Income Taxes and Retained Earnings

12 Months Ended

Dec. 31, 2011

Income Taxes and Retained Earnings [Abstract]

Income Taxes and Retained Earnings

Note 9.   Income Taxes and Retained Earnings

Under previous law, the provisions of the IRS and similar sections of Iowa law permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience.  Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996 and in all future years.

Deferred taxes have been provided for the difference between tax bad debt reserves and the loan loss allowances recorded in the financial statements subsequent to December 31, 1987.  However, at December 31, 2011, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $2,445,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses.  If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then-existing rates.  The approximate amount of unrecognized tax liability associated with these historical additions is $929,000.

Income tax expense is summarized as follows:

	Years Ended December 31,
	2011		2010		2009
Current	$	573,545	$	222,614	$	791,876
Deferred		212,455		254,886		732,824
	$	786,000	$	477,500	$	1,524,700

Deferred tax assets and liabilities consisted of the following components as of December 31, 2011 and 2010:

	2011			2010
Deferred tax assets:
Allowance for loan losses	$	2,180,000		$	2,293,000
Capital loss carry forward		385,000			391,000
Deferred directors fees and compensation		68,000			60,000
Deferred income		24,000			32,000
Accrued expenses		403,000			323,000
Tax credit carryforward		-			59,000
Stock-based compensation expense		70,000			70,000
Unrealized losses on securities available for sale		-			53,000
Other		35,000			135,000
Total gross deferred tax assets		3,165,000			3,416,000
Valuation allowance		(382,000	)		(382,000	)
Net deferred tax assets		2,783,000			3,034,000
Deferred tax liabilities:
Premises and equipment		508,000			356,000
Unrealized gains on securities available-for-sale		534,000			-
Title plant		127,000			204,000
Servicing rights		239,000			287,000
Other		23,361			35,406
Total gross deferred tax liabilities		1,431,361			882,406
Net deferred tax assets	$	1,351,639		$	2,151,594

The valuation allowance for deferred tax assets at December 31, 2011 and 2010, totaled $382,000.  The valuation allowance and the change in valuation allowance relate to realized and unrealized capital losses on certain equity investments in which the Company does not expect to be able to realize related tax benefits because of limitations on utilization of capital losses only against capital gains for federal and state tax purposes.

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:

	Year Ended December 31,
	2011						2010						2009
				Percent						Percent						Percent
				of Pretax						of Pretax						of Pretax
	Amount			Income			Amount			Income			Amount			Income
Income before income taxes	$	1,164,283			34.0	%	$	742,161			34.0	%	$	1,602,731			34.0	%
Nontaxable income		(180,127	)		(5.3	)		(142,534	)		(6.5	)		(134,292	)		(2.8	)
State income tax, net of
federal income tax benefit		92,312			2.7			59,477			2.7			109,659			2.3
Low-income housing tax credit		(225,401	)		(6.6	)		(191,356	)		(8.8	)		(139,287	)		(3.0	)
KSOP		(2,555	)		(0.1	)		(1,398	)		(0.1	)		(1,398	)		0.0
Increase (decrease) to valuation
allowance		-			0.0			(2,854	)		(0.1	)		(15,103	)		(0.3	)
Decrease in liability for unrecognized		-			0.0			(50,000	)		(2.3	)		-			0.0
tax benefits
Other		(62,512	)		(1.8	)		64,004			3.0			102,390			2.1
Income tax expense	$	786,000			23.0	%	$	477,500			21.9	%	$	1,524,700			32.3	%

Accounting guidance on uncertain tax positions addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements.  The Company recognizes the tax benefits from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation.  The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.  As of December 31, 2011 and 2010 the liability for unrecognized tax benefits was $150,000.

The Company has established contingency reserves for material, known tax exposures, including potential tax audit adjustments with respect to its state nexus issues.  The Company's tax reserves reflect management's judgment as to the resolution of the issues involved if subject to judicial review.  While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve.  With respect to these reserves, the Company's income tax expense would include (1) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue, and (2) any difference from the Company's tax position as recorded in the financial statements and the final resolution of a tax issue during the period.

Income tax returns for the years 2008 through 2011, with few exceptions, remain open to examination by federal and state taxing authorities.