INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES

INCOME TAXES

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. As a result of this revaluation, the Company recorded an income tax provision of $4.1 million for the period ending December 31, 2017. In addition, through the preparation the Company’s 2017 corporate tax return and the completion of cost segregation studies on new construction projects, the Company recognized a tax benefit of $408,000 for the year ending December 31, 2018.

Income tax expense for the years ended December 31, 2019, 2018 and 2017 consisted of the following:

(dollars in thousands)	2019		2018		2017
Current federal	$	19,430	$	16,871	$	27,064
Deferred federal		(408)		707		(199)
Revalue deferred taxes due to tax reform		0		(408)		4,137
Current state		1,394		1,462		1,559
Deferred state		(78)		(99)		(257)
Total income tax expense	$	20,338	$	18,533	$	32,304

The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 21% for 2019 and 2018 and 35% for 2017 to income before income taxes were as follows:

(dollars in thousands)	2019		2018		2017
Income taxes at statutory federal rate of 21% (2019 and 2018) and 35% (2017)	$	22,551	$	20,778	$	31,372
Increase (decrease) in taxes resulting from:
Tax exempt income		(1,682)		(1,434)		(2,015)
Nondeductible expense		194		165		193
State income tax, net of federal tax effect		1,040		1,077		846
Captive insurance premium income		(310)		(292)		(378)
Tax credits		(548)		(412)		(326)
Bank owned life insurance		(573)		(303)		(619)
Long - term incentive plan		(421)		(641)		(854)
Revaluation deferred tax asset at 21% rate		0		(408)		4,137
Other		87		3		(52)
Total income tax expense	$	20,338	$	18,533	$	32,304

NOTE 13 – INCOME TAXES (continued)

The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2019 and 2018 consisted of the following:

(dollars in thousands)	2019		2018
Deferred tax assets:
Bad debts	$	12,945	$	12,478
Pension and deferred compensation liability		1,505		1,188
Nonaccrual loan interest		1,104		937
Long-term incentive plan		2,281		2,357
Lease liability		1,303		0
Other		510		506
		19,648		17,466
Deferred tax liabilities:
Depreciation		4,741		4,583
Loan servicing rights		1,019		877
State taxes		464		447
Intangible assets		1,270		1,280
REIT spillover dividend		1,401		1,231
Prepaid expenses		795		786
Lease Right of Use		1,303		0
Other		382		475
		11,375		9,679
Valuation allowance		0		0
Net deferred tax asset	$	8,273	$	7,787

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 ($3.6) million and $1.3 million for 2019 and 2018, respectively. The deferred income tax asset allocated to the pension plan and SERP included in equity was $512,000 and $462,000 for 2019 and 2018, respectively.

The Company evaluated its deferred tax asset at year end 2019 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, 2019 or 2018. 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, 2019, 2018 and 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 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 2015.