15. Deferred Income Taxes

Deferred taxes are provided using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Excluding unrealized losses on available-for-sale securities, the Company has recorded a 100% deferred tax valuation allowance related to various temporary differences, principally consisting of the provision for loan losses and its net operating loss carryforwards.

In the second quarter of 2011, the Company, excluding discontinued operations, recorded less than $0.4 million of federal income tax benefit to reduce its deferred tax valuation allowance established on previously recorded deferred tax assets. The tax benefit resulted from adjustment of the deferred tax liability related to appreciation in the Company's available-for-sale investment portfolio. The Company also recorded a deferred tax valuation allowance on the tax benefit related to the loss recognized during the six months ended June 30, 2011, due to the uncertainty of future taxable income necessary to fully realize the recorded net deferred tax asset.

Changes in net deferred tax asset were as follows:


(dollars in thousands)	June 30, 2011			December 31, 2010
Balance at beginning of year	$	925		$	447
Income tax effect from change in unrealized gains on available-for-sale securities		(1,819	)		2,212
Employee benefit plan		(232	)		(427	)
Deferred income tax benefit on continuing operations		37,191			52,083
Deferred income tax benefit on discontinuing operations		213			—
Valuation allowance on deferred tax assets		(35,963	)		(53,390	)

Balance at end of period	$	315		$	925

The components of deferred tax assets and liabilities and the tax effect of each are as follows:


(dollars in thousands)	June 30, 2011			December 31, 2010
Deferred tax assets:
Allowance for loan losses	$	24,049		$	37,388
Net operating loss		78,749			36,902
Compensation and benefit plans		2,100			2,102
Fair value basis of loans		—			—
Pension and other post-retirement benefits		1,219			1,451
Interest rate swap		—			—
Other real estate owned		11,214			3,815
Net unrealized securities losses		—			343
Other		712			701

Subtotal deferred tax assets		118,043			82,702
Less: Valuation allowance		(111,698	)		(75,735	)

Total deferred tax assets		6,345			6,967

Deferred tax liabilities:
Core deposit intangible		1,491			1,648
Mortgage servicing rights		—			931
Depreciable basis of premises and equipment		1,086			1,251
Net deferred loan fees and costs		865			898
Net unrealized securities gains		1,476			—
SAB 109 valuation		—			265
Other		1,112			1,049

Total deferred tax liabilities		6,030			6,042

Net deferred tax assets	$	315		$	925

As of June 30, 2011 and December 31, 2010, net deferred income tax assets totaling $0.3 million and $0.9 million, respectively, are recorded on the Company's balance sheet. No valuation allowance is recorded for unrealized losses on investment securities because it is not more likely than not that the Company will have to sell these securities at a loss.