Federal Income Taxes

12 Months Ended

Dec. 31, 2015

(11) FEDERAL INCOME TAXES

Income tax expense was comprised of the following:



	Year Ended
	December 31
(Dollars in thousands)	2015		2014
Current tax expense:
Federal	$	1,581	$	1,894
State		10		9
Deferred income tax (benefit) expense:
Federal		(88)		(226)
Income tax expense	$	1,503	$	1,677

The effective income tax rates of 22.6% for 2015 and 25.9% for 2014 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)	2015		2014
Federal income taxes at statutory rate	$	2,258	$	2,203
Decrease resulting from:
Tax-exempt interest and dividend preference		(640)		(467)
Bank owned life insurance		(78)		(80)
Other, net (decrease) increase		(37)		21
Income tax expense	$	1,503	$	1,677

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



	December 31
(Dollars in thousands)	2015		2014
Deferred tax assets:
Allowance for credit losses	$	1,677	$	1,485
Unrealized losses on securities		402		227
Unrealized losses on reclassified securities		6		8
Unrealized loss on pension obligation		616		589
Capital loss disallowance		1		1
State net operating losses		528		463
Unvested stock awards		147		131
Deferred compensation (SERP)		732		704
Nonqualified stock options		59		74
Non-accrued interest		468		547
Provision for unfunded loans		64		57
OREO write-downs		52		75
Core deposit intangible		14		16
Accrued expenses		57		51
Total gross deferred tax assets		4,823		4,428
Deferred tax liabilities:
Depreciation		(31)		(101)
Pension expense		(27)		(50)
Bank shares tax credit		(199)		(189)
Prepaid expenses		(219)		(151)
Mortgage servicing rights		(44)		(28)
Deferred gain from insurance proceeds		(41)		-
Total gross deferred tax liabilities		(561)		(519)
Valuation allowance		(529)		(463)
Net deferred tax asset	$	3,733	$	3,446

As of December 31, 2015, 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 2012 through 2014 were open for examination as of December 31, 2015.

DNB had net state operating loss carryovers with the Commonwealth of Pennsylvania of $7.4 million and $6.8 million at December 31, 2015 and 2014, respectively for which a full valuation allowance has been established. These carryovers will begin to expire in 2021.