Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes [Abstract]

Income Taxes

Note 17 – Income Taxes

The Company and its subsidiary are subject to U.S. federal and state income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Income tax (benefit) expense was as follows:

	2021			2020
	(In thousands)
Current
Federal	$	4		$	(59	)
State		(38	)		144
Deferred
Federal		(909	)		7
State		(363	)		(499	)
Change in Valuation Allowance		369			-
Total	$	(937	)	$	(407	)

Effective tax rates differ from the federal statutory rate of 21% applied to income before income taxes due to the following:

	2021			2020
	(In thousands)
Federal statutory rate times financial statement net loss	$	(1,026	)	$	(220	)
Effect of:
State taxes, net of federal benefit		(292	)		(7	)
Earnings from bank owned life insurance		(9	)		(10	)
Merger-related expense		195			200
Low income housing credits		(58	)		(117	)
Change in valuation allowance		369			-
Tax effect of stock-based compensation		(129	)		-
Tax benefit from tax positions taken in prior years		-			(273	)
Other, net		13			20
Total	$	(937	)	$	(407	)

Year‑end deferred tax assets and liabilities were due to the following:

	2021			2020
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	677		$	909
Accrued liabilities		954			139
State income taxes		1			58
Stock compensation		154			310
Net operating loss carryforward		3,946			3,437
Non‑accrual loan interest		51			1
Partnership investment		155			188
General business credit		2,006			1,969
Alternative minimum tax credit		5			34
Net unrealized loss on securities available-for-sale		464			-
Right of use liability		319			-
Fair value adjustment on acquired loans		521			-
Other		363			40
Total deferred tax assets		9,616			7,085
Less: valuation allowance		(369	)		-
Total deferred tax assets, net of valuation allowance		9,247			7,085
Deferred tax liabilities:
Section 481 Adjustments to bad debts		(6	)		(334	)
Deferred loan fees/costs		(750	)		(651	)
Basis difference on fixed assets		(702	)		(18	)
Net unrealized appreciation on available‑for‑sale securities		-			(138	)
FHLB stock dividends		(98	)		(266	)
Mortgage servicing rights		-			(1	)
Prepaid expenses		(220	)		(44	)
Right of use assets		(317	)		-
Core deposit intangibles		(1,053	)		-
Total deferred tax liabilities		(3,146	)		(1,452	)
Net deferred tax assets	$	6,101		$	5,633

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluated both positive and negative evidence, the amount of taxes paid in available carry‑back years, and the forecasts of future income and tax planning strategies. Based on this analysis, the Company determined that, as of December 31, 2021, a valuation allowance of $369 thousand was required on the Company’s deferred tax assets, which totaled $6.1 million (net of valuation allowance). As of December 31, 2020, no valuation allowance required on the Company’s deferred tax assets, which totaled $5.6 million.

On June 29, 2020, the Assembly Bill No. 85 (AB 85) was signed into law by California Governor Gavin Newsom to raise additional income tax revenue to assist in balancing the California budget caused by the COVID-19 pandemic. The most significant provision of this bill is the suspension of the net operating loss (NOL) deduction for tax years beginning on or after January 1, 2020 and before January 1, 2023. The existing 20-year carry forward period for NOLs (10 years for losses incurred in the tax years 2000 through 2007) would be extended for up to three years if losses are not used due to the NOL suspension. This means the Bank cannot take California NOL deductions for 2020-2022 if its California taxable income is more than $1 million. The life of the 2011 NOL will be extended for up to three years. This also means the Bank could have more cash tax liability for 2020-2022.

As of December 31, 2021, the Company had federal net operating loss carryforwards of $7.4 million. Approximately $2.1 million of the federal net operating loss carryforwards can be carried forward indefinitely. The remaining $5.3 million will begin to expire, if not utilized, in 2032 through 2037. The Company also had California net operating loss carryforwards of $27.6 million which will begin to expire in 2032 through 2041 if not utilized, and D.C. net operating loss carryforwards of $0.6 million which can be carried forward indefinitely. The Company also had federal general business credits of $2.0 million, which will begin to expire in 2030 through 2041, if not utilized.

Prior to 2018, the Company computed its bad debt deduction for income tax purposes under the reserve method. In 2018, the Company requested, and the IRS consented to a change in accounting method used for computing its tax bad debt deduction from the reserve method to the charge-off method as defined under Internal Revenue Code Section 166. As a result, the Company computes its tax bad debt deduction under the new method and recaptures its excess tax bad debt reserve of $4.3 million into taxable income evenly over a 4 year period starting in 2018.

The Company did not have any unrecognized tax benefits as of December 31, 2021 and 2020.

Federal tax years 2018 through 2021 remain open for the assessment of Federal income tax. California tax years 2017 through 2021 remain open for the assessment of California franchise tax. The Company is not currently under examinations by any tax authorities.