Federal Income Taxes

12 Months Ended

Dec. 31, 2013

Federal Income Taxes [Abstract]

Federal Income Taxes

(11)  FEDERAL INCOME TAXES

Income tax expense (benefit) was comprised of the following:

	Year Ended
	December 31
(Dollars in thousands)	2013		2012
Current tax expense:
Federal	$	567	$	2,450
State		9		11
Deferred income tax expense (benefit):
Federal		644		(355)
State		-		-
Income tax expense	$	1,220	$	2,106

The effective income tax rates of 23.7% for 2013 and 28.7% for 2012 were different than the applicable statutory Federal income tax rate of 34%. The reason for these differences follows:

	Year Ended
	December 31
(Dollars in thousands)	2013		2012
Federal income taxes at statutory rate	$	1,747	$	2,497
Decrease resulting from:
Tax-exempt interest and dividend preference		(465)		(324)
Bank owned life insurance		(81)		(82)
Other, net increase		19		15
Income tax expense	$	1,220	$	2,106

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31
(Dollars in thousands)	2013		2012
Deferred tax assets:
Allowance for credit losses	$	1,572	$	2,325
Unrealized losses on securities		836		-
Unrealized losses on reclassified securities		11		18
Unrealized loss on pension obligation		375		759
Capital loss disallowance		1		1
State net operating losses		393		373
Unvested stock awards		58		45
Deferred compensation (SERP)		679		653
Nonqualified stock options		61		38
Non-accrued interest		622		422
Joint venture difference		-		-
Deferred compensation (BOLI)		-		-
Provision for unfunded loans		53		42
OREO write-downs		24		75
Accrued expenses		50		118
Total gross deferred tax assets		4,735		4,869
Deferred tax liabilities:
Unrealized gains on securities available for sale		-		(426)
Depreciation		(113)		(80)
Pension expense		(43)		(100)
Bank shares tax credit		(189)		(145)
Prepaid expenses		(169)		(155)
Mortgage servicing rights		(39)		(28)
Total gross deferred tax liabilities		(553)		(934)
Valuation allowance		(394)		(374)
Net deferred tax asset	$	3,788	$	3,561

As of December 31, 2013, DNB had no material unrecognized tax benefits or accrued interest and penalties. It is DNB’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Federal and state tax years 2010 through 2013 were open for examination as of December 31, 2013.

DNB had net operating loss carryovers with the Commonwealth of Pennsylvania of $6.0 million and $5.7 million at December 31, 2013 and 2012, respectively for which a full valuation allowance has been established. These carryovers will begin to expire in 2021.