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Note 10 - Income Taxes | 12 Months Ended
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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.

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