Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes [Abstract]

Income Taxes

13. Income Taxes

The provision for income taxes consists of the following for the years ended December 31, 2023 and 2022:

(in thousands)	2023		2022
Current Tax expense:
Federal	$	4,002	$	5,504
State		1,303		2,034
	$	5,305	$	7,538
Deferred tax (benefit)/expense:
Federal	$	(774)	$	339
State		(115)		256
	$	(889)	$	595
Income tax expense for the year	$	4,416	$	8,133

The reconciliation between the statutory federal income tax rate and effective income tax rate for the years ended December 31, 2023 and 2022 is as follows:

	2023		2022
Federal statutory rate		21.0%		21.0%
Tax-exempt income on securities and loans		(0.8)		(0.8)
Tax-exempt BOLI income		(1.3)		(0.8)
State income tax, net of federal tax benefit		4.7		5.6
Tax credits		(0.8)		(0.4)
Other		(0.1)		(0.1)
		22.7%		24.5%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s temporary differences as of December 31, 2023 and 2022 are as follows:

(in thousands)	2023		2022
Deferred tax assets:
Allowance for credit losses	$	4,855	$	3,880
Deferred fees		96		54
Deferred compensation		1,285		1,163
Federal and state tax loss carry forwards		2,776		2,873
Unrealized loss on investment securities		7,356		8,419
SERP		2,622		1,948
Lease liability		362		471
Low income housing		439		511
Other than temporary impairment on investment securities		464		520
Other real estate owned		83		120
Other		392		133
Total deferred tax assets		20,730		20,092
Valuation allowance		(2,776)		(2,873)
Total deferred tax assets less valuation allowance		17,954		17,219
Deferred tax liabilities:
Goodwill and other intangibles		(2,762)		(2,736)
Lease right-of-use asset		(282)		(418)
Pension		(2,958)		(2,121)
Depreciation		(403)		(921)
Derivative contract		(200)		(283)
Other		(216)		(135)
Total deferred tax liabilities		(6,821)		(6,614)
Net deferred tax assets	$	11,133	$	10,605

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry-back or carry-forward period available under the tax law during the periods in which temporary differences are deductible. The Corporation has considered future market growth, forecasted earnings, future taxable income, and feasible and permissible tax planning strategies in determining whether it will be able to realize the deferred tax asset. If the Corporation were to determine that it will not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if the Corporation were to make a

determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.

At December 31, 2023, the Corporation had Maryland net operating losses (“NOLs”) and other MD carryforwards of $39.1 million for which a deferred tax asset of $2.8 million has been recorded. There has been and continues to be a full valuation allowance on these NOLs based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.8 million at December 31, 2023 and $2.9 million at December 31, 2022.

The Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states jurisdictions. The 2018-2020 tax years remain open under the standard statute of limitations. Also, with few exceptions, the Corporation is no longer subject to state income tax examinations for tax years before 2020.

Any interest and penalties on income tax assessments or income tax refunds are recognized in the Consolidated Statements of Income as a components of interest expense (income) and other operating expense. There were no amounts of accrued tax-related interest and penalties at December 31, 2023 and 2022. Furthermore, there were no net interest and penalties related to unrecognized tax benefits for the periods presented.