We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Our income tax provision (benefit) consists of the following:

Year Ended December 31,	2011		2010		2009
(In Thousands)
Current income taxes:
Federal taxes	$	6,648	$	8,192	$	7,699
State and local taxes		1,849		(555)		(1,408)
Deferred income taxes:
Federal taxes		2,978		(2,183)		(8,384)
State and local taxes		-		-		-
Total	$	11,475	$	5,454	$	(2,093)

Current federal income taxes include taxes on income that cannot be offset by net operating loss carryforwards.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following is a summary of the significant components of our deferred tax assets and liabilities as of December 31, 2011 and 2010:

	2011		2010
(In Thousands)
Deferred tax liabilities:
Unrealized gains on available-for-sale securities	$	(7,105)	$	(4,287)
Accelerated depreciation		(912)		(707)
Other		(395)		(207)
Prepaid expenses		(1,428)		(1,361)
Deferred loan costs		(1,680)		(1,675)
Intangibles		(795)		—
Total deferred tax liabilities		(12,315)		(8,237)

Deferred tax assets:
Allowance for loan losses		18,578		21,119
Reserves and other		5,862		5,460
Deferred gains		505		398
Total deferred tax assets		24,945		26,977
Net deferred tax asset	$	12,630	$	18,740

Included in the table above is the effect of certain temporary differences for which no deferred tax expense or benefit was recognized. In 2011, such items consisted primarily of $7.1 million of unrealized gains on certain investments in debt and equity securities accounted for under ASC 320 partially offset by $550,000 related to postretirement benefit obligations accounted for under ASC 715. In 2010, they consisted primarily of $4.3 million of unrealized gains on certain investments in debt and equity securities, partially offset by $388,000 related to postretirement benefit obligations.

Based on our history of prior earnings and our expectations of the future, it is anticipated that operating income and the reversal pattern of our temporary differences will, more likely than not, be sufficient to realize a net deferred tax asset of $12.6 million at December 31, 2011. No federal or state net operating losses existed at December 31, 2011.

A reconciliation showing the differences between our effective tax rate and the U.S. Federal statutory tax rate is as follows:

Year Ended December 31,	2011		2010		2009
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State tax net of federal tax benefit	3.4		(1.8)		64.0
Interest income 50% excludable	(2.1)		(3.7)		50.6
Bank-owned life insurance income	(2.0)		(1.3)		22.4
Incentive stock option and other
nondeductible compensation	0.9		0.8		(18.0)
Settlement of prior year charitable donation	(1.2)		—		—
Federal tax credits	(0.5)		(1.1)		(8.0)
Other	0.1		—		0.4
Effective tax rate	33.6	%	27.9	%	146.4	%

We account for income taxes in accordance with FASB Accounting Standards Codification (“ASC”) 740, Income Taxes (formerly Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109). ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Benefits from tax positions are recognized in the financial statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

Related to the move of our corporate headquarters, during 2007, we donated (to the local Historical Society, for the purpose of community viewing) an N.C. Wyeth mural which was previously displayed in our former headquarters. Pursuant to an appraisal by a nationally recognized art appraisal firm, the estimated fair value of the mural was $6.0 million, which was recorded as a charitable contribution expense. We recognized a related offsetting gain on the transfer of the asset during 2007. The expense and offsetting gain was shown net in our Consolidated Financial Statements. As the gain on the transfer of the asset is permanently excludible from taxation, the charitable contribution transaction results in a permanent deduction for income tax purposes. The amount of the deduction represented an income tax uncertainty because it was subject to evaluation by the Internal Revenue Service (“IRS”). The IRS did not audit our 2007 income tax return and the statute of limitations on this tax year expired in 2011. Accordingly, we recorded a $416,000 tax benefit in 2011 related to the resolution of this uncertainty.

We record interest and penalties on potential income tax deficiencies as income tax expense. Federal tax years 2008 through 2011 remain subject to examination as of December 31, 2011, while tax years 2008 through 2011 remain subject to examination by state taxing jurisdictions. No federal or state income tax return examinations are currently in process. We do not expect to record or realize any material unrecognized tax benefits during 2012.

The total amount of unrecognized tax benefits related to ASC 740 as of December 31, 2011 was $88,000, all of which would affect our effective tax rate if recognized. The total amount of accrued interest and penalties included in such unrecognized tax benefits were $15,000 and $6,000, respectively, all of which was recorded as expense in 2011. A reconciliation of the total amounts of unrecognized tax benefits during 2011 is as follows:

(In Thousands)
Unrecognized tax benefits at December 31, 2010	$	967
Additions as a result of tax positions taken during prior years		96
Additions as a result of tax positions taken during current year		—
Reductions relating to settlements with taxing authorities		—
Reductions as a result of a lapse of statutes of limitations		(975	)
Unrecognized tax benefits at December 31, 2011	$	88