Note 6 - Income Taxes

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(6) Income Taxes

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

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2020			2019			2020			2019
Current income tax expense:
Federal	$	3,369		$	4,524		$	9,574		$	11,022
State		198			224			538			554
Total current income tax expense		3,567			4,748			10,112			11,576
Deferred income tax expense (benefit):
Federal		(1,507	)		(768	)		(2,653	)		21
State		(476	)		(201	)		(1,279	)		(4,969	)
Total deferred income tax expense (benefit)		(1,983	)		(969	)		(3,932	)		(4,948	)
Change in valuation allowance		7			4			9			24
Total income tax expense	$	1,591		$	3,783		$	6,189		$	6,652

An analysis of the difference between the statutory and ETR from operations follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
U.S. federal statutory income tax rate		21.0	%		21.0	%		21.0	%		21.0	%
Tax credits		(5.5	)		(0.5	)		(5.8	)		(0.6	)
Kentucky state income tax enactments		(1.9	)		(0.7	)		(1.9	)		(6.9	)
Change in cash surrender value of life insurance		(1.1	)		(0.8	)		(0.6	)		(0.9	)
State income taxes, net of federal benefit		0.6			0.7			0.7			0.7
Excess tax benefit from stock-based compensation arrangements		(2.6	)		(1.5	)		(0.9	)		(1.2	)
Tax exempt interest income		(0.3	)		(0.3	)		(0.3	)		(0.3	)
Other, net		(0.3	)		-			0.9			0.1
Effective tax rate		9.9	%		18.0	%		13.1	%		11.9	%

Current state income tax expense represents tax owed to the state of Indiana. Kentucky and Ohio state bank taxes are currently based on capital levels and are recorded as other non-interest expense.

The ETR at September 30, 2020 includes the anticipated full year impact of a historic tax credit project scheduled to be placed in service in the fourth quarter of 2020.

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, predominantly during the first quarter of 2019, Bancorp established a Kentucky state DTA 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 tax impact of $1.3 million, or approximately $0.06 per diluted share for 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200,000 per year beginning in 2021.

In April 2019, the Kentucky Legislature passed HB458 allowing entities filing a combined Kentucky income return to share certain tax attributes, including net operating loss carryforwards. The combined filing beginning in 2021 will allow Bancorp’s net operating loss carryforwards to offset against net revenue generated by the Bank up to 50% of the Bank’s Kentucky taxable income and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit, net of federal tax impact of $2.7 million, predominantly in the second quarter of 2019, or approximately $0.12 per diluted share for 2019. The losses are expected to be utilized when Bancorp begins filing a combined Kentucky income tax return. A valuation allowance is maintained for the loss that will expire in 2020.

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, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. As of September 30, 2020 and December 31, 2019, the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of Bancorp. Federal and state income tax returns are subject to examination for the years after 2015.