Note 13 - Income Taxes

3 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

13.  INCOME TAXES

Income tax expense for the three months ended September 30, 2011 was $762,000, compared with income tax benefit of $186,000 for the same period in 2010. The Company’s effective tax rate was 25.14% for the three months ended September 30, 2011 compared with 41.24% for the three months ended September 30, 2010. The decrease in the effective income tax rate in 2011 as compared with 2010 was primarily the result of the effect of state income taxes. The Texas tax is based on the Company’s gross margin with limited deductions. Because the Texas tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income.  Additionally, during the third quarter of 2011, the Company realized a benefit on a refund of Texas margin taxes for a contested prior period. The California tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the nine months ended September 30, 2011 was $3.1 million, compared with income tax benefit of $1.3 million for the same period in 2010. The Company’s effective tax rate was 31.38% for the nine months ended September 30, 2011 compared with 33.24% for the nine months ended September 30, 2010. The increase in the effective income tax rate in 2011 as compared with 2010 was primarily the result of non-deductible goodwill impairment and the effect of state income taxes.

As of September 30, 2011, the Company had approximately $15.5 million in net deferred tax assets.  Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the net deferred tax assets at September 30, 2011 and 2010 due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years.  In making such judgments, significant weight is given to evidence that can be objectively verified.  Because of historical losses that were recorded by the Company for the years ended December 31, 2009 and 2010, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

As a result of the losses incurred in 2009 and 2010, the Company is in a three-year cumulative pretax loss position at September 30, 2011.  A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset.  The Company has concluded that there is sufficient positive evidence to overcome this negative evidence.  The Company forecasts sufficient taxable income in the carryforward period, exclusive of tax planning strategies to fully realize its deferred tax asset.  The Company has projected its pretax earnings based upon business that the Company intends to conduct going forward, which in the past has produced steady and strong earnings.  During 2009 and 2010, earnings were negatively affected by the large increase in provisions for loan losses during the sharp economic downturn cycle.  The Company reduced its cost structure, and taking this into account, the Company projects that it will generate sufficient pretax earnings within a five-year period.

           The U.S. Federal and California State net operating loss carryforward period of 20 years provides enough time to utilize the deferred tax assets pertaining to the existing net operating loss carryforwards and any net operating losses that would be created by the reversal of the future net deductions which have not yet been taken on a tax return.