Quarterly report pursuant to Section 13 or 15(d)

Federal Income Taxes

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Federal Income Taxes
 6 Months Ended
Jun. 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
June 30, 2011
    
Three Months
Ended
June 30, 2011
    
Six Months
Ended
June 30, 2011
    
Six Months
Ended
June 30, 2010
  
                         
Current
     (80 )     ---     $ (82 )   $ (21 )
Deferred (benefit) expense
     80       ---       82       21  
                                 
    $ ---     $ ---     $ ---     $ ---  
 
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
June 30, 2011
    
Three Months Ended
June 30, 2010
    
Six Months
 Ended
June 30, 2011
    
Six Months
 Ended
June 30, 2010
  
                         
Statutory rate
     35 %     35 %     35 %     35 %
Statutory rate applied to income (loss) before taxes
   $ 840     $ 1,068     $ 1,292     $ (6,331 )
Add (deduct)
                                
Change in valuation allowance
     (654 )     342       (1,009 )     7,994  
Tax-exempt interest income
     (69 )     (99 )     (69 )     (266 )
Bank-owned life insurance
     (88 )     (28 )     (163 )     (98 )
Other, net
     (29 )     20       (51 )     4  
    $ ---     $ 1,303     $ ---     $ 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.  As the Company returns to consistent, sustained profitability, the need for the valuation allowance diminishes.

At June 30, 2011, the need for a valuation allowance was based primarily on the Company's net operating loss for 2009 and 2008, and the challenging environment currently confronting banks that could impact future operating results.  As a result, an $18.0 million valuation allowance on deferred tax assets was charged to federal income tax expense in 2009.  As a result of losses incurred in 2010, the Company increased the valuation allowance to $25.6 million at December 31, 2010.  At June 30, 2011, the valuation allowance was $24.6 million.  The valuation allowance may be reversed to income in future periods to the extent that the related deferred tax assets are realized or the valuation allowance is no longer required.
 
The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):

   
June 30,
2011
    
December 31,
2010
  
Deferred tax assets
            
Allowance for loan losses
   $ 13,117     $ 16,599  
Nonaccrual loan interest
     288       548  
Valuation allowance on other real estate owned
     4,909       3,641  
Net operating loss carryforward
     8,027       6,656  
Other
     1,112       975  
Gross deferred tax assets
     27,453       28,419  
Valuation allowance
     (24,640 )     (25,649 )
Total net deferred tax assets
     2,813       2,770  
                 
Deferred tax liabilities
                
Depreciation
     (1,938 )     (1,984 )
Purchase accounting adjustments
     (67 )     (113 )
Unrealized gain on securities available for sale
     (88 )     (6 )
Prepaid expenses
     (407 )     (347 )
Other
     (313 )     (320 )
Gross deferred tax liabilities
     (2,813 )     (2,770 )
                 
Net deferred tax asset
   $ ---     $ ---  

At June 30, 2011, we had federal net operating loss carryforwards of $22.9 million that expire in 2030.

There were no unrecognized tax benefits at June 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.