Audited Financial Statements Income Taxes  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying  amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces  deferred tax assets to the amount expected to be realized. The net deferred tax asset is reflected as a component of other  assets in the accompanying consolidated balance sheets. Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income  (loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss from  continuing operations that occurred during the year, plus or minus income tax effects of (1) changes in certain circumstances  that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in income tax laws or  rates, and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other comprehensive  income (loss) is related solely to changes in the valuation allowance on items that are normally accounted for in other  comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities. In accordance with ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax  position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is  the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not  meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize interest and  penalties related to income tax matters in income tax expense. The Company and its wholly-owned subsidiary file a  consolidated income tax return.  FASB ASC 820, which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted  accounting principles and expands disclosures about fair value measurements. ASC 820 applies only to fair-value  measurements that are already required or permitted by other accounting standards. The definition of fair value focuses on  the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction  between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset  or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based  measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the  assumptions that market participants would use in pricing the asset or liability. For more information related to fair value  measurements, please refer to Note 17, Fair Value Disclosures. The Company has evaluated the effects of events or transactions through the date of this filing that have occurred  subsequent to December 31, 2011. The Company does not believe there are any material subsequent events that would  require further recognition or disclosure, except as discussed in Note 22, Subsequent Events. Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding  for the year. Diluted net earnings per share reflect the potential dilution that could occur if the Company’s potential common  stock was issued. As of December 31, 2011, 2010 and 2009, the Company had no options issued or outstanding, and  therefore, no dilutive effect to consider for the diluted earnings per share calculation. A reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for the  years ended December 31, 2011, 2010 and 2009, respectively, is presented below.  NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE Subsequent Events  Fair Value Measurements  Year ended December 31 (Dollars in thousands, except share and per share data) 2011 2010 2009 Basic and diluted: Net earnings $ 5,538 $ 5,346 $ 2,404 Weighted average common shares outstanding 3,642,735 3,642,851 3,644,691 Earnings per share $ 1.52 $ 1.47 $ 0.66 page 43