NOTE 11 — INCOME TAXES

In accordance with the provisions of FASB ASC 740, the Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $1.0 million, $1.0 million and $0.7 million as of December 31, 2012, 2011 and 2010, respectively.

For the year ended December 31, 2012, unrecognized tax benefits decreased by $27,000 in connection with the tax position taken on expense related to prior business acquisition cost. For the year ended December 31, 2011, unrecognized tax benefits increased by $341,000 in connection with the tax position taken on expense related to non-qualified stock option and prior business acquisition costs. For the year ended December 31, 2010, unrecognized tax benefit decreased by $1.0 million mainly due to the audit result from the Franchise Tax Board (“FTB”) and the recognition of state tax benefits for the year.

In 2012 and 2011, the company accrued interest of $41,000 and $181,000 for uncertain tax benefits, respectively. In 2010, accrued interest of $136,000 was reversed due to the audit result from the FTB for the tax year 2005 to 2007. As of December 31, 2012, 2011 and 2010, the total amount of accrued interest related to uncertain tax positions, net of federal tax benefit, was $360,000, $319,000, and $138,000, respectively. We account for interest and penalties related to uncertain tax positions as part of our provision for federal and state income taxes. Accrued interest and penalties are included within the related tax liability line on the Consolidated Balance Sheets.

Unrecognized tax benefits primarily include state exposures from California Enterprise Zone interest deductions and income tax treatment for prior business acquisition costs, dividend income from Federal Reserve Bank stock and expense related to non-qualified stock options. We believe that it is reasonably possible that certain remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2014 because of a lapse of the statute of limitations. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next 12 months.

As of December 31, 2012, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2004 through 2011. As of December 31, 2012, the Company was subjected to audit or examination by Internal Revenue Service for the 2009 tax year, California FTB for the 2008 and 2009 tax years, and Texas Comptroller of Public Accounts for the 2008 tax year. Management does not anticipate any material changes in our financial statements due to the results of the audits.

A summary of the provision (benefit) for income taxes was as follows:

Deferred tax assets and liabilities were as follows:

As of December 31, 2012, the Company’s net deferred tax assets were primarily the result of net operating loss carryforwards, allowance for loan losses, and tax credit carryforwards. A valuation allowance of $82.3 million was recorded against its gross deferred tax asset balance as of December 31, 2011. For the year ended December 31, 2012, the Company recorded a net valuation allowance release of $62.6 million based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2012, in part because possible sources of taxable income were available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards, management determined that sufficient positive evidence existed as of December 31, 2012, to conclude that it was more likely than not that deferred taxes were fully realizable, and therefore, reduced the valuation allowance accordingly.

As of December 31, 2012, the Company had net operating loss carryforwards of $39.9 million and $183.8 million for federal and state income tax purposes, respectively, which are available to offset future taxable income, if any, through 2031.

Reconciliation between the federal statutory income tax rate and the effective tax rate is shown in the following table: