Income Tax

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

NOTE 13. Income Taxes

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

	Year Ended December 31,		Quarter Ended December 31,		Years Ended September 30,
(in thousands)	2012		2011		2011			2010
Current tax expense (benefit)
Federal	$	9,149	$	284	$	(17,343	)	$	(22,320	)
State		1,337		654		(1,460	)		(2,229	)
Total current tax expense (benefit)		10,486		938		(18,803	)		(24,549	)
Deferred tax expense (benefit)
Federal		7,202		7,985		(3,248	)		316
State		1,702		843		(1,621	)		(1,736	)
Total deferred tax expense (benefit)		8,904		8,828		(4,869	)		(1,420	)
Total tax expense (benefit) from continuing operations		19,390		9,766		(23,672	)		(25,969	)
Total tax expense from discontinued operations		—		—		6,549			1,581
Total tax expense (benefit)	$	19,390	$	9,766	$	(17,123	)	$	(24,388	)

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

	Year Ended December 31,			Quarter Ended December 31,			Years Ended September 30,
(dollars in thousands)	2012			2011			2011			2010
Expected federal income tax expense (benefit)	$	16,871		$	8,868		$	(21,452	)	$	(22,847	)
Increases (decreases) in income taxes resulting from
State income tax expense (benefit), net of federal income tax effect		1,209			974			(2,044	)		(2,166	)
Deferred adjustment for charter conversion		1,180			—			—			—
Tax exempt income		(480	)		(87	)		(374	)		(408	)
Other, net		610			11			198			(548	)
Total	$	19,390		$	9,766		$	(23,672	)	$	(25,969	)
Effective tax rate		40.23	%		38.54	%		38.62	%		39.78	%

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

	Years Ended September 30,
(dollars in thousands)	2011			2010
Expected federal income tax expense	$	1,044		$	1,435
Increases in income taxes resulting from
State income tax expense, net of federal income tax effect		361			43
Book over tax basis of insurance operations sold		4,478			—
Other, net		666			103
Total	$	6,549		$	1,581
Effective tax rate		219.47	%		38.56	%

The effective tax rate for the year ended September 30, 2011 is the result of a taxable gain on the sale of First Southeast.

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
	December 31,					September 30,
(in thousands)	2012			2011		2011			2010
Deferred tax assets
Loan loss allowances deferred for tax purposes	$	15,633		$	20,396	$	20,642		$	31,615
Expenses not deducted under economic performance rules		2,650			2,672		2,601			2,837
Unrealized loss (gain) on securities available for sale		1,067			1,208		(2,179	)		(3,527	)
Post retirement benefits		901			932		931			768
Net operating loss carryforward		326			2,986		4,489			1,607
Book over tax basis on intangibles		229			79		64			501
Nondeductible loss on bulk loan sale		—			—		7,738			—
Federal credits		—			628		1,459			—
Charitable contribution carryforward		—			478		671			566
Other		2,786			3,948		3,622			892
Total gross deferred tax assets	$	23,592		$	33,327	$	40,038		$	35,259
Deferred tax liabilities
Deferred gain on FDIC transaction	$	15,273		$	14,705	$	14,915		$	17,115
Excess carrying value of assets acquired for financial    reporting purposes over tax basis		6,877			6,708		6,839			6,898
Loan fee income adjustments for tax purposes		3,016			3,419		4,516			3,783
Expenses deducted under economic performance rules		603			736		875			895
FHLB stock dividends deferred for tax purposes		338			1,263		1,384			1,671
Other		1,132			1,097		671			883
Total gross deferred tax liabilities	$	27,239		$	27,928	$	29,200		$	31,245
Net deferred tax (liability) asset	$	(3,647	)	$	5,399	$	10,838		$	4,014

At December 31, 2012, First Federal had $7.5 million of state net operating loss carryforwards that will begin to expire in 2024.

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 losses, First Financial was in a three year cumulative loss position at December 31, 2012. A cumulative loss position is considered significant negative evidence in assessing the realizability of a DTA. Management has concluded that sufficient positive evidence exists to overcome this negative evidence, including that First Financial has both taxable and tax-deductible temporary differences at December 31, 2012 that are expected to reverse in the next 5-10 years. Further, the reversal of substantial taxable and tax-deductible temporary differences within the next 5-10 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.

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.

First Financial accounts for uncertain tax positions in accordance with the income taxes accounting guidance. The First Financial has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. The following tax years remain subject to examination as of December 31, 2012.

Jurisdiction	Tax Years
Federal	2008-2011
State	2008-2011

First Financial believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in material change to its financial position. Therefore, no material reserves for uncertain federal income tax positions have been recorded. First Financial recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. First Financial did not incur any federal income tax related interest income, interest expense or penalties for the year ended December 31, 2012, quarter ended December 31, 2011, and years ended September 30, 2011 and 2010.

The Consolidated Financial Statements at December 31, 2012, December 31, 2011 and September 30, 2011 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 Financial’s stock.