Income Taxes



The provision for income taxes consists of the following:	2018		2017		2016

Current Federal	$	6,699	$	10,481	$	11,468
Current State	412		473		447
Deferred Federal	2,226		276		1,611
Deferred State	191		304		420
Total	$	9,528	$	11,534	$	13,946

Effective tax rates differ from the federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 applied to income before income taxes due to the following:



	2018			2017			2016

Statutory Rate Times Pre-tax Income	$	11,772		$	18,274		$	17,195
Add (Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments	(2,129		)	(3,304		)	(2,929		)
State Income Tax, Net of Federal Tax Effect	476			505			564
General Business Tax Credits	(914		)	(715		)	(621		)
Company Owned Life Insurance	(260		)	(469		)	(346		)
Revaluation of Deferred Tax Assets/Liabilities due to Tax Reform	—			(2,284		)	—
Other Differences	583			(473		)	83
Total Income Taxes	$	9,528		$	11,534		$	13,946

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



	2018			2017
Deferred Tax Assets:
Allowance for Loan Losses	$	3,661		$	3,645
Unrealized Loss on Securities	1,885			665
Deferred Compensation and Employee Benefits	736			702
Other-than-temporary Impairment	238			243
Accrued Expenses	906			645
Business Combination Fair Value Adjustments	3,715			1,041
Pension and Postretirement Plans	119			100
Other Real Estate Owned	17			—
Non-Accrual Loan Interest Income	352			152
Net Operating Loss Carryforward	322			—
Other	366			302
Total Deferred Tax Assets	12,317			7,495
Deferred Tax Liabilities:
Depreciation	(1,879		)	(1,309		)
Leasing Activities, Net	(8,999		)	(7,343		)
FHLB Stock Dividends	(192		)	(196		)
Prepaid Expenses	(345		)	(368		)
Intangibles	(1,169		)	(597		)
Deferred Loan Fees	(514		)	(483		)
Mortgage Servicing Rights	(238		)	(133		)
Other	(674		)	(1,098		)
Total Deferred Tax Liabilities	(14,010		)	(11,527		)
Valuation Allowance	—			—
Net Deferred Tax Liability	$	(1,693	)	$	(4,032	)

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, 2018, 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, 2018 was approximately $1,070.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2018, 2017, and 2016, and did not recognize any increase in unrecognized benefits during 2018 relative to any tax positions taken in 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 tax expense accounts; no such accruals existed as of December 31, 2018, 2017, and 2016. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2014. 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 2014.