Note 10. Income Taxes

The Company is subject to U.S. federal income tax as well as bank franchise tax in the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2008.

Net deferred tax assets consisted of the following components at December 31, 2011 and 2010:


	(in thousands)
	2011		2010

Deferred Tax Assets
Allowance for loan losses	$	4,399	$	5,452
Allowance for other real estate owned		949		1,136
Interest on non-accrual loans		218		194
Unfunded pension liability		740		434
Split dollar liability		398		363
Gain on other real estate owned		1,085		710
Other		236		124

	$	8,025	$	8,413

Deferred Tax Liabilities
Depreciation	$	728	$	713
Prepaid pension		—		92
Securities available for sale		1,057		445
Discount accretion		10		9
Loan origination costs, net		105		124

	$	1,900	$	1,383


Valuation allowance		6,125		—

Net deferred tax assets	$	—	$	7,030

As of December 31, 2011, the Company had recorded a full valuation allowance on its net deferred tax assets (DTAs). The realization of DTAs is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. In assessing the need for a valuation allowance, the Company considered all available evidence about the realization of DTAs, both positive and negative, that could be objectively verified. The Company's positive evidence considered in support of its use of forecasted future earnings as a source of realizing DTAs was insufficient to overcome the negative evidence associated with its pre-tax cumulative loss position. Management's assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company's core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook, banking industry conditions and other factors. At December 31, 2011, management concluded that it is more likely than not that its full net deferred tax assets will not be realized and established a valuation allowance of $6.1 million.

The provision (benefit) for income taxes for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	(in thousands)
	2011			2010			2009
Current tax expense (benefit)	$	(2,607	)	$	1,780		$	2,605
Deferred tax expense (benefit)		6,442			(3,986	)		(1,850	)

	$	3,835		$	(2,206	)	$	755

The income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2011, 2010 and 2009, due to the following:


	(in thousands)
	2011			2010			2009
Computed tax expense (benefit) at statutory federal rate	$	(2,423	)	$	(1,975	)	$	988
Increase in income taxes from deferred tax valuation allowance		6,442			—			—
Decrease in income taxes resulting from:
Tax-exempt interest and dividend income		(186	)		(197	)		(202	)
Other		2			(34	)		(31	)

	$	3,835		$	(2,206	)	$	755