NOTE 12- INCOME TAXES

The consolidated provision for federal income tax expense (benefit) was as follows:

	2012		2011
Current payable (receivable)	$	0	$	0
Deferred liability (benefit)		0		(103,669)
	$	0	$	(103,669)

The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of December 31, 2012 and 2011:

	2012		2011
Deferred tax asset
Allowance for loan losses	$	720,764	$	1,401,490
Non-accrual loans		122,734		359,526
Deferred loan costs, net		18,918		10,976
Foreclosed assets		1,359,106		1,401,133
Other		20,497		24,233
Net operating loss carryforward		3,971,753		3,086,212
		6,213,772		6,283,570
Deferred tax liabilities
Depreciation	$	(236,196)	$	(240,472)
Accretion on securities		(1,520)		(273)
Unrealized gain on securities available for sale		(217,229)		(217,229)
Prepaid expenses		(43,003)		(37,166)
Other		(11,645)		(11,646)
		(509,593)		(506,786)
	$	5,704,179	$	5,776,784
Valuation allowance		(5,704,179)		(5,776,784)
Net deferred tax asset	$	0	$	0

Accounting guidance related to income taxes requires that companies assess whether a valuation allowance should be established against their 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. The previous losses dating back to 2007 significantly restricted our ability under the accounting rules to rely on projections of future taxable income to support the recovery of our deferred tax assets. Consequently, we determined it necessary to carry a valuation allowance against our entire net deferred tax asset.

Although the Company recognized a profit in 2012, there must be a consistent trend of profitability in order to support the realization of our deferred tax assets. The valuation allowance against our deferred tax assets may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. We will continue to monitor our deferred tax assets quarterly for changes affecting their realizability.

A reconciliation of the difference between federal income tax expense (benefit) and the amount computed by applying the statutory rate of 34% in 2012 and 2011 is as follows:

	2012		2011
Tax at statutory rate	$	91,065	$	(874,167)
Tax-exempt interest income		(28,643)		(30,281)
Other		10,184		(100,016)
Change in valuation allowance		(72,606)		900,795
Federal income tax expense (benefit)	$	0	$	(103,669)

An income tax benefit associated with continuing operations in the amount of $103,669 was recorded for the year ending December 31, 2011. The benefit recorded considered the results of current period adjustments to other comprehensive income. Generally, the calculation for income tax expense (benefit) does not consider the tax effects of changes in other comprehensive income or loss, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances when there is a pre-tax loss from continuing operations and income from other categories such as other comprehensive income. In such case, pre-tax income from other categories is included in the tax expense (benefit) calculation for the current period.

There were no unrecognized tax benefits at December 31, 2012, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.

As of December 31, 2012, the Company has a net operating loss carryover of $11,681,626 to be utilized to offset future taxable income that will begin expiring in 2029. The Company is no longer subject to examination by the Internal Revenue Service for years before 2009.