Deferred Tax Assets and Income Taxes

3 Months Ended

Mar. 31, 2013

Deferred Tax Assets and Income Taxes

Deferred Tax Assets and Income Taxes

Note 6.  Deferred Tax Assets and Income Taxes

The table below summarizes the Company’s net deferred tax asset:

	March 31,		December 31,
(dollar amounts in thousands)	2013		2012
Deferred tax assets
Reserves for loan losses	$	9,983	$	14,348
Forgone interest on non-accrual loans	831		884
Fixed assets	481		405
Accruals	1,048		792
Alternative minimum tax credit	2,024		2,153
Deferred income	1,876		1,838
Deferred compensation	1,529		1,477
Net operating loss carryforward	189		907
Other than temporary impairment	-		45
Realized built-in loss subject to § 382	2,685		3,234
Charitable contribution	61		61
State deferred tax	693		59
Total deferred tax assets	21,400		26,203
Deferred tax liabilities
Fair value adjustment for purchased assets	421		455
Investment securities valuation	1,069		2,745
Deferred costs, prepaids and FHLB advances	951		1,070
Total deferred tax liabilities	2,441		4,270
Net deferred tax assets	$	18,959	$	21,933

Deferred Tax Assets Valuation Allowance

U.S. GAAP requires that companies assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified.  U.S. GAAP provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable, and also limits projections of future taxable income to that which can be estimated over a reasonable amount of time.

The pre-tax losses the Company reported in 2010 and 2009 resulted in a three year cumulative loss position, which provided significant negative evidence about the Company’s ability to realize a portion of its deferred tax assets as of December 31, 2011 and 2010. Due to the three year cumulative pre-tax loss position as of December 31, 2010, management believed that it was no longer more likely than not that the Company would generate enough future taxable income over the projection period in order for all of its deferred tax assets to be realized. As a result of this negative evidence, the Company recorded a partial valuation allowance of approximately $7.1 million for its deferred tax assets in 2010 through a charge to income tax expense. The Company’s determination of the valuation allowance for a portion of its deferred tax assets was based on a determination that the recovery of the entire deferred tax asset was no longer more likely than not due to: (1) an analysis of cumulative pre-tax losses over a three year horizon, through December 31, 2010; (2) a projection of future taxable income over a period of time the Company believed to be reasonably estimable (“the projection period”); and (3) a detailed analysis to determine the amount of the deferred tax asset expected to be realized over the projection period of five years.

The ultimate realization of the Company’s deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences reverse.  The deferred tax assets for which there is no valuation allowance relate to amounts that are expected to be realized through subsequent reversals of existing taxable temporary differences over the projection period.  The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on the Company’s consolidated results of operations or financial position.

The Company’s return to profitability in 2011 and continued profits in 2012 substantially eliminated the three year cumulative loss position.  In addition, declines in the level of deferred tax assets and changes in their composition, along with projections of profitability for the foreseeable future and an improvement in the credit quality of the Company’s loan portfolio have combined to improve the outlook for the recovery of the valuation allowance provided for in 2010.  As a result of this improved outlook, the Company reduced the level of valuation allowance in the fourth quarter of 2011 by $1.5 million and then reversed the remaining $5.6 million valuation allowance in 2012, of which amount $0.8 million was reversed in the first quarter of 2012, based on the Company’s determination that it was more likely than not that its entire deferred tax asset position would be realized.

Income Taxes

The Company is subject to income taxation by both federal and state taxing authorities.  Income tax returns for the years ended December 31, 2011, 2010, 2009 and 2008 are open to audit by federal and state taxing authorities.  The Company does not have any uncertain income tax positions and has not accrued for any interest or penalties as of March 31, 2013 and December 31, 2012. The following table provides a summary for the current and deferred amounts of the Company’s income tax expense / (benefit):

	For the Three Months Ended
	March 31,
(dollar amounts in thousands)	2013			2012
Current:
Federal	$	(2,048	)	$	(269	)
State	(211		)	(293		)
Total current benefit	(2,259		)	(562		)
Deferred:
Federal	3,777			567
State	873			421
Total deferred expense	4,650			988
Deferred Tax Valuation Allowance:
Federal	-			(592		)
State	-			(208		)
Total deferred tax valuation allowance change	-			(800		)
Total income tax expense / (benefit)	$	2,391		$	(374	)

The following table reconciles the statutory federal income tax expense / (benefit) and rate to the Company’s effective income tax expense / (benefit) and rate:

	For the Three Months Ended March 31,
	2013				2012
(dollar amounts in thousands)	Amount			Percent	Amount			Percent
Tax expense at federal statutory tax rate	$	2,142		35.0%	$	424		35.0%
State income taxes, net of federal income tax benefit	430			7.0%	83			6.9%
Change in deferred tax asset valuation allowance	-			0.0%	(800		)	-66.1%
Bank owned life insurance	(44		)	-0.7%	(18		)	-1.5%
Tax exempt income, net of interest expense	(121		)	-2.0%	(54		)	-4.4%
Other, net	(16		)	-0.2%	(9		)	-0.8%
Total income tax expense/(benefit)	$	2,391		39.1%	$	(374	)	-30.9%