Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes [Abstract]

Income Taxes

Note 16 – 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 expense (benefit) was as follows:

	2022		2021
	(In thousands)
Current
Federal	$	700	$	4
State		218		(38	)
Deferred
Federal		944		(909	)
State		551		(363	)
Change in Valuation Allowance		–		369
Total	$	2,413	$	(937	)

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

	2022			2021
	(In thousands)
Federal statutory rate times financial statement net gain (loss)	$	1,705		$	(1,026	)
Effect of:
State taxes, net of federal benefit		623			(292	)
Earnings from bank owned life insurance		(9	)		(9	)
Merger-related expense		–			195
Low-income housing credits		(6	)		(58	)
Change in valuation allowance		–			369
Tax effect of stock-based compensation		25			(129	)
Other, net		75			13
Total	$	2,413		$	(937	)

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

	2022			2021
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	1,063		$	677
Accrued liabilities		555			954
State income taxes		45			1
Stock compensation		226			154
Net operating loss carryforward		2,616			3,946
Non‑accrual loan interest		–			51
Partnership investment		257			155
General business credit		1,962			2,006
Alternative minimum tax credit		5			5
Net unrealized loss on securities available-for-sale		7,388			464
Right of use liability		266			319
Fair value adjustment on acquired loans		291			521
Other		332			363
Total deferred tax assets		15,006			9,616
Less: valuation allowance		(369	)		(369	)
Total deferred tax assets, net of valuation allowance		14,637			9,247
Deferred tax liabilities:
Section 481 adjustments to bad debts		(7	)		(6	)
Deferred loan fees/costs		(776	)		(750	)
Basis difference on fixed assets		(723	)		(702	)
FHLB stock dividends		(90	)		(98	)
Nonaccrual loan interest		(8	)		–
Prepaid expenses		(186	)		(220	)
Right of use assets		(256	)		(317	)
Core deposit intangibles		(719	)		(1,053	)
Total deferred tax liabilities		(2,765	)		(3,146	)
Net deferred tax assets	$	11,872		$	6,101

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, management determined that, as of December 31, 2022, a valuation allowance of $369 thousand was required on the Company’s deferred tax assets, which totaled $11.9 million (net of valuation allowance). 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, 2022, the Company had federal net operating loss carryforwards of $3.1 million. Approximately $2.7 million of the federal net operating loss carryforwards can be carried forward indefinitely. The remaining $364 thousand will begin to expire, if not utilized, in 2036 through 2037. The Company also had California net operating loss carryforwards of $23.0 million which will begin to expire in 2031 through 2041 if not utilized. The Company also had federal general business credits of $2.0 million, which will begin to expire in 2030 through 2041, if not utilized.

The Company did not have any unrecognized tax benefits as of December 31, 2022 and 2021.

Federal tax years 2018 through 2022 remain open for the assessment of Federal income tax. California tax years 2017 through 2022 remain open for the assessment of California franchise tax. The Company is not currently under examination by any tax authorities.