Federal Income Taxes

12 Months Ended

Dec. 31, 2013

Federal Income Taxes [Abstract]

Federal Income Taxes

Note 11. Federal Income Taxes

The temporary differences which give rise to significant portions of deferred tax assets and liabilities are as follows:

(Dollars in thousands)	December 31
Deferred Tax Assets	2013		2012
Allowance for loan losses	$	3,299	$	3,529
Deferred compensation		1,015		1,102
Purchase accounting		50		63
Deferred loan fees and costs, net		160		160
Capital loss carryover		887		887
Other than temporary impairment of investments		538		512
Accumulated other comprehensive loss		2,420		2,087
AMT Credit		226		968
Other		1,062		703
		9,657		10,011
Valuation allowance		(1,250)		(1,232)
Total gross deferred tax assets		8,407		8,779
Deferred Tax Liabilities
Core deposit intangibles		184		307
Depreciation		184		179
Joint ventures and partnerships		53		62
Pension		2,425		2,615
Mortgage servicing rights		63		80
Customer list		53		75
Total gross deferred tax liabilities		2,962		3,318
Net deferred tax asset	$	5,445	$	5,461

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  Based on the level of historical taxable income 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 Bank will realize the benefits of these deferred tax assets.

The components of the provision for Federal income taxes attributable to income from operations were as follows:

	For the Years Ended December 31
(Dollars in thousands)	2013		2012		2011
Current tax expense	$	947	$	145	$	502
Deferred tax expense (benefit)		348		367		(91)
Income tax provision	$	1,295	$	512	$	411

For the years ended December 31, 2013, 2012, and 2011, the income tax provisions are different from the tax expense which would be computed by applying the Federal statutory rate to pretax operating earnings.  A reconciliation between the tax provision at the statutory rate and the tax provision at the effective tax rate is as follows:

	For the Years Ended December 31
(Dollars in thousands)	2013		2012		2011
Tax provision at statutory rate	$	2,559	$	1,998	$	2,373
Income on tax-exempt loans and securities		(1,212)		(1,251)		(1,167)
Nondeductible interest expense relating to carrying  tax-exempt obligations		30		43		63
Dividends received exclusion		(15)		(17)		(20)
Income from bank owned life insurance		(185)		(217)		(226)
Valuation allowance		-		-		32
Life insurance proceeds		111		-		-
Other, net		7		(44)		(644)
Income tax provision	$	1,295	$	512	$	411
Effective income tax rate		17.2%		8.7%		5.9%

During the second quarter of 2011, an internal review discovered that tax-exempt commercial loans booked in the fourth quarter of 2008, during 2009, 2010 and the first quarter of 2011 were not properly coded as tax-exempt in the Bank’s core processing system. This resulted in the income from these loans being recorded as taxable income and the benefit of the tax-exempt status was not reflected in the Corporation’s income tax calculation. After a thorough review of the affected loans to determine the unrecorded tax benefit, and consultation with the Corporation’s internal and external audit firms, the Corporation deemed the adjustment to be immaterial to the consolidated financial statements for the current and prior years and therefore, no prior period adjustment was required. The Corporation recorded the past income tax benefits during the second quarter of 2011. The adjustment to income tax expense made in the second quarter of 2011 was a credit of approximately $660 thousand attributable to the years 2008, 2009 and 2010 and approximately $95 thousand attributable to the first quarter of 2011.  This adjustment is reflected in the 2011 income tax expense.  The tax adjustment of $660 thousand is reflected in the other, net line item of the reconciliation of the tax provision shown above. Had the tax adjustment of $660 thousand been allocated proportionally to the years it was generated, the effective tax rate for 2011 would have been 15.3%.

At December 31, 2013, the Corporation had a capital loss carryover of $2.6 million.  This loss carryover can only be offset with capital gains for federal income tax purposes.  The tax benefit of this carryover is $887 thousand and the Corporation has recorded a valuation allowance of $887 thousand against the capital loss carryover.

The Corporation recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense for all periods presented.  The Corporation is no longer subject to U.S. Federal examinations by tax authorities for the years before 2010.