Note 12. Income Taxes

The components of income tax expense (benefit) are as follows:


Years ended December 31, (In thousands)	2011			2010
Current taxes – federal	$	284		$	277
Deferred taxes – federal		(219	)		(292	)

Income tax expense (benefit)	$	65		$	(15	)

A reconciliation of the expected income tax expense computed by applying the federal statutory rate of 34% to income included in the consolidated statements of income follows:


Years ended December 31, (In thousands)	2011			2010
Expected tax expense	$	396		$	324
Tax exempt interest		(272	)		(307	)
Income on bank owned life insurance		(55	)		(56	)
Other		(4	)		24

Income tax expense (benefit)	$	65		$	(15	)

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and does not believe it has any liability related to uncertain tax positions. The Company's policy is to classify any interest or penalties recognized as interest expense or noninterest expense, respectively. The years ended December 31, 2011, 2010 and 2009 remains open for audit by all major jurisdictions.

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


December 31, (In thousands)	2011		2010
Deferred tax assets
Allowance for loan and other real estate losses	$	894	$	992
Interest on non-accrual loans		352		218
Deferred loan interest, fees		107		125
Employee benefit liabilities		254		245
Alternative minimum tax carryforward		395		301
Other-than-temporary impairment valuation		102		—
Net unrealized losses on securities available for sale		—		—

Total deferred tax assets		2,104		1,881

Deferred tax liabilities
Prepaid expenses		40		48
Depreciation		118		113
Accretion of discount on investment securities		59		52
Net unrealized gains on securities available for sale		237		85

Total deferred tax liabilities		454		298

Net deferred tax asset	$	1,650	$	1,583

Deferred tax assets or liabilities are initially recognized for differences between the financial statement carrying amount and the tax basis of asset and liabilities which will result in future deductible or taxable amounts and operating loss and tax credit carry-forwards. A valuation allowance is then established, as applicable, to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss or credit carry-forwards depends on having sufficient taxable income of an appropriate character within the carry-back and carry-forward periods. Sources of taxable income that may allow for the realization of tax benefits include (1) taxable income in the current year of prior years that is available through carry-back, (2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) taxable income generated by future operations. There is no valuation allowance for deferred tax assets as of December 31, 2011 and 2010. It is management's belief that realization of the deferred tax asset is more likely than not.