Pilgrim Bancshares, Inc.

NOTE 9 - INCOME TAXES

The components of income tax expense are as follows:

	Years Ended
	December 31,
	2017		2016
	(In Thousands)

Current:
Federal	$	725	$	572
State		206		157
		931		729

Deferred:
Federal		(60)		(103)
State		(16)		(32)
Change in valuation allowance		11		(92)
Deferred taxes before tax rate change		(65)		(227)
Tax rate change impact		240		-
		175		(227)
Total income tax expense	$	1,106	$	502

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:

	Years Ended
	December 31,
	2017			2016
	% of			% of
	Income			Income

Statutory federal income tax rate		34.0	%		34.0	%
(Decrease) increase in tax rates resulting from:
Tax-exempt income		(1.3)			(1.8)
Other		0.5			1.7
State taxes, net of federal tax		5.7			5.5
Change in valuation allowance		0.5			(6.1)
Tax rate before tax change		39.4			33.3
Tax rate change impact		11.0			-
Effective tax rates		50.4	%		33.3	%

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

	December 31,
	2017		2016
	(In Thousands)

Deferred tax assets:
Allowance for loan losses	$	348	$	423
Securities capital loss carryforwards		26		37
Writedown of securities		13		17
Interest on nonaccrual loans		1		-
Net unrealized holding loss on available-for-sale securities		43		71
Charitable contribution carryovers		65		178
Stock expense		46		50
ESOP expense		14		11
Deferred compensation		88		73
Other		1		7
Gross deferred tax assets		645		867
Valuation allowance		(26)		(37)
Gross deferred tax assets after valuation allowance		619		830

Deferred tax liabilities:
Book basis in excess of tax basis of premises and equipment		(60)		(90)
Gross deferred tax liabilities		(60)		(90)
Net deferred tax asset	$	559	$	740

As of December 31, 2017 and 2016, the Company had no operating loss and tax credit carryovers for tax purposes. As of December 31, 2017, the Company had capital loss carryovers of $125,000 which are due to expire in 2019. The capital losses can only be utilized against realized capital gains; therefore, as of December 31, 2017 a valuation allowance in the amount of $26,000 exists against the deferred tax benefit to the extent management deems it probable the deferred tax benefits will not be fully realized.

In connection with its initial public offering, the Company donated common stock and cash in the amount of $725,000 to the Foundation. The remaining charitable contribution carryforward was $232,000 at December 31, 2017 and expires in 2019. The related tax benefit included in net deferred tax assets is $65,000. A valuation allowance in the amount of $83,000 was released in 2016 based on management’s assessment that the Company will be able to fully utilize the deferred tax asset related to the charitable contribution before it expires.

In prior years, the Bank was allowed a special tax-basis bad debt deduction under certain provisions of the Internal Revenue Code. As a result, retained earnings of the Bank as of December 31, 2016 includes approximately $1,229,000 for which federal and state income taxes have not been provided. If the Bank no longer qualifies as a bank as defined in certain provisions of the Internal Revenue Code, this amount will be subject to recapture in taxable income using a combined federal and state tax rate of approximately 28%.

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Act). Among other provisions, the Tax Act reduces the historical corporate income tax rate to a newly enacted rate of 21 percent for tax years beginning after December 31, 2017. At the date the new legislation is enacted, under ASC 740, Income Taxes, the Company is required to recognize the effects of the change in tax law and rates on its deferred tax assets and liabilities as a charge to income tax expense. As a result of the above Tax Act and the revaluation of deferred tax assets and liabilities at December 31, 2017, the Company recognized additional income tax expense of $240,000 in 2017.