Note 14 - Federal and State Income Taxes

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Federal and State Income Taxes

Note 14. Federal and State Income Taxes

Federal and state income tax expense was comprised of the following components for the years ended December 31, 2020, 2019, and 2018:

	2020		2019		2018
	(dollars in thousands)
Current	$	27,237	$	8,255	$	2,723
Deferred		(14,530)		6,364		6,292
	$	12,707	$	14,619	$	9,015

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2020, 2019, and 2018:

	Year Ended December 31,
	2020				2019				2018
			% of				% of				% of
			Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)
Computed "expected" tax expense	$	15,391	21.0	%	$	15,126	21.0	%	$	10,948	21.0	%
Tax exempt income, net		(5,943)	(8.1)			(4,470)	(6.2)			(3,958)	(7.6)
Bank-owned life insurance		(308)	(0.4)			(360)	(0.5)			(343)	(0.6)
State income taxes, net of federal benefit, current year		3,622	4.9			3,668	5.1			2,681	5.2
Change in unrecognized tax benefits		546	0.7			(93)	(0.1)			(45)	(0.1)
Goodwill impairment		105	0.1			630	0.9			—	—
Intended liquidation of bank-owned life insurance		—	—			790	1.1			—	—
Tax credits		(456)	(0.6)			(705)	(1.0)			(154)	(0.3)
Acquisition costs		—	—			—	—			227	0.4
Excess tax benefit on stock options exercised and restricted stock awards vested		(242)	(0.3)			(287)	(0.4)			(425)	(0.8)
Other		(215)	(0.3)			320	0.4			84	0.1
Federal and state income tax expense	$	12,707	17.3	%	$	14,619	20.3	%	$	9,015	17.3	%

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2020 and 2019:

	2020		2019
	(dollars in thousands)
Balance, beginning	$	1,254	$	1,249
Impact of tax positions taken during current year		787		375
Gross increase (decrease) related to tax positions of prior years		39		44
Reduction as a result of a lapse of the applicable statute of limitations		(187)		(414)
Balance, ending	$	1,893	$	1,254

Included in the unrecognized tax benefits liability at December 31, 2020 are potential benefits of approximately $1.4 million that, if recognized, would affect the effective tax rate.

The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit

Note 14. Federal and State Income Taxes (continued)

claimed or expected to be claimed on an income tax return. At December 31, 2020 and 2019, accrued interest on uncertain tax positions was approximately $277 thousand and $232 thousand, respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income tax expense” in the statements of income.

The Company’s federal income tax returns are open and subject to examination from the 2017 tax return year and later. Various state franchise and income tax returns are generally open from the 2016 and later tax return years based on individual state statutes of limitations.

The net deferred tax liabilities consisted of the following as of December 31, 2020 and 2019:

	2020		2019
	(dollars in thousands)
Deferred tax assets:
Historic tax credits	$	68	$	68
Net unrealized losses on securities available for sale and derivative instruments		—		126
Compensation		10,288		8,433
Loan/lease losses		20,016		11,332
Net operating loss carryforwards, federal and state		628		739
Other		71		605
		31,071		21,303
Deferred tax liabilities:
Net unrealized gains on securities available for sale and derivative instruments		869		—
Premises and equipment		5,737		4,616
Equipment financing leases		13,373		16,252
Acquisition fair value adjustments		3,351		3,963
Intended liquidation of bank-owned life insurance		—		850
Gain on sale of assets and liabilities of subsidiary		—		794
Investment accretion		28		28
Deferred loan origination fees, net		197		704
Other		922		832
		24,477		28,039
Net deferred tax liabilities	$	6,594	$	(6,736)

At December 31, 2020, the Company had $3.0 million of federal tax net operating loss carryforwards which are set to expire in varying amounts between 2029 and 2033. At December 31, 2020, the Company had $2.1 million of state tax net operating loss carryforwards which are set to expire in varying amounts between 2023 and 2028. All of the federal tax net operating loss carryforwards and the state tax net operating loss carryforwards were acquired from Community National and CNB.

Note 14. Federal and State Income Taxes (continued)

The change in deferred income taxes was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2020, 2019, and 2018:

	2020		2019		2018
	(dollars in thousands)
Provision for income taxes	$	(14,530)	$	6,364	$	6,292
Net deferred tax asset resulting from market value adjustments of acquisitions		—		(381)		(52)
Net deferred tax assets resulting from sale of other subsidiary		363		—		—
Net deferred tax liabilities resulting from sale of bank subsidiary		—		(1,644)		—
Statement of stockholders' equity- Other comprehensive income (loss)		837		1,433		(1,000)
	$	(13,330)	$	5,772	$	5,240