Note 13. INCOME TAXES

The following table summarizes the provision for income taxes included in the statement of operations for the years ended December 31, 2012, 2011 and 2010:

	Year Ended December 31,
(in thousands)	2012		2011		2010
Current	$	—	$	—	$	(3,512	)
Deferred	—		—		3,512
Total	$	—	$	—	$	—

The following table presents a reconciliation between the effective income tax expense (benefit) and the income tax expense (benefit) that would have been provided at the federal statutory tax rate of 34.0% for each of the years ended December 31, 2012, 2011 and 2010:

	Year Ended December 31,
(in thousands)	2012			2011			2010
Benefit at statutory tax rates	$	(4,662	)	$	(114	)	$	(10,785	)
Add (deduct):
Tax effects of non-taxable income	(1,824		)	(2,288		)	(2,704		)
Non-deductible interest expense	65			98			170
Bank owned life insurance	(235		)	(268		)	(252		)
Change in valuation allowance	6,637			2,568			13,165
Other items, net	19			4			406
Provision for income taxes	$	—		$	—		$	—

The following table summarizes the components of the net deferred tax liability included in other liabilities at December 31, 2012, and the net deferred tax asset included in other assets at December 31, 2011:

	December 31,
(in thousands)	2012			2011
Allowance for loan and lease losses	$	6,603		$	7,299
Deferred compensation	2,517			2,497
Unrealized holding losses on securities available-for-sale	—			2,044
Other-than-temporary impairment	—			577
Other real estate owned valuation	932			1,308
Deferred intangible assets	1,602			1,735
Employee benefits	41			39
Accrued interest	1,441			1,126
AMT tax credits	2,215			2,215
Fixed asset valuation	407			407
Charitable contribution carryover	312			217
Accrued rent expense	213			210
Accrued vacation	51			—
Accrued real estate taxes	14			175
Depreciation	—			13
Net operating loss carryover	18,422			10,104
Gross deferred tax assets	34,770			29,966

Deferred loan origination fees	(34		)	(77		)
Unrealized holding gains on securities available-for-sale	(3,451		)	—
Depreciation	(254		)	—
Gross deferred tax liabilities	(3,739		)	(77		)
Net deferred asset before valuation allowance	31,031			29,889
Valuation allowance	(34,482		)	(27,845		)
Net deferred tax (liabilities) assets	$	(3,451	)	$	2,044

At December 31, 2012 and 2011, the Company had recognized $11.6 million of refundable federal income taxes associated with its net operating losses incurred in 2010 and 2009.

As of December 31, 2012 and 2011, the Company has established a valuation allowance of $34.5 million and $27.8 million, respectively, related to net deferred tax assets that would be realizable based only on future taxable income. At December 31, 2011, no valuation allowance was recorded for the deferred tax asset related to the unrealized holding losses on securities available-for-sale because the Company had the intent and ability to hold these securities until recovery of the unrealized losses, which may be at maturity. The Company will continue to monitor its deferred tax position and may make changes to the valuation allowance recorded as circumstances change.

As of December 31, 2012, the Company had $54.2 million of net operating loss carryovers resulting in a deferred tax asset of $18.4 million. Beginning in 2031, these net operating loss carryovers will expire if not utilized. As of December 31, 2012, the Company also had $917 thousand of charitable contribution carryovers resulting in gross deferred tax assets of $312 thousand. These charitable contribution carryovers will expire after December 31, 2015 if not utilized. In addition, the Company had alternative minimum tax credit carryovers of $2.2 million as of December 31, 2012 that have an indefinite life.

The Company records interest and penalties on potential income tax deficiencies as part of non-interest expense. Tax years 2009 through 2011 remain subject to examination by the Federal government and state taxing jurisdictions. In May 2012, the Company was contacted by the Internal Revenue Service (IRS) for examination of its 2010 and 2009 income tax returns. In February of 2013, the Company was notified by the IRS that the examinations were in the review stage. The Company can provide no assurance as to how these audits will be resolved.