Note 11: Taxes on Income

The components of taxes on income follow:


	For the Year Ended December 31,
(Dollars in thousands)	2013		2012		2011
Current tax (benefit) expense:
Federal	$	462	$	712	$	(18,319)
State		74		232		(4,875)
Deferred tax expense (benefit):
Federal		9,362		8,145		(18,375)
State		858		794		(2,088)
Taxes on income	$	10,756	$	9,883	$	(43,657)

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,
(Dollars in thousands)	2013		2012		2011
Computed tax (benefit) expense at statutory rates	$	9,867	$	9,124	$	(39,183)
Increase (decrease) in income taxes resulting from:
Benefit of income not subject to U.S. Federal income tax		(213)		(213)		(165)
Expenses not deductible for U.S. Federal income tax		96		150		124
State income taxes, net of Federal income tax benefit		749		476		(3,755)
Reversal of FIN 48 reserve		-		-		(953)
State payment or refund from prior periods (federally tax affected)		-		50		-
Tax credit recapture		76		-		-
Other		181		296		275
Taxes on income	$	10,756	$	9,883	$	(43,657)

The calculated year-to-date effective tax rate is 38.2% for 2013, 37.9% for 2012, and (39.0%) for 2011.

At December 31, 2013, we had $10.7 million federal net operating loss carryforward expiring in 2031, $53.1 million of state net operating loss carryforward expiring in 2031, and $0.6 million of state net operating loss carryforward expiring in 2021. In addition, we had $2.5 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, 2013. 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;

Ability to carryforward federal and Oklahoma tax losses for 20 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;

Improvement in overall asset quality and related credit metrics;

Redemption of Trust Preferred Securities; and

Change in executive management.

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 quick utilization of existing net operating loss carryforwards, 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 $24.9 million and $32.2 million at December 31, 2013 and 2012, 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)		2013		2012
Deferred tax assets:
	Provision for loan losses	$	15,072	$	19,246
	Net operating loss carryforward		5,065		12,674
	Tax credit carryforward		3,443		3,070
	Write-downs on other real estate		-		1,669
	Nonaccrual loan interest		539		527
	Deferred compensation & profit sharing accrual		173		551
	Investments		468		457
	Section 597 gain - FDIC-assisted acquisition		1,214		(119)
	Accrued Expenses		812		-
	Other		43		(51)
Total deferred tax assets			26,829		38,024

Deferred tax liabilities:
	Accumulated depreciation		(2,476)		(2,835)
	Amortizable assets		(614)		(749)
	Dividend - Equity vs. Cost Method		(316)		(492)
	Prepaid expenses		(188)		(254)
	FHLB stock dividends		(192)		(220)
	Stock-based compensation		(6)		(216)
Total deferred tax liabilities			(3,792)		(4,766)
	Deferred taxes (payable) receivable on investment
	securities available for sale		1,900		(1,075)
Net deferred tax asset		$	24,937	$	32,183

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 2010. 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. Additionally, as procedurally required, our company’s 2010 and 2011 federal returns were examined in connection with the 2011 net operating loss carryback and no adjustments were required.

Unrecognized Tax Benefits – ASC 740, Income Taxes, provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. As of December 31, 2013, we have no unrecognized tax benefits related to Federal or State income tax matters and do not anticipate any changes within the next twelve months. Additionally, no interest and penalties have been accrued related to uncertain tax positions.