NOTE 11 - INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

11. INCOME TAXES

The (benefit) provision for income taxes for the years ended December 31, was as follows (in thousands):

	2012			2011			2010
Current tax (benefit) provision:
Federal	$	(99	)	$	63		$	(228	)
State		117			46			3
Total		18			109			(225	)
Deferred tax (benefit) provision:
Federal		2,715			695			(3,862	)
State		(200	)		(269	)		(1,398	)
Impact of valuation allowance		(4,277	)		(223	)		4,500
Total		(1,762	)		203			(760	)
Total (benefit) provision for income taxes	$	(1,744	)	$	312		$	(985	)

Current and deferred tax (benefit) provision for the years ended December 31, 2012, 2011, and 2010 was ($1,744,000), $312,000 and ($985,000), respectively. During 2010, the Company recorded a partial valuation allowance of $4,500,000 against the Company’s deferred tax asset which reduced the tax benefit recognized in 2010. During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and during the quarter ended September 30, 2012 the Company reversed the remaining State valuation allowance of $4,277,000.  

At December 31, 2012, the Bank had Federal and State net operating loss carryforwards (NOLs) for tax purposes of approximately $3,907,000 and $25,290,000, respectively. The Company’s Federal NOLs will expire in 2031 and its California NOLs will expire in 2032 if not fully utilized.

A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense, and unrealized gains and losses, for financial and tax reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the Company’s cumulative losses in 2009 and 2010, it was determined that as of December 31, 2010, the Company was not able to meet the “more likely than not” standard as to realization of a portion of its deferred tax assets and accordingly established a partial valuation allowance of $4,500,000. During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and during the quarter ended September 30, 2012 the Company reversed the remaining State valuation allowance of $4,277,000. The decision to reverse the remaining valuation allowance was based on the following positive evidence:

• The quarter ended September 30, 2012 marked the Company’s eighth consecutive quarter of positive earnings

• Continued profitability is expected for the foreseeable future

• At September 2012 classified loans as a percent of total loans were 5.8% as compared to 13.3% as of December 2010

• At September 2012 nonaccrual loans as a percent of total loans were 2.4% as compared to 3.6% as of December 2010

• Other real estate owned totaled $21,689,000 at September 2012 compared to $25,784,000 at December 2010

• Effective April 2012, the supervisory agreement by and among North Valley Bancorp, North Valley Bank, and the Federal Reserve Bank of San Francisco was terminated

• Implementation of various cost savings measures, including reductions in the number of personnel and regulatory approval to consolidate two of its branches during the third quarter; one located in Redding, California and the other in Ukiah, California

• Approval by the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions allowing North Valley Bank upstream $16.5 million to the Company to pay all deferred interest on its subordinated debentures and to fully redeem its North Valley Capital Trust I subordinated notes in the amount of $10.3 million

• Redemption of the Company’s North Valley Capital Trust I on July 25, 2012

• The length of the carryforward period in which the Company has to utilize its net operating losses and tax credits

• The reduction of nonperforming assets and classified assets significantly reduces the risk associated with future financial projections.

The effective federal tax rate for the years ended December 31, differs from the statutory tax rate as follows:

	2012			2011			2010
Federal statutory income tax rate		35.0	%		35.0	%		(35.0	%)
State income taxes net of Federal income tax benefit		(1.2	%)		(4.3	%)		25.9	%
Tax exempt income		(4.0	%)		(6.5	%)		(8.9	%)
Impact of valuation allowance		(61.1	%)		(6.6	%)		3.1	%
Increase in reserve for uncertain tax positions		—			1.2	%		—
Other		(7.1	%)		(9.5	%)		1.3	%
Effective tax (benefit) rate		(38.4	%)		9.3	%		(13.6	%)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset at December 31 are as follows (in thousands):

	2012		2011
Deferred tax assets:
Allowance for loan losses	$	5,252	$	5,802
Accrued pension obligation		3,070		2,693
Underfunded pension obligation		1,125		625
Deferred compensation		755		758
Deferred loan fees and costs		—		84
Discount on acquired loans		14		39
Stock based compensation		181		135
Tax credits		2,092		1,656
Net operating loss		4,109		5,248
Capital loss		489		489
Other real estate owned		2,597		2,193
Other		864		376
Total deferred tax assets before valuation allowance		20,548		20,098
Valuation allowance		—		4,277
Total deferred tax assets	$	20,548	$	15,821
Deferred tax liabilities:
Tax depreciation in excess of book depreciation		1,149		1,195
FHLB stock dividend		410		410
Deferred loan fees and costs		986		—
Originated mortgage servicing rights		412		319
Core deposit intangibles		117		79
Unrealized gain on available-for-sale securities		2,284		1,647
Market to market adjustment		28		152
California franchise tax		2,612		1,030
Other		204		268
Total deferred tax liabilities	$	8,202	$	5,100
Net deferred tax asset	$	12,346	$	10,721

The Company and its subsidiaries file income tax returns in the United States and California jurisdictions. There are currently no pending federal tax examinations by tax authorities. With few exceptions, the Company is no longer subject to examination by federal taxing authorities for the years ended on or before December 31, 2008 and by state and local taxing authorities for years ended on or before December 31, 2007. The Company’s primary market areas are designated as “Enterprise Zones” and the Company receives tax credits for hiring individuals in these markets and receives an interest deduction for loans made in designated enterprise zones. The tax credits and interest deductions are significant to the Company in reducing its effective tax rate. These positions could be challenged by the California Franchise Tax Board, and an unfavorable adjustment could occur. The California Franchise Tax Board is currently conducting examinations of the State of California returns for 2003, 2004, 2007 and 2008.

The Company determined its unrecognized tax benefit to be $519,000 for the years ended December 31, 2012 and 2011. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2012		2011
Beginning balance	$	519	$	480
Additions based on tax positions related to the current year		—		39
Additions for tax positions of prior years		—		—
Reductions for tax positions of prior years		—		—
Settlements		—		—
Ending balance	$	519	$	519

Of this total, the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is not considered significant for disclosure purposes. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

During the year ended December 31, 2012, the Company was not assessed any interest and penalties. The Company had approximately $42,000 and $30,000 for the payment of interest and penalties accrued at December 31, 2012 and 2011, respectively.