Note 10 - Federal Income Taxes

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 10 - FEDERAL INCOME TAXES

The consolidated income tax expense is as follows:

	2020			2019		2018
Current expense	$	14,945,000		$	10,978,000	$	10,170,000
Deferred expense		(4,141,000	)		26,000		(372,000	)
Change in valuation allowance		(94,000	)		0		0
Tax expense	$	10,710,000		$	11,004,000	$	9,798,000

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:

	2020			2019			2018
Tax at statutory rate	$	11,518,000		$	12,697,000		$	10,883,000
Increase (decrease) from
Tax-exempt interest		(681,000	)		(644,000	)		(620,000	)
Bank owned life insurance		(238,000	)		(804,000	)		(201,000	)
Change in valuation allowance		(94,000	)		0			0
Other		205,000			(245,000	)		(264,000	)
Tax expense	$	10,710,000		$	11,004,000		$	9,798,000

The statutory tax rate was 21% for 2020, 2019 and 2018.

Significant components of deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:

	2020		2019
Deferred income tax assets
Allowance for loan losses	$	7,973,000	$	5,017,000
Deferred compensation		511,000		577,000
Stock compensation		541,000		720,000
Nonaccrual loan interest income		211,000		239,000
Deferred loan fees		924,000		104,000
Capital loss carryforward		0		94,000
Fair value write-downs on foreclosed properties		537,000		26,000
Other		938,000		683,000
Deferred tax asset before valuation allowance		11,635,000		7,460,000
Valuation allowance		0		(94,000	)
Deferred tax asset after valuation allowance		11,635,000		7,366,000
Deferred income tax liabilities
Depreciation		1,175,000		1,743,000
Prepaid expenses		297,000		269,000
Core deposit intangible		498,000		787,000
Mortgage loan servicing rights		1,720,000		977,000
Unrealized gain on securities		1,458,000		982,000
Business combination adjustments		2,142,000		2,058,000
Other		521,000		485,000
Deferred tax liability		7,811,000		7,301,000
Total net deferred tax asset	$	3,824,000	$	65,000

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, 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 expired at December 31, 2020 and we no longer carry this asset or the valuation allowance against it.

We had no unrecognized tax benefits at any time during 2020 or 2019 and do not anticipate any significant increase in unrecognized tax benefits during 2021. 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 2020 or 2019. Our U.S. federal income tax returns are no longer subject to examination for all years before 2017.