Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

NOTE 16 - INCOME TAXES

Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statement of income for the three and nine months ended September 30:

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(dollars in thousands)		2011			2010			2011			2010
Provision at statutory rate of 35%	$	8,695		$	4,776		$	24,058		$	13,185
Tax-exempt income		(2,421	)		(2,416	)		(7,182	)		(7,749	)
Reversal of portion of unrecognized tax benefits		(623	)		(652	)		(623	)		(652	)
State income taxes		1,196			228			2,292			475
Interim period effective rate adjustment		888			0			89			0
Other, net		310			(187	)		(144	)		(77	)
Income tax expense	$	8,045		$	1,749		$	18,490		$	5,182
Effective tax rate		32.4	%		12.8	%		26.9	%		13.8	%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2011 based on the current estimate of the effective annual rate.

For the three and nine months ended September 30, 2011, the effective tax rate was higher than the three and nine months ended September 30, 2010. The higher tax rate in the third quarter and nine months of 2011 is the result of an increase in pre-tax book income while tax-exempt income remained relatively stable.

No valuation allowance was recorded at September 30, 2011 and 2010 because, based on our current expectations, Old National believes that it will generate sufficient income in the future years to realize deferred tax assets.

Unrecognized Tax Benefits

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(dollars in thousands)		2011			2010
Balance at January 1	$	4,553		$	8,500
Additions (reductions) based on tax positions related to the current year		4			(3,348	)
Reductions due to statute of limitations expiring		(413	)		(601	)
Balance at September 30	$	4,144		$	4,551

Approximately $0.35 million of unrecognized tax benefits, if recognized, would favorably affect the effective income tax rate in future periods.

The Company reversed $0.62 million related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The positive $0.62 million income tax reversal relates to the 2007 statute of limitations expiring. The statute of limitations expired in the third quarter of 2011. As a result, the Company reversed a total of $0.62 million from its unrecognized tax benefit liability which includes $0.21 million of interest.