INCOME TAXES

12 Months Ended

Dec. 31, 2020

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, reduced 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. 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, 2020, 2019 and 2018 consisted of the following:

(dollars in thousands)	2020		2019		2018
Current federal	$	20,032	$	19,430	$	16,871
Deferred federal		(1,688)		(408)		707
Revalue deferred taxes due to tax reform		—		—		(408)
Current state		1,484		1,394		1,462
Deferred state		(289)		(78)		(99)
Total income tax expense	$	19,539	$	20,338	$	18,533

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

(dollars in thousands)	2020		2019		2018
Income taxes at statutory federal rate of 21%	$	21,814	$	22,551	$	20,778
Increase (decrease) in taxes resulting from:
Tax exempt income		(1,925)		(1,682)		(1,434)
Nondeductible expense		117		194		165
State income tax, net of federal tax effect		944		1,040		1,077
Captive insurance premium income		(227)		(310)		(292)
Tax credits		(540)		(548)		(412)
Bank owned life insurance		(595)		(573)		(303)
Long - term incentive plan		(58)		(421)		(641)
Revaluation deferred tax asset at 21% rate		—		—		(408)
Other		9		87		3
Total income tax expense	$	19,539	$	20,338	$	18,533

NOTE 13 – INCOME TAXES (continued)

The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2020 and 2019 consisted of the following:

(dollars in thousands)	2020		2019
Deferred tax assets:
Bad debts	$	15,634	$	12,945
Pension and deferred compensation liability		2,006		1,505
Nonaccrual loan interest		892		1,104
Long-term incentive plan		1,212		2,281
Lease liability		1,190		1,303
Other		745		510
		21,679		19,648
Deferred tax liabilities:
Depreciation		4,718		4,741
Loan servicing rights		1,162		1,019
State taxes		524		464
Intangible assets		1,265		1,270
REIT spillover dividend		1,180		1,401
Prepaid expenses		948		795
Lease right of use		1,190		1,303
Other		442		382
		11,429		11,375
Valuation allowance		—		—
Net deferred tax asset	$	10,250	$	8,273

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 ($7.8) million and ($3.6) million for 2020 and 2019, respectively. The deferred income tax asset allocated to the pension plan and SERP included in equity was $476,000 and $512,000 for 2020 and 2019, respectively.

The Company evaluated its deferred tax asset at year end 2020 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, 2020 or 2019. 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, 2020, 2019 and 2018. 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 2016.