Note 7 - Income Taxes

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(7) Income Taxes

Components of income tax expense from operations follows:

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2023			2022			2023			2022
Current income tax expense:
Federal	$	7,129		$	9,231		$	20,409		$	12,838
State		1,859			1,261			4,223			1,875
Total current income tax expense		8,988			10,492			24,632			14,713
Deferred income tax expense:
Federal		(1,087	)		(1,922	)		(1,311	)		1,542
State		(259	)		454			428			1,761
Total deferred income tax expense		(1,346	)		(1,468	)		(883	)		3,303
Change in valuation allowance		-			-			-			-
Total income tax expense	$	7,642		$	9,024		$	23,749		$	18,016

An analysis of the difference between the statutory and ETRs from operations follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2023			2022			2023			2022
U.S. federal statutory income tax rate		21.0	%		21.0	%		21.0	%		21.0	%
State income taxes, net of federal benefit		3.3			3.6			3.4			3.5
Excess tax benefit from stock-based compensation arrangements		0.1			-			(0.3	)		(1.3	)
Change in cash surrender value of life insurance		(0.1	)		-			(0.5	)		0.6
Tax credits		(0.7	)		(0.5	)		(0.5	)		(0.6	)
Tax exempt interest income		(0.5	)		(0.5	)		(0.5	)		(0.7	)
Non-deductible merger expenses		-			-			-			0.2
Insurance captive		(0.2	)		(0.3	)		(0.3	)		(0.3	)
Other, net		(0.9	)		0.7			(0.2	)		(0.3	)
Effective tax rate		22.0	%		24.0	%		22.1	%		22.1	%

Current state income tax expense for 2023 and 2022 represents tax owed to the state of Kentucky, Indiana and Illinois. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.

On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and disallow the related tax benefits, both prospectively and retroactively, for a period of three years. While the proposed regulation has not been finalized, it is expected to be finalized during the fourth quarter of 2023. As a result, Bancorp elected not to renew the insurance captive effective August 2023 and expects it to be dissolved by the end of the year. The tax benefits associated with the Captive are not expected to be experienced going forward.

GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of September 30, 2023 and December 31, 2022, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal and state income tax returns are subject to examination for the years after 2018.