NET DEFERRED TAX ASSET AND INCOME TAXES

12 Months Ended

Dec. 31, 2011

Net Deferred Tax Asset And Income Taxes

NET DEFERRED TAX ASSET AND INCOME TAXES

NOTE 11 – NET DEFERRED TAX ASSET AND INCOME TAXES

Salisbury provides deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not. The components of the income tax provision were as follows:

Years ended December 31, (in thousands)	2011		2010		2009
Federal	$	739	$	572	$	897
State		81		50		114
Current provision		820		622		1,011
Federal		130		71		(1,060	)
State		—		—		—
Change in valuation allowance		—		—		—
Deferred benefit		130		71		(1,060	)
Income tax provision (benefit)	$	950	$	693	$	(49	)

The following is a reconciliation of the expected federal statutory tax to the income tax provision:

Years ended December 31, (in thousands)	2011			2010			2009
Income tax at statutory federal tax rate		34.0	%		34.0	%		34.0	%
Connecticut Corporation tax net of federal tax benefit		1.1			0.8			3.1
Tax exempt income and dividends received deduction		(17.5	)		(19.6	)		(40.3	)
Other		1.2			.7			1.2
Change in valuation allowance		—			—			—
Effective income tax rates		18.80	%		15.9	%		(2.0	)%

The components of Salisbury’s net deferred tax assets are as follows:

Years ended December 31, (in thousands)	2011			2010
Allowance for loan losses	$	1,162		$	1,109
Interest on non-performing loans		156			160
Accrued deferred compensation		50			54
Post-retirement benefits		15			17
Other real estate owned property write-down		—			22
Capital loss carry forward		349			349
Unrecognized pension expense		1,060			612
Write-down of securities		1,388			1,388
Alternative minimum tax		751			626
Net unrealized holding loss on available-for-sale securities		—			1,330
Gross deferred tax assets		4,931			5,667
Valuation allowance		(349	)		(349	)
Gross deferred tax assets, net		4,582			5,318
Deferred loan costs, net		(342	)		(280	)
Goodwill and core deposit intangible asset		(725	)		(714	)
Accelerated depreciation		(1,254	)		(1,232	)
Mark-to-market purchase accounting adjustments		(28	)		(42	)
Mortgage servicing rights		(255	)		(229	)
Prepaid pension		(453	)		(281	)
Net unrealized holding gain on available-for-sale securities		(696	)		—
Gross deferred tax liabilities		(3,753	)		(2,778	)
Net deferred tax asset	$	829		$	2,540

Salisbury will only recognize a deferred tax asset when, based upon available evidence, realization is more likely than not.

At December 31, 2011 and 2010, a valuation allowance was established for the entire amount of the state deferred tax assets as a result of Connecticut legislation that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company (“PIC”). In accordance with this legislation, in 2004, Salisbury formed a PIC, SBT Mortgage Service Corporation. Salisbury does not expect to pay state income tax in the foreseeable future unless there is a change in Connecticut law. Accordingly, Salisbury does not expect to be able to utilize the net operation losses generated by the PIC and has established a valuation allowance.

Salisbury’s policy is to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2011 and 2010, there were no material uncertain tax positions related to federal and state tax matters. Salisbury is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2008 through December 31, 2011.