NOTE K—INCOME TAXES

The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009, are as follows:

In thousands	2011		2010		2009

Federal:
Current	$	1,816	$	722	$	2,942
Deferred		279		1,296		(1,647	)

		2,095		2,018		1,295
State:
Current		59		39		62

	$	2,154	$	2,057	$	1,357

Reconciliations of the statutory federal income tax at a rate of 34% to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2011, 2010 and 2009, are as follows:

	Percentage of Income before Income Taxes

	2011			2010			2009
Federal income tax at statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefit		0.4	%		0.4	%		0.5	%
Tax-exempt income		(6.0	)%		(5.8	)%		(6.9	)%
Earnings on investment in life insurance		(3.1	)%		(3.5	)%		(4.0	)%
Rehabilitation and low-income housing credits		(5.2	)%		(5.5	)%		(7.9	)%
Other		0.1	%		0.1	%		0.1	%

		20.2	%		19.7	%		15.8	%

The provision for federal income taxes includes $0, $24,000 and $6,000 of income taxes related to net gains on sales of securities in 2011, 2010 and 2009, respectively. Rehabilitation and low-income housing income tax credits were $556,000, $578,000, and $679,000 during 2011, 2010 and 2009, respectively. Projected credits are $556,000 in 2012, $405,000 in 2013, and $372,000 thereafter.

Components of deferred tax assets and liabilities at December 31 were as follows:

In thousands	2011		2010

Deferred tax assets:
Allowance for loan losses	$	5,264	$	5,152
Accrued deferred compensation		664		672
Pension		2,751		1,412
Deferred loan fees		35		70
Other than temporary impairment		178		178
Low income housing tax credit carryforward		447		385
Non-accrual interest		230		224
Director deferred liability		300		221
Other		382		172

		10,251		8,486

Deferred tax liabilities:
Available for sale securities		3,088		2,021
Prepaid pension benefit cost		4,268		3,398
Prepaid expenses		281		316
Accumulated depreciation		540		574
Goodwill/intangibles		627		723

		8,804		7,032

Net Deferred Tax Asset	$	1,447	$	1,454

The Corporation has a federal tax credit carryforward related to low income housing credits that expires in 2030.

The Corporation did not have any uncertain tax positions at December 31, 2011 and 2010. The Corporation's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.

Years that remain open for potential review by the Internal Revenue Service are 2008 through 2010.