14.

INCOME TAXES

The realization of the Company’s deferred tax assets (net of recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences, and the ability to carry back losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including expected trends of profitability, current and future taxable income, scheduled reversals of taxable temporary differences and other tax planning strategies.

In 2009, the Company established a $1.8 million valuation allowance on deferred tax assets based primarily on our net operating losses from 2007 through 2009. The valuation allowance grew to $5.8 million at December 31, 2011. As a result of the Company’s return to profitability and its gain on debt extinguishment in 2013, the valuation was reduced to $4.1 million at December 31, 2014.

Throughout 2014, the positive evidence increased while the negative evidence decreased. The company achieved twelve consecutive quarters of profitability at December 31, 2014, which moved the Company into a cumulative income position for the most recent three year periods. The Bank’s regulatory capital ratio has improved and the Bank’s troubled assets have been declining removing regulatory burden from an FDIC Directive. The company’s projections also show positive future taxable income. As such, at December 31, 2014, the Company determined the positive evidence supporting the realizability of our deferred tax assets outweighed the negative evidence supporting the continued maintenance of the valuation allowance. Therefore, the full $4.1 million valuation allowance was reversed to income tax expense at December 31, 2014. The Company achieved its 13^th consecutive quarter of profitability in the first quarter of 2015 and again concluded that no valuation allowance on net deferred tax assets was necessary at March 31, 2015.

There were no unrecognized tax benefits at March 31, 2015 or December 31, 2014, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2011.