Note 12: Taxes on Income

The components of taxes on income follow:


	For the Year Ended December 31,
(Dollars in thousands)	2012		2011		2010
Current tax (benefit) expense:
Federal	$	712	$	(18,319)	$	11,852
State		232		(4,875)		694
Deferred tax expense (benefit):
Federal		8,145		(18,375)		(2,455)
State		794		(2,088)		(353)
Taxes on income	$	9,883	$	(43,657)	$	9,738

A reconciliation from the expected tax expense (benefit) using the U.S. Federal income tax rate of 35% to consolidated effective income tax expense (benefit) follows:


	For the Year Ended December 31,
					As Restated
(Dollars in thousands)	2012		2011		2010
Computed tax (benefit) expense at statutory rates	$	9,124	$	(39,183)	$	7,387
Increase (decrease) in income taxes resulting from:
Benefit of income not subject to U.S. Federal income tax		(213)		(165)		(135)
Expenses not deductible for U.S. Federal income tax		150		124		2,150
State income taxes, net of Federal income tax benefit		476		(3,755)		286
Reversal of FIN 48 reserve		-		(953)		-
Texas tax refund (federally tax affected)		50		-		(559)
Other		296		275		609
Taxes on income	$	9,883	$	(43,657)	$	9,738

The calculated year-to-date effective tax rate is 37.9% for 2012, (39.0%) for 2011, and 46.1% for 2010.

At December 31, 2012, we had $30.7 million federal net operating loss carryforward expiring in 2031, $64.0 million of state net operating loss carryforward expiring in 2031, and $2.0 million of state net operating loss carryforward expiring in 2021. In addition, we had $2.1 million alternative minimum tax credit that can be carried forward indefinitely.

A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of certain income and expense items for financial statement reporting purposes. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

We conducted an analysis to assess the need for a valuation allowance at December 31, 2012. As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance for deferred tax assets was needed. In accordance with ASC 740, Income Taxes, a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The future realization of the tax benefit depends on the existence of sufficient taxable income within the carryback and carryforward periods.

As part of our analysis, we considered the following positive evidence:

·	Taxes paid in prior carryback years;

·	Long history of earnings profitability;

·	Projected future taxable income, exclusive of tax planning strategies, sufficient to utilize the deferred tax assets;

·	Current year income exceeding forecasted income;

·	Change in executive management; and

·	Ability to carryforward federal and Oklahoma tax losses for 20 years.

Due to the loss incurred in 2011, we remain in a three-year cumulative pretax loss position that is considered significant negative evidence in the determination of the need for a valuation allowance. Included in the three-year pretax loss position is $101.0 million related to the nonrecurring sale of nonperforming assets and potential problem loans during 2011. 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.

Net deferred tax assets of $32.2 million and $40.9 million at December 31, 2012 and 2011, respectively, are reflected in the accompanying consolidated statements of financial condition in other assets.

Temporary differences that give rise to the deferred tax assets include the following:


		At December 31,
(Dollars in thousands)		2012		2011
Deferred tax assets:
	Provision for loan losses	$	19,246	$	18,213
	Net operating loss carryforward		12,674		24,705
	Tax credit carryforward		3,070		2,419
	Write-downs on other real estate		1,669		831
	Nonaccrual loan interest		527		321
	Deferred compensation & profit sharing accrual		551		518
	Investments		457		29
Total deferred tax assets			38,194		47,036

Deferred tax liabilities:
	Accumulated depreciation		(2,835)		(3,112)
	Amortizable assets		(749)		(868)
	Dividend - Equity vs. Cost Method		(492)		-
	Prepaid expenses		(254)		(320)
	FHLB stock dividends		(220)		(277)
	Stock-based compensation		(216)		92
	Section 597 gain - FNBA FDIC-assisted acquisition		(119)		(281)
	Other		(51)		(74)
Total deferred tax liabilities			(4,936)		(4,840)
	Deferred taxes (payable) receivable on investment
	securities available for sale		(1,075)		(1,286)
Net deferred tax asset		$	32,183	$	40,910

We entered into a Settlement Agreement (“the Agreement”) with the Oklahoma Tax Commission (“OTC”) on June 28, 2011 with respect to certain claims made by the OTC. We protested the multi-year claims and as a result of settlement of that protest, a previously recorded reserve against those claims was released. As a result of the Agreement, we paid $3.6 million of state tax expense for the years under audit and an additional $1.2 million for tax years 2008 through 2010.

The settlement of this outstanding audit closes the examination period for the years in question and removes the need for us to further reserve for uncertain tax positions in accordance with ASC 740, Income Taxes.

We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal or state tax examinations for years before 2009. On February 15, 2012, we were notified by the Internal Revenue Service that the 2009 income tax filing was under audit and on January 14, 2013, we received final notice that the examination was completed with no adjustments proposed.