NOTE 12- INCOME TAXES

The consolidated provision for federal income tax expense at December 31, 2013 and 2012 was as follows:

	2013		2012
Current payable	$	105,000	$	0
Deferred liability		0		0
	$	105,000	$	0

The net deferred tax asset includes the following amounts of deferred tax assets and liabilities as of December 31, 2013 and 2012:

	2013		2012
Deferred tax asset
Allowance for loan losses	$	527,146	$	720,764
Non-accrual loans		84,892		122,734
Deferred loan costs, net		18,477		18,918
AMT credit carryforward		85,306		0
Accrued Expenses (461h)		20,163		0
Foreclosed assets		1,069,467		1,359,106
Other		1,916		20,497
Net operating loss carryforward		2,555,381		3,971,753
		4,362,748		6,213,772
Deferred tax liabilities
Depreciation	$	(215,388)	$	(236,196)
Accretion on securities		(2,695)		(1,520)
Unrealized gain on securities available for sale		(217,229)		(217,229)
Prepaid expenses		(24,856)		(43,003)
Other		(11,645)		(11,645)
		(471,813)		(509,593)
	$	3,890,935	$	5,704,179
Valuation allowance		(3,890,935)		(5,704,179)
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, the Company considers both positive and negative evidence and analyzes 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. Consequently, the Company determined it necessary to carry a valuation allowance against our entire net deferred tax asset each reporting period since 2009.

The realization of the Company’s deferred tax assets is largely dependent upon the ability to generate future income. Although the Company recognized a profit in 2013 and 2012, there must be a consistent trend of profitability in order to support the realization of deferred tax assets. The valuation allowance against the Company’s 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. The Company will continue to monitor its deferred tax assets quarterly for changes affecting their realizability.

A reconciliation of the difference between federal income tax expense and the amount computed by applying the statutory rate of 34% in 2013 and 2012 is as follows:

	2013		2012
Tax at statutory rate	$	1,919,298	$	91,065
Tax-exempt interest income		(22,650)		(28,643)
Other		21,596		10,184
Change in valuation allowance		(1,813,244)		(72,606)
Federal income tax expense	$	105,000	$	0

As a result of the large gain on the extinguishment of debt, the Company recorded income tax expense from operations in the amount of $105,000. This amount represents projected taxable earnings subject to alternative minimum taxation which may fluctuate in future periods with changes in operating results.

There were no unrecognized tax benefits at December 31, 2013, 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, 2013, the Company has a net operating loss carryforward of $7,466,000 to be utilized to offset future taxable income that will begin expiring in 2029. The gain on the extinguishment of debt is primarily responsible for the $4.2 million reduction of net operation loss carry-forward since year-end 2012.