NOTE 16 – INCOME TAXES

Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C Corporation). As such, any periods prior to October 11, 2019 will only reflect an effective state income tax rate. In connection with the conversion of tax status, the Company recognized a deferred tax asset of $534,000 and an income tax benefit of $534,000.

In recording the impact of the conversion to a C Corporation, the Company recorded a deferred income tax expense of $2,741,000 related to the unrealized gains (losses) on debt securities and derivatives, through the income statement in accordance with ASC 740-20-45-8; therefore, the amount shown in other comprehensive income has not been reduced by the above expense. This difference will remain in accumulated other comprehensive income until the underlying securities are sold or mature and the underlying cash flow hedging relationships terminate in accordance with the portfolio approach allowed under ASC 740.

Allocation of income tax expense between current and deferred portions for the years ended December 31 is as follows:


	2020		2019		2018
	(dollars in thousands)
Current
Federal	$	8,358	$	4,849	$	—
State		4,709		3,102		869
Total current		13,067		7,951		869

Deferred
Federal		(226)		(1,437)		—
State		(113)		(724)		—
Change in tax status		—		(534)		—
Total deferred		(339)		(2,695)		—
Income tax expense	$	12,728	$	5,256	$	869

Income tax expense differs from the statutory federal rate for the years ended December 31 due to the following:



	2020				2019				2018
	Amount		Percentage		Amount		Percentage		Amount		Percentage
	(dollars in thousands)
Federal income tax, at statutory rate	$	10,410	21.0	%	$	3,933	5.5	%	$	—	—	%
Increase (decrease) resulting from:
Federally tax exempt interest income		(1,470)	(3.0)			(372)	(0.5)			—	—
State taxes, net of federal benefit		3,631	7.4			2,212	3.1			869	1.3
Change in tax status		—	—			(534)	(0.8)			—	—
Other		157	0.3			17	—			—	—
Income tax expense	$	12,728	25.7	%	$	5,256	7.3	%	$	869	1.3	%

The components of the deferred tax assets and liabilities are as follows:


	December 31,		December 31,
	2020		2019
	(dollars in thousands)
Deferred tax assets
Allowance for loan losses	$	9,046	$	6,309
Compensation related		2,301		5,859
Deferred loan fees		1,595		497
Nonaccrual interest		660		858
Foreclosed assets		45		574
Goodwill		336		531
Other		1,046		785
Total deferred tax assets		15,029		15,413

Deferred tax liabilities
Fixed asset depreciation		4,361		4,201
Mortgage servicing rights		1,692		2,428
Other purchase accounting adjustments		1,115		1,356
Intangible assets		580		841
Prepaid assets		685		504
Net unrealized gain on debt securities available-for-sale		6,604		2,251
Other		370		426
Total deferred tax liabilities		15,407		12,007
Net deferred tax (liability) asset	$	(378)		3,406