Note 14 - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

14.   INCOME TAXES

Components of Income Tax Expense (Benefit)

(Dollar amounts in thousands)

	Years Ended December 31,
	2011		2010			2009
Current tax expense (benefit):
Federal	$	1,929	$	(14,926	)	$	(10,298	)
State		419		1,439			(5,420	)
Total		2,348		(13,487	)		(15,718	)
Deferred tax expense (benefit):
Federal		1,605		(8,895	)		(28,808	)
State		555		(6,162	)		(5,650	)
Total		2,160		(15,057	)		(34,458	)
Total income expense (benefit)	$	4,508	$	(28,544	)	$	(50,176	)

Federal income tax expense (benefit) and the related effective income tax rate are primarily influenced by the amount of tax-exempt income derived from investment securities and bank-owned life insurance in relation to pre-tax income and state income taxes. State income tax expense (benefit) and the related effective tax rate are influenced by state tax rules relating to consolidated/combined reporting and sourcing of income and expense.

Income tax expense totaled $4.5 million in 2011 following an income tax benefit of $28.5 million in 2010. The variance was primarily attributable to an increase in pre-tax income in 2011 compared to the prior year, as well as a decrease in tax-exempt income and the impact of the Illinois tax law change described below.

Effective January 1, 2011, the Illinois corporate income tax rate increased from 7.3% to 9.5%. This rate increase resulted in additional state tax expense, net of federal tax, of $418,000 for 2011. The Company recorded a $1.6 million income tax benefit in first quarter 2011 related to the resulting increase in the Company’s deferred tax asset. The rate will decline to 7.75% in 2015 and return to 7.3% in 2025. The legislation also suspends net operating loss utilization in 2011 and limits the amount of utilization to $100,000 per year in 2012 and 2013.

Differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities result in temporary differences for which deferred tax assets and liabilities have been recorded.

Deferred Tax Assets and Liabilities

(Dollar amounts in thousands)

	December 31,
	2011			2010
Deferred tax assets:
Alternative minimum tax (“AMT”) and other credit carryforwards	$	12,798		$	8,185
Federal net operating loss (“NOL”) carryforwards		16,962			7,299
Allowance for credit losses		42,687			50,775
Unrealized losses		22,940			24,610
OREO		5,376			8,490
State NOL carryforwards		11,456			11,776
Other state tax benefits		8,150			8,221
Other		10,783			10,191
Total deferred tax assets		131,152			129,547
Deferred tax liabilities:
Purchase accounting adjustments and intangibles		(10,278	)		(12,569	)
Deferred loan fees		(3,215	)		(3,441	)
Accrued retirement benefits		(6,681	)		(2,354	)
Depreciation		(2,843	)		(2,063	)
Cancellation of indebtedness income		(5,340	)		(5,340	)
Other		(9,365	)		(8,160	)
Total deferred tax liabilities		(37,722	)		(33,927	)
Deferred tax valuation allowance		-			(30	)
Net deferred tax assets		93,430			95,590
Tax effect of adjustments related to other comprehensive income (loss)		9,194			17,763
Net deferred tax assets including adjustments	$	102,624		$	113,353
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2030	$	48,463		$	20,856
Illinois gross NOL carryforwards, begin to expire in 2018	$	220,101		$	225,027
Indiana gross NOL carryforwards, begin to expire in 2021	$	23,872		$	19,872
Wisconsin gross NOL carryforwards, begin to expire in 2025	$	229		$	-
Other credits (1)	$	12,798		$	8,185

(1)   Consists of AMT credits, which have an indefinite life and other credits, which have a 20-year life. Approximately $2.6 million of other credits will begin to expire in 2028.

Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition. Management believes that it is more likely than not that net deferred tax will be fully realized and no valuation allowance is required.

Components of Effective Tax Rate

	Years Ended December 31,
	2011			2010			2009
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Tax-exempt income, net of interest expense disallowance		(21.3	%)		27.0	%		16.5	%
State income tax, net of federal income tax effect		(0.3	%)		9.5	%		12.1	%
Other, net		(2.4	%)		3.2	%		2.5	%
Effective tax rate		11.0	%		74.7	%		66.1	%

The change in effective income tax rate from 2010 to 2011 was primarily attributable to a decrease in tax-exempt income as a percent of total pre-tax income or loss and, to a lesser extent, by an increase in the Illinois income tax rate.

The change in effective income tax rate from 2009 to 2010 was primarily attributable to an increase in tax-exempt interest as a percent of the pre-tax loss.

As of December 31, 2011, 2010, and 2009, the Company’s retained earnings included an appropriation for an acquired thrift’s tax bad debt reserves of approximately $2.5 million for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings was distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

Uncertainty in Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and in Illinois, Indiana, Iowa, and Wisconsin. Audits of the Company’s 2002-2005 Illinois income tax returns were closed during 2010 without significant adjustments. Audits of the Company’s 2006-2007 Illinois income tax returns were closed in 2011 without significant adjustments. The Internal Revenue Service initiated audits of the Company’s 2006, 2007, and 2009 federal income tax returns in 2011. The Company believes it is reasonably possible that these audits will be resolved in 2012 without significant changes to the returns as filed.

The Company is no longer subject to examination by federal tax authorities for years prior to 2006; by Indiana and Iowa tax authorities for years prior to 2008; and Illinois tax authorities for years prior to 2008, except with respect to an amended 2006 Illinois return for which the statute of limitations remains open. The Company began filing in Wisconsin in 2009 as a result of changes in the Wisconsin tax law.

Rollforward of Unrecognized Tax Benefits

(Dollar amounts in thousands)

	Years Ended December 31,
	2011			2010			2009
Balance at beginning of year	$	429		$	314		$	5,751
Additions for tax positions relating to the current year		-			2			9
Additions for tax positions relating to prior years		226			263			-
Reductions for tax positions relating to prior years		(80	)		(72	)		(5,446	)
Reductions for settlements with taxing authorities		(207	)		-			-
Lapse in statute of limitations		-			(78	)		-
Balance at end of year	$	368		$	429		$	314
Interest and penalties not included above (1):
Interest expense (benefit), net of tax effect, and penalties	$	44		$	(21	)	$	(556	)
Accrued interest and penalties, net of tax effect, at end of year	$	52		$	8		$	29

(1)   Included in income tax expense (benefit) in the Consolidated Statements of Income.

The reductions in uncertain tax positions in 2011 compared to 2010 are a result of the resolution of certain tax authority examinations, partially offset by a change in exposure as a result of the prior year settlement with taxing authorities. The increase in uncertain tax positions in 2010 compared to 2009 resulted from additions for tax positions relating to prior years.

The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next 12 months. Included in the balance at December 31, 2011 are tax positions totaling $269,000 that would favorably affect the Company’s effective tax rate if recognized in future periods.