(9) Income Taxes

The composition of income tax expense for the years ended December 31, 2013, 2012, and 2011 was as follows:

(in thousands)	2013		2012			2011
Current:
Federal	$	584	$	651		$	374
State	71		156			(214		)
Total current	655		807			160
Deferred:
Federal	1,485		(197		)	386
State	282		(64		)	45
Total deferred	1,767		(261		)	431
Total income tax expense	$	2,422	$	546		$	591

Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory Federal income tax rate for the reasons noted in the table for the years ended December 31, 2013, 2012, and 2011 are as follows:

	2013					2012					2011
(in thousands)	Amount			%		Amount			%		Amount			%
Income before provision for income tax expense	$	7,396				$	3,368				$	3,448
Tax at statutory Federal income tax rate	$	2,515		34.00	%	$	1,145		34.00	%	$	1,172		34.00	%
Tax-exempt income	(353		)	(11.27	)	(380		)	(11.27	)	(404		)	(11.72	)
State income tax, net of Federal tax benefit	233			3.15		61			1.81		(111		)	(3.23	)
Release of prior year over accrual	0			0.00		(371		)	(11.01	)	0			0.00
Other, net	27			6.87		91			2.70		(66		)	(1.91	)
Provision for income tax expense	$	2,422		32.75	%	$	546		16.23	%	$	591		17.14	%

The components of deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are as follows:

(in thousands)	2013		2012
Deferred tax assets:
Allowance for loan losses	$	5,213	$	5,640
Impairment of other real estate owned	1,771		2,774
Goodwill	2,134		2,483
Available-for-sale securities	914		0
Deferred taxes on pension	0		997
Nonaccrual loan interest	1,015		940
Core deposit intangible	822		904
Pension	896		450
Deferred compensation	44		36
Other	322		449
Total deferred tax assets	$	13,131	$	14,673
Deferred tax liabilities:
Available-for-sale securities	$	0	$	2,088
Premises and equipment	988		958
Mortgage servicing rights	1,114		908
Deferred taxes on pension	328		0
Assets held for sale	112		110
FHLB stock dividend	100		100
Other	72		1
Total deferred tax liabilities	2,714		4,165
Net deferred tax asset	$	10,417	$	10,508

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the 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 upon 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 the Company will realize the benefits of these temporary differences at December 31, 2013 and, therefore, did not establish a valuation reserve.

At December 31, 2013, the accumulation of prior years’ earnings representing tax bad debt deductions of the Bank was $2.9 million. If these tax bad debt reserves were charged for losses other than bad debt losses, the Bank would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. As a result of the lapse of the statue of limitations for the 2007 tax year, the Company recognized $340,351 of gross unrecognized tax benefits and $30,969 of accrued interest which resulted in a decrease in the effective tax rate for the year ended December 31, 2011. As of December 31, 2013, 2012, and 2011, respectively, the Company did not have any uncertain tax provisions.

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

	2013		2012		2011
Unrecognized tax benefits as of January 1,	$	0	$	0	$	340,351
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years	0		0		0
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year	0		0		0
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities	0		0		0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations	0		0		(340,351		)
Unrecognized tax benefits as of December 31,	$	0	$	0	$	0