NOTE 13 – INCOME TAXES

Income tax expense for the years ended December 31, 2016, 2015 and 2014 consisted of the following:

(dollars in thousands)	2016		2015		2014
Current federal	$	23,749	$	19,992	$	18,877
Deferred federal		268		1,378		1,118
Current state		1,086		1,257		1,650
Deferred state		30		206		740
Total income tax expense	$	25,133	$	22,833	$	22,385

Income tax expense included an expense (benefit) of $23,000, $16,000 and ($89,000) applicable to security transactions for 2016, 2015 and 2014. The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 35% for 2016, 2015 and 2014 to income before income taxes were as follows:

(dollars in thousands)	2016		2015		2014
Income taxes at statutory federal rate of 35%	$	27,026	$	24,220	$	23,167
Increase (decrease) in taxes resulting from:
Tax exempt income		(1,498)		(1,323)		(1,301)
Nondeductible expense		190		206		196
State income tax, net of federal tax effect		726		951		1,656
Captive insurance premium income		(361)		(363)		(378)
Tax credits		(311)		(241)		(233)
Bank owned life insurance		(554)		(605)		(631)
Reserve for unrecognized tax benefits		0		0		(64)
Other		(85)		(12)		(27)
Total income tax expense	$	25,133	$	22,833	$	22,385

The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2016 and 2015 consisted of the following:

(dollars in thousands)	2016		2015
Deferred tax assets:
Bad debts	$	17,187	$	17,187
Pension and deferred compensation liability		1,310		1,370
Non-qualified stock options		38		309
Nonaccrual loan interest		2,061		2,618
Long-term incentive plan		2,348		987
Other		450		337
		23,394		22,808
Deferred tax liabilities:
Accretion		121		156
Depreciation		4,952		4,222
Loan servicing rights		1,174		1,070
State taxes		620		632
Deferred loan fees		78		65
Intangible assets		1,925		1,891
REIT spillover dividend		1,479		1,413
Prepaid expenses		959		907
Other		418		422
		11,726		10,778
Valuation allowance		0		0
Net deferred tax asset	$	11,668	$	12,030

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 ($386,000) and $2.3 million for 2016 and 2015. The deferred income tax liability allocated to the pension plan and SERP included in equity was $1.1 million for both 2016 and 2015.

During the first quarter of 2014, the Indiana legislature approved new tax rates for financial institutions. The tax rate, 8.0% for 2014, is scheduled to drop to 6.5% for 2017. The new legislation further reduces the rate to 4.9%, phased-in beginning in 2019. This lower state tax rate going forward will reduce the benefit provided by the Company's existing deferred tax items. As a result of the revaluation of the Company's state deferred tax items, the Company recorded a non-cash adjustment for state tax expense of $431,000 in 2014.

Unrecognized Tax Benefits

The Company did not have any unrecognized tax benefits at December 31, 2016 or 2015. 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, 2016, 2015 and 2014. 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 2012.