Income Taxes

The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:



	For the Years Ended December 31,
(Dollars in thousands)	2014		2013		2012
Current:
Federal	$	2,509	$	4,172	$	2,753
State	777		591		258
Deferred:
Federal	4,027		922		2,397
State	135		11		143
	$	7,448	$	5,696	$	5,551

The provision for income taxes differs from the expected statutory provision as follows:



	For the Years Ended December 31,
(Dollars in thousands)	2014		2013		2012
Expected provision at statutory rate	35.0	%	35.0	%	35.0	%
Difference resulting from:
Tax exempt interest income	(11.2	)	(11.7	)	(12.1	)
Increase in value of bank owned life insurance assets	(1.9	)	(3.9	)	(3.5	)
Other, including state income taxes, valuation allowances and rate differentials	3.2		1.8		1.6
	25.1	%	21.2	%	21	%

During the years ended December 31, 2014 and 2013, the Corporation recorded excess tax benefits resulting from the exercise of employee stock options and restricted stock of $0 thousand and $1 thousand respectively, to additional paid-in capital.

At December 31, 2014, the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in noninterest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in noninterest expense in the year it is assessed and is treated as a deductible expense for tax purposes. At December 31, 2014, the Corporation’s tax years 2011 through 2013 remain subject to federal examination as well as examination by state taxing jurisdictions.

Deferred income taxes reflect the the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred state taxes are combined with federal deferred taxes (net of the impact of deferred state tax on the deferred federal tax) and are shown in the table below by major category of deferred income or expense. The Corporation has a state net operating loss carry-forward of $25.0 million which will begin to expire after December 31, 2018 if not utilized. A valuation allowance at December 31, 2014 and 2013 was attributable to deferred tax assets generated in certain state jurisdictions for which management believes it is more likely than not that such deferred tax assets will not be realized. Additionally, deferred tax assets of $2 thousand and $28 thousand were reversed and recorded to additional paid-in capital during the years ended December 31, 2014 and 2013, respectively, as a result of unrecognized restricted stock and non-qualified stock option expense.

The assets and liabilities giving rise to the Corporation’s deferred tax assets and liabilities are as follows:



	At December 31,
(Dollars in thousands)	2014			2013
Deferred tax assets:
Loan and lease loss	$	7,358		$	8,785
Deferred compensation	2,492			2,675
Actuarial adjustments on retirement benefits*	8,625			4,568
Interest on nonaccrual loans	—			2,268
State net operating losses	1,621			1,743
Other-than-temporary impairments on equity securities	577			759
Alternative minimum tax credits**	1,067			1,367
Net unrealized holding losses on securities available-for-sale*	—			792
Other	1,125			280
Gross deferred tax assets	22,865			23,237
Valuation allowance	(1,461		)	(1,630		)
Total deferred tax assets, net of valuation allowance	21,404			21,607
Deferred tax liabilities:
Market discount	2,224			1,722
Retirement plans	5,700			5,602
Intangible assets	2,308			2,212
Net unrealized holding gains on securities available-for-sale and swaps*	837			—
Total deferred tax liabilities	11,069			9,536
Net deferred tax assets	$	10,335		$	12,071

*Represents the amount of deferred taxes recorded in accumulated other comprehensive loss.

** The alternative minimum tax credits have an indefinite life.