The following table reflects the effect of temporary differences that give rise to the components of the net deferred tax asset as of June 30, 2011 and December 31, 2010 (in thousands):

		June 30			December 31
		2011			2010
Deferred tax assets:
REO and loan loss reserves	$	39,308		$	40,652
Deferred compensation		6,566			6,765
Net operating loss carryforward		26,016			21,161
Low income housing tax credits		3,739			3,319
Other		--			--
Total deferred tax assets		75,629			71,897

Deferred tax liabilities:
FHLB stock dividends		(6,230	)		(6,230	)
Depreciation		(3,939	)		(4,405	)
Deferred loan fees, servicing rights and loan origination costs		(4,620	)		(4,646	)
Intangibles		(2,630	)		(3,041	)
Financial instruments accounted for under fair value accounting		(17,782	)		(16,983	)
Other		(264	)		--
Total deferred tax liabilities		(35,465	)		(35,305	)

Deferred income tax asset		40,164			36,592

Unrealized gain on securities available-for-sale		(884	)		(421	)

Valuation allowance		(39,280	)		(36,171	)

Deferred tax asset, net	$	--		$	--

The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making this assessment. While management believes a return to sustainable profitability is probable, based on available evidence and the guidance provided in GAAP, management is unable to conclude that it is more likely than not that the net deferred tax assets as of June 30, 2011 will be realized in the future. The valuation allowance increased to $39.3 million during the first six months of 2011 from $36.2 million at December 31, 2010.

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $56.1 million and $21.5 million, respectively, which will expire, if unused, by the end of 2030. The Company also has federal and state tax credit carryforwards of $3.3 million and $410,000, respectively, which will expire, if unused, by the end of 2030.

Retained earnings at June 30, 2011 and December 31, 2010 include approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been recognized. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate. Based on current corporate tax rates, this amount would be approximately $1.9 million at June 30, 2011.