Income Taxes

12 Months Ended

Dec. 31, 2019



The provision for income taxes consists of the following:	2019			2018		2017

Current Federal	$	8,263		$	6,699	$	10,481
Current State	1,004			412		473
Deferred Federal	3,545			2,226		276
Deferred State	(795		)	191		304
Total	$	12,017		$	9,528	$	11,534

Effective tax rates differ from the federal statutory rate of 21% for 2019 and 2018, and 35% for 2017 applied to income before income taxes due to the following:



	2019			2018			2017

Statutory Rate Times Pre-tax Income	$	14,960		$	11,772		$	18,274
Add (Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments	(2,246		)	(2,129		)	(3,304		)
State Income Tax, Net of Federal Tax Effect	165			476			505
General Business Tax Credits	(1,039		)	(914		)	(715		)
Company Owned Life Insurance	(421		)	(260		)	(469		)
Revaluation of Deferred Tax Assets/Liabilities due to Tax Reform	—			—			(2,284		)
Other Differences	598			583			(473		)
Total Income Taxes	$	12,017		$	9,528		$	11,534

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



	2019			2018
Deferred Tax Assets:
Allowance for Loan Losses	$	3,466		$	3,661
Lease Liability (Operating Leases)	2,198			—
Unrealized Loss on Securities	—			1,885
Deferred Compensation and Employee Benefits	787			736
Other-than-temporary Impairment	240			238
Accrued Expenses	1,209			906
Business Combination Fair Value Adjustments	3,475			3,715
Pension and Postretirement Plans	200			119
Other Real Estate Owned	48			17
Non-Accrual Loan Interest Income	554			352
Net Operating Loss Carryforward	786			322
Other	1,044			366
Total Deferred Tax Assets	14,007			12,317
Deferred Tax Liabilities:
Depreciation	(2,498		)	(1,879		)
Leasing Activities, Net	(10,816		)	(8,999		)
Unrealized Gain on Securities	(4,302		)	—
FHLB Stock Dividends	(245		)	(192		)
Prepaid Expenses	(629		)	(345		)
Intangibles	(2,032		)	(1,169		)
Deferred Loan Fees	(589		)	(514		)
Mortgage Servicing Rights	(75		)	(238		)
Right of Use Asset (Operating Leases)	(2,180		)	—
Other	(685		)	(674		)
Total Deferred Tax Liabilities	(24,051		)	(14,010		)
Valuation Allowance	—			—
Net Deferred Tax Liability	$	(10,044	)	$	(1,693	)

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, 2019, 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, 2019 was approximately $1,070.

As of December 31, 2019, the Company had net operating loss carryforwards of $18,267, which expire in years ranging from 2020 through 2039. These net operating loss carryforwards were primarily derived from the acquisition of First Security and Citizens First.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2019, 2018, and 2017, and did not recognize any increase in unrecognized benefits during 2019 relative to any tax positions taken in 2019. 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, 2019, 2018, and 2017. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2015. 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 2015.