Note 5 - Income Taxes

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Income Tax Disclosure [Text Block]

( 5 ) Income Taxes

Components of income tax expense from operations were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2018			2017			2018			2017
Current income tax expense
Federal	$	3,426		$	4,722		$	5,862		$	7,725
State		182			179			310			293
Total current income tax expense		3,608			4,901			6,172			8,018
Deferred income tax (benefit) expense
Federal		(421	)		(631	)		46			(657	)
State		(28	)		(24	)		(7	)		14
Total deferred income tax expense		(449	)		(655	)		39			(643	)
Change in valuation allowance		-			113			-			126
Total income tax expense	$	3,159		$	4,359		$	6,211		$	7,501

An analysis of the difference between statutory and effective income tax rates for the

three

and

six

months ended

June 30, 2018

and

2017

follows:

	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
U.S. federal statutory income tax rate		21.0	%		35.0	%		21.0	%		35.0	%
Excess tax benefits from share-based compensation arrangements		(1.2	)		(0.7	)		(1.5	)		(3.8	)
Tax credits		(0.7	)		(5.1	)		(0.5	)		(5.3	)
Tax exempt interest income		(0.5	)		(1.1	)		(0.5	)		(1.1	)
Increase in cash surrender value of life insurance		(1.2	)		(1.9	)		(0.6	)		(1.6	)
State income taxes, net of federal benefit		0.7			0.7			0.7			0.7
Other, net		0.8			2.2			0.1			2.1
Effective income tax rate		18.9	%		29.1	%		18.7	%		26.0	%

State income tax expense represents tax owed in Indiana. Kentucky and Ohio state bank taxes are based on capital levels, and are recorded as other non-interest expense.

In

December 2017

the Tax Cuts and Jobs Act was enacted and, among other matters, it reduced Bancorp’s marginal federal income tax rate from

35%

to

21%.

Largely offsetting that decrease, the effective tax rate for the

three

and

six

month periods ending

June 30, 2018

as compared with the year earlier periods were affected by substantially lower benefit from excess tax benefits from share-based compensation arrangements and from tax credits.

In

December 2017,

the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin

No.

118

(“SAB

118”

) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of tax reform in situations where a registrant does

not

have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB

118

allows a measurement period

not

to extend beyond

one

year from the tax reform’s enactment date to complete the necessary accounting.

In

two

areas, Bancorp recorded provisional amounts of deferred taxes as of

December 31, 2017,

where the information was

not

available to complete the accounting:

1

) the Company’s deferred tax assets of

$565

thousand for temporary differences in certain tax credit investments is awaiting receipt of Schedules K-

1

from outside preparers. Management believe the Company used a reasonable estimate to account for this item; however, there

may

be provisions of the new tax law that could impact the partnerships’ calculation of taxable income, which in effect could affect the Company’s share of taxable income. The final effect will

not

be known until receipt of Schedules K-

1.

2

) Bancorp estimated that

no

reductions are required to deferred tax assets included in the

$19

thousand of future deductions for compensation that might be subject to new limitations under Code Sec.

162

(m) which, generally, limits to

$1

million annual deductions for certain compensation paid to certain executives. There is uncertainty in applying new rules to existing contracts, and Bancorp is seeking clarification before finalizing its analysis. In a

third

area, the Company recorded

no

provisional amounts to its deferred tax liability for temporary differences between the tax and financial reporting bases of certain property and equipment items. These cannot be reasonably estimated. Bancorp’s deferred tax liability of

$541

thousand for temporary differences between the tax and financial reporting bases of fixed assets is awaiting completion of a cost segregation study to take advantage of additional depreciation deductions available through tax reform. Bancorp will complete and record income tax effects of tax reform during the period the necessary information becomes available. This measurement period will

not

extend beyond

December 22, 2018.

US 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

June 30, 2018

and

December 31, 2017,

the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of the Company. Federal and state income tax returns are subject to examination for the years after

2013.