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Note 7 - Income Taxes | 9 Months Ended
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Sep. 30, 2024
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) |  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Current income tax expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 7,835 |  |  | $ | 7,129 |  |  | $ | 20,047 |  |  | $ | 20,409 |
State |  |  | 1,696 |  |  |  | 1,859 |  |  |  | 4,552 |  |  |  | 4,223 |
Total current income tax expense |  |  | 9,531 |  |  |  | 8,988 |  |  |  | 24,599 |  |  |  | 24,632 |
Deferred income tax expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (1,560 | ) |  |  | (1,087 | ) |  |  | (1,830 | ) |  |  | (1,311 | )
State |  |  | (332 | ) |  |  | (259 | ) |  |  | (392 | ) |  |  | 428 |
Total deferred income tax expense |  |  | (1,892 | ) |  |  | (1,346 | ) |  |  | (2,222 | ) |  |  | (883 | )
Change in valuation allowance |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total income tax expense |  | $ | 7,639 |  |  | $ | 7,642 |  |  | $ | 22,377 |  |  | $ | 23,749 |
An analysis of the difference between the statutory and ETRs from operations follows:
|  | Three months ended |  |  | Nine months ended |
|  | September 30, |  |  | September 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
U.S. federal statutory income tax rate |  |  | 21.00 | % |  |  | 21.00 | % |  |  | 21.00 | % |  |  | 21.00 | %
State income taxes, net of federal benefit |  |  | 2.91 |  |  |  | 3.27 |  |  |  | 3.12 |  |  |  | 3.42 |
Excess tax benefit from stock-based compensation arrangements |  |  | (1.38 | ) |  |  | 0.12 |  |  |  | (0.36 | ) |  |  | (0.29 | )
Change in cash surrender value of life insurance |  |  | (0.79 | ) |  |  | (0.08 | ) |  |  | (0.73 | ) |  |  | (0.49 | )
Tax Credits |  |  | (0.52 | ) |  |  | (0.71 | ) |  |  | (0.90 | ) |  |  | (0.48 | )
Tax exempt interest income |  |  | (0.42 | ) |  |  | (0.48 | ) |  |  | (0.45 | ) |  |  | (0.49 | )
Insurance captive |  |  | - |  |  |  | (0.19 | ) |  |  | - |  |  |  | (0.27 | )
Other, net |  |  | (0.15 | ) |  |  | (0.93 | ) |  |  | (0.41 | ) |  |  | (0.32 | )
Effective tax rate |  |  | 20.65 | % |  |  | 22.00 | % |  |  | 21.27 | % |  |  | 22.08 | %
Current state income tax expense for 2024 and 2023 represents tax owed to the states of Kentucky, Indiana and Illinois. Ohio state taxes are based on bank 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 by June 30, 2025. 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 September 30, 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 2019 and state income tax returns are subject to examination for the years after 2018. 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 $177 million and $175 million as of September 30, 2024 and December 31, 2023, respectively, and are included in other assets on the condensed consolidated balance sheets. As of September 30, 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 condensed consolidated balance sheets, were as follows:
(dollars in thousands) |  | September 30, 2024 |
Remainder of 2024 |  | $ | 34,012 |
2025 |  |  | 66,473 |
2026 |  |  | 36,261 |
2027 |  |  | 7,179 |
2028 |  |  | 893 |
Thereafter |  |  | 13,725 |
Total unfunded contributions |  | $ | 158,543 |
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 for the three and nine month periods ended September 30, 2024 and 2023:
|  | Three months ended |  |  | Nine months ended |
|  | September 30, |  |  | September 30, |
(in thousands) |  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Proportional amortization method: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tax credits and other tax benefits recognized |  | $ | 2,448 |  |  | $ | (85 | ) |  | $ | 9,570 |  |  | $ | 614 |
Amortization expense in provision for income taxes |  |  | 1,927 |  |  |  | 1,114 |  |  |  | 7,753 |  |  |  | 1,910 |
Amortization expense in other non-interest expense |  |  | - |  |  |  | 323 |  |  |  | - |  |  |  | 970 |
Effective yield method: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tax credits and other tax benefits recognized |  | $ | - |  |  | $ | 399 |  |  | $ | - |  |  | $ | 1,198 |
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 three and nine month periods ended September 30, 2024 and 2023.

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