13. Income Taxes

The following is a summary of income tax expense for the years ended December 31, 2016, 2015, and 2014:


	2016			2015		2014

Current – federal	$	6,181		$	7,777	$	8,471

Current – state		(33	)		139		110

Deferred – federal		1,023			376		733


Income tax expense	$	7,171		$	8,292	$	9,314

The components of the net deferred tax asset as of December 31, 2016 and 2015 are as follows:


	2016		2015

Deferred tax assets:
Allowance for loan losses	$	4,679	$	4,799
Fair value adjustments – business combination		2,530		1,661
Deferred compensation		2,891		2,443
Impaired security valuation		261		497
Net operating loss carryover		627		1,137
Post-retirement benefits		1,688		1,562
Unrealized loss on interest rate swap		161		258
Nonaccrual loan interest		649		762
Accrued expenses		1,282		1,072
Deferred fees and costs		629		388
Other		465		442

		15,862		15,021

Deferred tax liabilities:
Unrealized gain on securities available for sale		750		1,900
Premises and equipment		2,258		1,737
Intangibles – section 197		4,735		4,558
Mortgage servicing rights		487		337
Other		23		19

		8,253		8,551


Net deferred tax asset	$	7,609	$	6,470

During 2014, the Corporation generated net capital losses of $36 which, if unable to be utilized, expire December 31, 2019. During 2015, the Corporation generated additional net capital losses of $222 which, if unable to be utilized, expire December 31, 2020. In 2016, the Corporation generated net capital gains of $70, resulting in cumulative net capital losses of $188 that expire December 31, 2020. The associated deferred tax assets of $66 and $90 as of December 31, 2016 and 2015, respectively, are included in other deferred tax assets. The Corporation determined that it was not required to establish a valuation allowance for deferred tax assets since management believes that the deferred tax assets are likely to be realized through a carry back to taxable income in prior years, future reversals of existing temporary differences, future net capital gains and future taxable income.

The reconciliation of income tax attributable to pre-tax income at the federal statutory tax rates to income tax expense is as follows:


	2016			%			2015			%			2014			%
Tax at statutory rate	$	9,699			35.0		$	10,671			35.0		$	11,336			35.0
Tax exempt income, net		(2,054	)		(7.4	)		(1,816	)		(6.0	)		(1,684	)		(5.2	)
Bank owned life insurance		(379	)		(1.3	)		(418	)		(1.4	)		(364	)		(1.1	)
Merger costs		170			0.6			30			0.1			0			0.0
Other		(265	)		(1.0	)		(175	)		(0.5	)		26			0.1


Income tax expense	$	7,171			25.9		$	8,292			27.2		$	9,314			28.8

At December 31, 2016 and 2015, the Corporation has no unrecognized tax benefits. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Corporation recognizes interest and/or penalties related to income tax matters as part of income tax expense. At December 31, 2016 and 2015, there were no amounts accrued for interest and/or penalties and no amounts recorded as expense for the years ending December 31, 2016, 2015 and 2014.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the Commonwealth of Pennsylvania. The Corporation is no longer subject to examination by the taxing authorities for years prior to 2013. Tax years 2013 through 2015 remain open to federal and state examination.

In connection with its acquisition of FC Banc Corp., the Corporation assumed a federal net operating loss carryforward of $6,367, which expires in 2033. Under Section 382 of the Internal Revenue Code, the utilization of the loss carryforward in future years is limited based on the consideration paid and other factors. The annual limitation on the utilization of this loss carry forward is $1,455. As of December 31, 2016, the balance of the net operating loss carryforward is $1,793. Management believes that the net operating loss carryforward will be used in full before its expiration.