Note 5 - Income Taxes

9 Months Ended

Sep. 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						Nine months ended
	September 30,						September 30,
(In thousands)	2018			2017			2018			2017
Current income tax expense
Federal	$	3,888		$	5,211		$	9,750		$	12,936
State		196			179			506			472
Total current income tax expense		4,084			5,390			10,256			13,408
Deferred income tax (benefit) expense
Federal		(502	)		(1,583	)		(456	)		(2,240	)
State		(27	)		(44	)		(34	)		(30	)
Total deferred income tax expense		(529	)		(1,627	)		(490	)		(2,270	)
Change in valuation allowance		-			333			-			459
Total income tax expense	$	3,555		$	4,096		$	9,766		$	11,597

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

three

and

nine

months ended

September 30, 2018

and

2017

follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2018			2017			2018			2017
U.S. federal statutory income tax rate		21.0	%		35.0	%		21.0	%		35.0	%
Excess tax benefits from stock-based compensation arrangements		-			(1.5	)		(1.0	)		(3.0	)
Increase in cash surrender value of life insurance		(0.7	)		(1.1	)		(0.6	)		(1.4	)
Tax exempt interest income		(0.4	)		(1.0	)		(0.5	)		(1.1	)
Tax credits		(0.2	)		(3.2	)		(0.4	)		(4.6	)
Other, net		(0.1	)		(2.9	)		0.1			0.3
State income taxes, net of federal benefit		0.8			0.6			0.7			0.7
Effective income tax rate		20.4	%		25.9	%		19.3	%		25.9	%

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

nine

month periods ending

September 30, 2018

as compared with the year earlier periods were affected by substantially lower benefit from excess tax benefits from stock-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 had deferred tax assets of

$565

thousand for temporary differences as of

December 31, 2017

in certain tax credit investments. Management believes the Company used a reasonable estimate to account for this item; however, the final effect will

not

be known until the Company completes an analysis of received Schedules K-

1.

Based on the information received and reported in the Company’s

2017

tax return, filed in the

fourth

quarter of

2018,

Management anticipates recording a benefit of

$136

thousand of income tax benefit due to TCJA as a measurement period adjustment.

2

) Bancorp estimated that

no

reductions are required to deferred tax assets included in the

$13.5

million 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. 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

September 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.