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12. Income Taxes

12 Months Ended

Mar. 31, 2013

12. INCOME TAXES

Income tax provision (benefit) for the years ended March 31 consisted of the following (in thousands):

	2013		2012		2011
Current	$	29	$	(158)	$	324
Deferred		-		8,536		1,841
Total	$	29	$	8,378	$	2,165

The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31, 2013 and 2012 are as follows (in thousands):

	2013		2012
Deferred tax assets:
Deferred compensation	$	120	$	512
Loan loss reserve		5,635		7,149
Accrued expenses		221		245
Accumulated depreciation		817		568
Deferred gain on sale		327		402
Tax credit carryforwards		6,079		6,111
Net unrealized loss on securities available for sale		522		603
Impairment on investment security		233		233
REO expense		3,889		2,814
Non-compete agreement		93		106
Other		395		367
Valuation allowance for deferred tax assets		(16,181)		(16,830)
Total deferred tax asset		2,150		2,280

Deferred tax liabilities:
FHLB stock dividend		(1,035)		(1,063)
Purchase accounting		(23)		(49)
Prepaid expense		(175)		(178)
Loan fees/costs		(395)		(387)
Total deferred tax liability		(1,628)		(1,677)
Deferred tax asset, net	$	522	$	603

A reconciliation of the Company’s effective income tax rate with the federal statutory tax rate for the years ended March 31 is as follows:

	2013		2012		2011
Statutory federal income tax rate	34.0	%	34.0	%	34.0	%
State and local income tax rate	1.9		1.5		1.5
ESOP market value adjustment	0.8		0.1		(0.2)
Interest income on municipal securities	(0.2)		0.1		(0.3)
Bank owned life insurance	(7.6)		0.9		(3.3)
Valuation adjustment	(23.9)		(72.5)		-
Other, net	(3.9)		(0.1)		1.7
Effective federal income tax rate	1.1	%	(36.0)	%	33.4	%

There were no taxes related to the gains on sales of securities for the years ended March 31, 2013, 2012 and 2011. The tax effects of certain tax benefits related to stock options are recorded directly to shareholders’ equity.

The Bank’s retained earnings at March 31, 2013 and 2012 include base year bad debt reserves, which amounted to $2.2 million, for which no federal income tax liability has been recognized. The amount of unrecognized deferred tax liability at March 31, 2013 and 2012 was $781,000. This represents the balance of bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the unlikely event that the Company’s banking subsidiaries (1) make distributions in excess of current and accumulated earnings and profits, as calculated for federal tax purposes, (2) redeem their stock, or (3) liquidate. Management does not expect this temporary difference to reverse in the foreseeable future. At March 31, 2013, the Company had a deferred tax asset of $5.8 million and $257,000 for federal and state, net operating loss carryforwards, respectively, which will expire in 2032.

At March 31, 2013 and 2012, the Company had no unrecognized tax benefits or uncertain tax positions. In addition, the Company had no accrued interest or penalties as of March 31, 2013 or 2012. It is the Company’s policy to recognize potential accrued interest and penalties as a component of income tax expense. The Company is subject to U.S. federal income tax and income tax of the State of Oregon. The years 2009 to 2012 remain open to examination for federal income taxes, and years 2008 to 2012 remain open to State examination.

In accordance with current accounting guidance, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. “More likely than not” is defined as greater than 50% probability of occurrence. A determination as to the ultimate realization of the deferred tax assets is dependent upon management’s judgment and evaluation of both positive and negative evidence, forecasts of future taxable income, applicable tax planning strategies, and an assessment of current and future economic and business conditions. Positive evidence reviewed included long-term earnings history prior to recent economic downturn, recent improved performance trends, proven ability to utilize deferred tax credits, projection of future income, capital levels and net operating loss carryback availability. Negative evidence reviewed consisted primarily of the losses sustained by the Company during fiscal year 2012.

After considering both the positive and negative factors, management carried a valuation allowance for deferred taxes of $16.2 million and $16.8 million, respectively, as of March 31, 2013 and 2012.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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