Annual report pursuant to Section 13 and 15(d)

FEDERAL INCOME TAXES

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FEDERAL INCOME TAXES
 12 Months Ended
Dec. 31, 2011
Federal Income Taxes [Abstract]  
FEDERAL INCOME TAXES
NOTE 14 - FEDERAL INCOME TAXES

Income tax expense (benefit) was as follows (dollars in thousands):

   
2011
    
2010
  
             
Current
   $ (198 )   $ (7 )
Deferred (benefit) expense
     198       1,310  
Change in valuation allowance
     ---       ---  
                 
    $ ---     $ 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):

   
2011
    
2010
  
             
Statutory rate
     35 %     35 %
Statutory rate applied to income (loss) before taxes
   $ 2,040     $ (5,793 )
Add (deduct)
                
Change in valuation allowance
     (1,624 )     7,629  
Tax-exempt interest income
     (10 )     (246 )
Bank-owned life insurance
     (330 )     (217 )
Other, net
     (76 )     (70 )
                 
    $ ---     $ 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 all 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 December 31, 2011, a valuation allowance of $24.0 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):

   
2011
    
2010
  
Deferred tax asset
            
Allowance for loan losses
   $ 11,074     $ 16,599  
Nonaccrual loan interest
     839       548  
Valuation allowance on other real estate owned
     6,029       3,641  
Net operating loss carryforward
     7,673       6,656  
Other
     1,137       975  
Gross deferred tax assets
     26,752       28,419  
Valuation allowance
     (24,026 )     (25,649 )
Total net deferred tax assets
     2,726       2,770  
                 
Deferred tax liabilities
                
Depreciation
     (1,758 )     (1,984 )
Purchase accounting adjustments
     (22 )     (113 )
Unrealized gain on securities available for sale
     (204 )     (6 )
Prepaid expenses
     (407 )     (347 )
Other
     (335 )     (320 )
Gross deferred tax liabilities
     (2,726 )     (2,770 )
                 
Net deferred tax asset
   $ ---     $ ---  
 
At December 31, 2011, we had federal net operating loss carryforwards of $21.9 million that expire in 2030.

There were no unrecognized tax benefits at December 31, 2011 or 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 2008.