9. Income Taxes

The components of the income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are as follows:


	2011			2010			2009
	(in thousands)
Current tax expense (benefit):
Federal	$	277		$	989		$	(4,547	)
State		91			228			384

Total		368			1,217			(4,163	)

Deferred tax expense (benefit):
Federal		5,250			(18,384	)		(5,904	)
State		1,724			(3,680	)		(1,861	)
Change in valuation allowance		(80,452	)		22,064			12,762

Total		(73,477	)		—			4,997

Applicable income tax expense (benefit)	$	(73,110	)	$	1,217		$	834

During 2011, the Company recorded current income tax expense of $368,000, primarily related to the release of the residual tax effects of changes in the beginning of the year valuation allowance previously allocated to OCI. These residual tax effects resulted from changes in the deferred tax liability associated with deferred gains on terminated cash flow hedges recorded in OCI. During 2010, the Company recorded income tax expense of $1.2 million.

Income tax expense (benefit) is different from the amounts computed by applying the federal statutory rate of 35% for the years ended December 31, 2011, 2010, and 2009 to income (loss) before income taxes because of the following:


	2011			2010			2009
	(in thousands)
Federal income tax benefit at statutory rate	$	6,302		$	(18,412	)	$	(10,751	)
Increase (decrease) in taxes resulting from:
Change in valuation allowance		(80,452	)		22,064			12,762
State tax expense (benefit) before valuation allowance		1,173			(2,379	)		(960	)
Tax-exempt interest income, net of disallowed interest deduction		(1,003	)		(1,549	)		(1,764	)
Residual tax effect of change in beginning of year valuation allowance previously allocated to OCI		500			1,255			2,539
Adjustment to prior year alternative minimum tax liability		—			—			(1,034	)
Other, net		370			238			42

Total	$	(73,110	)	$	1,217		$	834

Under U.S. generally accepted accounting principles, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.

In 2008, the Company determined a valuation allowance was necessary, largely based on negative evidence including cumulative losses caused by credit losses in the residential real estate construction portfolio and general uncertainty surrounding future economic and business conditions.

The Company evaluates the need for a deferred tax asset valuation allowance on an ongoing basis, considering both positive and negative evidence. For the year ended December 31, 2011, positive evidence included the Company's return to profitability, continued improvement in asset quality and credit ratios, the continued reduction in real estate construction and bank and bank holding company loan portfolios that had substantial losses in the past three years and an improving economic environment. Negative evidence included the Company's cumulative losses from 2009 through 2011, no available taxes paid in open carryback years and no significant tax planning opportunities to accelerate income. Based on the Company's assessment of all available evidence, management determined that it is more-likely-than-not that the deferred tax asset will be realized. Therefore, at December 31, 2011, the Company released its $73.2 million valuation allowance against the net deferred tax assets resulting in a credit to income tax (benefit) expense.

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
	(in thousands)
*Deferred Tax Assets:*
Loans, principally due to allowance for loan losses	$	45,118		$	51,788
Federal net operating loss and tax credit carry forwards		24,928			19,247
Other real estate owned and repossessed assets		9,246			10,444
Deferred income, principally net loan origination fees		475			5,136
State taxes net operating loss carry forwards, net		5,829			4,582
Employee benefits		3,978			3,914
Deferred rent		948			1,188
Premises, leasehold improvements and equipment, principally due to differences in depreciation 912		1,703			1,184
Interest expense		3			54
Brokered CD swaps		321			—
Other		774			533
Tax effect of other comprehensive income		—			8,933

Gross deferred tax assets		93,323			107,003
Less: Valuation allowance		—			(92,742	)

Net deferred tax assets		93,323			14,261

*Deferred Tax Liabilities:*
Mark-to-market on loans transferred to portfolio		(25	)		(573	)
FHLB stock dividends		(817	)		(790	)
Discount accretion		(188	)		(170	)
Other		(929	)		(1,122	)
Tax effect of other comprehensive income		(17,221	)		—

Gross deferred tax liabilities		(19,180	)		(2,655	)

Net deferred tax assets	$	74,143		$	11,606

At December 31, 2011, the Company had $104.4 million of Illinois State operating loss carry forwards that will begin to expire in 2023. In addition, the Company had a federal operating loss carry forward of $63.6 million that will begin to expire in 2029, a federal tax credit carry forward of $1.3 million that will begin to expire in 2029 and a $1.4 million alternative minimum tax credit carry forward that can be carried forward indefinitely.

As of December 31, 2011, the Company maintained a reserve for unrecognized tax positions of $37,000, compared to a reserve of $90,000 at December 31, 2010.

The Company is no longer subject to examination by federal tax authorities for the years 2004 and prior because the statute of limitations has expired. The Company, which is located and primarily does business in Illinois, is no longer subject to examination by the Illinois taxing authorities for the years 2007 and prior because the statute of limitations has expired.