Note 11 - Income Taxes

(Table amounts in $ 000s)

A summary of federal and state income taxes on operations follows:

	2011			2010			2009
Current payable tax:
Federal	$	0		$	0		$	(2,174	)
State		0			0			0
Change in valuation allowance		3,962			2,639			13,680
Deferred tax (benefit)		(3,962	)		(2,639	)		(5,944	)

Provision for income taxes	$	0		$	0		$	5,562

The components of deferred tax assets and liabilities at December 31, 2011 and 2010 follow:

	2011			2010
Deferred tax assets:
Allowance for loan and lease losses	$	7,645		$	7,118
Deferred compensation and directors' fees		100			96
Net operating loss carry forward for state income tax purposes		2,075			1,013
Net operating loss carry forward for federal income tax purposes		8,723			2,822
Alternative minimum tax credit carry forward		380			380
Low income housing limited partnership credit carry forward		402			402
Impairment on securities available for sale		0			4,683
Unrealized loss on securities available for sale		0			976
Basis difference in other real estate owned		2,018			1,587
Other items		63			136
Gross deferred tax assets		21,406			19,213
Deferred tax liabilities:
Depreciation		(224	)		(901	)
Federal Home Loan Bank stock dividends		(202	)		(195	)
Deferred loan fees		(345	)		(310	)
Basis difference in acquired assets		(352	)		(507	)
Unrealized gain on securities available for sale		(658	)		0
Other items		(2	)		(5	)
Gross deferred tax liabilities		(1,783	)		(1,918	)
Valuation allowance		(20,281	)		(16,319	)

Net deferred tax (liability) asset	$	(658	)	$	976

The remaining net deferred tax liability of the Company at year-end 2011 of $658,000 consists primarily of the tax effect of the unrealized gains of the Company's securities. There was no deferred tax asset valuation allowance against this deferred tax item as the amount changes as the market values of the securities change.

In 2011, the Company had an accumulated net operating loss for state income tax purposes of approximately $37,746,000, which will be carried forward to reduce future taxable income. The State of Illinois has suspended the use of net operating losses carried forward until the 2014 tax year. The net operating loss carried forward will begin to expire in 2020 if it is not utilized.

At December 31, 2011, the Company had an accumulated net operating loss for federal income tax purposes of approximately $25,655,000, which will be carried forward to reduce future taxable income. The net operating loss carried forward will expire in 2029 if it is not utilized.

At December 31, 2011, the Company had a low income housing investments tax credit carry forward of $402,000 for federal income tax purposes. This credit will expire in 2026 if it is not utilized.

At December 31, 2011, the Company had an alternative minimum tax credit carry forward of $380,000 for federal income tax purposes. There is no statutory expiration date for this credit.

The provision for income taxes differs from that computed at the statutory federal corporate rates as follows:

	2011			2010			2009

Income tax calculated at statutory rate (34%)	$	(2,274	)	$	(2,161	)	$	(10,199	)
Add (subtract) tax effect of:
Tax-exempt income, net of disallowed interest expense		(117	)		(136	)		(171	)
State income tax, net of federal tax benefit		(419	)		(306	)		(1,445	)
Tax credits from low income housing investments		(80	)		(80	)		(80	)
Goodwill impairment		0			0			3,696
Change in valuation allowance		3,962			2,639			13,680
Change in effective state income tax rate		(237	)		0			0
Other items, net		(835	)		44			81

Provision for income taxes	$	0		$	0		$	5,562

During 2009, the Company recognized a $9,522,000 write-down of its goodwill. The Company was unable to tax affect the goodwill write-down as it primarily was derived from the acquisition of another financial institution through the purchase of the financial institution's stock.

Prior to being merged with the Bank, the former subsidiary, First Federal Bank, fsb (the "Thrift") qualified under provisions of the Internal Revenue Code which permitted it to deduct from taxable income a provision for bad debts which differed from the provision charged to income in the financial statements. Tax legislation passed in 1996 requires all thrift institutions to deduct a provision for bad debts for tax purposes based on actual loss experience. Retained earnings at December 31, 2011 includes approximately $3,269,000 for which no provision for federal income taxes has been made. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then prevailing rates, resulting in approximately $1,269,000 of deferred tax liability.

At year-end 2011, management reviewed whether it had any material contingent liabilities associated with uncertain tax positions and determined that it had none.