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Note 11 - Federal Income Taxes | 12 Months Ended
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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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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