Income Taxes
Income tax expense was as follows:
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| | For the Years Ended December 31, | | |
| (in thousands) | | 2024 | | 2023 | | | | | | |
| Current expense | | | | | | | | | | |
| Federal | | $ | 10,472 | | | $ | 8,192 | | | | | | | |
| State | | 2,202 | | | 2,020 | | | | | | | |
| Total current expense | | 12,674 | | | 10,212 | | | | | | | |
| Deferred tax expense (benefit) | | (1,814) | | | 142 | | | | | | | |
| Total income tax expense | | $ | 10,860 | | | $ | 10,354 | | | | | | | |
The components of the net deferred tax asset at December 31, 2024 and 2023 were:
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| (in thousands) | | 2024 | | 2023 | | | | | | |
| Deferred tax assets: | | | | | | | | | | |
| Allowance for credit losses | | $ | 11,928 | | | $ | 7,230 | | | | | | | |
| Reserve for recourse on mortgage loans sold | | 553 | | | 242 | | | | | | | |
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| Stock-based compensation | | 793 | | | 309 | | | | | | | |
| Long-term incentive program | | 497 | | | 372 | | | | | | | |
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| Write-down of equity investments | | 1,054 | | | — | | | | | | | |
| Unrealized loss on investment securities available-for-sale | | 3,789 | | | 4,253 | | | | | | | |
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| Lease liability, net of right of use asset | | 149 | | | 45 | | | | | | | |
| Purchase accounting adjustments - loans and deposits | | 4,137 | | | — | | | | | | | |
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| Other reserves | | 904 | | | 16 | | | | | | | |
| Deferred tax asset before valuation allowance | | 23,804 | | | 12,467 | | | | | | | |
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| Valuation allowance | | 1,054 | | | — | | | | | | | |
| Deferred tax asset | | 22,750 | | | 12,467 | | | | | | | |
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| Deferred tax liabilities: | | | | | | | | | | |
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| Accumulated depreciation | | 249 | | | 214 | | | | | | | |
| Intangible assets | | 2,405 | | | — | | | | | | | |
| Mortgage and other servicing rights | | 1,347 | | | — | | | | | | | |
| Purchase accounting adjustments - fixed assets | | 1,717 | | | — | | | | | | | |
| Other | | 362 | | | 1 | | | | | | | |
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| Deferred tax liability | | 6,080 | | | 215 | | | | | | | |
| Net deferred tax asset | | $ | 16,670 | | | $ | 12,252 | | | | | | | |
Based on the Company’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 a net deferred tax asset of $16.7 million at December 31, 2024 from continuing operations. The Company reduces the carrying amounts of deferred tax assets by a valuation allowance, if, based on the available evidence, it is more likely than not that such assets will not be realized. At December 31, 2024 a valuation allowance of $1.1 million was established for a deferred tax asset arising from the write-down of a legacy IFH equity investment for which realizability is uncertain. At December 31, 2023, no valuation allowance was recognized.
The Company’s net deferred tax asset of $16.7 million at December 31, 2024 increased $4.4 million, compared to $12.3 million at December 31, 2024. The variance in net deferred tax asset year over year included the allowance for credit losses of $4.7 million and was also augmented in part by the IFH acquisition, including net purchase accounting adjustments of $2.4 million, intangible assets of $2.4 million, mortgage and other servicing rights of $1.3 million and a write-down on an equity investment of $1.1 million for which a valuation allowance of $1.1 million was established.
Note 13 - Income Taxes (continued)
The differences between the federal income tax rate and the effective tax rate for the Company are reconciled as follows:
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| | 2024 | | 2023 | | | | | | |
| Statutory federal income tax rate | | 21.00 | % | | 21.00 | % | | | | | | |
| Increase (decrease) resulting from: | | | | | | | | | | |
| State income taxes, net of federal income tax benefit | | 3.63 | | | 3.13 | | | | | | | |
| Valuation allowance on deferred tax asset | | 1.32 | | | — | | | | | | | |
| Nondeductible merger expenses | | 0.64 | | | — | | | | | | | |
| Stock-based compensation expense | | 0.56 | | | (0.05) | | | | | | | |
| Bank-owned life insurance | | (0.74) | | | (0.54) | | | | | | | |
| Tax credits, net of amortization | | (0.26) | | | — | | | | | | | |
| Tax-exempt interest and dividend income | | (0.01) | | | 0.01 | | | | | | | |
| Other, net | | (0.18) | | | (1.15) | | | | | | | |
| Effective Tax Rate | | 25.96 | % | | 22.40 | % | | | | | | |
The Company’s effective tax rate of 25.96% for 2024 increased 3.56%, compared to 22.40% for 2023. The change in effective tax rate was due, in part, to the write-down of a legacy IFH equity investment which resulted in a deferred tax asset with an offsetting valuation allowance, certain nondeductible merger related expenses and stock-based compensation expense. Offsetting this includes tax credits, net of amortization, arising from the Company’s 2024 investment in low income housing tax credits reduced the effective tax rate in 2024.The Company does not have material uncertain tax positions and did not recognize any adjustments for unrecognized tax benefits. The Company remains subject to examination of income tax returns for the years ending after December 31, 2020.
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.