Federal Income Taxes

12 Months Ended

Dec. 31, 2015

Note 12. Federal Income Taxes

The temporary differences which give rise to significant portions of deferred tax assets and liabilities are as follows:



(Dollars in thousands)	December 31
Deferred Tax Assets	2015		2014
Allowance for loan losses	$	3,429	$	3,098
Deferred compensation		1,017		1,041
Purchase accounting		22		21
Deferred loan fees and costs, net		160		160
Capital loss carryover		813		1,013
Other than temporary impairment of investments		376		369
Accumulated other comprehensive loss		1,917		1,597
AMT Credit		192		192
Other		423		750
		8,349		8,241
Valuation allowance		(1,000)		(1,200)
Total gross deferred tax assets		7,349		7,041

Deferred Tax Liabilities
Core deposit intangibles		-		61
Depreciation		334		233
Joint ventures and partnerships		37		39
Pension		2,199		2,331
Mortgage servicing rights		21		49
Total gross deferred tax liabilities		2,591		2,713
Net deferred tax asset	$	4,758	$	4,328

In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, Management believes it is more likely than not that the Bank will realize the benefits of these deferred tax assets other than those for which a valuation allowance has been recorded.

The components of the provision for Federal income taxes attributable to income from operations were as follows:



	For the Years Ended December 31
(Dollars in thousands)	2015		2014		2013
Current tax expense	$	2,382	$	1,712	$	947
Deferred tax expense (benefit)		(111)		294		348
Income tax provision	$	2,271	$	2,006	$	1,295

For the years ended December 31, 2015, 2014, and 2013, the income tax provisions are different from the tax expense which would be computed by applying the Federal statutory rate to pretax operating earnings. A reconciliation between the tax provision at the statutory rate and the tax provision at the effective tax rate is as follows:



	For the Years Ended December 31
(Dollars in thousands)	2015		2014		2013
Tax provision at statutory rate (34%)	$	4,241	$	3,539	$	2,559
Income on tax-exempt loans and securities		(1,566)		(1,466)		(1,212)
Nondeductible interest expense relating to carrying tax-exempt obligations		22		28		30
Dividends received exclusion		(2)		(7)		(15)
Income from bank owned life insurance		(182)		(163)		(185)
Life insurance proceeds		(35)		-		111
Change in valuation allowance		(200)		-		-
Stock option compensation		25		-		-
Other, net		(32)		75		7
Income tax provision	$	2,271	$	2,006	$	1,295

Effective income tax rate		18.2%		19.3%		17.2%

At December 31, 2015, the Corporation had a capital loss carryover of $2.4 million. This loss carryover can only be offset with capital gains for federal income tax purposes. The tax benefit of this carryover is $1 million, expiring between 2016 and 2019, and the Corporation has recorded a valuation allowance of $1 million against the capital loss carryover.

The Corporation recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense for all periods presented. No penalties or interest were recognized in 2015, 2014 or 2013. The Corporation has no uncertain tax positions at December 31, 2015. The Corporation is no longer subject to U.S. Federal examinations by tax authorities for the years before 2012.