9. Taxes on Income

The tax effects of significant items comprising the Company's net deferred tax assets (liabilities) are as follows:

	December 31,
(In thousands)	2012			2011
Deferred tax assets:
Credit losses not currently deductible	$	4,391		$	5,016
State franchise tax		0			0
Deferred compensation		1,912			1,797
Net operating losses		7,773			9,581
Depreciation		518			344
Accrued reserves		194			164
Write-down on other real estate owned		3,283			2,873
Impairment loss on CMO's		0			1,214
Capitalized OREO expenses		793			1,371
Unrealized loss on AFS securities		0			209
Other		1,908			1,356
Total deferred tax assets		20,772			23,925
Deferred tax liabilities:
State Tax		(1,889	)		(2,245	)
FHLB dividend		(103	)		(201	)
Loss on limited partnership investment		(1,695	)		(2,283	)
Unrealized gain on AFS		(458	)		0
Deferred gain SFAS No. 159 – fair value option		(2,819	)		(3,166	)
Fair value adjustments for purchase accounting		(123	)		(122	)
Interest on nonaccrual loans		(368	)		(101	)
Deferred loan costs		(602	)		(228	)
Prepaid expenses		(305	)		(408	)
Total deferred tax liabilities		(8,362	)		(8,754	)
Valuation Allowance		(2,686	)		(3,686	)
Net deferred tax assets	$	9,724		$	11,485

The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At December 31, 2012 and 2011, the Company had a recorded valuation allowance of $2.7 million and $3.7 million, respectively. There was no valuation allowance recorded prior to December 31, 2011.

Taxes on income for the years ended December 31, consist of the following:

(In thousands)
2012:	Federal			State			Total
Current	$	719		$	(416	)	$	303
Deferred		466			764			1,230
	$	1,185		$	348		$	1,533
2011:
Current	$	(1,468	)	$	2,151		$	683
Deferred		1,182			(3,580	)		(2,398	)
	$	(286	)	$	(1,429	)	$	(1,715	)

A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:

	Years Ended December 31,
	2012			2011
Statutory federal income tax rate		34.0	%		(34.0	%)
State franchise tax, net of federal income tax benefit		3.0			(10.1	)
Tax exempt interest income		0			0
Low Income Housing – federal credits		(1.1	)		0
Cash surrender value of life insurance		(2.4	)		(1.4	)
Goodwill impairment		0			4.4
Valuation Allowance		(13.2	)		27.4
Other		(0.1	)		0
		20.2	%		(13.7	%)

At December 31, 2012 the Company has remaining federal net operating loss carry-forwards totaling $6.7 million, and remaining state net operating loss carry-forwards totaling $50.8 million which expire between 2016 and 2031.

The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity's financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term, "more likely than not", means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority.

The Company and its subsidiary file income tax returns in the U.S federal jurisdiction, and several states within the U.S. There are no filings in foreign jurisdictions. During 2010, the Company amended its federal tax returns for the year 2004 through 2009 to utilize the five-year NOL carry-back provisions allowed by the IRS for 2009. These amended tax returns were audited by the IRS and the examination was finalized during the first quarter of 2013 and the settlement did not have a material impact on the Company's financial statements.

During the second quarter of 2006, the FTB issued the Company a letter of proposed adjustments to, and assessments for, (as a result of examination of the tax years 2001 and 2002) certain tax benefits taken by the Bank's subsidiary REIT during 2002. Since 2007, the Company had asserted its administrative protest and appeal rights on the REIT issue and accrued its potential liability. Then in 2011, the Company, under the provisions of Franchise Tax Board Voluntary Compliance Initiative Program (VCI 2), the Company settled its case.

The Company is not currently aware of any other tax jurisdictions where the Company or any subsidiary is subject to examination by federal, state, or local taxing authorities.