Note 14 - Federal and State Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

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, 2022, 2021, and 2020:

	2022		2021		2020
	(dollars in thousands)
Current	$	19,165	$	7,290	$	27,237
Deferred		(4,682)		15,272		(14,530)
	$	14,483	$	22,562	$	12,707

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, 2022, 2021, and 2020:

	Year Ended December 31,
	2022				2021				2020
			% of				% of				% of
			Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)
Computed "expected" tax expense	$	23,845	21.0	%	$	25,508	21.0	%	$	15,391	21.0	%
Tax exempt income, net		(10,689)	(9.4)			(7,537)	(6.2)			(5,943)	(8.1)
Bank-owned life insurance		(432)	(0.4)			(386)	(0.3)			(308)	(0.4)
State income taxes, net of federal benefit, current year		4,482	3.9			5,089	4.2			3,622	4.9
Change in unrecognized tax benefits		498	0.4			578	0.5			546	0.7
Goodwill impairment		—	—			—	—			105	0.1
Provision adjustment from accounting method change		(1,181)	(1.0)			—	—			—	—
Tax credits		(1,362)	(1.2)			34	—			(456)	(0.6)
Acquisition costs		276	0.2			95	0.1			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(503)	(0.4)			(436)	(0.4)			(242)	(0.3)
Re-measurement of deferred tax asset to incorporate newly enacted tax rates		—	—			—	—			207	0.3
Other		(451)	(0.4)			(383)	(0.3)			(215)	(0.3)
Federal and state income tax expense	$	14,483	12.7	%	$	22,562	18.6	%	$	12,707	17.3	%

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2022 and 2021:

	2022		2021
	(dollars in thousands)
Balance, beginning	$	2,182	$	1,893
Impact of tax positions taken during current year		758		1,326
Gross increase (decrease) related to tax positions of prior years		75		(646)
Reduction as a result of a lapse of the applicable statute of limitations		(335)		(391)
Balance, ending	$	2,680	$	2,182

Included in the unrecognized tax benefits liability at December 31, 2022 are potential benefits of approximately $2.2 million that, if recognized, would affect the effective tax rate.

Note 14. Federal and State Income Taxes (continued)

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 claimed or expected to be claimed on an income tax return. At December 31, 2022 and 2021, accrued interest on uncertain tax positions was approximately $333 thousand and $236 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 2019 tax return year and later. Various state franchise and income tax returns are generally open from the 2018 and later tax return years based on individual state statutes of limitations.

The net deferred tax assets consisted of the following as of December 31, 2022 and 2021:

	2022		2021
	(dollars in thousands)
Deferred tax assets:
Historic tax credits	$	68	$	68
Low income housing tax credits		226		—
Net unrealized losses on securities available for sale and derivative instruments		21,319		—
Compensation		13,413		11,912
Loan/lease losses		20,466		19,023
Net operating loss carryforwards, federal and state		1,262		1,354
Other		—		17
		56,754		32,374
Deferred tax liabilities:
Net unrealized gains on securities available for sale and derivative instruments		—		747
Premises and equipment		6,271		6,099
Equipment financing leases		2,484		6,462
Acquisition fair value adjustments		3,816		3,269
Investment accretion		27		27
Deferred loan origination fees, net		1,624		1,403
Other		2,094		677
		16,316		18,684
Net deferred tax assets	$	40,438	$	13,690

At December 31, 2022, the Company had $5.4 million of federal tax NOL carryforwards and $2.1 million of state tax NOL carryforwards.  $1.9 million of the federal tax NOL carryforwards are related to the acquisition of Community National and CNB and these losses are set to expire in varying amounts between 2029 and 2033.  The $2.1 million of the state tax NOL carryforwards are also related to the acquisition of Community National and CNB and are set to expire in varying amounts between 2023 and 2028. The additional $3.5 million of federal tax NOLs were acquired in 2022 with the Guaranty Bank acquisition.  The newly acquired federal tax NOLs are expected to be utilized prior to their expiration dates.

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, 2022, 2021, and 2020:

	2022		2021		2020
	(dollars in thousands)
Provision for income taxes	$	(4,682)	$	15,272	$	(14,530)
Net deferred tax assets resulting from sale of other subsidiary		—		—		363
Statement of stockholders' equity- Other comprehensive income (loss)		(22,066)		(122)		837
	$	(26,748)	$	15,150	$	(13,330)