Annual report [Section 13 and 15(d), not S-K Item 405]

Income Taxes

v3.26.1
Income Taxes
 12 Months Ended
Dec. 31, 2025
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Pre-tax income is entirely related to domestic activities, the Company did not have any foreign operations.
At year-end, components of income tax expense (benefit) consist of the following:
(Dollars in thousands) 2025 2024
Current income tax expense:
Federal
 $ 225  $ 309 
State
 345  371 
Total current expense
 570  680 
Deferred income tax (benefit) expense:
Federal
(418) 622 
State
 (138) 22 
Total deferred (benefit) expense
 (556) 644 
Change in valuation allowance 9  1 
Total income tax expense (benefit) $ 23  $ 1,325 
The Company did not have any income tax expense (benefit) in foreign jurisdictions.
Effective tax rates differ from the federal statutory rate of 21% for 2025 and 2024 applied to income before income taxes due to the following:
2025 2024
(Dollars in thousands) Amount % of Pre-tax Income Amount % of Pre-tax Income
U.S. federal statutory income tax $ 1,703  21.0  % $ 2,826  21.0  %
State and local income tax, net of federal income tax benefit(1)
170  2.1  311  2.3 
Tax credits:
Low income housing tax credits(2)
(23) (0.3) (12) (0.1)
New markets tax credits(3)
(479) (5.9) (474) (3.5)
Changes in valuation allowances 9  0.1  1  — 
Nontaxable or nondeductible items:
Tax-exempt income, net
 (1,181) (14.6) (1,249) (9.3)
Bank owned life insurance
 (290) (3.6) (171) (1.3)
Other nondeductible items
 14  0.2  45  0.3 
Share-based compensation(4)
111  1.4  48  0.4 
Other, net (11) (0.1) -  — 
Income tax expense (benefit) at effective tax rate $ 23  0.3  % $ 1,325  9.8  %
(1) State taxes in Illinois make up the majority (greater than 50%) of the tax effect in this category.
(2) Net of amortization and tax losses.
(3) Net of basis reduction.
(4) Share-based compensation includes any excess benefits or shortfalls from vestings and exercises.

Income taxes paid were as follows:
(Dollars in thousands) 2025 2024
Federal $ -  $ - 
State and local:
Illinois
 150  405 
Indiana
 -  10 
Total income taxes paid $ 150  $ 415 
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) 2025 2024
Deferred tax assets:
Allowance for credit losses
 $ 5,024  $ 5,128 
Deferred compensation
 331  374 
Unrealized depreciation on securities available-for-sale
 13,139  18,319 
Net operating loss
 5,748  6,120 
Tax credits
 926  673 
Nonaccrual loan interest income
 214  173 
Share-based compensation
 131  267 
Unqualified deferred compensation plan
 50  60 
Accrued compensation
 301  241 
Purchase accounting
 693  548 
Deferred loan costs, net of fees
 472  432 
Lease liability
 3,791  3,916 
Capital loss carryforward
 378  - 
Other
 100  213 
Total deferred tax assets 31,298  36,464 
Deferred tax liabilities:
Depreciation
 (568) (874)
Prepaid expenses
 (479) (480)
Mortgage servicing rights
 (187) (217)
Deferred stock dividends
 (122) (122)
Goodwill
 (783) (701)
Partnership
 (138) (254)
Lease right of use
 (3,929) (4,124)
REIT spillover dividends
 (134) (125)
Other
 (64) (49)
Total deferred tax liabilities (6,404) (6,946)
Valuation allowance (72) (63)
Net deferred tax asset $ 24,822  $ 29,455 
At December 31, 2025, the Company has Indiana net operating loss carry forwards of approximately $5.6 million which will begin to expire in 2038 if not used. The Company also has a state tax credit carry forward of approximately $72 thousand which expire from 2026 to 2034. Management has concluded that the state net operating losses will be fully utilized and therefore no valuation allowance is necessary on the state net operating loss. A valuation allowance is in place on the state tax credit carryforward, as it is not expected to be utilized before expiration. A valuation allowance of $72 thousand and $63 thousand was provided at December 31, 2025 and 2024, respectively for the state tax credits net of federal benefit.
The Company 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 losses is $362 thousand for First Personal while there is no limitation on the use of the Illinois losses. Management has determined that all of the losses are more likely than not to be utilized before expiration.
The Company 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 losses expire in years ranging from 2030 to 2037, $3.6 million of the federal losses do not expire, and the Illinois losses
expire in years ranging from 2029 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 losses. Management has determined that all of the losses are more likely than not to be utilized before expiration.

The Company acquired $3.3 million of federal net operating loss carryforwards and $57.4 million of Illinois net operating loss carryforwards with the acquisition of Royal Financial, Inc. during 2022 of which $2.7 million of the federal losses expire in years ranging from 2030 to 2036, $623 thousand of the federal losses 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 losses is $755 thousand for Royal, while there is no limitation on the use of the Illinois losses. Management has determined that all of the losses are more likely than not to be utilized before expiration.

At December 31, 2025 $2.4 million of the federal loss carryforwards, $67.1 million of the Illinois loss carryforward remain and $5.6 million of Indiana loss carryforwards remain; the benefit of which is reflected in deferred tax assets.

The Company qualified under provisions of the Internal Revenue Code, to deduct from taxable income a provision for bad debts in excess of both the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at December 31, 2025 and 2024 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 December 31, 2025 and 2024.

The Company had no unrecognized tax benefits at any time during 2025 or 2024 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2026. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2025 or 2024.

The Company and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Company is no longer subject to examination by taxing authorities for the years before 2022.