12. Income Taxes

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

12. Income Taxes

The Company prepares its federal income tax return on a consolidated basis. Federal income taxes are allocated to members of the consolidated group based on taxable income.

Federal income tax expense (benefit) for the years ended December 31 was as follows:

		2012			2011
Currently paid or payable	$	92,482		$	348,610
Deferred expense (benefit)		(231,970	)		(114,334	)
Total income tax (benefit) expense	$	(139,488	)	$	234,276

Total income tax expense (benefit) differed from the amounts computed at the statutory federal income tax rate of 34 percent primarily due to the following for the years ended December 31:

		2012			2011
Computed expense at statutory rates	$	1,448,808		$	1,298,059
Tax exempt interest & BOLI		(379,715	)		(382,943	)
Disallowed interest		20,169			20,786
Partnership tax credits		(1,260,200	)		(704,826	)
New markets tax credit amortization expense		26,177			0
Other		5,273			3,200
	$	(139,488	)	$	234,276

The deferred income tax benefit consisted of the following items for the years ended December 31:

		2012			2011
Depreciation	$	(37,653	)	$	(46,560	)
Mortgage servicing rights		(29,859	)		7,050
Deferred compensation		(22,827	)		115,239
Bad debts		(249,202	)		(53,913	)
Non-accrual loan interest		73,065			(19,867	)
Limited partnership amortization		(340,021	)		0
Investment in Partners		44,991			0
Fair value adjustment on acquired premises
and equipment		153,862			0
Core deposit intangible		(115,896	)		(144,869	)
Loan fair value		(18,031	)		(29,648	)
Fannie Mae preferred stock write down		779,578			16,919
Alternative minimum tax		59,031			0
OREO write down		0			53,210
Tax credit carryovers		(604,096	)		0
Other		75,088			(11,895	)
Change in deferred tax benefit	$	(231,970	)	$	(114,334	)

Listed below are the significant components of the net deferred tax asset at December 31:

		2012		2011
Components of the deferred tax asset:
Bad debts	$	1,396,437	$	1,147,235
Non-accrual loan interest		26,907		99,972
Deferred compensation		245,037		222,210
Limited partnerships		84,741		0
Contingent liability - MPF program		40,526		42,139
Fair value adjustment on acquired securities
available-for-sale		0		528,205
Fannie Mae preferred stock write down		0		251,373
Capital lease		71,041		66,995
Alternative minimum tax		0		59,031
Fair value adjustment on acquired premises
and equipment		0		153,862
Tax and rehab credit carryforwards		604,096		0
Other		34,789		112,310
Total deferred tax asset		2,503,574		2,683,332
Components of the deferred tax liability:
Depreciation		260,607		298,260
Limited partnerships		0		255,280
Mortgage servicing rights		343,271		373,130
Unrealized gain on securities available-for-sale		88,482		68,892
Investment in Partners		44,991		0
Core deposit intangible		463,582		579,478
Fair value adjustment on acquired loans		54,513		72,544
Total deferred tax liability		1,255,446		1,647,584
Net deferred tax asset	$	1,248,128	$	1,035,748

US GAAP provides for the recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized.

The net deferred tax asset is included in other assets in the consolidated balance sheets.

ASC Topic 740, "Income Taxes", defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. The Company has adopted these provisions and there was no material effect on the consolidated financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2009 through 2011.