SIERRA BANCORP Income Taxes Disclosure
13. INCOME TAXES
The provision for income taxes follows (dollars in thousands):
Year Ended December 31, | |||||||||
| 2025 | | 2024 | | 2023 | ||||
Current expense: | |||||||||
Federal | $ | 8,971 | $ | 5,702 | $ | 8,470 | |||
State | 5,150 | 3,578 | 5,493 | ||||||
Total current tax expense | 14,121 | 9,280 | 13,963 | ||||||
Deferred expense: | |||||||||
Federal | (169) | 2,711 | (1,531) | ||||||
State | 64 | 1,317 | (812) | ||||||
Total deferred tax (benefit) expense | (105) | 4,028 | (2,343) | ||||||
Total income tax expense | $ | 14,016 | $ | 13,308 | $ | 11,620 | |||
The components of the net deferred tax asset, included in other assets, are as follows (dollars in thousands):
December 31, | ||||||
| 2025 | | 2024 | |||
Deferred tax assets: | ||||||
Allowance for credit losses on loans | $ | 6,350 | $ | 7,341 | ||
Deferred compensation | 5,282 | 4,903 | ||||
Accrued reserves | 765 | 1,006 | ||||
Non-accrual loans | 257 | 256 | ||||
Lease liability | 6,820 | 7,003 | ||||
Loan fair value adjustment | 71 | 128 | ||||
Intangibles | 163 | 48 | ||||
Net operating losses | 1,051 | 1,115 | ||||
State income tax deduction | 1,046 | 760 | ||||
Other | 811 | 764 | ||||
Unrealized losses on debt securities | 9,727 | 13,119 | ||||
Total deferred tax assets | 32,343 | 36,443 | ||||
Deferred tax liabilities: | ||||||
Deferred loan origination costs | (1,165) | (1,268) | ||||
Right-of-use asset | (7,849) | (8,204) | ||||
TruPS accretion | (629) | (682) | ||||
FMV equity securities | (528) | (528) | ||||
Prepaids | (783) | (771) | ||||
Other | (924) | (1,123) | ||||
Premises and equipment | (1,081) | (1,196) | ||||
Total deferred tax liabilities | (12,959) | (13,772) | ||||
Net deferred tax assets | $ | 19,384 | $ | 22,671 | ||
The Company believes that the deferred tax assets will be fully realized, therefore no valuation allowance has been recorded.
The Company adopted ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” on a prospective basis beginning with the year ended December 31, 2025. A reconciliation of income tax expense at the rate (21% in 2025) to the Company’s actual income tax expense for the year ended December 31, 2025, is shown below:
Year Ended December 31, 2025 | ||||
Amount | Percent | |||
Income tax expense at federal statutory rate | $ | 11,832 | 21.00% | |
State and local income tax, net of federal tax effect (1) | 4,119 | 7.31% | ||
Tax credits | ||||
Affordable housing tax credits, net of amortization and other income tax benefit | (505) | (0.90)% | ||
Nontaxable or nondeductible items | ||||
Tax-exempt interest, net of disallowance | (854) | (1.52)% | ||
Bank-owned life insurance | (724) | (1.28)% | ||
Other | (8) | (0.01)% | ||
Other adjustments | 156 | 0.28% | ||
$ | 14,016 | 24.88% | ||
| (1) | State taxes in California made up the majority () of the tax effect in this category. |
The following table is a reconciliation of the statutory U.S. corporate federal income tax rate to the Company’s effective tax rate for 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09:
Year Ended December 31, | ||||||
| 2024 | | 2023 | |||
Income tax expense at federal statutory rate | $ | 11,312 | $ | 9,758 | ||
Increase (decrease) resulting from: | ||||||
State franchise tax expense, net of federal tax effect | 3,867 | 3,698 | ||||
Tax exempt municipal income | (1,416) | (2,291) | ||||
Nondeductible interest expense | 585 | |||||
Affordable housing tax credits | (208) | 16 | ||||
Excess tax (benefit) expense of stock-based compensation | (329) | 22 | ||||
Cash surrender value - life insurance | (594) | (371) | ||||
Other | 91 | 788 | ||||
Total | $ | 13,308 | $ | 11,620 | ||
Effective tax rate | 24.71% | 25.01% | ||||
Income taxes paid were as follows (dollars in thousands):
| 2025 | ||
Federal | $ | 5,825 | |
California | 4,650 | ||
Other state and local | 7 | ||
Total | $ | 10,482 | |
The Company is subject to federal income tax and income tax of various states. Our federal income tax returns for the years ended December 31, are open to audit by the federal authorities and our California state tax returns for the years ended December 31, are open to audit by the state authorities.
At December 31, 2025, the Company has federal net operating loss carry forwards of approximately $2.8 million which expire at various dates from 2031 to 2036. The Company also had California Franchise tax net operating loss carry forwards of approximately $5.4 million which expire at various dates from 2034 to 2041. Net operating loss carry forwards available from acquisitions are substantially limited by Section 382 of the Internal Revenue Code and benefits not expected to be realized due to the limitation have been excluded from the deferred tax asset and net operating loss carry forward amounts noted above.
There were no recorded interest or penalties related to uncertain tax positions as part of income tax for the years ended December 31, 2025, 2024, and 2023, respectively. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.
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.