NOTE 6 — INCOME TAXES

We accounted for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enacted date.

We record net tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. To the extent future earnings are recognized, the realization of the deferred tax asset will be recorded as a credit to income tax expense. Until such time as the valuation allowance is reversed, we will generally not record an income tax provision or benefit on the statement of operations. Our deferred tax valuation allowance was $10.1 million and $82.3 million at June 30, 2012 and December 31, 2011, respectively. During the quarter, we reversed a valuation allowance of $53.1 million on its deferred taxes assets.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percentage points occurs by one or more five-percent shareholders within a three-year period. We determined that such an ownership change occurred as of November 18, 2011, as a result of a registered rights and best efforts public offering and an underwritten public offering of our common stock. Based on calculations, this ownership change resulted in estimated limitations on the utilization of net operating loss carryforwards and tax credits. We estimate that approximately $5.3 million of our California net operating loss carryforward deferred tax asset will be effectively eliminated and no valuation allowance reversal was recognized for such deferred tax assets. Pursuant to Section 382, a portion of the limited net operating loss carryforwards becomes available for use each year. We estimate that approximately $10.4 million of the restricted net operating loss carryforwards become available for such use.

We recorded a net tax benefit of $47.2 and $47.1 million for the three and six months ended June 30, 2012, respectively. For the three and six months ended June 30, 2012, the Bank reversed a $53.1 million of valuation allowance on its deferred tax asset. This reversal is the result of an analysis performed to determine the extent of future earnings considered “more likely than not”. In addition, we have recorded income tax expense of $5.9 million and $6.0 million for the three and six months ended June 30, 2012, respectively, resulting in a net tax benefit of $47.2 million and $47.1 million for the three and six months ended June 30, 2012. Our effective tax rates were (548.7) percent and (294.0) percent for the three months and six months ended June 30, 2012, respectively, as compared to the statutory tax rate of 42%. The difference from the statutory rates in 2012 is mainly due to the release of valuation allowance of deferred tax assets.