NET DEFERRED TAX ASSET AND INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

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)	2012	2011	2010
Federal	$ 1,076	$ 739	$ 572
State	112	81	50
Current provision	1,188	820	622
Federal	(199)	130	71
State	-	-	-
Change in valuation allowance	-	-	-
Deferred benefit	(199)	130	71
Income tax provision (benefit)	$ 989	$ 950	$ 693

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

Years ended December 31, (in thousands)	2012	2011	2010
Income tax at statutory federal tax rate	34.0%	34.0%	34.0%
Connecticut Corporation tax net of federal tax benefit	1.47	1.1	0.8
Tax exempt income and dividends received deduction	(16.25)	(17.5)	(19.6)
Other	0.27	1.2	0.7
Change in valuation allowance	-	-	-
Effective income tax rates	19.49%	18.80%	15.9%

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

Years ended December 31, (in thousands)	2012	2011
Allowance for loan losses	$ 1,259	$ 1,162
Interest on non-performing loans	220	156
Accrued deferred compensation	46	50
Post-retirement benefits	15	15
Other real estate owned property write-down	7	-
Capital loss carry forward	349	349
Unrecognized pension expense	242	1,060
Write-down of securities	1,388	1,388
Alternative minimum tax	591	751
Net unrealized holding loss on available-for-sale securities	-	-
Gross deferred tax assets	4,117	4,931
Valuation allowance	(349)	(349)
Gross deferred tax assets, net	3,768	4,582
Deferred loan costs, net	(351)	(342)
Goodwill and core deposit intangible asset	(736)	(725)
Accelerated depreciation	(1,171)	(1,254)
Mark-to-market purchase accounting adjustments	(17)	(28)
Mortgage servicing rights	(353)	(255)
Prepaid pension	(234)	(453)
Net unrealized holding gain on available-for-sale securities	(1,496)	(696)
Gross deferred tax liabilities	(4,358)	(3,753)
Net deferred tax asset	$ (590)	$ 829

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

At December 31, 2012 and 2011, 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, 2012 and 2011, there was 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, 2009 through December 31, 2012.