NOTE 13 – INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act ("Act") was enacted into law and, among other items, reduces the corporate income tax rate from 35% to 21%, effective January 1, 2018. The enactment of this law resulted in a lower federal income tax rate resulting in a reduction of the benefit provided by the Company's existing deferred tax assets.

In accordance with ASC Topic 740, "Income Taxes", the Company revalued its net deferred tax asset based on facts and circumstances available for the reporting period ending December 31, 2017 in which the Act was enacted and through the time the Company issues its financial statements for that reporting period. Preliminary assumptions were made for temporary timing differences, including but not limited to, book-to-tax depreciation on fixed assets. The company's revaluation of its net deferred tax asset and other relevant details remain subject to modifications as the company finalizes its federal and state income tax returns for the year ended December 31, 2017 and as information and analysis regarding the Act and other relevant factors emerge. The Company does not expect material variances from these estimates and expects that final valuation amounts will be determined upon the filing of the federal and state income tax returns, which is expected to occur in September 2018.

As a result of this revaluation, the Company recorded a non-cash, non-operating and non-recurring income tax provision of $4.1 million. Over the long-run, the reduction in corporate tax rates is expected to reduce income tax expense beginning January 1, 2018.

Income tax expense for the years ended December 31, 2017, 2016 and 2015 consisted of the following:

(dollars in thousands)	2017	2016	2015
Current federal	$27,064	$23,749	$19,992
Deferred federal	(199)	268	1,378
Revalue deferred taxes due to tax reform	4,137	0	0
Current state	1,559	1,086	1,257
Deferred state	(257)	30	206
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$32,304	$25,133	$22,833

Income tax expense included an expense (benefit) of $11,000, $23,000 and $16,000 applicable to security transactions for 2017, 2016 and 2015. The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 35% for 2017, 2016 and 2015 to income before income taxes were as follows:

(dollars in thousands)	2017	2016	2015
Income taxes at statutory federal rate of 35%	$31,372	$27,026	$24,220
Increase (decrease) in taxes resulting from:
Tax exempt income	(2,015)	(1,498)	(1,323)
Nondeductible expense	193	190	206
State income tax, net of federal tax effect	846	726	951
Captive insurance premium income	(378)	(361)	(363)
Tax credits	(326)	(311)	(241)
Bank owned life insurance	(619)	(554)	(605)
Long - term incentive plan	(854)	0	0
Revaluation deferred tax asset at 21% rate	4,137	0	0
Other	(52)	(85)	(12)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$32,304	$25,133	$22,833

The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2017 and 2016 consisted of the following:

(dollars in thousands)	2017	2016
Deferred tax assets:
Bad debts	$12,043	$17,187
Pension and deferred compensation liability	1,028	1,310
Non-qualified stock options	4	38
Nonaccrual loan interest	970	2,061
Long-term incentive plan	2,043	2,348
Other	399	450
	16,487	23,394
Deferred tax liabilities:
Accretion	28	121
Depreciation	3,614	4,952
Loan servicing rights	793	1,174
State taxes	426	620
Deferred loan fees	0	78
Intangible assets	1,261	1,925
REIT spillover dividend	1,242	1,479
Prepaid expenses	752	959
Other	384	418
	8,500	11,726
Valuation allowance	0	0
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$7,987	$11,668

In addition to the net deferred tax assets included above, the deferred income tax asset/liability allocated to the unrealized net gain/(loss) on securities available for sale included in equity was ($226,000) and $386,000 for 2017 and 2016. The deferred income tax asset allocated to the pension plan and SERP included in equity was $625,000 million and $1.1 million for 2017 and 2016, respectively.

The Company evaluated its deferred tax asset at year end 2017 and has concluded that it is more likely than not that it will be realized. The Company expects to have taxable income in the future such that the deferred tax asset will be realized. Therefore, no valuation allowance is required.

Unrecognized Tax Benefits

The Company did not have any unrecognized tax benefits at December 31, 2017 or 2016. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

No interest or penalties were recorded in the income statement and no amount was accrued for interest and penalties for the period ending December 31, 2017, 2016 and 2015. 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 taxes accounts.

The Company and its subsidiaries file a consolidated U.S. federal tax return and a combined unitary return in the States of Indiana and Michigan. These returns are subject to examinations by authorities for all years after 2013.