Income Taxes

The provision for income taxes consists of the following for the years ended December 31:



(In thousands)		2013		2012
Current Tax expense:
Federal	$	518	$	417
State		416		96
	$	934	$	513
Deferred tax expense:
Federal	$	927	$	22
State		361		378
	$	1,288	$	400
Income tax expense for the year	$	2,222	$	913

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows:



	2013	2012
Federal statutory rate	35.0%	35.0%
Tax-exempt income on securities and loans	(7.3)	(11.9)
Tax-exempt BOLI income	(4.1)	(11.2)
State income tax, net of federal tax benefit	7.3	7.9
Tax credits	(5.6)	(10.1)
Other	0.4	6.7
	25.7%	16.4%

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 the Corporation’s temporary differences as of December 31 are as follows:



(In thousands)		2013		2012
Deferred tax assets:
Allowance for loan losses	$	5,435	$	6,446
Deferred loan fees		28		70
Deferred compensation		767		704
Federal and state tax loss carry forwards		6,057		5,289
AMT and other carry forwards		1,772		1,712
Unrealized loss on investment securities available-for-sale		12,686		8,771
Pension/SERP		0		1,677
Other than temporary impairment on investment securities		5,449		5,937
Other real estate owned		1,749		1,243
Other		1,191		1,874
Total deferred tax assets		35,134		33,723
Valuation allowance		(1,563)		(1,471)
Total deferred tax assets less valuation allowance		33,571		32,252
Deferred tax liabilities:
Amortization of goodwill		(2,171)		(1,857)
Pension/SERP		(574)		0
Depreciation		(1,207)		(1,409)
Other		(410)		(104)
Total deferred tax liabilities		(4,362)		(3,370)
Net deferred tax assets	$	29,209	$	28,882

State income tax expense amounted to $.8 million during 2013 and $.5 million during 2012.

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry-back or carry-forward period available under the tax law during the periods in which temporary differences are deductible. The Corporation has considered future market growth, forecasted earnings, future taxable income, and feasible and permissible tax planning strategies in determining whether it will be able to realize the deferred tax asset. If the Corporation were to determine that it will not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if the Corporation were to make a determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.

At December 31, 2013 the Corporation has federal net operating losses (“NOLs”) of approximately $9.8 million and West Virginia NOLs of approximately $4.9 million for which deferred tax assets of $3.4 million and $0.2 million, respectively, have been recorded at December 31, 2013. The federal and West Virginia NOLs were created in 2012 and 2010 and will begin expiring in 2030. Management has determined that a deferred tax valuation allowance is not required for 2013 on the Federal and West Virginia NOLs because we believe it is more likely than not that these deferred tax assets can be realized prior to expiration of their carry-forward periods. This determination is based primarily on the ability of the Corporation to immediately generate approximately $11.4 million of taxable income through tax planning strategies, irrespective of any additional future operating income. At December 31, 2013 these strategies include the ability to generate approximately $2.1 million in taxable gains through the sale of investment securities, approximately $8.0 million in taxable gains through the sale of its Bank Owned Life Insurance and approximately $1.2 million in taxable gains through the sale of its fixed rate mortgage portfolio.

The Corporation has Maryland NOL carry-forwards of $31.4 million relating to a Parent Company (First United Corporation) NOL for which a deferred tax asset of $1.6 million has been recorded at December 31, 2013. There has been and continues to be a full valuation allowance on this NOL based on the fact that it is more likely than not that this deferred tax asset will not be realized because First United Corporation files a separate Maryland income tax return, has recurring tax losses and is not expected to generate sufficient taxable income in the future to utilize the NOL carry-forwards before they expire beginning in 2019. The valuation allowance of $1.6 million at December 31, 2013 reflects an increase of $.1 million from the level at December 31, 2012.

In addition, based on our evaluation of the four sources of taxable income, we have concluded that no valuation allowance is necessary for the Corporation’s remaining federal and state deferred tax assets at December 31, 2013, as it is more likely than not (defined a level of likelihood that is more than 50%) that they will be realized based on the expected reversal of deferred tax liabilities, the generation of future income sufficient to realize the deferred tax assets as they reverse and the ability to implement tax planning strategies to prevent the expiration of any carry-forward periods.