NOTE 12 – INCOME TAXES

Following is a summary of the major items comprising the differences in taxes computed at the federal statutory tax rate and as recorded in the consolidated statement of income for the years ended December 31:


(dollars in thousands)		2012			2011			2010
Provision at statutory rate of 35%	$	44,725		$	34,917		$	15,218
Tax-exempt income:
Tax-exempt interest		(8,590	)		(8,035	)		(9,060	)
Section 291/265 interest disallowance		147			213			329
Bank owned life insurance income		(2,258	)		(1,863	)		(1,418	)
Tax-exempt income		(10,701	)		(9,685	)		(10,149	)
Reserve for unrecognized tax benefits		(292	)		(623	)		(652	)
State income taxes		3,409			3,188			518
Other, net		(1,031	)		(495	)		331
Income tax expense	$	36,110		$	27,302		$	5,266
Effective tax rate		28.3	%		27.4	%		12.1	%

The effective tax rate varied significantly from 2010 to 2011 due to increases in pre-tax income while tax-exempt income remained relatively stable. The provision for income taxes consisted of the following components for the years ended December 31:


(dollars in thousands)		2012		2011		2010
Income taxes currently payable
Federal	$	21,015	$	6,742	$	2,687
State		1,975		288		0
Deferred income taxes related to:
Federal		11,052		17,422		2,230
State		2,068		2,850		349
Deferred income tax expense		13,120		20,272		2,579
Provision for income taxes	$	36,110	$	27,302	$	5,266

Significant components of net deferred tax assets (liabilities) were as follows at December 31:


(dollars in thousands)		2012			2011
Deferred Tax Assets
Allowance for loan losses,
net of recapture	$	20,861		$	24,100
Benefit plan accruals		18,389			7,881
AMT credit		23,029			25,765
Unrealized losses on benefit plans		8,347			9,665
Net operating loss carryforwards		5,135			2,860
Premises and equipment		30,790			30,348
Federal tax credits		0			4,066
Other-than-temporary-impairment		7,546			9,776
Loans - ASC 310		90,516			63,658
Other real estate owned		8,715			3,209
Lease exit obligation		1,232			289
Other, net		5,415			5,743
Total deferred tax assets		219,975			187,360
Deferred Tax Liabilities
Accretion on investment securities		(590	)		(717	)
Lease receivable, net		(3,757	)		(5,263	)
Purchase accounting		(6,737	)		(4,215	)
FDIC indemnification asset		(64,152	)		(64,672	)
Unrealized gains on available-
for-sale investment securities		(24,972	)		(15,873	)
Unrealized gains on held-to-
maturity securities		(2,177	)		(3,159	)
Unrealized gains on hedges		0			(96	)
Other, net		(1,274	)		(1,673	)
Total deferred tax liabilities		(103,659	)		(95,668	)
Net deferred tax assets	$	116,316		$	91,692

The net deferred tax asset is included with other assets on the balance sheet. No valuation allowance was recorded at December 31, 2012 and 2011 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards at December 31, 2012 and 2011 of $9.3 million and $0, respectively. This federal net operating loss was acquired from the recent acquisition of Indiana Community Bancorp. If not used, the federal net operating loss carryforwards will begin to expire in 2032. Old National has alternative minimum tax credit carryforwards at December 31, 2012 and 2011 of $23.0 million and $25.8 million, respectively. The alternative minimum tax credit carryforward does not expire. Old National has federal tax credit carryforwards at December 31, 2012 and 2011 of $0 million and $4.1 million, respectively. The federal tax credits consist of new market tax credits and low-income housing credits. All available federal tax credits were utilized as of December 31, 2012. Old National has state net operating loss carryforwards totaling $34.6 million and $52.5 million at December 31, 2012 and 2011, respectively. If not used, the state net operating loss carryforwards will begin to expire in 2023.

Unrecognized Tax Benefits

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)		2012			2011			2010
Balance at January 1	$	4,145		$	4,553		$	8,500
Additions based on tax positions related to the current year		2			4			3,806
Reductions due to statute of limitations expiring		(194	)		(412	)		(3,440	)
Reductions for tax positions of prior years		0			0			(4,313	)
Balance at December 31	$	3,953		$	4,145		$	4,553

Approximately $0.16 million of unrecognized tax benefits, net of interest, if recognized, would favorably affect the effective income tax rate in future periods. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

It is the Company's policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. The Company recorded interest and penalties in the income statement for the years ended December 31, 2012, 2011 and 2010 of $(0.1) million, $(0.2) million and $0.3 million, respectively. The amount accrued for interest and penalties in the balance sheet at December 31, 2012 and 2011 was $1.3 million and $1.4 million, respectively.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2009 through 2012 tax years are open and subject to examination.

In the third quarter of 2012, the Company reversed $0.29 million, including interest of $0.1 million not included in the table above, related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The positive $0.29 million income tax reversal relates to the 2008 statute of limitations expiring. The statute of limitations expired in the third quarter of 2012. As a result, the Company reversed a total of $0.29 million from its unrecognized tax benefit liability which includes $0.1 million of interest.

In the third quarter of 2011, the Company reversed $0.62 million, including interest of $0.21 million not included in the table above, 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.

In the third quarter of 2010, the Company reversed $0.65 million, including interest of $0.05 million not included in the table above, related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The positive $0.65 million income tax reversal relates to the 2006 statute of limitations expiring. The statute of limitations expired in the third quarter of 2010. As a result, the Company reversed a total of $0.65 million from its unrecognized tax benefit liability which includes $.05 million of interest.