NOTE 12 - INCOME TAXES

The components of income tax (benefit) expense are stated below:


	For the years ended December 31,
(In thousands)	2014		2013
Income tax (benefit) expense
Current	$	(654)	$	42
Deferred		—		-
Income tax (benefit) expense	$	(654)	$	42

The difference between the income tax (benefit) expense and the amount computed by applying the statutory federal income tax rate of 34% in 2014 and 2013 is as follows:


	For the years ended December 31,
(In thousands)	2014		2013
Computed tax expense at statutory rate	$	1,645	$	731
Non-controlling interest		(186)		—
Tax-exempt income		-		(22)
Fines and penalties		28		-
Stock options expense		71		-
Nondeductible expense		18		21
Bank owned life insurance		(174)		(183)
Capital loss carryover-expired		202		-
Charitable contributions carryover-expired		2		-
Refunds-prior year amended tax return filings		(654)		-
Adjustment to prior year items		(3,584)		1,933
Increase (decrease) in valuation allowance		1,978		(2,438)
Income tax (benefit) expense	$	(654)	$	42

Deferred tax assets and liabilities consist of the following:


	As of December 31,
(In thousands)	2014		2013
Deferred tax assets
Allowance for loan and lease losses	$	3,495	$	4,648
Net operating loss carryforward		23,801		18,908
Asset valuation reserves		—		34
Escrow settlement reserves		—		561
Security writedowns		1,855		2,193
OREO writedowns		465		1,490
Investment in partnerships		2,046		1,805
Pension obligations		5,249		4,926
Unrealized losses on debt securities		—		2,171
Share-based compensation cost		77		143
Non-accrual interest		287		134
Capital loss carryovers		1,739		2,892
Charitable contribution carryovers		16		14
Employee bonuses		91		—
Accrued liabilities		163		—
Alternative minimum tax credit carryforward		282		—
Other		149		77
Total deferred tax assets before valuation allowance		39,715		39,996
Deferred tax liabilities
Penalties on delinquent tax certificates		72		39
Unrealized gains on AFS debt securities		308		—
Unrealized gains on AFS equity securities		434		429
Prepaid deductions		17		190
Other		55		8
Total deferred tax liabilities		886		666
Less valuation allowance		(39,137)		(37,159)
Net deferred tax (liability) asset, included in other assets	$	(308)	$	2,171

As of December 31, 2014 the Company had a federal net operating loss (“NOL”) carryforwards of approximately $60.1 million and state NOL carryforwards of $145.3 million which are available to be carried forward to future tax years. The federal loss carryforwards will begin to expire in 2029 and the state NOLs will begin to expire in 2027 if not fully utilized.

The Company has approximately $4.0 million available to be utilized as of December 31, 2014 related to net operating loss carryovers from the acquisition of Knoblauch State Bank. The ability to utilize these carryovers will expire in 2015. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code.

As of December 31, 2014, the Company has capital loss carryforwards of approximately $5.1 million and charitable contribution carryovers of $47,000 which will begin to expire as of December 31, 2015 if not utilized. The Company also has general business tax credit carryovers of $1,000 that will begin to expire as of December 31, 2030 if not utilized and AMT tax credits of $282,000 that has an indefinite life.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. The deferred tax assets/(liabilities), net of valuation allowances, totaled $(308,000) and $2.2 million at December 31, 2014 and 2013, respectively. Management evaluated the deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future reversals of temporary differences and future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income or shareholders' equity if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between projected operating performance, actual results and other factors.

As of December 31, 2014, the Company was in a cumulative book loss position for the three-year period ended December 31, 2014. For purposes of establishing a deferred tax asset valuation allowance, this cumulative book loss position is considered significant objective evidence that the Company may not be able to realize some portion of the deferred tax assets in the future.

As of December 31, 2014, and 2013, management concluded that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets. Management’s conclusion was based on consideration of the relative weight of the available evidence and the uncertainty of future market conditions on results of operations.