Stock Yards Bancorp, Inc. Income Taxes Disclosure

(9) Income Taxes

 

Pre-tax income is entirely related to domestic activities, as Bancorp has no foreign operations.

 

Components of income tax expense from continuing operations follows:

 

Years Ended December 31, (in thousands)		2025				2024				2023
Current income tax expense:
Federal		$	33,894			$	27,377			$	25,360
State			6,982				5,566				5,254
Total current income tax expense			40,876				32,943				30,614
Deferred income tax expense (benefit):
Federal			(2,396	)			(2,681	)			(977	)
State			(434	)			(435	)			542
Total deferred income tax expense (benefit)			(2,830	)			(3,116	)			(435	)
Total income tax expense		$	38,046			$	29,827			$	30,179

 

Bancorp did not have any income tax expense (benefit) in foreign jurisdictions.

 

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

 

Years Ended December 31, (in thousands)		2025				2024				2023
Unrealized gain (loss) on securities available for sale		$	11,222			$	(359	)		$	7,416
Unrealized gain (loss) on derivatives			(24	)			983				(58	)
Minimum pension liability adjustment			(1,397	)			18				(17	)
Total income tax (benefit) expense recorded directly to stockholders' equity		$	9,801			$	642			$	7,341

 

An analysis of the difference between statutory rates and ETRs from operations in accordance with the adoption of ASU 2023-09 follows:

 

		2025
(dollars in thousands)		Amount				Percent
U.S. federal statutory income tax rate		$	37,421				21.00	%
State income taxes, net of federal benefit (1)			5,173				2.90
Tax credits (2):
Low income housing tax credits			(2,402	)			(1.35	)
Historic rehabilitation tax credits			(570	)			(0.32	)
Non-taxable or non-deductible items:
Changes in cash surrender value of life insurance			(944	)			(0.53	)
Tax-exempt interest income			(555	)			(0.31	)
Other:
Stock-based compensation			(602	)			(0.34	)
Other			525				0.30
Effective tax rate		$	38,046				21.35	%

 

(1) State taxes in Kentucky made up the majority (greater than 50%) of the tax effect in this category.

(2) The disclosures in this category are reflected net of proportional amortization and other tax benefits.

 

An analysis of the difference between statutory and ETRs from operations prior to the adoption of ASU 2023-09 follows:

 

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

 

Current state income tax expense for 2025, 2024 and 2023 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.

 

Income taxes paid were as follows:

 

Years Ended December 31, (in thousands)		2025
Federal income taxes		$	15,855
State and local income taxes:
Kentucky			4,120
Indiana			1,145
Illinois			75
Total income taxes paid		$	21,195

 

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, 2025 and December 31, 2024, 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 2021 and state income tax returns are subject to examination for the years after 2020.

 

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

 

December 31, (in thousands)		2025				2024
Deferred tax assets:
Investment securities		$	19,149			$	30,308
Allowance for credit losses			22,556				21,373
Deferred compensation			7,158				6,605
Operating lease liability			8,016				7,580
Acquired loan fair value adjustments			2,056				2,500
Accrued expenses			4,905				3,905
Interest rate swaps			471				-
Write-downs and costs associated with OREO			-				27
Deferred PPP loan fees			-				9
Total deferred tax assets			64,311				72,307
Deferred tax liabilities:
Right-of-use operating lease asset			7,670				7,300
Mortgage servicing rights			2,502				2,786
Core deposit intangibles			1,435				1,975
Customer list intangible			1,343				1,681
Property and equipment			2,341				2,143
Other liabilities			2,249				1,897
Investments in tax credit partnerships			338				227
Loan costs			1,758				1,599
Interest rate swaps			-				925
Leases			8				128
Total deferred tax liabilities			19,644				20,661
Net deferred tax asset		$	44,667			$	51,646

 

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, 2025.

 

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, 2025 and 2024 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 $195 million and $185 million as of December 31, 2025 and December 31, 2024, respectively, and are included in other assets on the condensed consolidated balance sheets.

 

As of December 31, 2025, 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, 2025
2026		$	56,727
2027			35,531
2028			3,183
2029			1,510
2030			1,764
Thereafter			6,516
Total unfunded contributions		$	105,231

 

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)		2025				2024				2023
Proportional amortization method:
Tax credits and other tax benefits recognized		$	18,530			$	12,390			$	417
Amortization expense in provision for income taxes			13,703				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, 2025 and 2024.