Income Taxes



The provision for income taxes consists of the following:	2016		2015			2014

Current Federal	$	11,468	$	11,407		$	9,179
Current State	447		898			393
Deferred Federal	1,611		(920		)	1,928
Deferred State	420		221			569
Total	$	13,946	$	11,606		$	12,069

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



	2016			2015			2014

Statutory Rate Times Pre-tax Income	$	17,195		$	14,585		$	14,145
Add (Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments	(2,929		)	(2,250		)	(1,697		)
State Income Tax, Net of Federal Tax Effect	564			727			625
General Business Tax Credits	(621		)	(750		)	(562		)
Company Owned Life Insurance	(346		)	(296		)	(289		)
Other Differences	83			(410		)	(153		)
Total Income Taxes	$	13,946		$	11,606		$	12,069

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



	2016			2015
Deferred Tax Assets:
Allowance for Loan Losses	$	5,269		$	4,913
Unrealized Loss on Securities	3,456			—
Deferred Compensation and Employee Benefits	1,146			1,030
Other-than-temporary Impairment	377			378
Accrued Expenses	956			641
Business Combination Fair Value Adjustments	2,838			376
Pension and Postretirement Plans	67			57
Other Real Estate Owned	—			133
Non-Accrual Loan Interest Income	158			255
Net Operating Loss Carryforward	196			7
Unused Tax Credits	86			—
Other	472			352
Total Deferred Tax Assets	15,021			8,142
Deferred Tax Liabilities:
Depreciation	(1,612		)	(800		)
Leasing Activities, Net	(9,845		)	(8,970		)
Unrealized Gain on Securities	—			(2,150		)
FHLB Stock Dividends	(304		)	(235		)
Prepaid Expenses	(461		)	(502		)
Intangibles	(1,113		)	(353		)
Deferred Loan Fees	(691		)	(591		)
Mortgage Servicing Rights	(231		)	—
General Business Tax Credits	(235		)	(178		)
Other	(1,692		)	(1,044		)
Total Deferred Tax Liabilities	(16,184		)	(14,823		)
Valuation Allowance	—			—
Net Deferred Tax Liability	$	(1,163	)	$	(6,681	)

The Company has federal and state net operating loss carryforwards of $561 and $106, respectively. These carryforwards expire in 2027.

Under the Internal Revenue Code, through 1996 two 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 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, 2016, 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, 2016 was approximately $1,762.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2016, 2015, and 2014, and did not recognize any increase in unrecognized benefits during 2016 relative to any tax positions taken in 2016. 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, 2016, 2015, and 2014. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2012. 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 2012.