Note 11: Income Taxes

Income tax expense (benefit) for the year ended December 31 was as follows:

	2013		2012
Current federal	$	105	$	-
Current state	29		-
Deferred federal	2,780		(302)
Deferred state	989		(436)
Change in valuation allowance	(74,145)		738
	$	(70,242)	$	-

The following were the components of the deferred tax assets and liabilities as of December 31:

	2013		2012
Allowance for loan losses	$	12,725	$	18,236
Deferred compensation	788		679
Amortization of core deposit asset	1,656		965
Goodwill amortization/impairment	15,252		16,796
Stock option expense	583		785
OREO write downs	10,041		16,632
Federal net operating loss (“NOL”) carryforward	28,023		20,736
State net operating loss (“NOL”) carryforward	11,847		10,186
Deferred tax credit	1,444		1,444
Other assets	1,166		585
Total deferred tax assets	83,525		87,044

Accumulated depreciation on premises and equipment	(1,035)		(1,063)
Accretion on securities	(8)		(122)
Mortgage servicing rights	(2,571)		(1,819)
State tax benefits	(6,994)		(7,315)
Other liabilities	(178)		(217)
Total deferred tax liabilities	(10,786)		(10,536)
Net deferred tax asset before valuation allowance	72,739		76,508
Tax benefit on net unrealized losses on securities	4,927		928
Valuation allowance	(2,363)		(76,508)
Net deferred tax asset	$	75,303	$	928

At December 31, 2013, the Company had $80.1 million federal net operation loss (“NOL”) carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032 and $14.8 million expires in 2033. The Company had $124.7 million state NOL carryforward of which, $29.4 million expires in 2021, and $95.3 million expires in 2025. In addition, the Company had $1.4 million in alternative minimum tax credit that can be carried forward indefinitely.

The components of the provision for deferred income tax expense (benefit) were as follows:

	2013		2012
Provision for loan losses	$	5,511	$	6,125
Deferred Compensation	(109)		(51)
Amortization of core deposit asset	(691)		(382)
Stock option expense	202		326
OREO write downs	6,591		(6,538)
Federal net operating loss carryforward	(7,287)		(926)
State net operating loss carryforward	(1,661)		(446)
Depreciation	(28)		(202)
Net premiums and discounts on securities	(114)		85
Mortgage servicing rights	752		281
Goodwill amortization/impairment	1,544		1,526
State tax benefits	(321)		114
Change in valuation allowance	(74,145)		738
Other, net	(620)		(650)
Total deferred tax benefit	$	(70,376)	$	-

Effective tax rates differ from federal statutory rates applied to financial statement loss due to the following:

	2013		2012
Tax at statutory federal income tax rate	$	4,145	$	(25)
Nontaxable interest income, net of disallowed interest deduction	(245)		(192)
BOLI income	(694)		(563)
State income taxes, net of federal benefit	662		(53)
Change in valuation allowance	(74,145)		738
Deficiency from restricted stock	10		299
Other, net	25		(204)
Tax at effective tax rate	$	(70,242)	$	-

The Company recorded a tax benefit of $70.2 million on $11.8 million pre-tax income for the year 2013. The tax benefit was composed of $134,000 in current income tax expense and $3.8 million in deferred income tax expense offset by a $74.1 million reversal of the deferred tax valuation allowance reserve. The Company evaluated positive and negative evidence in order to determine if it was more likely than not that the deferred tax asset would be recovered through future income. Significant positive evidence evaluated included recent and projected earnings, significantly improved asset quality and an improved capital position. Negative evidence identified included a reduction in net interest margin as a result of the current rate environment, and historic runoff of loans. After evaluating all of the evidence, the Company believes it will more likely than not utilize the net deferred tax assets and reversed a significant portion of the valuation reserve on the net deferred tax asset in the third quarter of 2013.