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INCOME TAXES
12 Months Ended
Dec. 31, 2012
INCOME TAXES  
INCOME TAXES

Note 14—INCOME TAXES

        Income tax expense (benefit) for the years ended December 31, 2012, 2011and 2010 consists of the following:

 
  Year ended December 31  
(Dollars in thousands)
  2012   2011   2010  

Current

                   

Federal

  $   $   $ 136  

State

    284     142     102  
               

 

    284     142     238  
               

Deferred

                   

Federal

    1,336     1,315     327  

State

             
               

 

    1,336     1,315     327  
               

Income tax expense (benefit)

  $ 1,620   $ 1,457   $ 565  
               

        Reconciliation from expected federal tax expense to effective income tax expense (benefit) for the periods indicated are as follows:

 
  Year ended December 31  
(Dollars in thousands)
  2012   2011   2010  

Expected federal income tax expense

  $ 1,900   $ 1,625   $ 822  

State income tax net of federal benefit

    187     112     67  

Tax exempt interest

    (182 )   (29 )   (52 )

Increase in cash surrender value life insurance

    (130 )   (59 )   (131 )

Valuation allowance

        35     97  

Other

    (155 )   (227 )   (238 )
               

 

  $ 1,620   $ 1,457   $ 565  
               

        The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities:

 
  December 31,  
(Dollars in thousands)
  2012   2011  

Assets:

             

Allowance for loan losses

  $ 1,609   $ 1,598  

Excess tax basis of deductible intangible assets

    121     121  

Net operating loss carry forward

    1,699     3,277  

Unrealized loss on available-for-sale securities

         

Compensation expense deferred for tax purposes

    767     736  

Fair value adjustment on interest rate swap agreement

    115     205  

Deferred loss on other-than-temporary-impairment charges

    257     471  

Interest on nonaccrual loans

    99     109  

Tax credit carry-forwards

    829     410  

Excess discount accretion on securities for tax purposes

        360  

Other

    401     232  
           

Total deferred tax asset

    5,897     7,519  

Valuation reserve

    132     132  
           

Total deferred tax asset net of valuation reserve

    5,765     7,387  
           

Liabilities:

             

Tax depreciation in excess of book depreciation

    118     126  

Excess tax basis of non-deductible intangible assets

    11     42  

Excess financial reporting basis of assets acquired

    956     1,014  

Unrealized gain on available-for-sale securities

    1,266     705  

Other

        22  
           

Total deferred tax liabilities

    2,351     1,909  
           

Net deferred tax asset recognized

  $ 3,414   $ 5,478  
           

        At December 31, 2012 there is a $132 thousand valuation allowance that relates to deferred tax benefits for contribution carry forwards and capital loss carry forwards. At December 31, 2012, the Company has net operating loss carry forwards for federal income tax purposes of approximately $5.0 million available to offset future taxable income through 2031. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additional amounts of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. During 2010, the Company recognized OTTI charges on certain investment securities in the amount of $13.5 million, which resulted in recognition of a $4.6 million deferred tax asset at December 31, 2010. These losses were not deductible until the securities were either sold or deemed worthless. During 2011 and 2012, a significant portion of those investments that created the deferred tax asset were sold and as a result created an $8.0 million taxable loss. The remaining $5.0 million tax net operating loss can be carried forward until the year ended 2031. The net deferred asset is included in other assets on the consolidated balance sheets.

        A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available-for-sale. The change in the tax expense related to the change in unrealized losses on these securities of $564 thousand has been recorded directly to shareholders' equity. The balance in the change in net deferred tax asset results from the current period deferred tax expense of $1.3 million.

        Tax returns for 2010 and subsequent years are subject to examination by taxing authorities.