Note 8. Income Taxes

The table below details the components of the Company's net deferred tax assets as of December 31, 2016 and 2015:

	December 31,
	2016		2015
		(dollars in thousands)
Deferred tax assets
Allowance for loan and lease losses	$	8,371	$	8,551
Net operating loss carryforwards		4,851		7,682
Deferred compensation		1,780		1,608
Investment securities valuation		1,649		–
Forgone interest on non-accrual loans		1,498		1,472
Accruals		1,116		942
Deferred income		1,036		1,034
Alternative minimum tax credits		846		2,491
Fair value adjustment for acquired assets and liabilities		216		727

Total deferred tax assets		21,363		24,507
Deferred tax liabilities
State deferred tax		1,234		1,656
Deferred costs, prepaids and FHLB advances		584		573
Premises and equipment		400		638
Investment securities valuation		–		368

Total deferred tax liabilities		2,218		3,235

Net deferred tax assets	$	19,145	$	21,272

Deferred tax assets relate to amounts that are expected to be realized through subsequent reversals of existing taxable temporary differences over the projection period. The ultimate realization of the Company's deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences reverse. U.S. GAAP requires the Company to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, significant weight is given to evidence, both positive and negative, that can be objectively verified. At December 31, 2016 and 2015, there was no valuation allowance for the Company's deferred tax assets. The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on the Company's consolidated results of operations or financial position.

In 2014, Management assessed the impact of the MISN Transaction for limitations under I.R.C. Section 382 and determined that, given the assumption that the Company generates sufficient future taxable income to utilize net operating losses ("NOLs"), no loss of NOL carry-forward utilization would result from the estimated annual I.R.C. Section 382 base limitation resulting from the transaction. Furthermore, due to the fact that MISN was in a net unrealized built-in gain position ("NUBIG") the Company's annual I.R.C. Section 382 limitation will likely increase over the next three years for realized built-in gains ("RBIG").

As of December 31, 2016, the Company has deferred tax assets attributable to NOLs available for carry-forward for federal and state tax purposes totaling $9.5 million and $14.0 million, respectively. Deferred tax assets attributable to these NOLs total $4.3 million as of December 31, 2016. This amount is comprised of $2.8 million for federal and $1.5 million for state. Of the $4.3 million in NOLs, $0.3 million of state NOLs are attributable to operating losses the Company incurred in prior years, and $3.0 million and $1.0 million of federal and state NOLs are attributable to the MISN Transaction. The realization of NOL carry-forwards attributable to operating losses the Company incurred in prior years will expire in 2029. NOLs attributable to the MISN Transaction will expire in 2034. The realization of these NOL carry-forwards for federal and state tax purposes is limited under current tax law with limitations placed on the amount of NOL that can be utilized annually. The Company does not, however, believe that these annual limitations will impact the ultimate deductibility of these NOL carry-forwards. Additionally, at December 31, 2016, the Company has $0.5 million in alternative minimum tax credit ("AMT") for federal income tax purposes, and $0.3 million AMT for state income tax purposes, that have no expiration.

The Company is subject to income taxation by both federal and state taxing authorities. Income tax returns for the years ended December 31, 2016, 2015, 2014 and 2013 are open to audit by federal taxing authorities, while income tax returns are open to audit by state taxing authorities for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. As of December 31, 2016 the Company's 2013 federal income tax return was under examination by the IRS. The Company does not anticipate any material impact to the financial statements as a result of this examination. The Company does not have any uncertain income tax positions and accrued interest charges and penalties as of December 31, 2016 and 2015 were immaterial to the financial statements.

The following table provides a summary for the current and deferred components of the Company's income tax provision for the years ended December 31, 2016, 2015 and 2014:

	For the Years Ended December 31,
	2016		2015		2014
		(dollars in thousands)
Current:
Federal	$	5,156	$	3,351	$	141
State		1,969		1,544		253

Total current provision		7,125		4,895		394

Deferred:
Federal	$	2,792	$	3,250	$	3,116
State		1,160		737		1,239

Total deferred provision		3,952		3,987		4,355

Total provision	$	11,077	$	8,882	$	4,749

The following table reconciles the statutory federal income tax expense and rate to the Company's effective income tax expense and rate for the years ended December 31, 2016, 2015 and 2014:

	For the Years Ended December 31,
	2016						2015						2014
	Amount			Percent			Amount			Percent			Amount			Percent
		(dollars in thousands)
Tax provision at federal statutory tax rate	$	9,803			35.0		$	8,481			35.0		$	4,800			35.0
State income taxes, net of federal income tax benefit		2,004			7.2			1,568			6.5			970			7.1
Tax exempt income, net of interest expense		(987	)		(3.5	)		(962	)		(4.0	)		(826	)		(6.0	)
Bank owned life insurance		(303	)		(1.1	)		(224	)		(0.9	)		(217	)		(1.6	)
Merger and integration		294			1.1			–			–			61			0.4
Other, net		266			0.9			19			0.1			(39	)		(0.3	)

Total provision for income taxes	$	11,077			39.6		$	8,882			36.7		$	4,749			34.6