Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE 6 – INCOME TAXES

The provision (benefit) for federal income taxes is computed by applying the statutory federal income tax rate to income (loss) before income taxes as reported in the consolidated financial statements after deducting non-taxable items, principally income on bank-owned life insurance, and deducting credits related to certain investments.

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has reviewed the deferred tax position for the Corporation at September 30, 2011 and December 31, 2010. The Corporation’s evaluation of taxable events, losses in recent years and the continuing deterioration of the Michigan economy led management to conclude that it was more likely than not that the benefit would not be realized. As a result, the Corporation maintained a full valuation allowance at September 30, 2011 and December 31, 2010.

An income tax benefit associated with continuing operations in the amount of $300,000 was recorded for the nine month period ending September 30, 2011. For the three month period ended September 30, 2010 an income tax benefit associated with continuing operations of $235,000 was recorded. For the nine month period ended September 30, 2010 an income tax benefit associated with continuing operations of $128,000 was recorded. The benefit recorded considers the results of current period adjustments to other comprehensive income and discontinued operations. Generally, the calculation for income tax expense (benefit) does not consider the tax effects of changes in other comprehensive income or loss, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances when there is a pre-tax loss from continuing operations and income from other categories such as other comprehensive income or discontinued operations. In such case, pre-tax income from other categories is included in the tax expense (benefit) calculation for the current period.

In the ordinary course of business, the Corporation enters into certain transactions that have tax consequences. From time to time, the Internal Revenue Service (IRS) questions and/or challenges the tax position taken by the Corporation with respect to those transactions. The Corporations believes that its tax returns were filed based upon applicable statutes, regulations and case law in effect at the time of the transactions. The IRS, an administrative authority of a court, if presented with the transactions, could disagree with the Corporation’s interpretation of the tax law. After evaluating the risks and opportunities, the best outcome may result in a settlement. The ultimate outcome for each position is not known.

At September 30, 2011, net unrecognized tax benefits were $125,000. There were no unrecognized tax benefits recorded in any previously reported periods presented. The increase of $125,000 in unrecognized tax benefits from June 30, 2011 was the result of an item noted in the Corporation’s on-going IRS examination related to a deduction taken associated with the write off and subsequent recovery of a loan. Accrued interest and penalties were not considered to be significant. The Corporation continues to engage in discussions with the IRS related to its ongoing examinations for the 2008 and 2009 tax years and based upon current knowledge the Corporation does not believe that it is more likely than not that other positions taken will not be sustained upon ultimate resolution and/or appeal. The Corporation does not expect the total amount of unrecognized tax benefits to change within the next twelve months. The aforementioned item would not be expected to have a significant impact on the Corporation’s effective tax rate in any one reporting period if and when recognized.

Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes that accrued tax liabilities and valuation allowance are adequate to absorb the effect, if any, relating to the ultimate resolution of the uncertain tax position in the matter outlined above.

The Corporation and its subsidiaries are subject to U.S federal income taxes as well as income tax of the state of Michigan. The Corporation is no longer subject to examination by taxing authorities for years before 2007.