Income Taxes

Income tax expense is comprised of the following:



	Years Ended December 31,
	2011			2010		2009
Taxes currently payable
Federal	$	45,026		$	5,188	$	18,291
State	1,823			1,460		237
Deferred (benefit) expense	(756		)	30,443		7,117
	$	46,093		$	37,091	$	25,645



The actual income tax rate differs from the statutory tax rate as shown in the following table:
		Years Ended December 31,
		2011		2010		2009
Statutory rate		35.00	%	35.00	%	35.00	%
Increase (decrease) in rate due to:
	Interest on tax-exempt securities and tax-free loans, net	(3.04	)	(3.36	)	(4.09	)
	Bank owned life insurance	(3.26	)	(3.94	)	(4.65	)
	State income tax (net)	0.72		0.68		0.15
	Tax credits	(2.12	)	(2.37	)	(1.97	)
	ESOP Dividends	(0.24	)	(0.29	)	(0.49	)
	Non-deductible meals and entertainment	0.29		0.30		0.28
	Other	0.48		0.47		(0.44	)
Effective tax rates		27.83	%	26.49	%	23.79	%

Income tax expense as reflected in the previous table excludes net worth-based taxes, which are assessed in Ohio, Pennsylvania and Missouri. These taxes are $5.5 million, $7.6 million and $6.1 million in 2011, 2010 and 2009, respectively, and are recorded in other operating expense in the accompanying consolidated statements of income and comprehensive income.

Principal components of the Corporation's net deferred tax asset are summarized as follows:



		Years Ended
		December 31,
		2011			2010
Deferred tax assets:
	Allowance for credit losses	$	42,481		$	43,959
	Employee benefits	44,572			34,692
	REMIC	6,749			7,263
	Acquired liabilities	5,576			7,380
	Goodwill	13,041			14,314
	Core deposit intangible	1,066			649
	Other	1,875			35
		115,360			108,292
Deferred tax liabilities:
	Leased assets and depreciation	(4,776		)	(3,381		)
	Acquired loans	(35,533		)	(37,516		)
	Available for sale securities	(28,929		)	(18,697		)
	FHLB stock	(25,577		)	(25,577		)
	Loan fees and expenses	(4,618		)	(6,757		)
		(99,433		)	(91,928		)
Total net deferred tax asset		$	15,927		$	16,364



The period change in deferred taxes recorded both directly to capital and as a part of the income tax expense can be summarized as follows:
		Years ended
		December 31,
		2011			2010
Deferred tax changes reflected in other comprehensive income		$	1,193		$	(346	)
Deferred tax changes reflected in Federal income tax expense		(756		)	30,443
Deferred tax changes reflected in acquired net assets		—			(21,402		)
	Net change in deferred taxes	$	437		$	8,695

Income tax benefits are recognized in the financial statements for a tax position only if it is considered “more likely than not” of being sustained on audit based solely on the technical merits of the income tax position. If the recognition criteria are met, the amount of income tax benefits to be recognized is measured based on the largest income tax benefit that is more than 50 percent likely to be realized on ultimate resolution of the tax position.

A reconciliation of the change in the reserve for uncertain tax positions is as follows:



	Federal and State Tax			Accrued Interest and Penalties			Gross Unrecognized Income Tax Benefits
Balance at January 1, 2011	$	979		$	801		$	1,780
Additions for tax provisions related to prior year	18			1,414			1,432
Reduction for tax positions related to prior closed tax years	(44		)	(598		)	(642		)
Reduction for tax positions related to prior tax years	(7		)	(126		)	(133		)
Balance at December 31, 2011	$	946		$	1,491		$	2,437
Components of Reserve:
Potential adjustment to non-deductible interest expense	$	58		$	9		$	67
Timing of the accrual for interest on nonperforming assets	—			1,175			1,175
State income tax exposure	888			307			1,195
Balance at December 31, 2011	$	946		$	1,491		$	2,437

The Corporation recognized accrued interest and penalties, as appropriate, related to unrecognized tax benefits (“UTBs)”, in the effective tax rate. The balance of accrued interest and penalties at the reporting periods is presented in the table above. The reserve of uncertain tax positions is recorded in accrued taxes, expenses and other liabilities on the consolidated balance sheets.

The Corporation and its subsidiaries are routinely examined by various taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local tax examinations by tax authorities for years before 2008. The expiration of statutes of limitation for various jurisdictions is expected to reduce the UTB balance by approximately $0.4 million within the next twelve months. Management anticipates that the UTB balance will increase by $0.5 million as a result of the 2011 tax filings in the next twelve months. If the total amount of UTBs were recognized the effective tax rate would decrease by 147 basis points to 26.36% at December 31, 2011.

Management monitors changes in tax statutes and regulations and the issuance of judicial decisions to determine the potential impact to uncertain income tax positions. As of December 31, 2011, Management had identified no other potential Treasury regulations or legislative initiatives that could have a significant impact on the UTB balance within the next twelve months.