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)		2011			2010					2009
Provision at statutory rate of 35%	$	34,917		$	15,218				$	(2,582	)
Tax-exempt income:
Tax-exempt interest		(8,035	)		(9,060	)				(14,545	)
Section 291/265 interest disallowance		213			329					515
Bank owned life insurance income		(1,863	)		(1,418	)				(824	)
Tax-exempt income		(9,685	)		(10,149	)				(14,854	)
Reserve for unrecognized tax benefits		(623	)		(652	)				(706	)
State income taxes		3,188			518					(3,829	)
Other, net		(495	)		331					857
Income tax expense (benefit)	$	27,302		$	5,266			$		(21,114	)
Effective tax rate		27.4	%		12.1		%			286.2	%

The effective tax rate varied significantly from 2009 through 2011 due to increases in pre-tax income while tax-exempt income decreased. The provision for income taxes consisted of the following components for the years ended December 31:


(dollars in thousands)		2011		2010				2009
Income taxes currently payable
Federal	$	6,742	$	2,687			$	4,248
State		288		0				0
Deferred income taxes related to:
Provision for loan losses		6,399		(460	)			(3,042	)
Other, net		13,873		3,039				(22,320	)
Deferred income tax benefit		20,272		2,579				(25,362	)
Provision for (benefit from) income taxes	$	27,302	$	5,266		$		(21,114	)

In 2011, the primary components of the $13,873 Other deferred income tax expense included $(4,929) related to benefit plan accruals, $7,782 related to purchase accounting, $3,816 related to premises and equipment, $(2,498) related to lease receivable, $6,562 related to ASC 310 loans, and $2,382 related to other real estate owned.

In 2010, the primary components of the $3,039 Other deferred income tax expense included $4,762 related to benefit plan accruals, $2,058 related to premises and equipment, $(1,781) related to alternative minimum tax credit carryforwards and $(1,823) related to low income housing credit carryforwards.

In 2009, the primary components of the $(22,320) Other deferred income tax benefit included $(2,897) related to our net operating loss, $(3,024) related to benefit plan accruals, $(9,451) related to other-than-temporary impairment and $(9,076) related to alternative minimum tax credit carryforwards.

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


(dollars in thousands)		2011			2010
Deferred Tax Assets
Allowance for loan losses,
net of recapture	$	24,100		$	29,334
Benefit plan accruals		7,881			1,369
AMT credit		25,765			25,509
Unrealized losses on benefit plans		9,665			7,715
Net operating loss		2,860			3,452
Premises and equipment		30,348			35,657
Federal tax credits		4,066			3,621
Other-than-temporary-impairment		9,776			9,624
Loans - ASC 310		63,658			0
Other real estate owned		3,209			422
Other, net		6,032			6,005
Total deferred tax assets		187,360			122,708
Deferred Tax Liabilities
Accretion on investment securities		(717	)		(559	)
Lease receivable, net		(5,263	)		(7,761	)
Purchase accounting		(4,215	)		(11,605	)
FDIC indemnification asset		(64,672	)		0
Unrealized gains on available-
for-sale investment securities		(15,873	)		(2,600	)
Unrealized gains on held-to-
maturity securities		(3,160	)		(3,773	)
Unrealized gains on hedges		(96	)		(567	)
Other, net		(1,672	)		(1,940	)
Total deferred tax liabilities		(95,668	)		(28,805	)
Net deferred tax assets	$	91,692		$	93,903

The net deferred tax asset is included with other assets on the balance sheet. No valuation allowance was recorded at December 31, 2011 and 2010 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National did not have a federal net operating loss carryforward at December 31, 2011 or 2010, respectively. Old National has alternative minimum tax credit carryforwards at December 31, 2011 and 2010 of $25.8 million and $25.5 million, respectively. The alternative minimum tax credit carryforward does not expire. Old National has federal tax credit carryforwards at December 31, 2011 and 2010 of $4.1 million and $3.6 million, respectively. The federal tax credits consist of new market tax credits and low-income housing credits. If not used, the federal tax credit carryforwards will begin to expire in 2026. Old National has state net operating loss carryforwards totaling $52.5 million and $63.7 million at December 31, 2011 and 2010, respectively. If not used, the net operating loss carryforwards will begin to expire in 2022.

Unrecognized Tax Benefits

The Company adopted FASB ASC 740-10, Income Taxes (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes), on January 1, 2007. 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)		2011			2010			2009
Balance at January 1	$	4,553		$	8,500		$	7,513
Additions based on tax positions related to the current year		4			3,806			7,293
Reductions due to statute of limitations expiring		(412	)		(3,440	)		(5,186	)
Reductions for tax positions of prior years		0			(4,313	)		(1,120	)
Balance at December 31	$	4,145		$	4,553		$	8,500

Approximately $0.35 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, 2011, 2010 and 2009 of $(0.2) million, $0.3 million, and $0, respectively. The amount accrued for interest and penalties in the balance sheet at December 31, 2011 and 2010 was $1.4 million and $1.6 million, respectively.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2008 through 2011 tax years are open and subject to examination.

In the third quarter of 2011, the company reversed $0.62 million 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 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.

In the third quarter of 2009, the Company reversed $0.7 million related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The positive $0.7 million income tax reversal relates to the 2005 statute of limitations expiring. The statute of limitations expired in the third quarter of 2009. As a result, the Company reversed a total of $0.7 million from its unrecognized tax benefit liability which includes $.05 million of interest.