Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Taxes

Note 10. Income Taxes

The Company is subject to U.S. federal and Virginia income tax as well as bank franchise tax in the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2010.

Net deferred tax assets consisted of the following components at December 31, 2013 and 2012:

	(in thousands)
	2013		2012
Deferred Tax Assets
Allowance for loan losses	$	3,619	$	4,446
Allowance for other real estate owned		566		760
Interest on non-accrual loans		—		266
Unfunded pension liability		90		894
Split dollar liability		207		391
Gain on other real estate owned		769		990
Securities available for sale		584		—
Accrued pension		289		4
Loan origination costs, net		6		—
Other		10		118
	$	6,140	$	7,869
Deferred Tax Liabilities
Depreciation	$	685	$	674
Securities available for sale		—		601
Discount accretion		5		3
Loan origination costs, net		—		30
	$	690	$	1,308
Valuation allowance		—		6,561
Net deferred tax assets	$	5,450	$	—

As of December 31, 2013, the Company reversed the full valuation allowance on its net deferred tax assets (DTAs). The realization of DTAs is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of DTAs, both positive and negative, that could be objectively verified.

Positive evidence considered included (1) a return to trailing three years of cumulative pre-tax income in 2013, (2) the Company’s recent history of quarterly pre-tax earnings (seven out of the last eight quarters), (3) expectations for sustained profitability with sufficient taxable income to fully utilize the remaining net deferred tax benefits, and (4) significant reductions in the level of non-performing assets since their peak during 2011, which was the primary source of the losses generated in 2010 and 2011.

Negative evidence considered was (1) the uncertainty about the potential impact on earnings from nonperforming assets along with (2) a pre-tax loss reported by the Company during one quarterly period over the previous two years. As the number of consecutive periods of profitability increased and the level of profits are indicative of on-going results, the weight of cumulative losses as negative evidence decreased. A reduction in the weight given to such losses is further validated given that the source of the losses was an elevated level of problem assets and related credit costs, which have since been significantly reduced. After weighing both the positive and negative evidence, management determined that a valuation allowance on the net deferred tax asset was no longer warranted as of December 31, 2013.

The provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 consisted of the following:

	(in thousands)
	2013			2012		2011
Current tax expense (benefit)	$	(44	)	$	965	$	(2,607	)
Deferred tax expense (benefit)		(4,776	)		—		6,442
	$	(4,820	)	$	965	$	3,835

The income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2013, 2012 and 2011, due to the following:

	(in thousands)
	2013			2012			2011
Computed tax expense (benefit) at statutory federal rate	$	1,718		$	1,280		$	(2,423	)
Increase (decrease) in income taxes from deferred tax valuation allowance		(6,275	)		(167	)		6,442
Decrease in income taxes resulting from:
Tax-exempt interest and dividend income		(153	)		(125	)		(186	)
Other		(110	)		(23	)		2
	$	(4,820	)	$	965		$	3,835