Quarterly report pursuant to Section 13 or 15(d)

FEDERAL INCOME TAXES

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FEDERAL INCOME TAXES
 9 Months Ended
Sep. 30, 2011
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,
2011
    
Three Months
Ended
September 30,
2010
    
Nine Months
Ended
September 30,
2011
    
Nine Months
Ended
September 30,
2010
  
                         
Current
   $ (94 )   $ 21     $ (176 )   $ 1,303  
Deferred (benefit) expense
     94       (21 )     176       ---  
                                 
    $ ---     $ ---     $ ---     $ 1,303  
 
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,
2011
    
Three Months
Ended
September 30,
2010
    
Nine Months
 Ended
September 30,
2011
    
Nine Months
 Ended
September 30,
2010
  
                         
Statutory rate
     35 %     35 %     35 %     35 %
Statutory rate applied to income (loss) before taxes
   $ 368     $ 176     $ 1,660     $ (6,155 )
Add (deduct)
                                
Change in valuation allowance
     (251 )     (146 )     (1,260 )     7,848  
Tax-exempt interest income
     (4 )     ---       (4 )     (266 )
Bank-owned life insurance
     (86 )     (61 )     (249 )     (159 )
Other, net
     (27 )     31       (147 )     35  
    $ ---     $ ---     $ ---     $ 1,303  

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 loss 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 September 30, 2011, a valuation allowance of $24.4 million was maintained as the Company continued to face a challenging economic environment currently confronting banks that could negatively impact future operating results.    The valuation allowance may be reversed to income in future periods to the extent that the related deferred tax assets are realized or when the Company returns to consistent, sustained profitability.
 
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):

   
September 30, 2011
    
December 31,
2010
  
Deferred tax assets
            
Allowance for loan losses
   $ 12,195     $ 16,599  
Nonaccrual loan interest
     790       548  
Valuation allowance on other real estate owned
     5,848       3,641  
Net operating loss carryforward
     7,474       6,656  
Other
     923       975  
Gross deferred tax assets
     27,230       28,419  
Valuation allowance
     (24,389 )     (25,649 )
Total net deferred tax assets
     2,841       2,770  
                 
Deferred tax liabilities
                
Depreciation
     (1,893 )     (1,984 )
Purchase accounting adjustments
     (45 )     (113 )
Unrealized gain on securities available for sale
     (182 )     (6 )
Prepaid expenses
     (407 )     (347 )
Other
     (314 )     (320 )
Gross deferred tax liabilities
     (2,841 )     (2,770 )
                 
Net deferred tax asset
   $ ---     $ ---  
 
At September 30, 2011, we had federal net operating loss carry forwards of $21.4 million that expire in 2030.

There were no unrecognized tax benefits at September 30, 2011 or December 31, 2010 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 2007.