Note 9 - Income Taxes

12 Months Ended

Dec. 31, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(9) Income Taxes

Components of income tax expense follows:

Years Ended December 31, (in thousands)	2024			2023			2022
Current income tax expense:
Federal	$	27,377		$	25,360		$	22,405
State		5,566			5,254			2,962
Total current income tax expense		32,943			30,614			25,367
Deferred income tax expense (benefit):
Federal		(2,681	)		(977	)		(513	)
State		(435	)		542			2,336
Total deferred income tax expense (benefit)		(3,116	)		(435	)		1,823
Total income tax expense	$	29,827		$	30,179		$	27,190

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

Years Ended December 31, (in thousands)	2024			2023			2022
Unrealized gain (loss) on securities available for sale	$	(359	)	$	7,416		$	(35,323	)
Unrealized gain (loss) on derivatives		983			(58	)		-
Minimum pension liability adjustment		18			(17	)		126
Total income tax (benefit) expense recorded directly to stockholders' equity	$	642		$	7,341		$	(35,197	)

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

Years Ended December 31,	2024			2023			2022
U.S. federal statutory income tax rate		21.00	%		21.00	%		21.00	%
State income taxes, net of federal benefit		2.75			3.27			3.45
Excess tax benefits from stock-based compensation arrangements		(0.76	)		(0.31	)		(0.97	)
Change in cash surrender value of life insurance		(0.61	)		(0.64	)		0.18
Tax credits		(1.54	)		(0.54	)		(0.16	)
Tax exempt interest income		(0.43	)		(0.50	)		(0.62	)
Non-deductible merger expenses		-			-			0.11
Insurance captive		-			(0.20	)		(0.29	)
Amortization of investment in tax credit partnerships		-			0.20			0.06
Other, net		0.25			(0.40	)		(0.19	)
Effective tax rate		20.66	%		21.88	%		22.57	%

Current state income tax expense for 2024, 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. The regulation was finalized in January 2025 and its impact is being evaluated by management. Bancorp elected not to renew the insurance captive effective August 2023 and it was dissolved as of December 31, 2023.

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, 2024 and December 31, 2023, 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 2020 and state income tax returns are subject to examination for the years after 2019.

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

December 31, (in thousands)	2024		2023
Deferred tax assets:
Investment securities	$	30,308	$	29,805
Allowance for credit losses		21,373		19,575
Deferred compensation		6,605		6,807
Operating lease liability		7,580		5,449
Acquired loan fair value adjustments		2,500		3,205
Accrued expenses		3,905		2,691
Interest rate swaps		-		63
Write-downs and costs associated with OREO		27		27
Deferred PPP loan fees		9		17
Total deferred tax assets		72,307		67,639
Deferred tax liabilities:
Right-of-use operating lease asset		7,300		5,181
Mortgage servicing rights		2,786		3,192
Core deposit intangibles		1,975		2,688
Customer list intangible		1,681		2,062
Property and equipment		2,143		2,036
Other liabilities		1,897		2,025
Investments in tax credit partnerships		227		1,515
Loan costs		1,599		1,504
Interest rate swaps		925		-
Leases		128		200
Total deferred tax liabilities		20,661		20,403
Net deferred tax asset	$	51,646	$	47,236

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, 2024.

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, 2024 and 2023 based on management’s estimate of the temporary deductible differences that may expire prior to their utilization.

Bancorp periodically invests in certain partnerships that generate federal income tax credits. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income. In addition to income tax benefits, these investments also serve as an economical means of achieving CRA goals. The investments in such partnerships are recorded in other assets on the consolidated balance sheets, while the corresponding contribution requirements are recorded in other liabilities. While contributions are made periodically over the life of the respective investments, which can be up to 10 years depending on the type of investment, the majority of contributions associated with a respective investment are made within the first few years after entering the partnership.

Bancorp’s investments in tax credit partnerships, including the related unfunded contributions, totaled $185 million and $175 million as of December 31, 2024 and December 31, 2023, respectively, and are included in other assets on the condensed consolidated balance sheets.

As of December 31, 2024, Bancorp’s expected payments for unfunded contributions related to investments in tax credit partnerships, which are accrued and included in other liabilities on the consolidated balance sheets, were as follows:

(dollars in thousands)	December 31, 2024
2025	$	81,632
2026		46,236
2027		11,269
2028		965
2029		1,128
Thereafter		6,008
Total unfunded contributions	$	147,238

Effective January 1, 2024, Bancorp adopted ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” As a result, all of Bancorp’s investments in tax credit partnerships are now accounted for under the proportional amortization method, with related amortization expense recorded within income tax expense on the condensed consolidated income statements. Prior to 2024, Bancorp used both the effective yield and the proportional amortization methods to account for these investments, with related amortization expense recorded as a component of non-interest expenses on the condensed consolidated income statements.

The following table presents tax credits and other tax benefits recognized in addition to amortization expense related to Bancorp’s investment in tax credit partnerships:

December 31, (in thousands)	2024		2023
Proportional amortization method:
Tax credits and other tax benefits recognized	$	12,390	$	417
Amortization expense in provision for income taxes		9,268		3,295
Amortization expense in other non-interest expense		-		1,294
Effective yield method:
Tax credits and other tax benefits recognized	$	-	$	1,598
Amortization expense in provision for income taxes		-		-
Amortization expense in other non-interest expense		-		-

There were no impairment losses related to Bancorp’s investments in tax credit partnerships during the years ended December 31, 2024 and 2023.