Note 6 - Income Taxes

6 Months Ended

Jun. 30, 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.

In April 2019, the Kentucky legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings. The combined filing will allow Bancorp’s holding company net operating losses to offset against net revenue generated by The Bank and reduce Bancorp’s tax liability. Bancorp recorded s state tax benefit associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the three and six month periods ended June 30, 2019.

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

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018
Current income tax expense:
Federal	$	3,772		$	3,426		$	6,498		$	5,862
State		189			182			330			310
Total current income tax expense		3,961			3,608			6,828			6,172
Deferred income tax expense (benefit) :
Federal		224			(421	)		789			46
State		(3,155	)		(28	)		(4,768	)		(7	)
Total deferred income tax expense		(2,931	)		(449	)		(3,979	)		39
Change in valuation allowance		—			—			20			—
Total income tax expense	$	1,030		$	3,159		$	2,869		$	6,211

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

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
U.S. federal statutory income tax rate		21.0	%		21.0	%		21.0	%		21.0	%
Kentucky state income tax enactments		(14.1	)		—			(10.7	)		—
Excess tax benefits from stock-based compensation arrangements		(0.4	)		(1.2	)		(1.1	)		(1.5	)
Increase in cash surrender value of life insurance		(0.6	)		(1.2	)		(0.9	)		(0.6	)
Tax credits		(0.7	)		(0.7	)		(0.7	)		(0.5	)
Tax exempt interest income		(0.3	)		(0.5	)		(0.3	)		(0.5	)
State income taxes, net of federal benefit		0.8			0.7			0.8			0.7
Other, net		0.2			0.8			0.1			0.1
Effective income tax rate		5.9	%		18.9	%		8.2	%		18.7	%

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

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, 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 2015.