NOTE 15 — INCOME TAX

Income tax expense (benefit) was as follows:

Year Ended December 31	2012			2011			2010


Income tax expense
Currently payable	$	4,419		$	3,746		$	3,885
Deferred		1,731			(1,165	)		(4,708	)
Change in valuation allowance		(123	)		1,157			1,062

Total income tax expense	$	6,027		$	3,738		$	239

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	$	11,650		$	9,643		$	5,264
Tax exempt interest		(4,527	)		(4,631	)		(3,999	)
Effect of state income taxes		192			72			29
Non-deductible expenses		349			163			135
Tax exempt income on life insurance		(422	)		(469	)		(460	)
Tax credits		(861	)		(898	)		(717	)
Other		(354	)		(142	)		(13	)

Income tax expense	$	6,027		$	3,738		$	239

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

December 31	2012			2011


Assets
Allowance for loan losses	$	12,427		$	15,393
State net operating loss carryforward		5,898			5,673
Credit carryforwards		8,595			7,448
OREO write-downs		953			1,520
Other		2,765			1,278

Total assets		30,638			31,312

Liabilities
Depreciation		(3,664	)		(3,204	)
Mortgage servicing rights		(1,722	)		(2,135	)
Unrealized gain on securities AFS		(13,854	)		(12,326	)
Deferred loan fees/costs		(1,241	)		(855	)
Other		(2,407	)		(1,783	)

Total liabilities		(22,888	)		(20,303	)

Less: Valuation allowance		(5,916	)		(6,039	)

Net deferred tax asset	$	1,834		$	4,970

The Company has $2,585 of alternative minimum tax credit carryforwards, which under current tax law have no expiration period. The Company has general business credit carryforwards of $6,010 that begin to expire in 2027.

The Company has an Indiana state operating loss carryforward of $106,760, 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, 2012, 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, 2012 or 2011.

Retained earnings of the subsidiary bank includes approximately $13,112 for which no deferred income tax liability has been recognized. This amount represents an allocation of previously acquired institutions 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, 2012 and 2011.

Unrecognized Tax Benefits

The Company does not have any unrecognized tax benefits during any periods presented and does not expect this to significantly change in the next twelve months.

There were no interest and penalties recorded in the income statement during any period and no amounts accrued for interest and penalties at December 31, 2012, or 2011.

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 2009.