Note 11 - Federal Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

11

- FEDERAL INCOME TAXES

On

December 22, 2017,

H.R.1,

commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduced our corporate federal tax rate from

35%

to

21%

effective

January 1, 2018

and changed certain other provisions. As a result, we were required to re-measure our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The effect of this re-measurement was recorded to income tax expense in the year the tax law was enacted. For

2017,

the re-measurement of our net deferred tax asset resulted in additional income tax expense of

$1.3

million. Concurrent with the enactment of the Act, the SEC staff issued Staff Accounting Bulletin

No.

118

(“SAB

118”

), which allowed companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the Act over a period of up to

twelve

months in the reporting period in which the adjustment is identified. We applied SAB

118

effective

December 22, 2017.

At the conclusion of our analysis of

H.R.1,

we determined that

no

adjustments to our initial analysis were required.

The consolidated income tax expense is as follows:

	2019		2018			2017
Current expense	$	10,978,000	$	10,170,000		$	13,978,000
Deferred expense		26,000		(372,000	)		(505,000	)
Effect of federal tax law change		0		0			1,336,000
Tax expense	$	11,004,000	$	9,798,000		$	14,809,000

A reconciliation of the differences between the federal income tax expense recorded and the amount computed by applying the federal statutory rate to income before income taxes is as follows:

	2019			2018			2017
Tax at statutory rate	$	12,697,000		$	10,883,000		$	16,129,000
Increase (decrease) from
Tax-exempt interest		(644,000	)		(620,000	)		(1,030,000	)
Bank owned life insurance		(804,000	)		(201,000	)		(948,000	)
Effect of federal tax law change		0			0			1,336,000
Other		(245,000	)		(264,000	)		(678,000	)
Tax expense	$	11,004,000		$	9,798,000		$	14,809,000

The statutory tax rate was

21%

for

2019

and

2018

and

35%

for

2017.

Significant components of deferred tax assets and liabilities as of

December 31, 2019

and

2018

are as follows:

	2019			2018
Deferred income tax assets
Allowance for loan losses	$	5,017,000		$	4,700,000
Deferred compensation		577,000			630,000
Stock compensation		720,000			660,000
Nonaccrual loan interest income		239,000			297,000
Deferred loan fees		104,000			185,000
Capital loss carryforward		94,000			94,000
Fair value write-downs on foreclosed properties		26,000			15,000
Unrealized loss on securities		0			2,190,000
Other		683,000			340,000
Deferred tax asset before valuation allowance		7,460,000			9,111,000
Valuation allowance		(94,000	)		(94,000	)
Deferred tax asset after valuation allowance		7,366,000			9,017,000
Deferred income tax liabilities
Depreciation		1,743,000			1,205,000
Prepaid expenses		269,000			238,000
Core deposit intangible		787,000			1,142,000
Mortgage loan servicing rights		977,000			932,000
Unrealized gain on securities		982,000			0
Business combination adjustments		2,058,000			2,054,000
Other		485,000			183,000
Deferred tax liability		7,301,000			5,754,000
Total net deferred tax asset	$	65,000		$	3,263,000

A valuation allowance related to deferred tax assets is required when it is considered more likely than

not

that all or part of the benefits related to such assets will

not

be realized. At

December 31, 2019

and

2018,

we carried a valuation allowance of

$0.1

million against capital loss carryforwards generated by the disposal of certain capital investments acquired in our merger with Firstbank. The

$0.1

million of capital loss carryforwards will expire at

December 31, 2020

and we continue to carry a valuation allowance against the related deferred tax asset. We believe the remainder of our deferred tax assets is more likely than

not

to be realized.

We had

no

unrecognized tax benefits at any time during

2019

or

2018

and do

not

anticipate any significant increase in unrecognized tax benefits during

2020.

Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts;

no

such accruals existed at any time during

2019

or

2018.

Our U.S. federal income tax returns are

no

longer subject to examination for all years before

2016.