6.	INCOME TAXES

The components of income tax expense (benefit) are as follows:


	Current			Deferred*			Total
	(Dollars in thousands)
Year ended December 31, 2011:
Federal	$	(948	)	$	(397	)	$	(1,345	)
State		—			(199	)		(199	)

	$	(948	)	$	(596	)	$	(1,544	)


Year ended December 31, 2010:
Federal	$	831		$	(1,439	)	$	(608	)
State		135			(293	)		(158	)

	$	966		$	(1,732	)	$	(766	)


Year ended December 31, 2009:
Federal	$	2,863		$	(3,455	)	$	(592	)
State		698			(463	)		235

	$	3,561		$	(3,918	)	$	(357	)

*	Included in deferred tax is release of valuation allowance adjustment of $62 thousand for year ending December 31, 2009.

Total income tax expense was less than the amount computed by applying the federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows:


	Years ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Income taxes at statutory rate	$	(873	)	$	32		$	389
Increase (decrease) resulting from:
Effect of non-taxable interest income		(284	)		(539	)		(548	)
Decrease in valuation allowance		(36	)		—			(62	)
Bank owned life insurance		(110	)		(101	)		(105	)
State taxes, net of federal benefit		(131	)		(105	)		155
CAHEC tax credits		(145	)		(145	)		(144	)
Other, net		35			92			(42	)

Applicable income taxes	$	(1,544	)	$	(766	)	$	(357	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented below:


	2011			2010
	(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses	$	4,661		$	5,107
Capital loss carry forward		7			43
Postretirement benefits		228			282
Unrealized losses on available-for-sale investment securities		—			1,022
Unfunded postretirement benefits		83			12
Bank premises and equipment, principally due to differences in depreciation		—			75
Carry forward of tax credits		1,034			—
Other		1,775			1,573

Total gross deferred tax assets	$	7,788		$	8,114
Valuation allowance		(7	)		(43	)

Total net deferred tax assets		7,781			8,071

Deferred tax liabilities:
Bank premises and equipment, principally due to differences in depreciation		295			—
Unrealized gains on securities available for sale		183			—
Other		24			143

Total gross deferred tax liabilities		502			143

Net deferred tax asset	$	7,279		$	7,928

The valuation allowance for deferred tax assets was $7 thousand and $43 thousand at December 31, 2011 and December 31, 2010. The valuation allowance required at December 31, 2011 and 2010 was for certain capital losses related to investments in equity securities. These losses are capital in character and the corporation may not have current capital gain capacity to offset these losses. In order for these capital losses to be realized, the Company would need capital gains to offset them.

During 2009, the Company recognized capital gains which decreased the valuation allowance. However the Company does not have plans in place to generate any capital gains in the future. Accordingly, it is more likely than not that these capital losses will fail to be realized and a valuation allowance is required on this portion of the deferred tax asset.

Based on the Company's historical and current earnings, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets which are not provided for under the valuation allowance.

The Company and its subsidiary file a consolidated income tax return with the federal government separate income tax returns with the state of North Carolina. With few exceptions, the Company and its subsidiary are no longer subject to federal or state income tax examinations by tax authorities for years before 2008. Net economic loss carry forwards for North Carolina tax purposes as of December 31, 2011 will expire in 2026.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions. The years ended December 31, 2008 through December 31, 2010 remain open for audit for all major jurisdictions.