ 239  

 

Deferred income taxes reflect the tax impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations.

 

The Bank established Putnam Bank Mortgage Servicing Company during the year ended June 30, 2007. The subsidiary qualifies and operates as a Connecticut passive investment company pursuant to legislation. Because the subsidiary earns sufficient income from passive investments and its dividends to the parent are exempt from Connecticut Corporation Business Tax, the subsidiary Bank no longer expects to incur Connecticut income tax expense or to recognize its Connecticut deferred tax asset. The Parent company is still subject to the Connecticut Corporation Business Tax.

 

The reasons for the differences between the statutory federal income tax rate of 34% and the effective tax rates are summarized as follows for the years ended June 30:

 

    2017     2016  
    (In thousands)  
             
Federal income tax at statutory rate   $ 1,067     $ 387  
Increase (decrease) in tax resulting from:                
State taxes, net of federal benefit     1       1  
Stock-based compensation     (8 )     28  
Dividends received deduction     (110 )     (110 )
Bank-owned life insurance     (121 )     (92 )
Tax-exempt municipal income, net     (18 )     (10 )
Other, net     11       14  
Income tax expense before valuation allowance     822       218  
Valuation allowance     -       21  
Income tax expense   $ 822     $ 239  
Effective tax rates     26.2 %     21.0 %

 

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of June 30:

 

    2017     2016  
    (In thousands)  
Deferred tax assets:                
Allowance for loan losses   $ 821     $ 783  
Net unrealized holding loss on available-for-sale securities     63       70  
Deferred compensation     202       195  
Stock-based compensation     77       28  
Impairment losses on securities available-for-sale     859       859  
Accrued expenses     163       159  
Post retirement benefits     93       66  
Interest receivable on non-accrual loans     91       76  
Federal carryovers     1,348       2,025  
Other     146       160  
Gross deferred tax asset     3,863       4,421  
Valuation allowance     -       (21 )
Gross deferred tax assets, net of valuation allowance     3,863       4,400  
                 
Deferred tax liabilities:                
Depreciation and amortization     (1,675 )     (1,530 )
Deferred loan costs     (297 )     (303 )
Other     (29 )     (29 )
Gross deferred tax liability     (2,001 )     (1,862 )
Net deferred tax asset   $ 1,862     $ 2,538  

 

At June 30, 2017, federal carryovers consist of Alternative Minimum Tax credit carryovers of $1,328,000 which have no expiration date, and $61,000 of contribution carryovers which begin to expire on June 30, 2017.

 

Retained earnings at June 30, 2017 includes a contingency reserve for loan losses of $2,284,000 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 thrift institutions. It is not anticipated that the Company will incur a federal income tax liability related to the reduction of this reserve and accordingly, deferred income taxes of approximately $777,000 have not been recognized as of June 30, 2017 and 2016.

 

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of June 30, 2017 and 2016, there were no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended June 30, 2014 through June 30, 2017. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended June 30, 2017 and 2016.

 

As of June 30, 2016, there was a $21,000 valuation allowance related to charitable contribution carryforwards. As of June 30, 2017, the valuation allowance was reversed because the contribution carryforward was used to offset taxable income for the period ending June 30, 2017.