NOTE 10 – Income Taxes

The provision for income taxes consists of the following:	2012		2011			2010

Current Federal	$	9,649	$	3,333		$	6,147
Current State		568		184			480
Deferred Federal		260		4,241			(686	)
Deferred State		192		(32	)		(318	)
Total	$	10,669	$	7,726		$	5,623

Income tax expense is reconciled to the 35% statutory rate applied to the pre-tax income for the years presented in the table below:

	2012			2011			2010

Statutory Rate Times Pre-tax Income	$	12,153		$	9,791		$	6,660
Add (Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments		(1,007	)		(780	)		(533	)
State Income Tax, Net of Federal Tax Effect		494			99			105
General Business Tax Credits		(547	)		(370	)		(365	)
Company Owned Life Insurance		(341	)		(385	)		(282	)
Gain on American Community Bancorp, Inc. Stock		—			(366	)		—
Other Differences		(83	)		(263	)		38
Total Income Taxes	$	10,669		$	7,726		$	5,263

The net deferred tax liability at December 31 consists of the following:

	2012			2011
Deferred Tax Assets:
Allowance for Loan Losses	$	5,845		$	5,596
Deferred Compensation and Employee Benefits		1,282			1,355
Other-than-temporary Impairment		443			443
Accrued Expenses		646			705
Business Combination Fair Value Adjustments		—			985
Pension and Postretirement Plans		195			149
Other Real Estate Owned		140			100
Non-Accrual Loan Interest Income		254			3
General Business Tax Credits		—			25
Net Operating Loss Carryforward		—			72
Other		279			337
Total Deferred Tax Assets		9,084			9,770
Deferred Tax Liabilities:
Depreciation		(1,419	)		(1,520	)
Leasing Activities, Net		(7,753	)		(7,612	)
Unrealized Appreciation on Securities		(5,915	)		(5,949	)
FHLB Stock Dividends		(336	)		(333	)
Prepaid Expenses		(516	)		(431	)
Intangibles		(359	)		(861	)
Deferred Loan Fees		(394	)		(350	)
Business Combination Fair Value Adjustments		(333	)		—
General Business Tax Credits		(7	)		—
Other		(255	)		(181	)
Total Deferred Tax Liabilities		(17,287	)		(17,237	)
Valuation Allowance		(45	)		(45	)
Net Deferred Tax Liability	$	(8,248	)	$	(7,512	)

Under the Internal Revenue Code, through 1996 two acquired banking companies, which are now a part of the Company’s single banking subsidiary, were allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The acquired banks were formerly known as Peoples Community Bank (acquired in October 2005) and First American Bank (acquired in January 1999). Subject to certain limitations, these Banks were permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. The Banks generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the Banks were only allowed a deduction based on actual loss experience.

Retained earnings at December 31, 2012, include approximately $2,995 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 2012 was approximately $1,048.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2012, 2011, and 2010, and did not recognize any increase in unrecognized benefits during 2012 relative to any tax positions taken in 2012. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income tax expense accounts; no such accruals existed as of December 31, 2012, 2011, and 2010. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2008. The Company and its corporate subsidiaries doing business in Indiana file a combined Indiana unitary return, which is subject to examination for all years after 2007.