Income Taxes

12 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

NOTE 13. Income Taxes

     Income tax (benefit) expense is comprised of the following.

	Years Ended September 30,
(in thousands)	2011			2010			2009
Current tax (benefit) expense
Federal	$	(10,908	)	$	(20,947	)	$	21,062
State		(905	)		(2,163	)		2,944
Total current tax (benefit) expense		(11,813	)		(23,110	)		24,006
Deferred tax benefit
Federal		(3,626	)		(174	)		(5,661	)
State		(1,684	)		(1,104	)		(127	)
Total deferred tax benefit	$	(5,310	)	$	(1,278	)	$	(5,788	)
Total tax benefit	$	(17,123	)	$	(24,388	)	$	18,218

     A reconciliation of total tax (benefit) expense for the periods indicated follows.

	Years Ended September 30,
(in thousands)	2011			2010			2009
Tax benefit - continuing operations	$	(23,672	)	$	(25,969	)	$	(2,243	)
Tax expense - discontinued operations		6,549			1,581			1,628
Tax expense - extraordinary items		---			---			18,833
Total tax (benefit) expense	$	(17,123	)	$	(24,388	)	$	18,218

     A reconciliation from expected federal tax (benefit) expense of 35% to consolidated effective income tax (benefit) expense for the periods indicated follows.

	Years Ended September 30,
(dollars in thousands)	2011			2010			2009
Expected federal income tax (benefit) expense		$(20,408	)		$(21,412	)		$16,638
Increases (decreases) in income taxes resulting from Book over tax basis of insurance operations sold		4,478			---			---
State income tax expense, net of federal income tax effect		(1,683	)		(2,123	)		1,830
Tax exempt income		(374	)		(408	)		(418	)
Other, net		864			(445	)		168
Total		$(17,123	)		$(24,388	)		$18,218
Effective tax rate		29.37	%		39.86	%		38.32	%

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of First Financial’s deferred tax assets and liabilities are presented below.

	As of September 30,
(in thousands)	2011		2010
Deferred tax assets
Loan loss allowances deferred for tax purposes	$	20,642	$	31,615
Nondeductible loss on bulk loan sale		7,738		---
Net operating loss carryforward		4,489		1,607
Expenses not deducted under economic performance rules		2,601		2,837
Federal credits		1,459		---
Post retirement benefits		931		768
Charitable contribution carryforward		671		566
Book over tax basis on intangibles		64		501
Other		3,622		892
Total gross deferred tax assets	$	42,217	$	38,786
Deferred tax liabilities
Deferred gain on FDIC transaction	$	14,915	$	17,115
Excess carrying value of assets acquired for financial reporting purposes over tax basis		6,839		6,898
FHLB stock dividends deferred for tax purposes		1,384		1,671
Loan fee income adjustments for tax purposes		4,516		3,783
Expenses deducted under economic performance rules		875		895
Unrealized gain on securities available for sale		2,179		3,527
Other		671		883
Total gross deferred tax liabilities	$	31,379	$	34,772
Net deferred tax asset	$	10,838	$	4,014

     The recognition of deferred tax assets (“DTA”) is based on management’s judgment that realization of the asset meets a “more likely than not” standard. If such determination is not made, a valuation allowance is established against the DTA to reduce its level to where it is more likely than not that the tax benefit will be realized. Management’s judgment is based on estimates concerning various future events and uncertainties, including future reversals of existing taxable temporary differences, the timing and amount of future income earned by First Financial and the implementation of various tax planning strategies to maximize realization of the DTA.

     As a result of pre-tax book losses incurred during the last three fiscal years (before the extraordinary gain in fiscal 2009), First Financial was in a three year cumulative loss position at September 30, 2011. A cumulative loss position is considered significant negative evidence in assessing the realiz ability of a DTA. Management has concluded that sufficient positive evidence exists to overcome this negative evidence, including the following:

• Management forecasts sufficient taxable income in the next five years, even under stressed economic scenarios, to realize the DTA in the carryforward periods allowed under the respective federal and state revenue codes.

• First Financial has both taxable and tax-deductible temporary differences at September 30, 2011that are expected to reverse in the next 5-7 years. Further, the reversal of substantial taxable and tax-deductible temporary differences within the next 5-8 years are expected to closely mirror each other, and should further support the conclusion that the gross deferred tax benefits to be realized will be available to offset significant gross deferred tax liabilities.

• First Financial has stable levels of core operating noninterest income and noninterest expense.

• The current federal tax laws provide a twenty year carryforward for any net operating losses not otherwise utilized through a carry back. This carryforward period begins only once the deductions are realized on a tax return. First Financial has no history of tax benefits expiring unused, nor is it projecting any net operating loss carryforwards being generated based on current analysis or future projections.

• First Financial has a number of tax-planning strategies that it could employ, if necessary, to generate significant taxable income in future periods, should net operating losses face expiration. Examples would include restructuring the investment portfolio to invest in more taxable securities rather than the current mix of taxable and tax exempt investments, or the sale of various real estate assets triggering gains for tax purposes.

          Management believes that the combination of a strong history of taxable income, the projected current federal income tax receivables, and projected pre-tax income in future years represents positive evidence that the tax benefit will be realized. While realization of the deferred tax benefits is not assured, it is management’s judgment, after review of all available evidence and based on the weight of such evidence, that a valuation allowance is not necessary, as realization of these benefits meets the “more likely than not” standard.

     The Consolidated Financial Statements at September 30, 2011 and 2010 did not include a tax liability of $8.5 million related to the base year bad debt reserve amounts since these reserves are not expected to reverse until indefinite future periods, and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability include failure to meet the tax definition of a bank, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of First Federal’s stock.