Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Taxes

Note 8. Income Taxes

Total income taxes for the years ended December 31, 2012, 2011 and 2010 were allocated as follows:

(In thousands)	2012			2011			2010
Allocated to net income	$	(16,952	)		7,370			4,960
Allocated to stockholders’ equity, for unrealized holding gain/loss on    debt and equity securities for financial reporting purposes		(237	)		554			251
Allocated to stockholders’ equity, for tax expense (benefit) of pension liabilities		5,824			(2,912	)		(688	)
Total income tax expense (benefit)	$	(11,365	)		5,012			4,523

The components of income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010 are as follows:

($ in thousands)	2012			2011			2010
Current     - Federal	$	(8,401	)		9,204			25,353
- State		(43	)		2,094			3,807
Deferred   - Federal		(5,914	)		(3,234	)		(21,092	)
- State		(2,594	)		(694	)		(3,108	)
Total	$	(16,952	)		7,370			4,960

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2012 and 2011 are presented below:

(In thousands)	2012			2011
Deferred tax assets:
Allowance for loan losses	$	18,228			16,458
Excess book over tax SERP retirement plan cost		2,553			2,378
Deferred compensation		128			138
State net operating loss carryforwards		961			62
Accruals, book versus tax		1,403			329
Pension liability adjustments		1,396			7,220
Foreclosed real estate		6,813			1,402
Basis differences in assets acquired in FDIC transactions		1,058			771
Nonqualified stock options		554			277
Nonaccrual loan interest		420			744
All other		732			663
Gross deferred tax assets		34,246			30,442
Less: Valuation allowance		(112	)		(81	)
Net deferred tax assets		34,134			30,361
Deferred tax liabilities:
Loan fees		(1,427	)		(1,217	)
Excess tax over book pension cost		(451	)		(219	)
Depreciable basis of fixed assets		(2,308	)		(2,372	)
Amortizable basis of intangible assets		(9,119	)		(8,334	)
Unrealized gain on securities available for sale		(1,283	)		(1,520	)
FHLB stock dividends		(437	)		(437	)
All other		(124	)		(198	)
Gross deferred tax liabilities		(15,149	)		(14,297	)
Net deferred tax asset - included in other assets	$	18,985			16,064

A portion of the annual change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related 2012 and 2011 deferred tax expense (benefit) of approximately ($237,000) and $554,000 respectively, has been recorded directly to shareholders’ equity. Additionally, a portion of the annual change in the net deferred tax asset relates to pension adjustments. The related 2012 and 2011 deferred tax expense (benefit) of $5,824,000 and ($2,912,000), respectively, has been recorded directly to shareholders’ equity. The balance of the 2012 decrease in the net deferred tax asset of $8,508,000 is reflected as a deferred income tax expense, and the balance of the 2011 increase in the net deferred tax asset of $3,928,000 is reflected as a deferred income tax benefit in the consolidated statement of income (loss).

The valuation allowances for 2012 and 2011 relate primarily to state net operating loss carryforwards. It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not.

The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if recognized would affect the effective tax rate. The Company’s general policy is to record tax penalties and interest as a component of “other operating expenses.”

The Company’s tax returns are subject to income tax audit by federal and state agencies beginning with the year 2009.

Retained earnings at December 31, 2012 and 2011 includes approximately $6,869,000 representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank’s stock.

The following is a reconcilement of federal income tax expense at the statutory rate of 35% to the income tax provision reported in the financial statements.

(In thousands)	2012			2011			2010
Tax provision at statutory rate	$	(14,125	)		7,354			5,230
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income		(831	)		(852	)		(726	)
Low income housing tax credits		(181	)		(163	)		(143	)
Non-deductible interest expense		23			33			37
State income taxes, net of federal benefit		(1,714	)		910			454
Change in valuation allowance		31			(5	)		(145	)
Other, net		(155	)		93			253
Total	$	(16,952	)		7,370			4,960