Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the State of Maryland. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2021.
The following table provides information on components of income tax expense for the years ended December 31, 2024 and 2023.
| | | | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, 2024 | | December 31, 2023 | | |
| Current tax expense: | | | | | | |
| Federal | | $ | 4,264 | | | $ | 172 | | | |
| State | | 1,681 | | | 63 | | | |
| | 5,945 | | | 235 | | | |
| Deferred income tax expense: | | | | | | |
| Federal | | 6,570 | | | 1,692 | | | |
| State | | 2,300 | | | 1,029 | | | |
| | 8,870 | | | 2,721 | | | |
| | | | | | |
| Total income tax expense | | $ | 14,815 | | | $ | 2,956 | | | |
The following table provides a reconciliation of tax computed at the statutory federal tax rate to the actual tax expense for the years ended December 31, 2024 and 2023.
| | | | | | | | | | | | | | | | |
| | December 31, 2024 | | December 31, 2023 | | |
| Tax at federal statutory rate | | 21.0 | % | | 21.0 | % | | |
| Tax effect of: | | | | | | |
| Tax-exempt income | | (1.4) | | | (3.6) | | | |
| State income taxes, net of federal benefit | | 5.4 | | | 6.1 | | | |
| Bargain purchase gain | | — | | | (13.1) | | | |
| Nondeductible compensation costs | | 0.1 | | | 3.9 | | | |
| Nondeductible merger-related expenses | | — | | | 2.6 | | | |
| Other | | 0.1 | | | 3.9 | | | |
| Actual income tax expense rate | | 25.2 | % | | 20.8 | % | | |
The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of December 31, 2024 and 2023.
| | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, 2024 | | December 31, 2023 |
| Deferred tax assets: | | | | |
| Allowance for credit losses | | $ | 14,888 | | | $ | 14,534 | |
| Write-downs of OREO | | — | | | 33 | |
| Nonaccrual loan interest | | 578 | | | 344 | |
| Lease liabilities | | 3,035 | | | 3,326 | |
| Deferred compensation | | 4,078 | | | 4,160 | |
| Federal net operating loss | | — | | | 6,528 | |
| State net operating loss | | 2,066 | | | 2,448 | |
| Deferred loan fees | | 2,078 | | | 1,775 | |
| Acquisition fair value adjustments | | 24,988 | | | 30,452 | |
| Unrealized losses on available for sale securities | | 2,844 | | | 2,825 | |
| Other | | 1,233 | | | 1,398 | |
| Total deferred tax assets | | 55,788 | | | 67,823 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Depreciation | | 4,115 | | | 4,320 | |
| Right-of-use assets | | 2,918 | | | 3,229 | |
| Mortgage servicing rights | | 1,505 | | | 1,541 | |
| Acquisition fair value adjustments | | 1,651 | | | 2,401 | |
| | | | |
| | | | |
| Intangibles | | 11,223 | | | 13,611 | |
| Other | | 575 | | | 999 | |
| Total deferred tax liabilities | | 21,987 | | | 26,101 | |
| Less: valuation allowance | | $ | (1,944) | | | $ | (1,015) | |
| Net deferred tax assets | | $ | 31,857 | | | $ | 40,707 | |
Management of the Company has determined a full valuation allowance is required for the holding company’s state deferred tax assets, largely associated with its state net operating losses. As the holding company files in the state of Maryland on separate entity basis and has not had and does not expect to have taxable income in that jurisdiction for the foreseeable future, the Company believes, at the current and prior period end, it was more likely than not that the holding company’s state deferred tax assets will not be realized. This valuation allowance increased from $1.0 million to $1.9 million during the year ended December 31, 2024. Based on the Company’s analysis, no other valuation allowances have been recorded as the Company expects to realize its remaining federal and state deferred tax assets.
The Company has analyzed the tax positions taken or expected to be taken in its income tax returns for the periods ending December 31, 2024 and 2023, and has recorded no liabilities related to uncertain tax positions in accordance with the applicable guidance in ASC 740, Income Taxes.
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.