Federal Income Taxes

12 Months Ended

Dec. 31, 2011

Federal Income Taxes [Abstract]

FEDERAL INCOME TAXES

NOTE 8 - FEDERAL INCOME TAXES

The consolidated income tax expense (benefit) is as follows:

	2011			2010			2009
Current expense (benefit)	$	0		$	0		$	(4,483,000	)
Deferred benefit		0			(47,000	)		(13,276,000	)
Valuation allowance – change in estimate		(27,361,000	)		0			23,249,000
Tax expense (benefit)	$	(27,361,000	)	$	(47,000	)	$	5,490,000

2009 reflects the establishment of a valuation allowance, and 2011 the reversal of the allowance, related to a change in estimate about our ability to realize our net deferred tax assets in future years based on a change in circumstances. For 2010, the tax benefit relates to adjustments between other comprehensive income and tax benefit from operations due to accounting rules related to intraperiod tax allocation.

A reconciliation of the differences between the federal income tax expense (benefit) recorded and the amount computed by applying the federal statutory rate to income before income taxes is as follows:

	2011			2010			2009
Tax at statutory rate (35%)	$	3,543,000		$	(4,677,000	)	$	(16,309,000	)
Increase (decrease) from Tax-exempt interest		(595,000	)		(706,000	)		(866,000	)
Bank owned life insurance		(622,000	)		(601,000	)		(505,000	)
Change in valuation allowance		(29,640,000	)		5,896,000			23,249,000
Other		(47,000	)		41,000			(79,000	)
Tax expense (benefit)	$	(27,361,000	)	$	(47,000	)	$	5,490,000

Significant components of deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	2011		2010
Deferred income tax assets
Allowance for loan losses	$	12,786,000	$	15,879,000
Deferred loan fees		145,000		165,000
Deferred compensation		502,000		631,000
Nonaccrual loan interest income		635,000		935,000
Fair value write-downs on foreclosed properties		2,136,000		2,038,000
Net operating loss carryforward		11,201,000		10,379,000
Tax credit carryforwards		977,000		807,000
Other		718,000		704,000
		29,100,000		31,538,000
Deferred income tax liabilities
Depreciation		549,000		639,000
Unrealized gain on securities		2,042,000		694,000
Other		496,000		565,000
		3,087,000		1,898,000
Net deferred tax asset before valuation allowance		26,013,000		29,640,000
Valuation allowance		0		(29,640,000	)
Total net deferred tax asset	$	26,013,000	$	0

At December 31, 2011, we had carryforwards of the following tax attributes: gross federal net operating loss of $32.0 million that expires in years 2029 through 2031; general business tax credits of $0.6 million that expire in the years 2027 through 2031; and $0.3 million of federal alternative minimum tax credits with an indefinite life.

Accounting guidance requires us to assess whether a valuation allowance should be carried against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified. During 2011, we returned to pre-tax profitability for four consecutive quarters. Additionally, we experienced lower provision expense, continued declines in nonperforming assets and problem asset administration costs, a higher net interest margin, further strengthening of our regulatory capital ratios, and additional reductions in wholesale funding. Our analysis of the positive and negative evidence led us to conclude that, as of December 31, 2011, it was more likely than not that we had returned to sustainable profitability in amounts sufficient to allow for realization of our deferred tax assets in future years. Consequently, we reversed the valuation allowance that we had previously determined necessary to carry against our entire net deferred tax asset as of December 31, 2010 and 2009. $27.4 million of our December 31, 2010 valuation allowance was reversed due to this change in judgment and the remaining $2.2 million was reduced due to the tax effects of our 2011 pre-tax income.

We had no unrecognized tax benefits at any time during 2011 or 2010 and do not anticipate any significant increase in unrecognized tax benefits during 2012. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed at any time during 2011 or 2010. Our U.S. federal income tax returns are no longer subject to examination for all years before 2010.