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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes  
Income Taxes

Note 8. Income Taxes

 

Total income taxes for the years ended December 31, 2011, 2010 and 2009 were allocated as follows:

 

$ in thousands)  2011   2010   2009 
Allocated to net income  $7,370   $4,960   $37,618 
Allocated to stockholders’ equity, for unrealized holding gain/loss on
   debt and equity securities for financial reporting purposes		   554    251    610 
Allocated to stockholders’ equity, for tax benefit of pension liabilities   (2,912)   (688)   1,750 
   Total income taxes  $5,012   $4,523   $39,978 

 

 

The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are as follows:

 

$ in thousands)  2011   2010   2009 
Current    - Federal  $9,204    25,353    11,190 
  - State   2,094    3,807    1,830 
Deferred   - Federal   (3,234)   (21,092)   20,545 
  - State   (694)   (3,108)   4,053 
          Total  $7,370   $4,960   $37,618 

 

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2011 and 2010 are presented below:

 

($ in thousands)  2011   2010 
           
Deferred tax assets:          
    Allowance for loan losses  $16,458   $20,020 
    Excess book over tax SERP retirement plan cost   2,378    2,150 
    Deferred compensation   138    148 
    State net operating loss carryforwards   62    62 
    Accruals, book versus tax   329    — 
    Pension liability adjustments   7,220    4,308 
    Unrealized gain on securities available for sale   —    — 
    Basis differences in assets acquired in FDIC transactions   771    — 
    All other   3,086    2,225 
       Gross deferred tax assets   30,442    28,913 
        Less: Valuation allowance   (81)   (86)
             Net deferred tax assets   30,361    28,827 
Deferred tax liabilities:          
    Loan fees   (1,217)   (1,003)
    Excess tax over book pension cost   (219)   (61)
    Depreciable basis of fixed assets   (2,372)   (1,300)
    Amortizable basis of intangible assets   (8,334)   (7,423)
    Accruals, book versus tax   —    (66)
    Unrealized gain on securities available for sale   (1,520)   (966)
    FHLB stock dividends   (437)   (436)
    Basis differences in assets acquired in FDIC transactions   —    (7,520)
    All other   (198)   (274)
         Gross deferred tax liabilities   (14,297)   (19,049)
         Net deferred tax asset (liability) - included in other assets  $16,064   $9,778 

 

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 2011 and 2010 deferred tax expense (benefit) of approximately $554,000 and $251,000 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 2011 and 2010 deferred tax expense (benefit) of ($2,912,000) and ($688,000), respectively, has been recorded directly to shareholders’ equity. Purchase acquisitions also increased the net deferred tax asset by approximately $4,005,000 in 2011. The balance of the 2011 increase in the net deferred tax asset of $3,928,000 is reflected as a deferred income tax benefit, and the balance of the 2010 increase in the net deferred tax asset of $24,200,000 is reflected as a deferred income tax benefit in the consolidated statement of income.

 

The valuation allowances for 2011 and 2010 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 2008.

 

Retained earnings at December 31, 2011 and 2010 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)  2011   2010   2009 
                
Tax provision at statutory rate  $7,354   $5,230   $34,257 
Increase (decrease) in income taxes resulting from:               
  Tax-exempt interest income   (852)   (726)   (459)
  Low income housing tax credits   (163)   (143)   (114)
  Non-deductible interest expense   33    37    38 
  State income taxes, net of federal benefit   910    454    3,824 
  Change in valuation allowance   (5)   (145)   3 
  Other, net   93    253    69 
    Total  $7,370   $4,960   $37,618