Note 9 - Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

9. Income Taxes

The benefit for income taxes for the years ended December 31, 2014, 2013, and 2012 consists of the following:

(dollars in thousands)	2014			2013			2012
Current
Federal	$	96		$	269		$	81
State		-			-			-
Deferred		(142	)		(304	)		(225	)
Total benefit for income taxes	$	(46	)	$	(35	)	$	(144	)

The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of 35.0% for the years ended December 31, 2014, 2013, and 2012.

(dollars in thousands)	2014			2013			2012
Tax (benefit) provision computed at statutory rate	$	839		$	(1,230	)	$	1,214
Tax exempt interest		(246	)		(210	)		(257	)
Bank owned life insurance		-			(4	)		(26	)
Deferred tax asset valuation allowance		(679	)		1,428			(1,002	)
Other		40			(19	)		(73	)
Total benefit for income taxes	$	(46	)	$	(35	)	$	(144	)

The significant components of the Company’s net deferred tax asset as of December 31, 2014 and 2013 are as follows:

(dollars in thousands)	2014			2013
Deferred tax assets
Allowance for loan losses	$	4,143		$	4,403
Deferred compensation		786			721
Unrealized loss on securities available for sale		354			1,584
Realized loss in other than temporary impairment charge		1,124			1,121
Foreclosed real estate write-downs		1,470			1,131
Interest income on non-accrual loans		1,117			955
Net operating loss carryforward		10,622			11,826
Other		1,329			986
Total deferred tax assets		20,945			22,727
Deferred tax liabilities
Deferred loan costs		934			859
Other		370			460
Total deferred tax liabilities		1,304			1,319
Net deferred tax asset before valuation allowance		19,641			21,408
Less:  valuation allowance		(14,659	)		(15,338	)
Net deferred tax asset	$	4,982		$	6,070

The Company’s net deferred tax asset before the consideration of a valuation allowance decreased to $19.6 million at December 31, 2014 compared to $21.4 million at December 31, 2013. This decrease was primarily driven by decreases in the net operating loss carryforward and the unrealized loss on securities available for sale during the twelve month period ended December 31, 2014. The $19.6 million net deferred tax asset as of December 31, 2014 is comprised of $10.6 million currently recognizable through NOL carryforwards and $9.0 million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company’s largest future reversal relates to its allowance for loan losses, which totaled $4.1 million as of December 31, 2014.

The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, the Company believes it is important to consider the unique characteristics of an industry or business.  In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years.  The Company has an NOL which will begin to expire after December 31, 2030 if not utilized prior to that date. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.

In assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available.  Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. Based on the analysis of available positive and negative evidence, the Company determined that a valuation allowance should be recorded as of December 31, 2014 and 2013.

When determining an estimate for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in ASC 740-10-30. As a result of cumulative losses in recent years and the uncertain nature of the current economic environment, the Company did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor. The Company will continue to exclude future taxable income as a factor until it can show consistent and sustained profitability.

The Company did assess tax planning strategies as defined under ASC 740-10-30 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes for future fixed asset purchases. The Company believes that these tax planning strategies are (i.) prudent and feasible, (ii.) steps that the Company would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (iii.) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. The Company believes that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, has no present intention to implement such strategies.

The net deferred tax asset balance before consideration of a valuation allowance was $19.6 million as of December 31, 2014 and $21.4 million as of December 31, 2013.  The tax planning strategies assessed resulted in the projected realization of approximately $5.0 million in tax assets as of December 31, 2014 and $6.1 million as of December 31, 2013 which can be considered more likely than not to be realized. Accordingly, the Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of $14.7 million as of December 31, 2014 and $15.3 million as of December 31, 2013.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  As the Company continues to record consecutive quarters of profitable results, projections of future taxable income become more reliable and can again be used as a factor in assessing the ability to fully realize the deferred tax asset.  When the determination is made to include projections of future taxable income as a factor, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.

The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The Internal Revenue Service has completed its audits of the Company’s federal tax returns for all tax years through December 31, 2008.  There are currently no income tax audits being conducted by the Internal Revenue Service or the Pennsylvania Department of Revenue.  The Company’s federal income tax returns filed subsequent to 2008 remain subject to examination by the Internal Revenue Service.