Note 14 - Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

14. INCOME TAXES

Components of Income Tax (Benefit) Expense

(Dollar amounts in thousands)

	Years Ended December 31,
	2012			2011		2010
Current income tax (benefit) expense:
Federal	$	-		$	1,929	$	(14,926	)
State		1			419		1,439
Total		1			2,348		(13,487	)
Deferred income tax (benefit) expense:
Federal		(23,728	)		1,605		(8,895	)
State		(5,155	)		555		(6,162	)
Total		(28,883	)		2,160		(15,057	)
Total income (benefit) expense	$	(28,882	)	$	4,508	$	(28,544	)

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

Income tax benefits totaled $28.9 million for the year ended December 31, 2012 following income tax expense of $4.5 million for the year ended December 31, 2011 and tax benefits of $28.5 million for the year ended December 31, 2010. The year-to-year variances were attributable primarily to changes in pre-tax (loss) income from year to year, as well as decreases 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%. The Company recorded a $1.6 million income tax benefit in the first quarter of 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 suspended net operating loss utilization in 2011 and limited the amount of utilization to $100,000 per year in the years ended December 31, 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 were recorded.

Deferred Tax Assets and Liabilities

(Dollar amounts in thousands)

	December 31,
	2012			2011
Deferred tax assets:
Alternative minimum tax (“AMT”) and other credit carryforwards	$	13,379		$	12,798
Federal net operating loss (“NOL”) carryforwards		54,770			16,962
Allowance for credit losses		31,762			42,687
Unrealized losses on securities		23,737			22,940
OREO		4,949			5,376
State NOL carryforwards		17,287			11,456
Other state tax benefits		4,917			8,150
Other		10,130			10,783
Total deferred tax assets		160,931			131,152
Deferred tax liabilities:
Purchase accounting adjustments and intangibles		(15,402	)		(10,278	)
Deferred loan fees		(2,565	)		(3,215	)
Accrued retirement benefits		(5,151	)		(6,681	)
Dividends receivable		(2,167	)		(3,072	)
Depreciation		(2,049	)		(2,843	)
Cancellation of indebtedness income		(5,340	)		(5,340	)
Other		(5,548	)		(6,293	)
Total deferred tax liabilities		(38,222	)		(37,722	)
Deferred tax valuation allowance		-			-
Net deferred tax assets		122,709			93,430
Tax effect of adjustments related to other comprehensive (loss) income		10,896			9,194
Net deferred tax assets including adjustments	$	133,605		$	102,624
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2030	$	156,486		$	48,463
Illinois gross NOL carryforwards, begin to expire in 2018		297,448			220,101
Indiana gross NOL carryforwards, begin to expire in 2021		31,170			23,872
Iowa gross NOL carryforwards, begin to expire in 2027		367			-
Wisconsin gross NOL carryforwards, begin to expire in 2025		1,011			229
Other credits (1)		13,379			12,798

(1) Consists of AMT credits, which have an indefinite life and other credits, which have a 20-year life. Approximately $2.9 million of other credits will begin to expire during the year ended December 31, 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 assets will be fully realized and no valuation allowance is required.

Components of Effective Tax Rate

	Years Ended December 31,
	2012			2011			2010
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Tax-exempt income, net of interest expense disallowance		16.8	%		(21.3	%)		27.0	%
State income tax, net of federal income tax effect		7.0	%		(0.3	%)		9.5	%
Net other		(1.0	%)		(2.4	%)		3.2	%
Effective tax rate		57.8	%		11.0	%		74.7	%

The changes in effective tax rate from the year ended December 31,2010 to the year ended December 31,2011 and from the year ended December 31,2011 to the year ended December 31,2012 were attributable primarily to decreases in tax-exempt income from year to year and to variances in pre-tax income from year to year.

As of December 31, 2012, 2011, and 2010, 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. Audits of the Company’s 2006-2007 Illinois income tax returns were closed during 2011. Audits of the Company’s 2008-2009 Illinois income tax returns were closed during 2012. During the year ended December 31, 2012, the Internal Revenue Service completed audits of the Company’s 2006-2010 federal income tax returns. None of these audits resulted in significant adjustments.

The Company is no longer subject to examination by federal tax authorities for years prior to 2006 and by Illinois, Indiana, Iowa, and Wisconsin tax authorities for years prior to 2008.

Rollforward of Unrecognized Tax Benefits

(Dollar amounts in thousands)

	Years Ended December 31,
	2012			2011			2010
Balance at the beginning of the year	$	368		$	429		$	314
Additions for tax positions relating to the current year		-			-			2
Additions for tax positions relating to prior years		-			226			263
Reductions for tax positions relating to prior years		-			(80	)		(72	)
Reductions for settlements with taxing authorities		(368	)		(207	)		-
Lapse in statute of limitations		-			-			(78	)
Balance at the end of the year	$	-		$	368		$	429
Interest and penalties not included above (1):
Interest (benefit) expense, net of tax effect, and penalties	$	(52	)	$	44		$	(21	)
Accrued interest and penalties, net of tax effect, at end of year	$	-		$	52		$	8

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

The reductions in uncertain tax positions for the year ended December 31, 2012 compared to the year ended December 31, 2011 are a result of the resolution of the aforementioned tax authority examinations. The reductions in uncertain tax positions for the year ended December 31, 2011 compared to the year ended December 31, 2010 are a result of the resolution of certain tax authority examinations, partially offset by a change in exposure as a result of a prior year settlement with taxing authorities.

The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next 12 months.