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Note 9 - Income Taxes

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 9.

Income Taxes

The table below presents the components of our federal and state income tax benefit for 2015, 2014, and 2013.

Federal and State Income Tax Expense (Benefit)

(in thousands)		Year Ended December 31,
		2015				2014				2013

Current
Federal		$	313			$	-			$	-
State			(38	)			268				(21	)
Total			275				268				(21	)

Deferred
Federal			789				(15,140	)			(318	)
State			294				122				-
Total			1,083				(15,018	)			(318	)

Benefit for income taxes		$	1,358			$	(14,750	)		$	(339	)

The income tax benefit for 2014 is due to the release of the majority of the valuation allowance against the net deferred tax assets during 2014.

The table below presents reconciliation between our federal statutory income tax rate and our effective tax rate for 2015, 2014, and 2013.

Reconciliation of Statutory to Effective Tax Rate

		Year Ended December 31,
(in thousands)		2015				2014				2013

Income taxes at statutory Federal rate		$	1,190			$	326			$	(2,593	)
State taxes, net of Federal benefit			169				48				(21	)
Nondeductible expenses			10				175				6
Change in cash surrender value of life insurance			-				-				(178	)
Taxes on BOLI income			-				1,701				-
Valuation allowance			-				(16,812	)			-
Tangible Property Review IRC Sec 481(a)			-				(644	)
Current Year Change in valuation allowance			-				(39	)			2,447
Other			(11	)			495				-
Total Expense (benefit) for income taxes		$	1,358			$	(14,750	)		$	(339	)

In 2015, our effective tax rate is 38.8 % compare to (1538%) in 2014, which is different from the statutory rate of 34% due to the release of the valuation allowance against our net deferred tax assets during 2014. In 2013, our effective tax rate differs from the statutory rate due to the valuation allowance on the entire net deferred tax assets and the recognition of uncertain tax positions.

Deferred Tax Assets and Liabilities

In September 2014, we released a portion of our valuation allowance previously recorded on the net deferred tax asset. Deferred tax assets are created when expenses are recognized for financial reporting purposes prior to the corresponding recognition of expenses for tax reporting purposes; and/or income is recognized for tax reporting purposes prior to the corresponding recognition of income for financial reporting purposes.

The table below presents the balance of significant deferred tax assets, liabilities, and the valuation allowance at December 31, 2015, 2014 and 2013.

(in thousands)		2015				2014				2013

Deferred tax assets (liabilities):
Allowance for loan losses		$	2,042			$	1,918			$	2,213
Nonaccrual interest			1,467				1,508				1,474
Depriciation of premises and equipment			541				523				1,276
Accrued expenses			106				292				376
Share-based Compensation			161				-				-
OREO Writedowns			63				63				-
Capital loss carryover			-				572				572
State NOL carryforward benefit			3,235				3,435				3,613
Federal NOL carryforward benefit			16,303				17,372				18,427
NOL write-off for § 382 Limitation			(10,382	)			(10,382	)			(10,382	)
Federal AMT benefit estimate			136				-				-
Unrealized loss AFS			96				176				462
Other			(5	)			21				37
Gross deferred tax assets			13,763				15,498				18,068
Valuation allowance			-				(572	)			(18,068	)
Deferred tax assets, net of valuation allowance			13,763				14,926				-
Deferred tax asset, net		$	13,763			$	14,926			$	-

At December 31, 2015, the Bank had federal net operating loss carry forwards of $17.4 million and state net operating loss carry forwards of $65.0 million to offset future taxable income that will expire over various periods beginning 2029 through 2032.

Valuation Allowance against net Deferred Tax Assets

The Bank had approximately $18.1 million of net deferred tax assets which, prior to 2014, was subject to a valuation allowance because the realization of the net deferred tax assets was not more likely than not. In light of the Bank’s performance over the previous four quarters, Management determined that it was more likely than not that the Bank would be able to realize substantially all of its deferred tax assets and, therefore, a valuation allowance was no longer required. In the third quarter of fiscal year 2014, the Bank released 96.7% of its valuation allowance previously recorded on its net deferred tax assets which resulted in a credit to income tax expense, partially offset by the current income tax expense for the year.

The positive evidence that outweighed the negative evidence in Management’s assessment included, but was not limited to, the following:

●

Strong positive trend in financial performance over the previous four quarters

●

Forecasted 2015 and future period taxable income

●

Net Operating Loss carry-forwards do not begin to expire until 2029

●

A significant improvement in the quality of the loan portfolio

●

Favorable changes in operations which permanently reduce operating expenses.

The Bank will continue to evaluate its ability to realize its net deferred tax assets. Future evidence may prove that it is more likely than not that a portion of the deferred tax assets will not be realized at which point a valuation allowance may be reestablished.

At December 31, 2015 the Bank had no unrecognized tax benefits. The Bank does not expect the total amount of unrecognized tax benefits to significantly change over the next twelve months.