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11. Income Taxes
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes

Income taxes consist of the following:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Current federal tax expense  $977   $369 
Current state tax expense   365    49 
Deferred federal tax expense   13,306    2,826 
Deferred state tax expense (benefit)   1,520    (654)
Change in valuation allowance   –    (62,811)
           
Income tax expense (benefit)  $16,168   $(60,221)

 

Income tax expense/(benefit) for the years ended December 31, 2013 and 2012 differs from the amount determined by applying the statutory federal rate of 35% to income before income taxes as follows:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Expense at federal tax rate  $13,011   $3,215 
State taxes, net of federal income tax effect   2,079    1,190 
Other adjustments to tax reserve   (419)   (1,153)
Effect of change in state tax rate   (239)   (1,105)
Change in valuation allowance   –    (62,811)
Stock-based compensation   911    321 
Non-deductible expenses   619    63 
Other   206    59 
   $16,168   $(60,221)

 

 

The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

 

   December 31, 
   2013   2012 
   (In thousands) 
Deferred Tax Assets:          
Finance receivables  $17,258   $10,840 
Accrued liabilities   5,079    1,605 
Furniture and equipment   196    213 
NOL carryforwards   23,811    48,140 
Built in losses   13,074    14,406 
Pension accrual   –    2,080 
AMT credit carryforward   1,993    695 
Other   839    712 
Total deferred tax assets   62,250    78,691 
           
Deferred Tax Liabilities:          
FAS 91 deferred costs   (1,555)   (1,114)
Pension accrual   (1,136)   – 
Investment residual   (344)   (1,937)
Total deferred tax liabilities   (3,035)   (3,051)
           
Net deferred tax asset  $59,215   $75,640 

 

We acquired certain net operating losses and built-in loss assets as part of our acquisitions of MFN Financial Corp. (“MFN”) in 2002 and TFC Enterprises, Inc. (“TFC”) in 2003. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership change.

 

In determining the possible future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.

 

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgements, significant weight is given to evidence that can be objectively verified. As a result of the unprecedented adverse changes in the market for securitizations, the recession and the resulting high levels of unemployment that occurred in 2008 and 2009, we incurred substantial operating losses from 2009 through 2011 which led us to establish a valuation allowance against a substantial portion of our deferred tax assets. We determined at December 31, 2012 that, based on the weight of the available objective evidence, it was more likely than not that we would generate sufficient future taxable income to utilize our net deferred tax assets. Accordingly, we reversed the related valuation allowance of $62.8 million in the fourth quarter of 2012.

 

Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $59.2 million as of December 31, 2013 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $59.2 million consists of approximately $47.8 million of net U.S. federal deferred tax assets and $11.4 million of net state deferred tax assets. The major components of the deferred tax asset are $36.9 million in net operating loss carryforwards and built in losses and $22.3 million in net deductions which have not yet been taken on a tax return.

 

 

As of December 31, 2013, we had net operating loss carryforwards for federal and state income tax purposes of $48.4 million and $129.8 million, respectively. The federal net operating losses begin to expire in 2022. The state net operating losses begin to expire in 2014.

 

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits including interest and penalties for the year:

 

   2013   2012 
   (In thousands) 
Unrecognized tax benefit - opening balance  $1,331   $2,405 
Gross increases - tax positions in prior period   –    – 
Gross decreases - tax positions in current period   –    – 
Gross increases - tax positions in current period   –    250 
Settlements   (686)   (153)
Lapse of statute of limitations   (645)   (1,171)
           
Unrecognized tax benefit - ending balance  $–   $1,331 

 

We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2013, we had no unrecognized tax benefits for uncertain tax positions.

 

We are subject to taxation in the US and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2010.