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Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Taxes [Abstract]  
Income Taxes

Note 10. Income Taxes

The components of the income tax provision (benefit) for the years ended December 31, 2012, 2011 and 2010 are as follows:

 

                         
    2012     2011     2010  

Current

                        

Federal

   $ —       $ —       $ —    

State

     —         —         225,000  
   

 

 

    

 

 

    

 

 

  

Total

     —         —         225,000  
   

 

 

    

 

 

    

 

 

  

Deferred

                        

Federal

     —         —         —    

State

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Total

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Provision (benefit) for income taxes

   $ —       $ —       $ 225,000  
   

 

 

    

 

 

    

 

 

  

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, 2012, 2011 and 2010 is as follows:

 

                         
    2012     2011     2010  

Benefit for income taxes at statutory Federal rate

   $ (182,296 )    $ (5,256,200 )    $ (5,159,100 ) 

State taxes, net of Federal benefit

     —         —         148,500  

Dividends received deduction

     —         (50,100 )      (44,900 ) 

Nondeductible expenses

     4,570       5,900       8,600  

Write-off of DTA due to 382 Limitation

     —         10,382,276       —    

Change in cash surrender value of life insurance

     (175,814 )      (216,300 )      (213,000 ) 

(Decrease) increase in valuation allowance

     329,113       (4,853,660 )      5,452,116  

Other

     24,427       (11,916 )      32,784  
   

 

 

    

 

 

    

 

 

  

Total provision (benefit) for income taxes

   $ —       $ —       $ 225,000  
   

 

 

    

 

 

    

 

 

  

 

At December 31, 2012 and 2011, the tax effects of temporary differences that give rise to the Company’s deferred tax assets and deferred tax liabilities are as follows:

 

                         
    2012     2011     2010  

Deferred tax assets:

                        

Allowance for loan losses

   $ 2,343,090     $ 3,655,330     $ 5,988,212  

Nonaccrual interest

     1,324,824       774,233       5,125,083  

Investment impairment charges

     —         —         1,227,083  

Premises and equipment

     1,073,884       1,090,095       1,128,094  

Accrued expenses

     224,523       405,108       224,941  

Share-based Compensation

     72,456       —         —    

Capital loss carryover

     572,301       572,301       —    

State NOL carryforward benefit

     3,237,434       3,081,579       1,359,435  

Federal NOL carryforward benefit

     5,467,942       14,755,699       2,901,965  

NOL write-off for § 382 Limitation

     —         (10,382,276 )      —    

Federal AMT benefit estimate

     317,704       317,704       317,704  

Unrealized loss AFS

     250,819       —         —    

Other

     153,959       144,809       203,071  
   

 

 

    

 

 

    

 

 

  

Gross deferred tax assets

     15,038,936       14,414,582       18,475,588  

Valuation allowance

     (15,038,936 )      (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, 2012 and 2011 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, 2012, 2011 and 2010 are as follows:

 

                         
    2012     2011     2010  

Deferred tax (benefit) provision allocated to equity

   $ —       $ (712,832 )    $ 291,768  

Deferred tax provision allocated to operations

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Total deferred tax (benefit) provision

   $ —       $ (712,832 )    $ 291,768  
   

 

 

    

 

 

    

 

 

  

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, 2012. The deferred tax position has been affected by several significant transactions in prior years. These transactions include increased provision for loan losses, the 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, 2012, 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 $15.0 million against its deferred tax asset at December 31, 2012. 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 were approximately $36.2 million. Based on a 20 year carryforward period, the Company could 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 in 2011. Accordingly, the write-off of the deferred tax asset did not affect the consolidated financial statements as there was a full valuation allowance against the deferred tax asset.