Note 10 - Income Taxes

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(10) Income Taxes

Components of income tax expense (benefit) from operations follows:

Years Ended December 31, (in thousands)	2023			2022			2021
Current income tax expense:
Federal	$	25,360		$	22,405		$	13,292
State		5,254			2,962			2,059
Total current income tax expense		30,614			25,367			15,351
Deferred income tax expense (benefit):
Federal		(977	)		(513	)		3,318
State		542			2,336			2,176
Total deferred income tax expense (benefit)		(435	)		1,823			5,494
Change in valuation allowance		-			-			(93	)
Total income tax expense	$	30,179		$	27,190		$	20,752

Components of income tax (benefit) expense recorded directly to stockholders’ equity were as follows:

Years Ended December 31, (in thousands)	2023			2022			2021
Unrealized gain (loss) on securities available for sale	$	7,416		$	(35,323	)	$	(5,371	)
Unrealized gain (loss) on derivatives		(58	)		-			38
Minimum pension liability adjustment		(17	)		126			52
Total income tax (benefit) expense recorded directly to stockholders' equity	$	7,341		$	(35,197	)	$	(5,281	)

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

Years Ended December 31,	2023			2022			2021
U.S. federal statutory income tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal benefit		3.3			3.5			3.5
Excess tax benefits from stock-based compensation arrangements		(0.3	)		(1.0	)		(1.1	)
Change in cash surrender value of life insurance		(0.7	)		0.2			(0.8	)
Tax credits		(0.5	)		(0.2	)		(0.3	)
Tax exempt interest income		(0.5	)		(0.6	)		(0.4	)
Non-deductible merger expenses		-			0.1			0.4
Insurance captive		(0.2	)		(0.3	)		(0.2	)
Amortization of investment in tax credit partnerships		0.2			0.1			0.1
Other, net		(0.4	)		(0.2	)		(0.4	)
Effective tax rate		21.9	%		22.6	%		21.8	%

Current state income tax expense for 2023 and 2022 represents tax owed to the states of Kentucky, Indiana and Illinois. Ohio state 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 to be determined. While the proposed regulation has not been finalized, it is expected to be finalized in 2024. Bancorp elected not to renew the insurance captive effective August 2023 and it was dissolved as of December 31, 2023. The tax benefits associated with the Captive will not 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 December 31, 2023 and December 31, 2022, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal income tax returns are subject to examination for the years after 2019 and state income tax returns are subject to examination for the years after 2018.

The effects of temporary differences that gave rise to significant portions of DTAs and DTLs follows:

December 31, (in thousands)	2023		2022
Deferred tax assets:
Investment securities	$	29,805	$	35,935
Allowance for credit losses		19,575		18,099
Deferred compensation		6,807		6,349
Operating lease liability		5,449		5,066
Acquired loan fair value adjustments		3,205		3,506
Accrued expenses		2,691		4,605
Interest rate swaps		63		6
Write-downs and costs associated with OREO		27		21
Deferred PPP loan fees		17		77
Investments in tax credit partnerships		-		215
State net operating loss		-		540
Total deferred tax assets		67,639		74,419
Deferred tax liabilities:
Right-of-use operating lease asset		5,181		4,848
Mortgage servicing rights		3,192		3,712
Core deposit intangibles		2,688		3,399
Customer list intangible		2,062		2,469
Property and equipment		2,036		2,395
Other liabilities		2,025		2,009
Investments in tax credit partnerships		1,515		-
Loan costs		1,504		1,272
Leases		200		170
Total deferred tax liabilities		20,403		20,274
Net deferred tax asset	$	47,236	$	54,145

A valuation allowance is recognized for a DTA if, based on the weight of available evidence, it is more likely than not that some portion of the entire DTA will not be realized. Ultimate realization of DTAs is dependent upon generation of future taxable income during periods in which those temporary differences become deductible. Management considers scheduled reversal of DTLs, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over periods which the temporary differences resulting in remaining DTAs are deductible, management believes it is more likely than not that Bancorp will realize the benefits of these deductible differences at December 31, 2023.

Realization of DTAs/DTLs associated with investment in tax credit partnerships is dependent upon generating sufficient taxable capital gain income prior to their expiration. No valuation allowance was recorded as of both December 31, 2023 and 2022 based on management’s estimate of the temporary deductible differences that may expire prior to their utilization. In addition, realization of DTAs are evaluated for net operating losses that will not be utilized prior to their expiration. The Kentucky net operating losses began to be utilized in 2021 when Bancorp began filing a combined Kentucky income tax return with the Bank. The loss carryforward was $0 as of December 31, 2023.