NOTE G — INCOME TAXES

Management expects to realize the $58.5 million in net deferred tax assets well in advance of the statutory carryforward period. At September 30, 2014, approximately $10.4 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration date. Approximately $39.3 million of the remaining deferred tax assets relate to federal net operating losses which will expire in annual installments beginning in 2029 through 2032. Additionally, approximately $7.5 million of the deferred tax assets relate to state net operating losses which will expire in annual installments beginning in 2027 through 2032. Tax credit carryforwards at September 30, 2014 include federal alternative minimum tax credits totaling $1.3 million which have an unlimited carryforward period.

A valuation allowance could be required in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at September 30, 2014 that it is more likely than not that the net deferred tax assets of $58.5 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal projections which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recorded for some or all of the Company’s deferred tax assets. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.

The effective tax rate for the second and third quarter of 2014 was higher than first quarter 2014 due to merger related expenses that are not deductible for tax purposes. The effective rate for the last three months of 2014 is expected to be approximately 41.8 percent.