Federal Income Taxes

The components of income tax expense (benefit) for the periods indicated are as follows:



	Year Ended December 31,
	2013			2012			2011
	(In thousands)
Current	$	199		$	1		$	—
Deferred	(13,742		)	(1,000		)	—
Total income tax expense (benefit)	$	(13,543	)	$	(999	)	$	—

A reconciliation of the tax provision based on the statutory corporate rate of 35% during the years ended December 31, 2013, 2012 and 2011 on pretax income is as follows:



	Year Ended December 31,
	2013			2012			2011
	(In thousands)
Income tax expense at statutory rate	$	3,823		$	600		$	1,485
Income tax effect of:
Tax exempt interest, net	(21		)	(20		)	(24		)
Change in valuation allowance	(17,329		)	(6,347		)	(1,542		)
Expiration of FFNW Foundation donation	—			4,778			—
Other, net	(16		)	(10		)	81
Total income tax expense (benefit)	$	(13,543	)	$	(999	)	$	—

The net deferred tax asset, included in the accompanying consolidated balance sheets, consisted of the following at the dates indicated:



	December 31,
	2013			2012			2011
	(In thousands)
Deferred tax assets:
Net operating loss carryforward	$	7,441		$	11,474		$	11,070
Charitable contributions	27			25			4,797
ALLL	4,454			3,829			5,598
Reserve for unfunded commitments	121			87			42
Deferred compensation	698			689			715
Net unrealized loss on investments available for sale	463			—			—
Alternative minimum tax credit carryforward	1,685			1,485			1,485
Employee benefit plans	1,701			1,910			1,656
Net capital loss on investments	431			545			545
OREO market value adjustments	392			731			392
OREO expenses	122			202			352
Accrued expenses	163			142			137
Deferred tax assets before valuation allowance	17,698			21,119			26,789
Valuation allowance	(431		)	(16,851		)	(23,281		)
Total deferred tax assets	17,267			4,268			3,508
Deferred tax liabilities:
FHLB stock dividends	$	1,337		$	1,337		$	1,337
Loan origination fees and costs	592			621			666
Net unrealized gain on investments available for sale	—			538			455
Other, net	503			772			1,050
Total deferred tax liabilities	$	2,432		$	3,268		$	3,508
Deferred tax assets, net	$	14,835		$	1,000		$	—

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

The Company's federal net operating loss carryforward was $21.3 million at December 31, 2013 and will begin to expire in 2030. The Company had an alternative minimum tax credit carryforward totaling $1.7 million, with no expiration date.

The deferred tax asset valuation account consisted of the following specific valuation allowances at the dates indicated.



	Charitable Contributions			Other			Total Deferred Tax Asset Valuation
	(In thousands)
Balance at January 1, 2013	$	25		$	16,826		$	16,851
Additions	1			—			1
Deductions	(26		)	(16,395		)	(16,421		)
Balance at December 31, 2013	$	—		$	431		$	431

As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of approximately $4.5 million, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Bank does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore no provision has been made.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management evaluates both positive and negative evidence under the "more likely than not" standard. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be objectively verified.

During the quarter ended June 30, 2013, management determined that a full valuation allowance was no longer appropriate and reversed essentially all of the valuation allowance. In reaching this determination, management considered the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, available tax planning strategies, and projected taxable income. As of December 31, 2013, the Company had cumulative earnings over the recent three year period ended December 31, 2013 and positive trends in earnings and asset quality. The ultimate utilization of deferred tax assets is dependent upon the existence, or generation of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.