12. Income Taxes

The following is a summary of income tax expense for the years ended December 31, 2011, 2010, and 2009:


	2011		2010		2009

Current – federal	$	4,951	$	1,121	$	4,063

Current – state		137		97		37

Deferred - federal		441		2,251		(1,746	)


Income tax expense	$	5,529	$	3,469	$	2,354

The components of the net deferred tax asset as of December 31, 2011 and 2010 are as follows:


	2011			2010

Deferred tax assets:
Unrealized loss on securities available for sale	$	-		$	1,057
Allowance for loan losses		4,336			3,787
Deferred compensation		1,542			1,405
Impaired security valuation		495			899
Capital loss carryover		435			532
Post-retirement benefits		826			579
Unrealized loss on interest rate swap		584			303
Deferred loan fees/costs		2			58
Nonaccrual loan interest		455			215
Other		513			346

		9,188			9,181

Deferred tax liabilities:
Unrealized gain on securities available for sale		6,720			-
Premises and equipment		1,561			1,026
Intangibles – section 197		2,837			2,416
Intangibles – mortgage servicing rights		317			318
Other		308			409

		11,743			4,169


Net deferred tax asset (liability)	($	2,555	)	$	5,012

At December 31, 2011, the Corporation had a federal capital loss carryforward of $1,243 that will expire in 2015 if not used. 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 taxable temporary differences, future taxable income, and a tax planning strategy to realize the capital loss carryover included in the deferred tax asset.

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


	2011			%			2010			%			2009			%
Tax at statutory rate	$	7,222			35.0		$	5,175			35.0		$	3,803			35.0
Tax exempt income, net		(1,353	)		(6.6	)		(1,281	)		(8.7	)		(1,138	)		(10.5	)
Bank owned life insurance		(325	)		(1.6	)		(281	)		(1.9	)		(252	)		(2.3	)
Other		(15	)		(0.0	)		(144	)		(0.9	)		(59	)		(0.5	)


Income tax expense	$	5,529			26.8		$	3,469			23.5		$	2,354			21.7

At December 31, 2011 and 2010, the Corporation has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease 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, 2011 and 2010, there were no amounts accrued for interest and/or penalties.

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's 2006, 2007, and 2008 federal examinations have closed with no material impact to the Corporation's financial position. The Corporation is no longer subject to examination by the taxing authorities for years prior to 2008. Tax years 2008 through 2010 remain open to state examination.