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Note 10 - Income Taxes
 12 Months Ended
Dec. 31, 2022
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)

 

2022

  

2021

  

2020

 

Current income tax expense:

            

Federal

 $22,405  $13,292  $15,474 

State

  2,962   2,059   908 

Total current income tax expense

  25,367   15,351   16,382 
             

Deferred income tax expense (benefit):

            

Federal

  (513)  3,318   (5,398)

State

  2,336   2,176   (2,082)

Total deferred income tax expense (benefit)

  1,823   5,494   (7,480)

Change in valuation allowance

  -   (93)  (28)

Total income tax expense

 $27,190  $20,752  $8,874 

 

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

 

Years Ended December 31, (in thousands)

 

2022

  

2021

  

2020

 

Unrealized gain (loss) on securities available for sale

 $(35,323) $(5,371) $2,607 

Unrealized gain (loss) on derivatives

  -   38   (27)

Minimum pension liability adjustment

  126   52   (25)

Total income tax (benefit) expense recorded directly to stockholders' equity

 $(35,197) $(5,281) $2,555 

 

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

 

Years Ended December 31,

 

2022

  

2021

  

2020

 

U.S. federal statutory income tax rate

  21.0

%

  21.0

%

  21.0

%

State income taxes, net of federal benefit

  3.5   3.5   0.8 

Excess tax benefits from stock-based compensation arrangements

  (1.0)  (1.1)  (0.7)

Change in cash surrender value of life insurance

  0.2   (0.8)  (0.8)

Tax credits

  (0.2)  (0.3)  (5.5)

Kentucky state income tax enactments

  —   —   (2.2)

Tax exempt interest income

  (0.6)  (0.4)  (0.3)

Non-deductible merger expenses

  0.1   0.4   — 

Insurance captive

  (0.3)  (0.2)  — 

Amortization of investment in tax credit partnerships

  0.1   0.1   1.0 

Other, net

  (0.2)  (0.4)  (0.2)

Effective tax rate

  22.6

%

  21.8

%

  13.1

%

 

Current state income tax expense for 2022 and 2021 represents tax owed to the state of Kentucky, Indiana and Illinois. Prior to 2021, Kentucky state bank taxes were based on capital levels and were previously recorded as other non-interest expense. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.

 

The state of Kentucky passed legislation in 2019 that required financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021 and allows entities filing a combined Kentucky income tax return to share certain tax attributes, including net operating loss carryforwards.

 

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, 2022 and December 31, 2021, 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 2018 and state income tax returns are subject to examination for the years after 2017.

 

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

 

December 31, (in thousands)

 

2022

  

2021

 

Deferred tax assets:

        

Allowance for credit losses

 $18,099  $13,354 

Deferred compensation

  6,349   6,245 

Operating lease liability

  5,066   3,951 

State net operating loss

  540   2,217 

Deferred PPP loan fees

  77   1,186 

Accrued expenses

  4,605   3,345 

Investments in tax credit partnerships

  215   747 

Interest rate swaps

  6   — 

Securities

  35,935   1,171 

Acquired loan fair value adjustments

  3,506   808 

Other assets

  —   343 

Write-downs and costs associated with other real estate owned

  21   21 

Total deferred tax assets

  74,419   33,388 
         

Deferred tax liabilities:

        

Right-of-use operating lease asset

  4,848   3,706 

Property and equipment

  2,395   970 

Loan costs

  1,272   968 

Mortgage servicing rights

  3,712   1,088 

Leases

  170   221 

Core deposit intangibles

  3,399   1,077 

Customer list intangibles

  2,469   — 

Other liabilities

  2,009   1,018 

Total deferred tax liabilities

  20,274   9,048 

Net deferred tax asset

 $54,145  $24,340 

 

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, 2022.

 

Realization of DTAs 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, 2022 and 2021 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 losses began to be utilized in 2021 when Bancorp began filing a combined Kentucky income tax return with the Bank. A valuation allowance was previously maintained for the loss that expired in 2020. The loss carryforward is currently $14 million and expires over varying periods through 2040.