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Note 7 - Income Taxes
 12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 7 – Income Taxes

At year-end, components of income tax expense (benefit) consist of the following:

 

  

(Dollars in thousands)

 
  

2023

  

2022

 

Federal:

        

Current

 $92  $(169)

Deferred

  (584)  1,074 

State:

        

Current

  246   460 

Deferred, net of valuation allowance

  (89)  113 

Income tax expense (benefit)

 $(335) $1,478 

 

Effective tax rates differ from the federal statutory rate of 21% for 2023 and 2022 applied to income before income taxes due to the following:

 

  

(Dollars in thousands)

 
  

2023

  

2022

 

Federal statutory rate

  21%  21%

Tax expense at statutory rate

 $1,689  $3,477 

State tax, net of federal effect

  124   453 

Tax exempt income

  (1,314)  (1,419)

Bank owned life insurance

  (161)  (153)

Captive insurance

  (159)  (282)

Tax credit investments

  (531)  (494)

Non-deductible transaction costs

  -   98 

Other

  17   (202)

Total income tax expense (benefit)

 $(335) $1,478 

 

At December 31, the components of the net deferred tax asset recorded in other assets in the consolidated balance sheets are as follows:

 

  

(Dollars in thousands)

 
  

2023

  

2022

 

Deferred tax assets:

        

Allowance for credit losses

 $5,686  $3,346 

Deferred compensation

  356   361 

Unrealized depreciation on securities available-for-sale, net

  16,285   20,280 

Net operating loss

  6,546   7,010 

Tax credits

  683   52 

Nonaccrual loan interest income

  99   288 

Share based compensation

  293   339 

Unqualified deferred compensation plan

  67   65 

Other-than-temporary impairment

  41   42 

Accrued compensation

  260   55 

Purchase accounting

  426   364 

Deferred loan costs, net of fees

  337   339 

Other

  313   190 

Total deferred tax assets

  31,392   32,731 
         

Deferred tax liabilities:

        

Depreciation

  (1,213)  (1,322)

Prepaid expenses

  (491)  (637)

Mortgage servicing rights

  (249)  (295)

Deferred stock dividends

  (119)  (121)

Goodwill

  (608)  (533)

Partnership

  (383)  (366)

Other

  (201)  (213)

Total deferred tax liabilities

  (3,264)  (3,487)

Valuation allowance

  (62)  - 

Net deferred tax asset

 $28,066  $29,244 

 

At December 31, 2023, the Bancorp has Indiana net operating loss carryforwards of approximately $3.1 million which will expire in 2038 if not used. The Bancorp also has a state tax credit carryforward of approximately $79 thousand which expires from 2024 to 2033. Management has concluded that the state net operating losses are more likely than not to be utilized and therefore no valuation allowance is necessary. A valuation allowance, net of federal effect, of $62 thousand was recorded in 2023 on the state tax credit carryforward, as it is not expected to be utilized before expiration.

 

The Bancorp acquired $3.3 million of federal net operating loss carryforwards and $7.2 million of Illinois net operating loss carryforwards with the acquisition of First Personal Financial Corp during 2018, of which $2.2 million of the federal losses expire in years ranging from 2029 to 2035, $1.1 million of the federal losses do not expire, and the Illinois losses expire in years ranging from 2028 to 2036. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal loss carryforwards is $362 thousand for First Personal while there is no limitation on the use of the Illinois loss carryforwards. Management has determined that all of the loss carryforwards are more likely than not to be utilized before expiration.

 

The Bancorp acquired $7.2 million of federal net operating loss carryforwards and $11.4 million of Illinois net operating loss carryforwards with the acquisition of AJS Bancorp Inc. during 2019, of which $3.6 million of the federal loss carryforwards expire in years ranging from 2029 to 2034, $3.6 million of the federal loss carryforwards do not expire, and the Illinois loss carryforwards expire in years ranging from 2028 to 2037. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal losses is $834 thousand for AJS, while there is no limitation on the use of the Illinois loss carryforwards. Management has determined that all of the losses are more likely than not to be utilized before expiration.

 

The Bancorp acquired $3.3 million of federal net operating loss carryforwards and $57.9 million of Illinois net operating loss carryforwards with the acquisition of Royal Financial, Inc. during 2022, of which $2.7 million of the federal loss carryforwards expire in years ranging from 2030 to 2036, $623 thousand of the federal loss carryforwards do not expire, and the Illinois losses expire in years ranging from 2026 to 2032. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal loss carryforwards is $822 thousand for Royal, while there is no limitation on the use of the Illinois loss carryforwards. Management has determined that all of the loss carryforwards are more likely than not to be utilized before expiration.

 

At December 31, 2023 $6.3 million of the federal loss carryforwards, $68.1 million of the Illinois loss carryforward and $3.0 million of Indiana loss carryforwards remain; the benefit of which is reflected in deferred tax assets.

 

The Bancorp qualified under provisions of the Internal Revenue Code, to deduct from taxable income a provision for bad debts in excess of the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at both December 31, 2023 and 2022 includes, approximately $14.5 million, for which no provision for federal income taxes has been made. If, in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rate. The unrecorded deferred income tax liability on the above amounts was approximately $3.8 million at both December 31, 2023 and 2022.

 

The Bancorp had no unrecognized tax benefits at any time during 2023 or 2022 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2023. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Bancorp's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2023 or 2022.

 

The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Bancorp is no longer subject to examination by taxing authorities for the years before 2020.