## Bank Owned Life Insurance 

The Bank invests in bank owned life insurance ( " BOLI ") as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Bank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies and reported in other assets on the balance sheet. Income from the increase in the cash surrender value of the policies is included with other income on the statement of income. 

## Derivative Financial Instruments 

In connection with its mortgage banking activities, the Bank enters into commitments to originate certain fixed -rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Bank enters into forward commitments to sell individual mortgage loans at a fixed price at a future date to third -party investors to hedge the effect of changes in interest rates on the value of interest rate locks. Both the interest rate locks and the forward commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the reporting date. Gross derivative assets and liabilities are recorded within other assets and other liabilities on the balance sheet, with changes in fair value during the period recorded within gain on sale of loans on the statement of income. 

## Advertising Costs 

The Bank follows the policy of charging the costs of advertising to expense as incurred. Advertising costs totaled $ 118, 000 and $ 110, 000 for the years ended December 31, 2013 and 2012, respectively. 

## Stock Based Compensation 

The Bank follows the provisions of FASB ASC 718 -10 to account for its stock compensation plans. This guidance requires an entity to recognize the expense of employee services received in share - based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. 

## Income Taxes 

Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Bank determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. 

