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Income Taxes

12 Months Ended

Dec. 31, 2020

(14)	Income Taxes

The components of the federal and state income tax expense for the years ended December 31, 2020 and 2019 are as follows:


(dollars in thousands)	2020		2019
Federal:
Current	$	5,703	3,287
Deferred		1,242	(489)
		6,945	2,798
State:
Current		1,141	249
Deferred		12	(14)
		1,153	235
Totals	$	8,098	3,033

A reconciliation of the statutory income tax at 21% to the income tax expense included in the statement of operations is as follows for 2020 and 2019, respectively:


(dollars in thousands)		2020			2019
Federal income tax at statutory rate	$	7,252	21.0	%	2,838	21.0	%
State tax expense, net of federal benefit		911	2.6		186	1.4
Tax exempt interest		(153)	(0.4)		(65)	(0.5)
Bank owned life insurance		(59)	(0.2)		(61)	(0.5)
Incentive stock options		74	0.2		66	0.5
Other		73	0.2		69	0.5
Effective income tax rate	$	8,098	23.4	%	3,033	22.4	%

The components of the net deferred tax asset at December 31, 2020 and 2019 are as follows:


(dollars in thousands)	2020		2019
Deferred tax assets:
Allowance for loan and lease losses	$	4,230	2,111
Litigation reserve		—	220
Intangibles		30	58
Accrued incentive compensation		—	176
Accrued retirement		528	432
Unrealized loss on available for sale securities		—	2
Deferred rent		180	142
Mortgage repurchase reserve		641	16
Other		122	78
Total deferred tax asset		5,731	3,235
Deferred tax liabilities:
Property and equipment		(377)	(388)
Loan servicing rights		(1,337)	(183)
Mortgage pipeline fair-value adjustment		(1,156)	(77)
Hedge instrument fair-value adjustment		(1,252)	(41)
Unrealized gain on available for sale securities		(797)	—
Prepaid expenses		(340)	(152)
Deferred loan costs		(406)	(279)
Other		(4)	—
Total deferred tax liability		(5,669)	(1,120)
Net deferred tax asset	$	62	2,115

The effective tax rates for the twelve-month periods ended December 31, 2020 and 2019 were 23.4% and 22.4% respectively. The increase in rate from 22.4% to 23.4% between 2019 and 2020 was primarily related to the increase in state income tax expense as Meridian’s mortgage division expanded into Maryland in 2020.

Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income. The CARES Act, enacted in March 2020 grants potential tax relief to businesses, including corporate tax provisions that: temporarily allow for the carryback of certain net operating losses, increase interest expense deduction limitations, and allow accelerated depreciation deductions on certain fixed asset improvements. The tax relief under the CARES Act had no material impact to the Corporation’s Consolidated Financial Statements.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets.

As of December 31, 2020, the Corporation had an investment in low income housing tax credits of $1.3 million on which it recognized tax credits of $161 thousand, amortization of $180 thousand and tax benefits from losses of $26 thousand during the year ended December 31, 2020. As of December 31, 2019, the Corporation had an investment in low income housing tax credits of $1.5 million on which it recognized tax credits of $224 thousand, amortization of $245 thousand and tax benefits from losses of $33 thousand during the year ended December 31, 2019.

- 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.

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