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 six months ended June 30:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2013			2012			2013			2012
Provision at statutory rate of 35%	$	14,774		$	13,333		$	26,792		$	23,855
Tax-exempt income		(3,092	)		(2,636	)		(5,989	)		(5,146	)
State income taxes		1,156			1,133			2,372			2,027
State statutory rate change		1,257			—			1,257			—
Interim period effective rate adjustment		(358	)		(723	)		(223	)		(706	)
Other, net		(3	)		(218	)		(83	)		(801	)

Income tax expense	$	13,734		$	10,889		$	24,126		$	19,229

Effective tax rate		32.5	%		28.6	%		31.5	%		28.2	%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at June 30, 2013 and 2012 based on the current estimate of the effective annual rate.

For the six months ended June 30, 2013, the effective tax rate was higher than the six months ended June 30, 2012. The higher tax rate in the first six months of 2013 is the result of an increase in projected pre-tax book income while tax-exempt income remained relatively stable combined with an increase in income tax expense of approximately $1.3 million related to a statutory rate change during the second quarter of 2013.

No valuation allowance was recorded at June 30, 2013 and 2012 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)	2013		2012
Balance at January 1	$	3,953	$	4,145
Additions (reductions) based on tax positions related to the current year		8		1

Balance at June 30	$	3,961	$	4,146

Approximately $0.17 million of unrecognized tax benefits, if recognized, would favorably affect the effective income tax rate in future periods.