FIRST FINANCIAL CORP /IN/

INCOME TAXES:

Income tax expense is summarized as follows:



(Dollar amounts in thousands)	2017		2016		2015
Federal:
Currently payable	$	8,303	$	15,514	$	9,890
Deferred	3,756		1,326		(774		)
Expense due to enactment of federal tax reform	6,282		—		—
	18,341		16,840		9,116
State:
Currently payable	1,818		2,857		1,426
Deferred	463		186		(150		)
	2,281		3,043		1,276
TOTAL	$	20,622	$	19,883	$	10,392

The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is summarized as follows:



(Dollar amounts in thousands)	2017			2016			2015
Federal income taxes computed at the statutory rate	$	17,414		$	20,403		$	14,206
Add (deduct) tax effect of:
Tax exempt income	(4,102		)	(3,992		)	(4,047		)
Non-deductible insurance brokerage goodwill	—			1,797			—
ESOP dividend deduction	(102		)	(47		)	(164		)
State tax, net of federal benefit	1,483			1,978			829
Affordable housing credits	(148		)	(148		)	(148		)
Expense due to enactment of federal tax reform	6,282			—			—
Other, net	(205		)	(108		)	(284		)
TOTAL	$	20,622		$	19,883		$	10,392

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The primary change for the Corporation was to lower the corporate income tax rate from 35% to 21%. The Corporation's deferred tax assets and liabilities were re-measured based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. The amount recorded related to the re-measurement of the Corporation's deferred tax balance was $6.3 million, an increase to income tax expense for the year ended December 31, 2017.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2017 and 2016, are as follows:



(Dollar amounts in thousands)	2017			2016
Deferred tax assets:
Other than temporary impairment	$	1,829		$	5,397
Net unrealized losses on retirement plans	6,609			8,576
Net unrealized losses on securities available for sale	—			719
Loan loss provisions	5,195			7,318
Deferred compensation	3,661			5,881
Compensated absences	563			832
Post-retirement benefits	1,359			2,043
Deferred loss on acquisition	663			1,111
Other	2,123			3,119
GROSS DEFERRED ASSETS	22,002			34,996
Deferred tax liabilities:
Net unrealized gains on securities available-for-sale	(804		)	—
Depreciation	(1,989		)	(2,778		)
Mortgage servicing rights	(308		)	(486		)
Pensions	(201		)	(65		)
Intangibles	(2,446		)	(3,015		)
Other	(2,408		)	(3,180		)
GROSS DEFERRED LIABILITIES	(8,156		)	(9,524		)
NET DEFERRED TAX ASSETS	$	13,846		$	25,472

Unrecognized Tax Benefits — A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(Dollar amounts in thousands)	2017			2016			2015
Balance at January 1	$	698		$	513		$	589
Additions based on tax positions related to the current year	257			288			68
Additions based on tax positions related to prior years	—			—			—
Reductions due to the statute of limitations	(130		)	(103		)	(144		)
Balance at December 31	$	825		$	698		$	513

Of this total, $825 thousand represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.

The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2017, 2016 and 2015 was an expense increase of $4 thousand, an increase of $4 thousand, and a decrease of $17 thousand, respectively. The amount accrued for interest and penalties at December 31, 2017, 2016 and 2015 was $40 thousand, $31 thousand and $27 thousand, respectively.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2014.