Quarterly report pursuant to Section 13 or 15(d)

FEDERAL INCOME TAXES

v2.4.0.6
FEDERAL INCOME TAXES
 9 Months Ended
Sep. 30, 2012
FEDERAL INCOME TAXES [Abstract]  
FEDERAL INCOME TAXES
NOTE 9 - FEDERAL INCOME TAXES
 
Income tax expense (benefit) was as follows (dollars in thousands):
 
 
Three Months
Ended
September 30,
2012
 
 
Three Months
Ended
September 30,
2011
 
 
Nine Months
Ended
September 30,
2012
 
 
Nine Months
Ended
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
Current
 
$
275
$
(94
)
 
$
275
 
$
(176
)
Deferred (benefit) expense
 
---
94
 
 
---
 
 
 
176
 
 
$
275
$
---
 
 
$
275
 
 
$
---
 
 
The difference between the financial statement tax expense (benefit) and amount computed by applying the statutory federal tax rate to pretax income was reconciled as follows (dollars in thousands):
 
 
Three Months
Ended
September 30,
2012
 
 
Three Months
Ended
September 30,
2011
Nine Months
Ended
September 30,
2012
 
 
Nine Months
Ended
September 30,
2011
 
 
 
 
 
 
 
 
 
Statutory rate
 
 
35
%
 
35
%
 
35
%
 
 
35
%
Statutory rate applied to income before taxes
 
$
2,401
 
$
368
$
5,086
 
 
$
1,660
Add (deduct)
 
 
 
 
 
 
 
 
 
 
Change in valuation allowance
 
 
(1,761
)
 
(251
)
 
(4,056
)
 
 
(1,260
)
Tax-exempt interest income
 
 
(32
)
 
(4
)
 
(64
)
 
 
(4
)
Bank-owned life insurance
 
 
(73
)
 
(86
)
 
(230
)
 
 
(249
)
Other, net
 
 
(260
)
 
(27
)
 
(461
)
 
 
(147
)
$
275
$
---
$
275
$
---

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.
 
We established an $18.0 million valuation allowance on deferred tax assets in 2009 based primarily on the Company's net operating losses for 2009 and 2008. As a result of losses incurred in 2010, the Company increased the valuation allowance to $25.6 million at December 31, 2010. At December 31, 2011 and September 30, 2012, a valuation allowance of $24.0 million and $19.6 million, respectively, was maintained as the Company continued to face a challenging economic environment currently confronting banks that could negatively impact future operating results. The Company has recorded federal income tax expense of $275,000 for the three and nine month periods ended September 30, 2012 for estimated alternative minimum tax (AMT) as the Company projects it will have positive taxable income for the full year 2012 and AMT limits the amount of net operating loss carryforwards that can be applied for AMT each year.  At September 30, 2012, the Company has established a valuation allowance against this deferred tax asset consistent with its other deferred tax assets.
 
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
 
 
September 30,
2012
 
 
December 31,
2011
 
Deferred tax assets
 
 
 
 
 
 
Allowance for loan losses
 
$
9,194
 
 
$
11,074
 
Nonaccrual loan interest
 
 
996
 
 
 
839
 
Valuation allowance on other real estate owned
 
 
6,479
 
 
 
6,029
 
Net operating loss carryforward
 
 
4,325
 
 
 
7,673
 
Other
 
 
1,933
 
 
 
1,137
 
Gross deferred tax assets
 
 
22,927
 
 
 
26,752
 
Valuation allowance
 
 
(19,567
)
 
 
(24,026
)
Total net deferred tax assets
 
 
3,360
 
 
 
2,726
 
 
 
 
 
 
 
Deferred tax liabilities
 
 
 
 
 
 
Depreciation
 
 
(1,734
)
 
 
(1,758
)
Purchase accounting adjustments
 
 
---
 
 
(22
)
Unrealized gain on securities available for sale
 
 
(607
)
 
 
(204
)
Prepaid expenses
 
 
(669
)
 
 
(407
)
Other
 
 
(350
)
 
 
(335
)
Gross deferred tax liabilities
 
 
(3,360
)
 
 
(2,726
)
Net deferred tax asset
 
$
---
 
 
$
---
 
 
At September 30, 2012, we had federal net operating loss carry forwards of $12 million that expire through 2030.
 
There were no unrecognized tax benefits at September 30, 2012 or December 31, 2011 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2008.