NOTE 4 - Loan Servicing NOTE 7 - Income Taxes NOTE 5 - Premises and Equipment, Net NOTE 6 - Foreclosed Real Estate At year end, foreclosed real estate is summarized below: Depreciation expense was $1,469,000 and $1,422,000 for 2010 and 2009. At December 31, 2010 and 2009, there was no  valuation allowance required. The fair value of mortgage servicing rights at December 31, 2010 and 2009 was $434,000 and $398,000, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $601,000 and $596,000 at December 31, 2010 and 2009, respectively. Mortgage loans serviced for others are not reported  as assets. The principal balances of these loans at year end  are as follows: The components of the net deferred tax asset recorded in the consolidated balance sheets are as follows:  (Dollars in thousands) 2010 2009 __________ __________ Mortgage loan portfolios  serviced for FHLMC......................................... $ 58,944 $ 51,512 __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Servicing rights: Beginning of year ............................................. $ 309 $ 276 Additions ......................................................... 179 177 Amortized to expense ....................................... (113) (144) __________ __________ End of year.................................................... $ 375 $ 309 __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Cost: Land ................................................................. $ 4,540 $ 5,069 Buildings and improvements............................. 19,083 17,939 Furniture and equipment .................................. 10,751 10,194 __________ __________ Total cost ....................................................... 34,374 33,202 Less accumulated depreciation........................... (15,081) (13,612) __________ __________ Premises and equipment, net.......................... $ 19,293 $ 19,590 __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Commercial real estate and other dwellings ........ $ 563 $ 1,897 Residential real estate ......................................... 931 1,082 Construction and land development .................. 1,804 768 __________ __________ Total ............................................................. $ 3,298 $ 3,747 __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Deferred tax assets: Bad debts .......................................................... $ 3,582 $ 2,404 Deferred loan fees.............................................. 107 112 Deferred compensation ..................................... 647 636 Unrealized depreciation on securities  available-for-sale, net ...................................... 249 92 Net operating loss ............................................. 727 709 Tax credits ........................................................ 46 269 Nonaccrual loan interest income ....................... 22 79 Restricted stock awards...................................... 56 39 REO writedowns............................................... 22 66 Unqualified DCP.............................................. 43 42 Post retirement benefit ...................................... 67 65 Other-than-temporary impairment ................... 90 46. Other ................................................................ 21 6 __________ __________ Total deferred tax assets................................... 5,679 4,565 Deferred tax liabilities: Depreciation .................................................... (1,063) (1,137)  Prepaids ............................................................ (207) (198) Mortgage servicing rights .................................. (147) (121) Deferred stock dividends................................... (115) (115) Post retirement unrealized gain ......................... (50) (56) Other ................................................................ (13) (18) __________ __________ Total deferred tax liabilities .............................. (1,595) (1,645) Valuation allowance .......................................... (387) (376) __________ __________ Net deferred tax assets ...................................... $ 3,697 $ 2,544 __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Federal statutory rate.......................................... 34% 34% Tax expense at statutory rate .............................. $ 2,032 $ 569 State tax, net of federal effect.............................. (143) (201) Tax exempt income............................................ (907) (937) Bank owned life insurance.................................. (137) (138) Tax credits ......................................................... (76) (112) Other ................................................................. 28 6 __________ __________ Total income tax expense (benefit) .................. $ 797 $ (813) __________ __________ (Dollars in thousands) 2010 2009 __________ __________ Federal: Current ............................................................ $ 1,771 $ (365) Deferred........................................................... (757) (134) State: Current ............................................................ 14 6. Deferred........................................................... (231) (320) __________ __________ Income tax expense (benefit) ............................ $ 797 $ (813) __________ __________ Components of the income tax expense (benefit) consist of the following: Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following: At year end, premises and equipment are summarized below: Activity for capitalized mortgage servicing rights,  was as follows: 33