Federal Income Taxes

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Federal Income Taxes

10. Federal Income Taxes –

The provision for income taxes consists of the following:

	3 months ended					9 months ended
(In thousands)	September 30, 2013		September 30, 2012			September 30, 2013			September 30, 2012
Income Taxes:
Federal deferred expense (benefit)	$	171	$	(63	)	$	165		$	(57	)
Current tax expense		0		0			0			0
Valuation allowance		0		10			(5,868	)		(21	)
Total Income Tax (Benefit)	$	171	$	(53	)	$	(5,703	)	$	(78	)

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

	3 months ended						9 months ended
(In thousands)	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Federal income taxes computed at the expected statutory rate	$	305		$	146		$	570		$	442
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income		0			(1	)		0			(15	)
Increase in cash surrender value of life insurance – net		(53	)		(128	)		(160	)		(237	)
Valuation allowance for deferred tax assets		0			10			(5,868	)		(21	)
Other		(81	)		(80	)		(245	)		(247	)
Federal income tax provision per consolidated financial statements	$	171		$	(53	)	$	(5,703	)	$	(78	)

The components of the Corporation’s net deferred tax asset (liability) at September 30, 2013 and December 31, 2012 are as follows:

Taxes (payable) refundable on temporary differences at statutory rate:
(In thousands)	September 30, 2013			December 31, 2012
Deferred tax assets:
General loan loss allowance	$	3,288		$	4,130
Deferred loan fees		208			184
Deferred compensation		1,421			1,046
Other assets		1,281			1,357
Non-accrual interest		208			163
Unrealized loss on securities designated as available for sale		449			0
Tax credits and low income housing credits		2,429			2,134
NOL carry forward		2,080			1,341
Total deferred tax assets		11,364			10,355
Deferred tax liabilities:
FHLB stock dividends	$	(1,659	)	$	(1,660	)
Mortgage servicing rights		(1,396	)		(1,103	)
Book versus tax depreciation		(687	)		(697	)
Original issue discount		(673	)		(708	)
Unrealized gain on securities designated as available for sale		0			(51	)
Prepaid expense for FHLB advance restructure		(618	)		(140	)
Purchase price adjustments		(128	)		(128	)
Total deferred tax liabilities		(5,161	)		(4,487	)
Valuation Allowance	$	0		$	(5,868	)
Net deferred tax asset (liability)	$	6,203		$	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.