INCOME TAXES

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE K - INCOME TAXES

The following table summarizes significant components of the provision for income taxes for the periods presented:

	Successor Company			Predecessor Company
	November 19			January 1
	to			to			Years Ended
	December 31,			November 18,			December 31,
	2011			2011			2010			2009
Current tax provision:
Federal	$	-		$	-		$	(2,384,393	)	$	499,168
State		-			-			44,882			249,539
		-			-			(2,339,511	)		748,707
Deferred tax provision (benefit):
Federal		(482,323	)		(4,282,617	)		(2,882,893	)		(1,717,793	)
State		(37,677	)		(733,858	)		(951,232	)		(359,614	)
		(520,000	)		(5,016,475	)		(3,834,125	)		(2,077,407	)
Provision for income tax expense (benefit) before adjustment to deferred tax valuation allowance		(520,000	)		(5,016,475	)		(6,173,636	)		(1,328,700	)
Deferred tax asset valuation allowance		-			5,016,475			2,104,000			-
Net provision for income taxes	$	(520,000	)	$	-		$	(4,069,636	)	$	(1,328,700	)

Income tax expense (benefit) is reconciled to the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes as follows:

	Successor Company			Predecessor Company
	November 19			January 1
	to			to			Years Ended
	December 31,			November 18,			December 31,
	2011			2011			2010			2009
Tax computed at statutory rate of 34%	$	(227,205	)	$	(4,597,840	)	$	(4,740,911	)	$	(10,728,581	)
Effect of state income taxes		(24,867	)		(484,346	)		(598,191	)		(72,649	)
Non-taxable interest income		(19,463	)		(512,870	)		(667,295	)		(510,847	)
Non-taxable bank owned life insurance		(31,275	)		(233,399	)		(280,366	)		(287,799	)
Goodwill impairment		-			-			-			10,279,235
Valuation allowance		-			5,016,475			2,104,000			-
Other		(217,191	)		811,980			113,127			(17,059	)
	$	(520,000	)	$	-		$	(4,069,636	)	$	(1,328,700	)

Significant components of deferred taxes at December 31, 2011 and 2010 are as follows:

	Successor			Predecessor
	Company			Company
	2011			2010
Deferred tax assets:
Purchase accounting fair value adjustments	$	17,472,447		$	28,089
Net operating loss carryforward		11,699,259			1,922,812
Allowance for loan losses		87,518			7,981,449
Premises and equipment		29,601			39,247
Unrealized loss on hedges -		223,219
Deferred compensation		104,601			807,627
Other		952,439			666,525
Total deferred tax assets		30,345,865			11,668,968
Valuation allowance		-			(2,104,000	)
Net deferred tax assets		30,345,865			9,564,968
Deferred tax liabilities:
Intangible assets		-			(267,157	)
Unrealized gains on securities		(6,834	)		(1,407,377	)
Prepaid expenses		(148,438	)		(158,201	)
Total deferred tax liabilities		(155,272	)		(1,832,735	)
Net deferred tax asset	$	30,190,593		$	7,732,232

Successor Company

The Piedmont Investment was considered a change in control under Internal Revenue Code Section 382 (“Section 382”) and the Regulations, thereunder. Accordingly, we are required to evaluate potential limitation or deferral of its ability to carryforward pre-acquisition net operating losses and to determine the amount of net unrealized built-in losses (“NUBIL”), which may be subject to similar limitation or deferral. Under the Internal Revenue Code and Regulations, NUBIL realized within 5 years of the change in control are subject to potential limitation, which for us is November 18, 2016. Through that date, we will continue to analyze our ability to utilize such losses to offset anticipated future taxable income, however, this estimate will not be known until the five-year recognition period expires. Losses limited under these provisions are generally limited to a carryforward period of 20 years, subject to the annual limitation and expire if not used by the end of that period. We believe that all of these benefits from the net operating losses and built-in losses will ultimately be realized; however, that amount is subject to continuing analysis and has not yet been determined

Beginning with the Piedmont Investment and the application of purchase accounting at acquisition, we have evaluated our deferred tax assets (“DTA”) to determine whether a valuation allowance is necessary. In conducting this evaluation, we considered all available evidence, both positive and negative, based on the more-likely-than-not criteria that such assets will be realized. In conducting the DTA analysis, we believe it is essential to differentiate between the unique characteristics of each business. In particular, characteristics such as business model, level of capital and reserves held by regulated banks and their ability to absorb potential losses are important distinctions to be considered.

Negative Evidence. We considered the following five areas of potential negative evidence in our DTA analysis:

1. Rolling three-year cumulative loss.

The Predecessor Company was profitable on a pre-tax income basis until 2009. From 2009 through the Piedmont Investment date, the Predecessor Company incurred a cumulative pre-tax loss of $59.0 million, which included a non-deductible $30.2 million goodwill impairment charge in 2009. During the same period, the Predecessor Company recorded $48.6 million in provision for loan losses and $2.4 million in losses on foreclosed assets as the recent economic downturn and drop in home prices and commercial real estate values significantly impacted the Predecessor Company’s loan portfolio. The three-year cumulative loss was almost entirely due to the Predecessor Company’s non-deductible goodwill impairment and credit losses.

Although a three-year cumulative loss is generally a strong indicator used to determine whether a valuation allowance on DTA’s is necessary, we believe that because of the Piedmont Investment and resulting changes to the Company’s capital structure, business model and management team, many of the factors leading to the pre-acquisition three-year cumulative loss have been remediated.

2. History of operating losses or tax credit carry forwards expiring unused.

The Company has no history of operating loss or tax carry forwards expiring unused.

3. Losses expected in early future years.

As described under the positive evidence below, we expect to generate a profit in early future years.

4. Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years.

We are not currently aware of any unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years.

5. Carryback or carry forward period that is so brief it would limit realization of tax benefits if a significant deductible temporary difference is expected to reverse in a single year or the entity operates in a traditionally cyclical business.

Since the Predecessor Company did not begin incurring net operating losses until 2010, our pre-acquisition tax loss carry forwards, while they may be limited as to timing of realization under Section 382 because of the change in control transaction with Piedmont, do not begin to expire until 2030. Therefore, our carry forward period for realizing net operating losses is not brief and is not expected to limit realization of tax benefits.

Positive Evidence. We have considered the following sources of future taxable income as positive evidence to weigh against the negative evidence described above:

1. Future reversals of existing temporary differences and carry forwards.

Due to the application of purchase accounting related to the Piedmont Investment, our primary temporary tax differences relate to purchase accounting fair value adjustments to the Company’s assets and liabilities at acquisition date. Of the $17.5 million in DTA’s related to these purchase accounting fair value adjustments, $16.0 million were related to the purchased loan portfolio. At acquisition date, we eliminated the allowance for loan losses and adjusted the purchased loan portfolio to estimated fair value. Our fair value estimates involved projecting expected principal and interest cash flows over the remaining life of each loan and then discounting those cash flows based on current market rates for similar loans. Therefore, estimated fair value includes life of loan projections of credit losses.

We expect the temporary tax differences related to the purchased loan portfolio to reverse over the remaining life of the portfolio as expected losses are realized. We expect to either generate sufficient taxable income to fully utilize these reversals through reduced tax payments, or these reversals will shift to net operating loss carry forwards with a 20-year carry forward period. These net operating loss carry forwards would then be utilized, subject to the Section 382 limitation, as the Company generates sufficient taxable income.

2. Taxable income in carryback year(s).

We no longer have taxable income in carryback years that is available to offset existing net operating losses. The Company’s existing net operating losses began to accumulate in 2010 and are available for carry forward, subject to the Section 382 limitation on the timing of utilization, through at least 2030.

3. Future taxable income, exclusive of reversing temporary differences and carry forwards.

Projecting future taxable income requires estimates and judgments about future events that may be uncertain. In projecting future taxable income, we considered the significant changes to the Company that were made as a result of the Piedmont Investment and associated change in control. Piedmont purchased $75.0 million of the Company’s newly issued common stock on November 18, 2011, and following completion of a tender offer to legacy stockholders, owns approximately 88% of the Company’s outstanding common stock. Since the Piedmont Investment, a number of improvements have been made to the Company’s business. These are summarized as follows:

· Capital levels were substantially improved by $75.0 million Piedmont Investment.

· Problem assets have been reduced through various resolution methods, including bulk asset sales. Credit administration has been reorganized to emphasize strong, conservative underwriting that we believe will limit potential for future loan losses on new loan originations.

· Management has been reorganized, including replacement of the Chief Executive Officer, Chief Credit Officer, and Chief Financial Officer as well as addition of the current President, Chief Operating Officer, and Chief Information Officer.

· Earnings initiatives after Piedmont Investment include upgrading talent to drive revenue in priority customer segments, growing existing sources of fee income, improving net interest margin, reducing revenue leakage, balance sheet restructuring, nonperforming asset reductions, and cost reduction.

· Liquidity has been enhanced with Piedmont Investment and our non-core funding dependency has declined as borrowings were paid off and the balance sheet was restructured.

· Sensitivity to market risk is being addressed with enhanced asset/liability management process and monitoring.

We monitor the Company’s performance against our business plan and forecast on a regular basis. Based on our business plan and forecast, which consider the aforementioned improvements to the Company’s business since the Piedmont Investment, we currently expect our pre-tax income to build to levels sufficient to fully absorb the existing DTA.

4. Tax planning strategies that could, if necessary, be implemented.

In evaluating our DTA, we also considered certain prudent and feasible tax planning strategies that, if implemented, could prevent an operating loss or tax credit carry forward from expiring unused and could result in realization of the existing DTA. These strategies include increasing earning assets by leveraging existing capital held in excess of regulatory requirements and redeploying existing assets into either higher yielding or taxable instruments. We expect that these tax planning strategies could generate additional pre-tax income that would augment our ability to fully absorb the existing DTA.

Based on this evaluation, considering the weight of the positive evidence compared to the negative evidence, we concluded that at December 31, 2011, it is more likely than not that we will be able to fully realize the existing DTA and that a valuation allowance is not necessary.

The Company’s federal income tax returns are currently under examination from the 2008 through the 2010 tax return years. The Company’s state income tax returns are open and subject to examination from the 2008 tax return year and forward.

Predecessor Company

Based on the Predecessor Company’s evaluation of deferred tax assets, which included consideration of the Company’s recent operating losses, a valuation allowance of $2.1 million was recorded at December 31, 2010. In the predecessor period of January 1 to November 18, 2011, the Company placed a full valuation allowance on current period tax losses which totaled $5.0 million.