INCOME TAXES

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

INCOME TAXES

NOTE 15 - INCOME TAXES

Income tax expense for the years ended December 31, 201, 2010 and 2009 consisted of the following:

	2011			2010			2009
				(in thousands)
Current federal	$	15,845		$	16,346		$	12,648
Deferred federal		(1,993	)		(5,351	)		(4,225	)
Current state		1,413			1,683			953
Deferred state		(677	)		(798	)		(698	)
Tax benefit of stock options		130			357			191
Total income tax expense	$	14,718		$	12,237		$	8,869

105

NOTE 15 - INCOME TAXES (continued)

Income tax expense included ($67,000), ($2,000) and ($1,000) applicable to security transactions for 2011, 2010 and 2009. The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 35% for 2011, 2010 and 2009 to income before income taxes were as follows:

	2011			2010			2009
				(in thousands)
Income taxes at statutory federal rate of 35%	$	15,883		$	12,873		$	9,747
Increase (decrease) in taxes resulting from:
Tax exempt income		(1,376	)		(958	)		(884	)
Nondeductible expense		213			209			244
State income tax, net of federal tax effect		490			616			183
Net operating loss		0			(30	)		(30	)
Tax credits		(153	)		(127	)		(57	)
Bank owned life insurance		(348	)		(408	)		(411	)
Reserve for unrecognized tax benefits		22			22			30
Other		(13	)		40			47
Total income tax expense	$	14,718		$	12,237		$	8,869

      The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2011 and 2010 consisted of the following:

	2011				2010
	Federal		State		Federal		State
	(in thousands)
Deferred tax assets:
Bad debts	$	18,690	$	3,676	$	15,752	$	3,099
Pension and deferred compensation liability		491		97		444		87
Non-qualified stock options		288		57		176		34
Impairment of investment securities		125		25		634		125
Nonaccrual loan interest		1,264		249		600		118
Long-term incentive plan		771		151		383		75
Other		232		27		123		6
		21,861		4,282		18,112		3,544
Deferred tax liabilities:
Accretion		122		19		115		19
Depreciation		2,809		215		1,895		193
Loan servicing rights		825		162		854		168
State taxes		1,197		0		995		0
Leases		10		2		31		6
Deferred loan fees		46		9		59		12
Intangible assets		1,462		288		1,262		248
FHLB stock dividends		76		15		118		23
REIT spillover dividend		1,168		0		731		0
Prepaid expenses		266		52		165		32
		7,981		762		6,225		701
Valuation allowance		0		0		0		0
Net deferred tax asset	$	13,880	$	3,520	$	11,887	$	2,843

106

NOTE 15 - INCOME TAXES (continued)

In addition to the net deferred tax assets included above, the deferred income tax asset/liability allocated to the unrealized net gain/(loss) on securities available for sale included in equity was $4.4 million and $1.9 million for 2011 and 2010. The deferred income tax liability allocated to the benefit plan included in equity was $1.4 million and $1.0 million for 2011 and 2010.

Unrecognized Tax Benefits

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

	2011		2010
	(in thousands)
Balance January 1,	$	112	$	90
Additions based on tax positions related to the current year		22		22
Additions for tax positions of prior years		0		0
Reductions for tax positions of prior years		0		0
Reductions due to the statute of limitations		0		0
Settlements		0		0
Balance at December 31,	$	134	$	112

    The balance of $134,000 at December 31, 2011 represents the amount of unrecognized tax benefits that, 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.

No interest or penalties were recorded in the income statement and no amount was accrued for interest and penalties for the period ending December 31, 2011 and 2010. 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 taxes accounts.

The Company and its subsidiaries file a consolidated U.S. federal tax return and a combined unitary return in the States of Indiana and Michigan. These returns are subject to examinations by authorities for all years after 2007.