Income Taxes



The provision for income taxes consists of the following:	2017		2016		2015

Current Federal	$	10,481	$	11,468	$	11,407
Current State	473		447		898
Deferred Federal	276		1,611		(920		)
Deferred State	304		420		221
Total	$	11,534	$	13,946	$	11,606

Income tax expense is reconciled to the 35% statutory rate applied to the pre-tax income for the years presented in the table below:



	2017			2016			2015

Statutory Rate Times Pre-tax Income	$	18,274		$	17,195		$	14,585
Add (Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments	(3,304		)	(2,929		)	(2,250		)
State Income Tax, Net of Federal Tax Effect	505			564			727
General Business Tax Credits	(715		)	(621		)	(750		)
Company Owned Life Insurance	(469		)	(346		)	(296		)
Revaluation of Deferred Tax Assets/Liabilities due to Tax Reform	(2,284		)	—			—
Other Differences	(473		)	83			(410		)
Total Income Taxes	$	11,534		$	13,946		$	11,606

The net deferred tax liability at December 31 consists of the following:



	2017			2016
Deferred Tax Assets:
Allowance for Loan Losses	$	3,645		$	5,269
Unrealized Loss on Securities	665			3,456
Deferred Compensation and Employee Benefits	702			1,146
Other-than-temporary Impairment	243			377
Accrued Expenses	645			956
Business Combination Fair Value Adjustments	1,041			2,838
Pension and Postretirement Plans	100			67
Non-Accrual Loan Interest Income	152			158
Net Operating Loss Carryforward	—			196
Unused Tax Credits	—			86
Other	302			472
Total Deferred Tax Assets	7,495			15,021
Deferred Tax Liabilities:
Depreciation	(1,309		)	(1,612		)
Leasing Activities, Net	(7,343		)	(9,845		)
FHLB Stock Dividends	(196		)	(304		)
Prepaid Expenses	(368		)	(461		)
Intangibles	(597		)	(1,113		)
Deferred Loan Fees	(483		)	(691		)
Mortgage Servicing Rights	(133		)	(231		)
General Business Tax Credits	—			(235		)
Other	(1,098		)	(1,692		)
Total Deferred Tax Liabilities	(11,527		)	(16,184		)
Valuation Allowance	—			—
Net Deferred Tax Liability	$	(4,032	)	$	(1,163	)

On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Among other things, the Tax Act includes significant changes to the U.S. corporate income tax system, including: reducing the federal corporate rate from 35% to 21%; modifying the rules regarding limitations on certain deductions for executive compensation; introducing a capital investment deduction in certain circumstances; placing certain limitations on the interest deduction; and modifying the rules regarding the usability of net operating losses. Based upon its initial analysis of the Tax Act, the Company revalued its deferred tax assets and deferred tax liabilities at December 31, 2017 and, as a result, recorded a $2,284 [reduction in income tax expense] during the fourth quarter of 2017. This benefit was based on reasonable estimates by the Company of certain income tax effects of the Tax Act.

Under the Internal Revenue Code, through 1996 three acquired banking companies, which are now a part of the Company’s single banking subsidiary, were allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The acquired banks were formerly known as River Valley Financial Bank (acquired in March 2016), Peoples Community Bank (acquired in October 2005) and First American Bank (acquired in January 1999). Subject to certain limitations, these Banks were permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. The Banks generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the Banks were only allowed a deduction based on actual loss experience.

Retained earnings at December 31, 2017, include approximately $5,095 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 2017 was approximately $1,070.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2017, 2016, and 2015, and did not recognize any increase in unrecognized benefits during 2017 relative to any tax positions taken in 2017. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income tax expense accounts; no such accruals existed as of December 31, 2017, 2016, and 2015. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2013. The Company and its corporate subsidiaries doing business in Indiana file a combined Indiana unitary return, which is subject to examination for all years after 2013.