NOTE 9 — INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2025 and 2024 is summarized as follows:


	Years Ended December 31,
(In thousands of dollars)	2025			2024
Current portion:
Federal	$	5,512		$	2,933
State		943			425
		6,455			3,358
Deferred income tax (benefit) expense:
Federal	$	(207	)	$	1,760
State		(4	)		193
		(211	)		1,953
Total tax expense from continuing operations	$	6,244		$	5,311

The company does not have income from foreign sources and therefore does not have any foreign income tax.

A reconciliation between the income tax expense and the amount computed by applying the Federal statutory rate of 21% to income before income taxes follows:


	Years Ended December 31,
	2025				2024
(Amounts in thousands of dollars)	Amount			Percent	Amount			Percent
Tax at U.S. Statutory Rate	$	6,539		21.00%	$	5,715		21.00%
State income tax, net of federal income tax effect*		786		2.53%		503		1.85%
Tax credit investments**		(601	)	-1.93%		(628	)	-2.31%
Nontaxable or Nondeductible Items:
Tax exempt income, net of interest expense disallowance		(12	)	-0.04%		9		0.03%
Bank-owned life insurance		(381	)	-1.22%		(349	)	-1.28%
Stock-based compensation		2		0.01%		16		0.06%
Other items, net		(89	)	-0.29%		45		0.16%
Total tax expense	$	6,244		20.06%	$	5,311		19.51%

*State taxes in Georgia and South Carolina made up the majority (greater than 50 percent) of the tax effect in this category.

**Tax credit investments includes tax credits and the amortization of and projected tax losses from credit investments.

The gross amounts of deferred tax assets and deferred tax liabilities at December 31, 2025 and 2024 are as follows:


	Years Ended December 31,
(In thousands of dollars)	2025			2024
Deferred tax assets:
Net operating loss carryforward	$	6,440		$	7,134
Unrealized loss on securities available-for-sale		3,464			5,691
ACL on loans		4,441			4,024
Lease liability		1,074			1,124
ACL for unfunded commitments		933			636
Purchase accounting adjustments		263			370
Accrued expenses		480			501
Investments in partnerships		620			518
Stock-based compensation		702			506
Nonaccrual loan interest		539			265
Total deferred tax asset		18,956			20,769
Deferred tax liabilities:
Unrealized gain on cash flow hedges		(686	)		(924	)
Lease right-of-use asset		(916	)		(944	)
Origination costs and fees		(539	)		(547	)
Depreciation		(370	)		(146	)
Prepaid expenses		(75	)		(60	)
Total deferred tax liabilities		(2,586	)		(2,621	)
Net deferred tax asset	$	16,370		$	18,148

Deferred tax assets represent the future benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. After review of all positive and negative factors and potential tax planning strategies, as of December 31, 2025 and 2024, management has determined that a valuation allowance is not necessary. Management has determined that it is more likely than not that the remaining deferred tax asset at December 31, 2025 will be realized, and accordingly, has not established a valuation allowance.

The Company had federal net operating losses of $28.0 million and $30.5 million at December 31, 2025 and 2024, respectively. These net operating losses expire at various times from 2028 through 2037. The Company’s ability to benefit from the use of these net operating loss carryforwards is limited annually under Section 382 of the Internal Revenue Code. The Company has state net operating losses of $16.6 million and $20.4 million at December 31, 2025 and 2024, respectively. These net operating losses expire at various times from 2028 through 2038.

Income taxes paid (net of refunds received) were as follows:


	Years Ended December 31,
(In thousands of dollars)	2025		2024
Income Taxes Paid (Received):
Federal taxes paid	$	1,197	$	(1,395	)
State and city taxes paid:
California		130		60
Florida		200		155
New Jersey	*			55
New York	*			65
South Carolina	*			75
Other		308		101
Total state and city taxes paid		638		511
Total tax expense	$	1,835	$	(884	)

*Jurisdiction below the 5 percent of total income taxes paid (net of refunds) threshold for the period presented.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with applicable regulations. Tax returns for 2022 and subsequent years are subject to examination by taxing authorities.

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.

CoastalSouth Bancshares, Inc. Income Taxes Disclosure

About Income Taxes Disclosures

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