NOTE L - INCOME TAXES

Federal income tax expense as reported differs from the amount computed by applying the statutory Federal income tax rate to income before taxes. A reconciliation of the differences by amount and percent is as follows:

FEDERAL INCOME TAX SUMMARY
(DOLLARS IN THOUSANDS)

	Year Ended December 31,
	2014						2013						2012
	$			%			$			%			$			%

Income tax at statutory rate		2,937			34			3,132			34.0			3,039			34.0
Tax-exempt interest income		(1,266	)		(14.7	)		(1,498	)		(16.3	)		(1,511	)		(16.9	)
Non-deductible interest expense		49			0.6			61			0.7			67			0.7
Bank-owned life insurance		(218	)		(2.5	)		(217	)		(2.3	)		(315	)		(3.5	)
Other		44			0.5			23			0.2			15			0.2	)

Income tax expense		1,546			17.9			1,501			16.3			1,295			14.5

The ability to realize the benefit of deferred tax assets is dependent upon a number of factors, including the generation of future taxable income, the ability to carry back losses to recover taxes paid in previous years, the ability to offset capital losses with capital gains, the reversal of deferred tax liabilities, and certain tax planning strategies. A valuation allowance of $25,000 has been established to offset in its entirety the tax benefits associated with certain impaired securities that management believes may not be realizable.

The Corporation has a deferred tax asset for credits related to Alternative Minimum Taxes (AMT) of $996,000 as of December 31, 2014, $1,137,000 as of December 31, 2013, and $1,123,000 as of December 31, 2012. The AMT credits have an unlimited carry-forward period. No valuation has been established for these deferred tax assets in view of the Corporation's ability to carry forward tax credits to future years, coupled with the anticipated future taxable income as evidenced by the Corporation's earnings potential.

U.S. generally accepted accounting principles prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be 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 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be 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 should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Corporation recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Income. With few exceptions, the Corporation is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2011.

Significant components of income tax expense are as follows:

(DOLLARS IN THOUSANDS)

	Year Ended December 31,
	2014			2013			2012
	$			$			$
Current tax expense		1,032			1,671			814
Deferred tax expense (benefit)		531			(174	)		607
Valuation allowance adjustment		(17	)		4			(126	)
Income tax expense		1,546			1,501			1,295

Components of the Corporation's net deferred tax position are as follows:

(DOLLARS IN THOUSANDS)

	December 31,
	2014			2013			2012
	$			$			$

Deferred tax assets
Allowance for loan losses		2,428			2,454			2,555
Net unrealized holding losses on securities available for sale		—			2,030			—
Deferred compensation reserve		199			248			299
Capital loss carryforward		25			42			37
Other than temporary impairment		—			106			417
Tax credit carryforward		996			1,137			1,123
Charitable contribution carryforward		—			—			49
Allowance for off-balance sheet extensions of credit		105			148			124
Interest on non-accrual loans		170			164			136
Other		6			305			3
Total deferred tax assets		3,929			6,634			4,743
Valuation allowance		(25	)		(42	)		(37	)
Net deferred taxes		3,904			6,592			4,706

Deferred tax liabilities
Premises and equipment		(1,536	)		(1,388	)		(1,582	)
Net unrealized holding gains on securities available for sale		(516	)		—	)		(3,432	)
Discount on investment securities		(1	)		(61	)		(74	)
Credit losses on impaired securities		—			(228	)		(256	)
Other		(13	)		—	)		(83
Total deferred tax liabilities		(2,066	)		(1,677	)		(5,427	)
Net deferred tax assets (liabilities)		1,838			4,915			(721