NOTE 10 - FEDERAL INCOME TAXES

The composition of income tax expense is as follows:

	(Amounts in thousands)
	Years Ended December 31,
	2013			2012			2011
Current	$	(8	)	$	(1,131	)	$	1,254
Deferred		96			973			(61	)
Total	$	88		$	(158	)	$	1,193

The ability to realize the benefit of deferred tax assets is dependent upon a number of factors, including the generation of future taxable income, the ability to carry back taxes paid in previous years, the ability to offset capital losses with capital gains, the reversal of deferred tax liabilities, and certain tax planning strategies. A valuation allowance of $94,000 has been established to offset in its entirety the tax benefits associated with certain impaired securities that management believes may not be realizable.

The following is a summary of net deferred taxes included in other assets:

	(Amounts in thousands)
	December 31,
	2013			2012
Gross deferred tax assets:
Provision for loan and other real estate losses	$	1,280		$	1,301
Loan origination cost - net		298			268
Impairment loss on securities		784			119
Unrealized loss on available-for-sale securities		1,473			879
Deferred compensation		814			587
NOL carryforward		385			1,624
AMT credit carryforward		641			387
General business credit carryforward		182			483
Other items		727			838
Total gross deferred tax assets		6,584			6,486
Valuation allowance		(94	)		(94	)
Total net deferred tax assets		6,490			6,392
Gross deferred tax liabilities:
Depreciation		(433	)		(588	)
Other items		(593	)		(838	)
Total net deferred tax liabilities		(1,026	)		(1,426	)
Net deferred tax asset	$	5,464		$	4,966

The Company had a deferred tax asset of $641,000 for credits related to Alternative Minimum Taxes (AMT), a deferred tax asset of $385,000 relating to a net operating loss (NOL) carryforward, a deferred tax asset of $182,000 relating to a general business credit carryforward and a deferred tax asset of $94,000 relating to a capital loss carryforward as of December 31, 2013. In comparison, the Company had a deferred tax asset of $387,000 for credits related to Alternative Minimum Taxes (AMT), a deferred tax asset of $1,624,000 relating to a net operating loss (NOL) carryforward, a deferred tax asset of $483,000 relating to a general business credit carryforward and a deferred tax asset of $94,000 relating to a capital loss carryforward as of December 31, 2012. The AMT credits have an unlimited carry-forward period. The NOL carryforward and general business credit carryforward both have a 20 year life and expire in 2032. No valuation allowance has been established for these deferred tax assets in view of the Corporation’s ability to carry forward taxes paid and credits earned in previous years, to future years, coupled with the anticipated future taxable income as evidenced by the Corporation’s earnings potential. The capital loss carryforward has a 5 year life and expires in 2017; it has a 100% valuation allowance of $94,000 against it.

At December 31, 2013, the Company assessed its earnings history and trend over the prior two years, its estimate of future earnings, and the expiration dates of its potential net operating loss carry-forwards. Based on this assessment, the Company determined that it was more-likely-than-not that the deferred tax assets will be realized before their expiration. A valuation allowance was recorded at the Bank level in 2012 as explained above and at the Parent Company level relating to impaired losses incurred therein for 2011. Because of the Parent Company’s inability to generate taxable income, realization of the deferred tax asset therein was not probable.

The following is a reconciliation between tax expense using the statutory tax rate of 34% and the income tax provision:

	(Amounts in thousands) Years Ended December 31,
	2013			2012			2011
Statutory tax expense	$	636		$	937		$	1,790
Tax effect of non-taxable income		(504	)		(512	)		(517	)
Tax effect of earnings on bank-owned life insurance-net		(111	)		(129	)		(131	)
Tax effect of historical tax credit		—			(483	)		—
Tax effect of low income housing credit		13			—			—
Tax effect of non-deductible expenses		54			29			51
Federal income tax expense (benefit)	$	88		$	(158	)	$	1,193

The related income tax expense on investment securities gains amounted to $182,000 for 2013, $4,000 for 2012 and $300,000 for 2011, and is included in the federal income tax expense (benefit).

The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The provision also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. There were no significant unrecognized tax benefits at December 31, 2013 and the Company does not expect any significant increase in unrecognized tax benefits in the next twelve months. No interest or penalties were incurred for income taxes which would have been recorded as a component of income tax expense.

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company’s federal and state income tax returns for taxable years through 2009 have been closed for purposes of examination by the Internal Revenue Service and the Ohio Department of Revenue.