INCOME TAX

12 Months Ended

Dec. 31, 2011

INCOME TAX

INCOME TAX

NOTE 15 — INCOME TAX

        Income tax expense (benefit) was as follows:

Year Ended December 31	2011			2010			2009
Income tax expense
Currently payable	$	3,746		$	3,885		$	(391	)
Deferred		(1,165	)		(4,708	)		(12,360	)
Change in valuation allowance		1,157			1,062			1,106
Total income tax expense	$	3,738		$	239		$	(11,645	)

        Effective tax rates differ from the federal statutory rate of 35% applied to income before income taxes due to the following:

Federal statutory income tax rate		35	%		35	%		35	%
Federal statutory income tax	$	9,643		$	5,264		$	(26,524	)
Tax exempt interest		(4,631	)		(3,999	)		(3,263	)
Effect of state income taxes		72			29			(228	)
Resolution of uncertain tax position		—			—			(600	)
Non-deductible expenses		163			135			108
Non-deductible goodwill impairment		—			—			19,795
Tax exempt income on life insurance		(469	)		(460	)		(356	)
Tax credits		(898	)		(717	)		(474	)
Other		(142	)		(13	)		(103	)
Income tax expense	$	3,738		$	239		$	(11,645	)

        The components of the net deferred tax asset (liability) are as follows:

December 31	2011			2010
Assets
Allowance for loan losses	$	15,393		$	16,759
Net operating loss carryforward		5,673			5,075
Credit carryforwards		7,448			5,385
OREO write-downs		1,520			775
Other		1,278			1,458
Total assets		31,312			29,452
Liabilities
Depreciation		(3,204	)		(2,388	)
Mortgage servicing rights		(2,135	)		(2,151	)
Unrealized gain on securities AFS		(12,326	)		(5,093	)
Other		(2,638	)		(2,743	)
Total liabilities		(20,303	)		(12,375	)
Less: Valuation allowance		(6,039	)		(4,882	)
Net deferred tax asset	$	4,970		$	12,195

        The Company has $2,805 of alternative minimum tax credit carryforwards, which under current tax law have no expiration period. The Company has general business credit carryforwards of $4,643 that begin to expire in 2027.

        The Company has an Indiana state operating loss carryforward of $102,679, which begins to expire in 2019. The Company maintains a valuation allowance to reduce these carryforward items and other Indiana deferred tax assets to the amount expected to be realized.

        A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At December 31, 2011, the largest component of deferred tax assets is associated with the allowance for loan losses. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. With the exception of the deferred tax asset associated with the Company's Indiana deferred tax assets, no valuation allowance for deferred tax assets are considered necessary at December 31, 2011 or 2010.

        Retained earnings of certain subsidiary banks include approximately $13,112 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank" status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for the Company was approximately $4,589 at each of December 31, 2011 and 2010.

Unrecognized Tax Benefits

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

	2011		2010		2009
Balance at January 1,	$	—	$	—	$	484
Additions related to tax positions in current year		—		—		—
Reductions of tax positions from prior years		—		—		(484	)
Balance at December 31,	$	—	$	—	$	—

        The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

        The total amount of interest and penalties recorded in the income statement for the year ended December 31, 2011, 2010, and 2009 were $0, $0, and a reduction of $116 respectively, and the amount accrued for interest and penalties at December 31, 2011, 2010, and 2009 were $0, $0, and $0.

        The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Company is no longer subject to examination by taxing authorities for years before 2008.

        The Company is currently under a sales and use tax, income tax, and payroll withholding tax audit for the calendar years of 2009 and 2010 with the state of Indiana. The Company is also currently under audit with the state of Illinois for Illinois business tax for the years 2008 and 2009. The Company does not expect the results of these audits to have a material impact on the financial condition of the Company.