Federal Income Taxes

12 Months Ended

Dec. 31, 2012

Federal Income Taxes [Abstract]

FEDERAL INCOME TAXES

NOTE–I—FEDERAL INCOME TAXES

The provision for income taxes consists of the following:

	Year Ended December 31,
(Dollars in thousands)	2012			2011			2010
Income Taxes:
Federal current expense (benefit)	$	0		$	7		$	(299	)
Federal deferred expense (benefit)		758			(292	)		(5,038	)
Valuation allowance		(816	)		829			5,855
Total Income Tax (Benefit)	$	(58	)	$	544		$	518

A reconciliation of the rate of taxes which are payable at the federal statutory rate are summarized as follows:

(Dollars in thousands)	2012			2011			2010
Federal income taxes computed at the expected statutory rate	$	1,396		$	257		$	(4,774	)
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income		(15	)		(37	)		(21	)
Increase in cash surrender value of life insurance – net		(300	)		(249	)		(209	)
Valuation allowance for deferred tax assets		(816	)		829			5,855
Surrender of bank owned life insurance & penalty		0			72			70
Other		(323	)		(328	)		(403	)
Federal income tax provision per consolidated financial statements	$	(58	)	$	544		$	518

The components of the Corporation’s net deferred tax asset (liability) at December 31 are as follows:

	2012			2011
	(In thousands)
Taxes (payable) refundable on temporary differences at statutory rate:
Deferred tax assets:
General loan loss allowance	$	4,130		$	4,941
Deferred loan fees		184			301
Deferred compensation		1,046			1,059
Other assets		1,357			1,264
Non-accrual interest		163			364
Unrealized loss on securities designated as available for sale		0			7
Tax credits and low income housing credits		2,134			1,739
NOL carry forward		1,341			1,549
Total deferred tax assets		10,355			11,224
Deferred tax liabilities:
FHLB stock dividends	$	(1,660	)	$	(1,660	)
Mortgage servicing rights		(1,103	)		(1,109	)
Book versus tax depreciation		(697	)		(887	)
Original issue discount		(708	)		(755	)
Unrealized gain on securities designated as available for sale		(51	)		0
Prepaid expense for FHLB advance restructure		(140	)		0
Purchase price adjustments		(128	)		(129	)
Total deferred tax liabilities		(4,487	)		(4,540	)
Valuation Allowance	$	(5,868	)	$	(6,684	)
Net deferred tax asset (liability)	$	0		$	0

Income tax returns are subject to audit by the IRS. Income tax expense for current and prior periods is subject to adjustment based upon the outcome of such audits. During 2011, the IRS began an examination of the Corporation’s tax returns for the year ended December 31, 2009. The examination is near completion. The IRS has taken the position the Corporation took bad debt deductions prematurely. The Corporation disagrees. The matter has not been resolved at the examination level, therefore, the Corporation has contested the matter at the IRS Office of Appeals. Management believes it is more likely than not that the Corporation will be successful in the appeals process. If the IRS prevails, the Corporation may be required to repay approximately $1.57 million of tax refunds it had received as a result of a carryback of a net operating loss and the Corporation will increase their net operating loss tax carry forward by the same amount as the disallowed deduction. The Corporation has a 100% valuation allowance against its deferred tax asset. In the event that the Corporation does not prevail on appeals and the deferred tax asset has a 100% valuation allowance, the Corporation will be required to take a charge of income tax expense in the amount of $1.57 million plus assessed statutory interest.

At December 31, 2012, the Corporation had a $3.9 million net operating loss carry forward available to reduce future income taxes through 2030. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax assets and liabilities (including the impact of carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. Based upon the Corporation’s cumulative three year loss position and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will be unable to realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period change.

For years prior to 1996, the Bank was allowed a special bad debt deduction generally limited to 8% of otherwise taxable income, subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The bad debt deduction had accumulated to approximately $12.1 million as of December 31, 2012. The amount of the unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $4.1 million at December 31, 2012.