Note 6 - Income Taxes

3 Months Ended

Mar. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

( 6 ) Income Taxes

In

March 2019,

the Kentucky Legislature passed

HB354

requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in

2021.

Historically, the franchise tax, a component of non-interest expenses, was assessed at

1.1%

of net capital and averaged

$2.5

million annually over the prior

two

year-end periods. The Kentucky corporate income tax will be assessed at

5%

of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the

first

quarter of

2019,

Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal impact of

$1.3

million, or approximately

$0.06

per diluted share for the

first

quarter

2019.

  While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately

$200

thousand per year beginning in

2021.

Components of income tax expense (benefit) from operations follow:

	Three months ended
	March 31,
(In thousands)	2019			2018
Current income tax expense:
Federal	$	2,726		$	2,436
State		141			128
Total current income tax expense		2,867			2,564
Deferred income tax expense (benefit) :
Federal		565			467
State		(1,613	)		21
Total deferred income tax expense		(1,048	)		488
Change in valuation allowance		20			-
Total income tax expense	$	1,839		$	3,052

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

	Three months ended March 31,
	2019			2018
U.S. federal statutory income tax rate		21.0	%		21.0	%
Kentucky state income tax enactment		(7.3	)		-
Excess tax benefits from share-based compensation arrangements		(1.7	)		(1.9	)
Increase in cash surrender value of life insurance		(1.2	)		(0.4	)
Tax credits		(0.7	)		(0.4	)
Tax exempt interest income		(0.3	)		(0.5	)
State income taxes, net of federal benefit		0.7			0.7
Other, net		-			-
Effective income tax rate		10.5	%		18.5	%

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. See comment above regarding recent changes in Kentucky tax law.

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

March 31, 2019

and

December 31, 2018,

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

2014.