The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate of 35 percent on income from operations as indicated in the following analysis: A summary of the changes in the net deferred tax asset (liability) for the years ended December 31, 2002 and 2001 is as follows: Retained earnings at December 31, 2002 and 2001 included approximately $14,791,000 accumulated prior to January 1, 1987 for which no provision for federal income taxes has been made. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, it will be added to future taxable income. 50 (dollars in thousands) 2002 2001 Balance, beginning $ 330 $ 2,070 Deferred tax expense, charged to operations 678 (107) Other comprehensive income, charged to equity 15 (1,633) Balance, ending $1,023 $  330 (dollars in thousands) 2002 2001 Deferred tax asset: Allowance for loan losses $ 4,034 $3,168 Deferred directors’ fees 102 106 Real estate owned 271 6 Deferred compensation 230 225 Unrealized loss on cash flow hedges 638 – Other 394 16 Subtotal 5,669 3,521 Deferred tax liability: FHLB stock (1,045) (914) Premises and equipment (1,579) (1,807) Acquisition premium (727) – Unrealized gain on investments classified as available for sale (1,021) (398) Other (274) (72) Subtotal (4,646) (3,191) Deferred tax asset, net $ 1,023 $ 330 The net deferred tax asset (liability) at December 31, 2002 and 2001 is as follows: Years Ended December 31, (dollars in thousands) 2002 2001 2000 Federal tax based on statutory rate $ 9,531 $7,958 $7,171 Increase (decrease) resulting from: Effect of tax-exempt income (1,378) (374)(113) Amortization of acquisition intangibles 85 376 416 Interest and other nondeductible expenses 161 83 38 Nondeductible ESOP expense 389 242 56 State income tax on non-bank entities – 3 (74) Other (10) (59)20 Income tax expense $ 8,778 $8,229 $7,514 Effective rate 32.2% 36.2% 36.7%