ORRSTOWN FINANCIAL SERVICES INCORRF
ORRSTOWN FINANCIAL SERVICES INC Income Taxes Disclosure
INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Pennsylvania and the State of Maryland. The Company is no longer subject to tax examination by tax authorities for years before 2021.
The following table summarizes income tax expense for the years ended December 31, 2024, 2023 and 2022:
| 2024 | 2023 | 2022 | |||||||||||||||
| Current expense | $ | 6,623 | $ | 10,021 | $ | 5,170 | |||||||||||
| Deferred benefit | (867) | (651) | (591) | ||||||||||||||
| Income tax expense | $ | 5,756 | $ | 9,370 | $ | 4,579 | |||||||||||
Effective July 1, 2024, the Company changed its estimated state tax rate to reflect its assessment of the apportionment of income between states as a result of the Merger. Income tax expense for 2024 decreased by $287 thousand due to the application of the new rate to existing deferred tax balances.
The following table reconciles the Company's effective income tax rate to its statutory federal rate for the years ended December 31, 2024, 2023 and 2022:
| 2024 | 2023 | 2022 | |||||||||||||||
| Statutory federal tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||
| State taxes, net of federal benefit | 2.3 | 1.5 | 1.6 | ||||||||||||||
| Tax exempt interest income | (4.6) | (2.5) | (4.1) | ||||||||||||||
| Income from life insurance | (2.1) | (0.8) | (1.3) | ||||||||||||||
| Disallowed interest expense | 2.8 | 1.1 | 0.3 | ||||||||||||||
| Low-income housing credits and related expenses | (0.2) | (0.1) | (0.2) | ||||||||||||||
| Merger-related expenses | 1.3 | 0.3 | — | ||||||||||||||
| Share-based compensation and related expenses | (0.9) | (0.1) | (0.5) | ||||||||||||||
| Other | 1.1 | 0.4 | 0.4 | ||||||||||||||
| Effective income tax rate | 20.7 | % | 20.8 | % | 17.2 | % | |||||||||||
Net investment securities gains resulted in an income tax expense of $57 thousand for the year ended December 31, 2024 and an income tax benefit of $10 thousand and $34 thousand related to net losses on investment securities for the years ended December 31, 2023 and 2022, respectively.
The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the results of operations. There were no penalties or interest related to income taxes recorded in the consolidated statements of income for the years ended December 31, 2024, 2023 and 2022 and no amounts accrued for penalties at December 31, 2024 and 2023.
The following table summarizes the Company's deferred tax assets and liabilities at December 31, 2024 and 2023.
| 2024 | 2023 | ||||||||||
| Deferred tax assets: | |||||||||||
| Allowance for credit losses | $ | 11,116 | $ | 6,445 | |||||||
| Deferred compensation | 1,849 | 491 | |||||||||
| Retirement and salary continuation plans | 4,712 | 3,329 | |||||||||
| Share-based compensation | 785 | 712 | |||||||||
| Off-balance sheet reserves | 565 | 387 | |||||||||
| Nonaccrual loan interest | 1,735 | 1,388 | |||||||||
| Net deferred loan fees and costs | — | 342 | |||||||||
| Net unrealized losses on AFS securities | 8,014 | 7,331 | |||||||||
| Net unrealized losses on cash flow hedges | — | 54 | |||||||||
| Purchase accounting adjustments | 24,318 | 745 | |||||||||
| Bonus accrual | 3,201 | 845 | |||||||||
| Right-of-use lease liabilities | 3,248 | 2,594 | |||||||||
| Net operating loss carryforward | 1,534 | 1,770 | |||||||||
| Other | 2,618 | 677 | |||||||||
| Total deferred tax assets | 63,695 | 27,110 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation | 643 | 493 | |||||||||
| Net deferred loan fees and costs | 946 | — | |||||||||
| Net unrealized gains on cash flow hedges | 259 | — | |||||||||
| Mortgage servicing rights | 845 | 834 | |||||||||
| Purchase accounting adjustments | 13,879 | 479 | |||||||||
| Right-of-use lease assets | 3,157 | 2,433 | |||||||||
| Investment in partnerships | 1,232 | 468 | |||||||||
| Other | 87 | 386 | |||||||||
| Total deferred tax liabilities | 21,048 | 5,093 | |||||||||
| Deferred tax asset, net | $ | 42,647 | $ | 22,017 | |||||||
At December 31, 2024, the Company had acquired federal and state net operating loss carryforwards of $6.7 million each, subject to annual loss limitation limits per IRC Section 382, that expire beginning in 2033. A deferred tax asset is recognized for these carryforwards because the benefit is more likely than not to be realized.
FASB ASC 740, Income Taxes, (“ASC 740”) clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in ASC 740 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 was applied to all existing tax positions upon initial adoption. There was no liability for uncertain tax positions and no known unrecognized tax benefits at December 31, 2024 or 2023.
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.