(12)	INCOME TAXES

The components of income tax expense were as follows:


(In thousands)	2012			2011
Current	$	2,037		$	1,270
Deferred		(478	)		273

Totals	$	1,559		$	1,543

The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34% follows:


(In thousands)	2012			2011
Provision at federal statutory tax rate	$	1,868		$	1,880
State income tax-net of federal tax benefit		102			114
Tax-exempt interest income		(353	)		(364	)
Increase in cash value of life insurance		(62	)		(69	)
Other		4			(18	)

Totals	$	1,559		$	1,543

Effective tax rate		28.4	%		27.9	%

Significant components of the deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows:


(In thousands)	2012			2011
Deferred tax assets (liabilities):
Deferred compensation plans	$	112		$	123
Allowance for loan losses		1,645			1,493
Accrued early retirement		189			0
Other		92			33

Deferred tax assets		2,038			1,649

Depreciation		(580	)		(637	)
Deferred loan fees and costs		(54	)		(75	)
FHLB stock dividends		(101	)		(101	)
Unrealized gain on securities available for sale		(959	)		(906	)
Acquisition purchase accounting adjustments		0			(11	)

Deferred tax liabilities		(1,694	)		(1,730	)

Net deferred tax asset (liability)	$	344		$	(81	)

At December 31, 2012 and 2011, the Company had no liability for unrecognized income tax benefits related to uncertain tax positions and does not anticipate any increase in the liability for unrecognized tax benefits during the next twelve months. The Company believes that its income tax positions would be sustained upon examination and does not anticipate any adjustments that would result in a material change to its financial position or results of operations. The Company files U.S. federal income tax returns and Indiana state income tax returns. Returns filed in these jurisdictions for tax years ended on or after December 31, 2009 are subject to examination by the relevant taxing authorities. Each entity included in the consolidated federal and Indiana state income tax returns filed by the Company are charged or given credit for the applicable tax as though separate returns were filed.

Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at December 31, 2012 and 2011 include approximately $1.0 million of cumulative deductions for which no deferred federal income tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes subject to the then current corporate income tax rate. The unrecorded deferred liability on these amounts was approximately $354,000 at December 31, 2012 and 2011.

Federal legislation enacted in 1996 repealed the use of the qualified thrift reserve method of accounting for bad debts for tax years beginning after December 31, 1995. As a result, the Bank discontinued the calculation of the annual addition to the statutory bad debt reserve using the percentage-of-taxable-income method and adopted the experience reserve method for banks. Under this method, the Bank computes its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation also provided that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests as provided under prior law and if the Bank continues to qualify as a “bank” under existing provisions of the Internal Revenue Code.