Federal Income Taxes

12 Months Ended

Dec. 31, 2012

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)	2012		2011
Current tax expense:
Federal	$	2,450	$	2,240
State		11		-
Deferred income tax expense (benefit):
Federal		(355)		(174)
State		-		-
Income tax expense	$	2,106	$	2,066

The effective income tax rates of 28.7% for 2012 and 29.6% for 2011 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)	2012		2011
Federal income taxes at statutory rate	$	2,497	$	2,369
Decrease resulting from:
Tax-exempt interest and dividend preference		(324)		(222)
Bank owned life insurance		(82)		(84)
Other, net increase		15		3
Income tax expense	$	2,106	$	2,066

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)	2012		2011
Deferred tax assets:
Allowance for credit losses	$	2,325	$	2,096
Unrealized losses on securities		-		4
Unrealized losses on reclassified securities		18		31
Unrealized loss on pension obligation		759		725
Capital loss disallowance		1		1
Unvested stock awards		45		19
Deferred compensation (SERP)		403		380
Nonqualified stock options		38		15
Non-accrued interest		422		347
Joint venture difference		31		64
Deferred compensation (BOLI)		250		248
Provision for unfunded loans		42		34
OREO write-downs		75		69
Accrued expenses		87		48
Total gross deferred tax assets		4,496		4,081
Deferred tax liabilities:
Unrealized gains on securities available for sale		(426)		-
Depreciation		(80)		(91)
Pension expense		(100)		(134)
Bank shares tax credit		(145)		(102)
Prepaid expenses		(155)		(139)
Prepaid expenses		(28)		-
Total gross deferred tax liabilities		(934)		(466)
Valuation allowance		(1)		(1)
Net deferred tax asset	$	3,561	$	3,614

As of December 31, 2012, 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 2009 through 2012 were open for examination as of December 31, 2012.

DNB had net operating loss carryovers with the Commonwealth of Pennsylvania of $6.0 million and  $5.7million at December 31, 2012 and 2011, respectively for which a full valuation allowance has been established. These carryovers will begin to expire in 2021.