Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

12. Income Taxes

The Bank’s wholly-owned subsidiary, Naugatuck Valley Mortgage Servicing Corporation, qualifies and operates as a Connecticut passive investment company pursuant to legislation. Because the subsidiary earns income from passive investments which is exempt from Connecticut Corporation Business Tax and its dividends to the Bank are exempt from state tax, the Bank no longer expects to incur state income tax expense.

Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not, that some or all of the deferred tax assets will not be realized. The Company believes that all deferred tax assets will be realized in the future and that no valuation allowance is necessary.

The provision (benefit) for income taxes for the years ended December 31, 2011, 2010 and 2009 consisted of:

(In thousands)	2011			2010			2009
Current income tax expense	$	1,292		$	1,293		$	116
Deferred income tax expense (benefit), due to:
Depreciation		353			(36	)		(36	)
Mortgage-servicing rights		114			124			-
Deferred income		28			(3	)		(65	)
Post retirement benefits		5			16			(9	)
Charitable contributions		-			250			36
Other than temporary impairment on securities		(7	)		-			1,165
Reserve for loan losses		(645	)		(815	)		(389	)
Total deferred income tax (benefit) expense		(152	)		(464	)		702
Provision for income taxes	$	1,140		$	829		$	818

A reconciliation of the statutory federal income tax rate applied to income before income taxes with the income tax provision is as follows:

	Year Ended December 31,
(Dollars in thousands)	2011			2010			2009
Income tax expense at statutory rate of 34%	$	1,137		$	775		$	956
Increase (decrease) in income tax expense resulting from:
Nondeductible compensation expense		86			67			85
Income exempt from income tax		(102	)		(264	)		(225	)
Expiration of contribution carryforward		-			250			-
Other items, net		19			1			2
Provision for income taxes	$	1,140		$	829		$	818
Effective rate of income tax expense		34.1	%		36.4	%		29.1	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows at December 31, 2011 and 2010:

(In thousands)	2011			2010
Deferred tax assets
Reserve for loan losses	$	2,820		$	2,175
Deferred income		360			388
Post-retirement benefits		180			185
Other than temporary impairment on securities		7			-
Total deferred tax assets		3,367			2,748
Deferred tax liabilities
Depreciation		(381	)		(29	)
Available-for-sale securities		(276	)		(306	)
Mortgage-servicing rights		(238	)		(124	)
Total deferred tax liabilities		(895	)		(459	)
Net deferred tax assets	$	2,472		$	2,289

Retained earnings at December 31, 2011 includes a contingency reserve for loan losses of $1,843,000, which represents the tax reserve balance existing at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to thrift institutions. It is not anticipated that the Company will incur a federal income tax liability related to the reduction of this reserve and accordingly, deferred income taxes of $627,000 has not been recognized as of December 31, 2011.

Management regularly analyzes their tax positions and at December 31, 2011, does not believe that the Company has taken any tax positions where future deductibility is not certain. As of December 31, 2011, the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal and Connecticut income taxes for the years 2008-2011.