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Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

(16) Income Taxes

 

Income tax expense (benefit) attributable to income from operations consisted of the following:

 

   2020   2019   2018 
(Dollars in thousands)  Years ended December 31, 
   2020   2019   2018 
Current:            
Federal  $4,582   $1,805   $396 
State   708    (157)   (197)
Total current   5,290    1,648    199 
Deferred:               
Federal   (442)   (160)  $875 
State   (8)   22    155 
Total deferred   (450)   (138)   1,030 
Deferred tax valuation allowance   (53)   (57)   (146)
Deferred tax remeasurement   -    -    85 
Income tax expense  $4,787   $1,453   $1,168 

 

The reasons for the difference between actual income tax expense (benefit) and expected income tax expense attributable to income from operations at the statutory federal income tax rate were as follows:

 

          
(Dollars in thousands)  Years ended December 31, 
   2020   2019   2018 
Computed “expected” tax expense  $5,099   $2,544   $2,435 
(Reduction) increase in income taxes resulting from:               
Tax-exempt interest income, net   (695)   (748)   (850)
Deferred tax remeasurement   -    -    85 
Excess tax benefit from stock option exercise   (26)   -    (119)
Bank owned life insurance   (137)   (165)   (140)
Reversal of unrecognized tax benefits, net   (229)   (558)   (512)
State income taxes, net of federal benefit   800    407    364 
Investment tax credits   (28)   (15)   (24)
Other, net   3    (12)   (71)
Income tax (benefit) expense  $4,787   $1,453   $1,168 

 

 

 

The tax effects of temporary differences that give rise to the significant portions of the deferred tax assets and liabilities at the following dates were as follows:

 

       
(Dollars in thousands)  As of December 31, 
   2020   2019 
Deferred tax assets:          
Loans, including allowance for loan losses  $2,040   $1,590 
Net operating loss carry forwards   273    326 
State taxes   614    414 
Net deferred loan fees   432    11 
Acquisition costs   161    182 
Deferred compensation arrangements   66    69 
Investments   54    45 
Other, net   158    39 
Total deferred tax assets   3,798    2,676 
Less valuation allowance   (273)   (326)
Total deferred tax assets, net of valuation allowance   3,525    2,350 
           
Deferred tax liabilities:          
Unrealized gain on investment securities available-for-sale   3,065    1,700 
Premises and equipment, net of depreciation   500    361 
Mortgage servicing rights   777    492 
Prepaid expenses   302    157 
Intangible assets   278    181 
FHLB stock dividends   12    6 
Total deferred tax liabilities   4,934    2,897 
           
Net deferred tax liability  $(1,409)  $(547)

  

The Company has Kansas corporate net operating loss carry forwards totaling $4.7 million and $5.6 million as of December 31, 2020 and 2019, respectively, which expire between 2021 and 2027. The Company has recorded a valuation allowance against the Kansas corporate net operating loss carry forwards. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets at December 31, 2020.

 

Retained earnings at December 31, 2020 and 2019 include approximately $6.3 million for which no provision for federal income tax had been made. This amount represents allocations of income to bad debt deductions in years prior to 1988 for tax purposes only. Reduction of amounts allocated for purposes other than tax bad debt losses will create income for tax purposes only, which will be subject to the then current corporate income tax rate.

 

The Company has unrecognized tax benefits representing tax positions for which a liability has been established. A reconciliation of the beginning and ending amount of the liability relating to unrecognized tax benefits is as follows:

 

(Dollars in thousands)  Years ended December 31, 
   2020   2019 
Unrecognized tax benefits at beginning of year  $1,416   $1,472 
Gross increases to current year tax positions   1,100    554 
Gross decreases to prior year’s tax positions   (26)   (2)
Lapse of statute of limitations   (352)   (608)
Unrecognized tax benefits at end of year  $2,138   $1,416 

 

 

Tax years that remain open and subject to audit include the years 2017 through 2020 for both federal and state tax purposes. The Company recognized $352,000 and $608,000 of previously unrecognized tax benefits during 2020 and 2019, respectively. The gross unrecognized tax benefits of $2.1 million and $1.4 million at December 31, 2020 and December 31, 2019, respectively, would favorably impact the effective tax rate by $1.7 million and $1.1 million, respectively, if recognized. During 2020, the Company recorded $71,000 of income tax expense associated with interest and penalties. During 2019 and 2018, the Company recorded an income tax benefit of $77,000 and $119,000, respectively, associated with interest and penalties. As of December 31, 2020 and 2019, the Company has accrued interest and penalties related to the unrecognized tax benefits of $325,000 and $254,000, respectively, which are not included in the table above. The Company believes that it is reasonably possible that a reduction in gross unrecognized tax benefits of up to $48,000 is possible during the next 12 months as a result of the lapse of the statute of limitations.