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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes

Note 10. Income Taxes

The components of the income tax provision (benefit) for the years ended December 31, 2011, 2010 and 2009 are as follows:

 

                         
    2011     2010     2009  

Current

                        

Federal

   $ —       $ —       $ (6,410,852 ) 

State

     —         225,000       —    
   

 

 

    

 

 

    

 

 

  

Total

     —         225,000       (6,410,852 ) 
   

 

 

    

 

 

    

 

 

  

Deferred

                        

Federal

     —         —         6,333,524  

State

     —         —         2,291,078  
   

 

 

    

 

 

    

 

 

  

Total

     —         —         8,624,602  
   

 

 

    

 

 

    

 

 

  

Provision (benefit) for income taxes

   $ —       $  225,000     $ 2,213,750  
   

 

 

    

 

 

    

 

 

  

 

A reconciliation of the anticipated income tax benefit (computed by applying the statutory Federal income tax rate of 34% to loss before income taxes) to the income tax provision (benefit) as reported in the statements of operations for the years ended December 31, 2011, 2010 and 2009 is as follows:

 

                         
     2011     2010     2009  

Benefit for income taxes at statutory Federal rate

   $ (5,256,200 )    $ (5,159,100 )    $ (7,366,400 ) 

State taxes, net of Federal benefit

     —         148,500       (1,072,500 ) 

Dividends received deduction

     (50,100 )      (44,900 )      (70,100 ) 

Nondeductible expenses

     5,900       8,600       26,700  

Write-off of DTA due to 382 Limitation

     10,382,276       —         —    

Change in cash surrender value of life insurance

     (216,300 )      (213,000 )      (282,200 ) 

(Decrease) increase in valuation allowance

     (4,853,660 )      5,452,116       11,386,236  

Other

     (11,916 )      32,784       (407,986 ) 
   

 

 

    

 

 

    

 

 

  

Total provision (benefit) for income taxes

   $ —       $ 225,000     $ 2,213,750  
   

 

 

    

 

 

    

 

 

  

 

At December 31, 2011 and 2010, the tax effects of temporary differences that give rise to the Company’s deferred tax assets and deferred tax liabilities are as follows:

 

                 
    2011     2010  

Deferred tax assets:

                

Allowance for loan losses

   $ 3,655,330     $ 5,988,212  

Nonaccrual interest

     774,233       5,125,083  

Investment impairment charges

     —         1,227,083  

Premises and equipment

     1,090,095       1,128,094  

Accrued expenses

     405,108       224,941  

Capital loss carryover

     572,301       —    

State NOL carryforward benefit

     3,081,579       1,359,435  

Federal NOL carryforward benefit

     14,755,699       2,901,965  

NOL write-off for § 382 Limitation

     (10,382,276 )      —    

Federal AMT benefit estimate

     317,704       317,704  

Other

     144,809       203,071  
   

 

 

    

 

 

  

Gross deferred tax assets

     14,414,582       18,475,588  

Valuation allowance

     (14,414,582 )      (18,466,961 ) 
   

 

 

    

 

 

  

Deferred tax assets, net of valuation allowance

     —         8,627  
     

Deferred tax liabilities

                

Investment securities

     (82,337 )      (795,169 ) 

Other

     —         (8,627 ) 
   

 

 

    

 

 

  

Gross deferred tax liabilities

     (82,337 )      (803,796 ) 
   

 

 

    

 

 

  

Deferred tax liability, net

   $ (82,337 )    $ (795,169 ) 
   

 

 

    

 

 

  

The net deferred tax liability at December 31, 2011 and 2010 is included in accrued expenses and other liabilities in the consolidated balance sheets.

 

The allocation of the deferred tax (benefit) provision items charged to operations and items charged directly to equity for the years ended December 31, 2011, 2010 and 2009 are as follows:

 

                         
    2011     2010     2009  

Deferred tax (benefit) provision allocated to equity

   $ (712,832 )    $ 291,768     $ 558,874  
       

Deferred tax provision allocated to operations

     —         —         8,624,602  
   

 

 

    

 

 

    

 

 

  

Total deferred tax (benefit) provision

   $ (712,832 )    $ 291,768     $ 9,183,476  
   

 

 

    

 

 

    

 

 

  

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has reviewed the deferred tax position of the Company at December 31, 2011. The deferred tax position has been affected by several significant transactions in recent years. These transactions include increased provision for loan losses, the increasing levels of non-accrual loans and other-than-temporary impairment write-offs of certain investments, as well as a loss on the bulk sale of loans in 2011. As a result, the Company is in a cumulative net loss position at December 31, 2011, and under the applicable accounting guidance, has concluded that it is not more-likely-than-not that the Company will be able to realize its deferred tax assets and, accordingly, has established a full valuation allowance totaling $14.4 million against its deferred tax asset at December 31, 2011. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. If, in the future, the Company generates taxable income on a sustained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50% change of ownership in 2010. Consequently, use of the Company’s net operating loss carryforward and certain built in deductions available against future taxable income in any one year are limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company’s fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years.

The Company has analyzed the impact of its recent ownership change and has calculated the annual limitation under IRC 382 to be $284,000. Based on the analysis, the Company has determined that the pre-change net operating losses and net unrealized built-in deductions are approximately $36.2 million. Based on a 20 year carryforward period, the Company may utilize approximately $5.6 million of the pre change net operating losses and built-in deductions. Therefore, the Company wrote-off approximately $10.4 million of deferred tax assets. Accordingly, the write-off of the deferred tax asset did not affect the consolidated financial statements as there is a full valuation allowance against the deferred tax asset.