Note 10. Income Taxes

The current and deferred components of income tax expense were as follows:

For the years ended December 31,	2012			2011		2010
Federal income tax
Current	$	3,239,000		$	2,828,000	$	3,450,000
Deferred		(108,000	)		730,000		395,000
		3,131,000			3,558,000		3,845,000
State franchise tax		240,000			233,000		233,000
	$	3,371,000		$	3,791,000	$	4,078,000

The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows:

For the years ended December 31,	2012			2011			2010
Expected tax expense	$	5,621,000		$	5,654,000		$	5,668,000
Non-taxable income		(2,096,000	)		(1,794,000	)		(1,527,000	)
State franchise tax, net of federal tax benefit		156,000			152,000			151,000
Tax credits		(414,000	)		(383,000	)		(345,000	)
Other		104,000			162,000			131,000
	$	3,371,000		$	3,791,000		$	4,078,000

Deferred tax assets and liabilities are classified as other assets and other liabilities in the consolidated balance sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2012 and 2011 are as follows:

	2012			2011
Allowance for loan losses	$	4,375,000		$	4,550,000
OREO		131,000			153,000
Accrued pension and post-retirement		1,412,000			1,293,000
Unrealized loss on securities available for sale		-			-
Other than temporary impairment of securities available for sale		-			-
Other assets		192,000			57,000
Total deferred tax asset		6,110,000			6,053,000
Net deferred loan costs		(770,000	)		(664,000	)
Depreciation		(2,326,000	)		(2,236,000	)
Unrealized gain on securities available for sale		(4,275,000	)		(3,985,000	)
Mortgage servicing rights		(303,000	)		(421,000	)
Core deposit intangible		(203,000	)		(303,000	)
Investment in flow through entities		(323,000	)		(264,000	)
Prepaid expense		(422,000	)		(528,000	)
Other liabilities		-			(2,000	)
Total deferred tax liability		(8,622,000	)		(8,403,000	)
Net deferred tax liability	$	(2,512,000	)	$	(2,350,000	)

At December 31, 2012, the Company held investments in two limited partnerships with related New Market Tax Credits. These investments are carried at cost and amortized on the effective yield method. The tax credits from these investments are estimated at $636,000 and $589,000 for each of the years ended December 31, 2012 and 2011, respectively, and are recorded as a reduction of income tax expense. Amortization of the investments in the limited partnerships totaled $476,000 and $390,000 for the years ended December 31, 2012 and 2011, respectively, and is recognized as a component of income tax expense in the consolidated statements of income. The carrying value of these investments was $1,546,000 and $2,022,000 at December 31, 2012 and 2011, respectively, and is recorded in other

assets. The Company's total exposure to these limited partnerships was $5,046,000 and $5,522,000, at December 31, 2012 and 2011, respectively, which is comprised of the Company's equity investment in the limited partnerships and the balance of a participated loan receivable.

FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2009 through 2011.