Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

13. INCOME TAXES

The provisions (benefits) for income taxes are summarized as follows at December 31 (in thousands):

	2014			2013
Income tax provision (benefit):
Current:
Federal	$	--		$	--
State		--			--
Total current		--			--
Deferred:
Federal		367			2
State		919			(16	)
Valuation allowance		(21,856	)		25
Total deferred		(20,570	)		11
Total	$	(20,570	)	$	11

The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows at December 31 (in thousands):

	2014					2013
Taxes at statutory rate	$	1,270		34.0	%	$	252		34.0	%
Increase (decrease) resulting from:
State income tax—net		42		1.1			33		4.4
Valuation allowance-net		(21,060	)	(537.5	)		395		53.3
Earnings on life insurance policies		(388	)	(10.4	)		(275	)	(37.1	)
Nontaxable investments		(451	)	(12.0	)		(404	)	(54.5	)
Other—net		17		0.4			10		1.4
Total	$	(20,570	)	(550.6	)%	$	11		1.5	%

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would be able to realize the deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax valuation allowance, which would reduce the provision for income taxes.

The Company’s net deferred tax asset account was comprised of the following at December 31 (in thousands):

	2014			2013
Deferred tax assets:
Allowance for loan and lease losses	$	6,343		$	6,011
Discount on purchased loans		4,511			--
Real estate owned		2,649			3,511
Section 382 net operating loss carryforward		2,252			2,390
Net operating loss carryforward		11,239			10,410
Nonaccrual loan interest		920			806
Other		736			422
Total deferred tax assets		28,650			23,550
Valuation allowance		(1,017	)		(22,873	)
Deferred tax asset, net of allowance		27,633			677
Deferred tax liabilities:
Office properties		(3,240	)		(430	)
Core deposit intangible		(2,810	)		--
Unrealized gain on securities available for sale		(426	)		--
Pension plan contribution		(24	)		(118	)
Prepaid expenses and other		(436	)		(129	)
Total deferred tax liabilities		(6,936	)		(677	)
Net deferred tax asset (liability)	$	20,697		$	--

A financial institution may, for federal income tax purposes, carryback net operating losses ("NOL") to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2014, the Company had a $35.0 million NOL for federal income tax purposes that will be carried forward. The federal NOL carryforwards, if unused, expire in calendar years 2029 through 2034. The $35.0 million federal NOL includes $6.6 million of IRC Section 382 NOL carryforwards that have an annual limit of $405,000 that can be utilized to offset taxable income. At December 31, 2014, the Company had a $37.0 million NOL for Arkansas state income tax purposes. The state NOL carryforwards, if unused, expire in calendar years 2016 through 2019.

Specifically exempted from deferred tax recognition requirements are bad debt reserves for tax purposes of U.S. savings and loans in the institution’s base year, as defined. Base year reserves totaled approximately $4.2 million. Consequently, a deferred tax liability of approximately $1.6 million related to such reserves was not provided for in the consolidated statements of financial condition at December 31, 2014 and 2013. Payment of dividends to stockholders out of retained earnings deemed to have been made out of earnings previously set aside as bad debt reserves may create taxable income to the Bank. No provision has been made for income tax on such a distribution as the Bank does not anticipate making such distributions.

At September 30, 2014 the Company recorded a valuation allowance reversal on the basis of management’s assessment of the amount of its deferred tax assets that are more likely than not to be realized, resulting in a net tax benefit of $19.5 million for the nine months ended September 30, 2014. Additionally for the three months ended December 31, 2014, the Company recorded a valuation allowance reversal of $1.6 million which was primarily comprised of the valuation allowance that remained at September 30, 2014 in accordance with intra-period tax allocation rules under GAAP.

The Company regularly evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard as defined by generally accepted accounting principles. In accordance with ASC Topic 740-10, Income Taxes (ASC 740), a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback and carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

● Future reversals of existing temporary differences;

● Future taxable income exclusive of reversing temporary differences and carryforwards;

● Taxable income in prior carryback years; and

● Tax planning strategies

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all positive and negative evidence, including but not limited to:

● Nature, frequency and severity of recent losses;

● Duration of statutory carryforward periods;

● Historical experience with tax attributes expiring unused; and

● Near- and medium-term financial outlook.

The Company acquired FNSC on June 13, 2014.  The pretax income generated by FNSC since the merger on June 13, 2014 and as of September 30, 2014 was approximately $6.1 million.  As a result of the merger, the Company achieved its first quarter of positive taxable income in the quarter ended September 30, 2014. FNSC has a long history of achieving positive pretax income. The pretax income of FNSC for each of the years of 2011, 2012 and 2013 exceeded $13 million.  The Company viewed these positive factors in light of the negative evidence of the Company’s historical losses and concluded that the structural change of the Company as a result of the merger, as evidenced by its quarterly results, outweighs this negative factor.

Other positive evidence considered in connection with the Company’s decision to reverse its deferred tax valuation allowance include the significant improvement in the asset quality of the Company, as well as its detailed forecasts projecting the complete realization of all federal deferred tax assets before expiration under a stressed earnings scenario. In order to realize the federal net operating loss carryforwards as of December 31, 2014, the Company needs to generate pretax earnings of $35.0 million. The Company believes that it is more likely than not that this level of pretax earnings will be achievable even under a stressed scenario to utilize the net operating loss carryforwards and the remaining net deferred tax assets.

The Company had a total state net operating loss carryforward as of December 31, 2014 of $37.0 million. The Company believes it is more likely than not this this level of pretax earnings will be achievable to utilize the state NOL carryforwards prior to the expiration dates. As of December 31, 2014, a state NOL of $14.1 million expired unused and the associated deferred tax asset and the valuation allowance of $605,000 were both reversed during the three months ended December 31, 2014.

In addition, at December 31, 2014 the Company has certain deferred tax assets related to net unrealized built-in losses (“NUBILs”) established under IRC Section 382 on the date of the ownership change of May 3, 2011. If these losses are realized before May 3, 2016 (five years after the ownership change date), then they are not allowed to be taken as a deduction and are therefore permanently lost. The NUBILs at December 31, 2014 amounted to $3.0 million or $1.0 million on a tax effected basis. Since these NUBILs may be lost, the valuation allowance of $1.0 million was not reversed. If any of the NUBILs still remain on the books on May 3, 2016, the valuation allowance on the deferred tax asset can be reversed at that time. During the year ended December 31, 2014, $202,000 of deferred tax assets related to realized built in losses and their associated valuation allowances were reversed.

Upon considering all the positive and negative evidence, and the extent to which that evidence was objectively verifiable, the Company determined that the positive evidence outweighed the negative evidence and the deferred tax assets, with the exception of $1.0 million related to NUBILs, are more likely than not realizable, as of and for the year ended December 31, 2014. As a result, the valuation allowance was reversed resulting in a net tax benefit of $21.1 million, or $0.73 per diluted share, for the year ended December 31, 2014.

The Company will continue to regularly assess the ability to realize its deferred tax assets. Changes in earnings performance and future earnings projections, among other factors, may cause the Company to adjust its valuation allowance, which will impact the Company’s income tax in the period it determines that these factors have changes.

The Company files consolidated income tax returns in the U.S. federal jurisdiction and the state of Arkansas while Bear State Bank files in the state of Oklahoma. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years ended December 31, 2010 and forward.