Quarterly report pursuant to Section 13 or 15(d)

FEDERAL INCOME TAXES

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FEDERAL INCOME TAXES
 3 Months Ended
Mar. 31, 2013
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
March 31,
2013
 
 
Three Months
Ended
March 31,
2012
 
 
 
 
 
 
 
 
Current
 
$
-
 
$
13
 
Deferred (benefit) expense
 
 
1,142
 
 
 
(13
)
 
 
$
1,142
 
 
$
-
 
 
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
March 31,
2013
 
 
Three Months
Ended
March 31,
2012
 
 
 
 
 
 
 
Statutory rate
 
35
%
 
 
35
%
Statutory rate applied to income before taxes
$
1,265
 
 
$
1,570
Add (deduct)
 
 
 
 
 
Change in valuation allowance
 
-
 
 
(1,473
)
Tax-exempt interest income
 
(46
)
 
 
(12
)
Bank-owned life insurance
 
(60
)
 
 
(78
)
Other, net
 
(17
)
 
 
(7
)
$
1,142
$
-

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 our net operating losses for 2009 and 2008.  As a result of losses incurred in 2010, we increased the valuation allowance to $25.6 million at December 31, 2010.  At December 31, 2011, a valuation allowance of $24.0 million was maintained.

Over the past several quarters, the positive evidence has been increasing, while the negative evidence has been decreasing.  The most significant negative evidence at December 31, 2012 was the level of other real estate owned at $51.6 million, which was down $14.8 million from December 31, 2011.  We achieved our 11th consecutive quarter of profit as of December 31, 2012.  With the positive results of the fourth quarter of 2012, we moved into a cumulative income position for the most recent three year period.  In the first quarter of 2012, the FDIC and DIFS terminated the Bank's Consent Order and, in the fourth quarter of 2012, the FRB terminated its Written Agreement with the Company, reducing regulatory uncertainty.  Based on this, sustained improvement in asset quality and our projected results, our analysis at December 31, 2012 concluded that it was "more likely than not" that we will continue to produce earnings and that the positive evidence outweighed the negative evidence regarding our ability to utilize our deferred tax assets.  As such, the full valuation allowance of $18.9 million was reversed to federal income tax expense at December 31, 2012.  We achieved our 12th consecutive quarter of profitability in the first quarter of 2013 and again concluded that no valuation allowance on our net deferred tax asset was necessary at March 31, 2013.
 
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):
 
 
March 31,
2013
 
 
December 31,
2012
 
Deferred tax assets
 
 
 
 
 
 
Allowance for loan losses
 
$
8,220
 
 
$
8,309
 
Nonaccrual loan interest
 
 
1,050
 
 
 
1,023
 
Valuation allowance on other real estate owned
 
 
6,261
 
 
 
6,356
 
Net operating loss carryforward
 
 
3,123
 
 
 
4,188
 
Other
 
 
1,797
 
 
 
1,794
 
Gross deferred tax assets
 
 
20,451
 
 
 
21,670
 
Valuation allowance
 
 
-
 
 
-
Total net deferred tax assets
 
 
20,451
 
 
 
21,670
 
 
 
 
 
 
 
 
Deferred tax liabilities
 
 
 
 
 
 
Depreciation
 
 
(1,642
)
 
 
(1,693
)
Unrealized gain on securities available for sale
 
 
(460
)
 
 
(517
)
Prepaid expenses
 
 
(308
)
 
 
(308
)
Other
 
 
(347
)
 
 
(372
)
Gross deferred tax liabilities
 
 
(2,757
)
 
 
(2,890
)
Net deferred tax asset
 
$
17,694
 
 
$
18,780
 
 
At March 31, 2013, we had federal net operating loss carry forwards of $8.9 million that expire through 2030.
 
There were no unrecognized tax benefits at March 31, 2013 or December 31, 2012 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 2009.