INCOME TAXES
The components of income tax expense were as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2025 | | 2024 | | 2023 |
| Current: | | | | | |
| Federal | $ | 5,253 | | | $ | 6,780 | | | $ | 7,924 | |
| State | 524 | | | 1,014 | | | 755 | |
| Total | 5,777 | | | 7,794 | | | 8,679 | |
| Deferred: | | | | | |
| Federal | 3,286 | | | 806 | | | (534) | |
| State | 340 | | | (27) | | | 16 | |
| Total | 3,626 | | | 779 | | | (518) | |
| Income taxes | $ | 9,403 | | | $ | 8,573 | | | $ | 8,161 | |
The Company does not have any income tax expense (benefit) in foreign jurisdictions for the years ended December 31, 2025, 2024, and 2023.
The differences between the ETR and the federal statutory income tax rate in accordance with ASU 2023-09 are as follows:
| | | | | | | | | | | |
| (Dollars in thousands) | 2025 |
| Federal income tax at statutory rate | $ | 9,755 | | | 21.0 | % |
State income taxes, net of federal benefit1 | 682 | | | 1.5 | |
| Nontaxable or nondeductible: | | | |
| Tax-exempt income on loans and investment securities | (398) | | | (0.9) | |
| Earnings on investment in bank-owned life insurance | (544) | | | (1.2) | |
| | | |
| Gain on life insurance proceeds | (60) | | | (0.1) | |
| Merger-related costs | 136 | | | 0.3 | |
| Excess compensation | 53 | | | 0.1 | |
| Other | (221) | | | (0.5) | |
| Effective income tax rate | $ | 9,403 | | | 20.2 | % |
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1 State taxes in Maryland make up the majority of this line item.
The differences between the ETR and the federal statutory income tax rate before adoption of ASU 2023-09 are as follows:
| | | | | | | | | | | |
| 2024 | 2023 |
| Federal income tax at statutory rate | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 1.9 | | | 1.5 | |
| Tax-exempt income on loans and investment securities | (1.0) | | | (1.3) | |
| Earnings on investment in bank-owned life insurance | (1.0) | | | (1.0) | |
| | | |
| Nondeductible merger-related costs | 0.7 | | | — | |
| Other | (0.4) | | | 0.3 | |
| Effective income tax rate | 21.2 | % | | 20.5 | % |
The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:
| | | | | | | | | | | |
| (In thousands) | 2025 | | 2024 |
| Deferred tax assets: | | | |
| Investment securities available for sale | $ | 5,595 | | | $ | 11,178 | |
| Allowance for credit losses | 5,246 | | | 3,909 | |
| Purchase accounting | 4,173 | | | — | |
| Accrued deferred compensation | 1,760 | | | 1,436 | |
| Deferred director fees | 1,176 | | | 1,153 | |
| Lease liability | 986 | | | 592 | |
| Defined benefit pension plan | 750 | | | 1,031 | |
| Allowance for unfunded commitments | 406 | | | 315 | |
| Nonaccrual interest | 341 | | | 246 | |
| | | |
| Deferred loan fees | 75 | | | 46 | |
| Accumulated depreciation | — | | | 59 | |
| Other | 707 | | | 837 | |
| Total gross deferred tax assets | 21,215 | | | 20,802 | |
| Deferred tax liabilities: | | | |
| Goodwill and intangible assets, net | 5,123 | | | 1,449 | |
| Prepaid defined benefit pension plan cost | 4,804 | | | 4,729 | |
| Right of use asset | 921 | | | 592 | |
| Purchase accounting | 871 | | | 25 | |
| Prepaid expenses | 196 | | | 50 | |
| | | |
| Accumulated depreciation | 117 | | | — | |
| Total gross deferred tax liabilities | 12,032 | | | 6,845 | |
| Net deferred tax asset | $ | 9,183 | | | $ | 13,957 | |
Based on the Corporation's history of prior earnings and its expectations of the future, it is anticipated that operating income and the reversal pattern of its temporary differences will, more likely than not, be sufficient to realize the benefits of these net deferred tax assets and has not recorded any valuation allowances on its deferred tax assets as of December 31, 2025 and 2024.
The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states for which income is derived. The Corporation is no longer subject to examination by taxing authorities for years before 2021.
The Corporation follows accounting guidance related to accounting for uncertainty in income taxes. Under the “more likely than not” threshold guidelines, the Corporation believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. The Corporation did not have any material uncertain tax positions at December 31, 2025 or 2024.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.