INCOME TAXES

The components of income tax expense were as follows:



	For the Year Ended December 31,
	2014			2013		2012
	(in thousands)
Current	$	26,361		$	15,394	$	16,003
Deferred	(6,187		)	2,210		(3,731		)
Total	$	20,174		$	17,604	$	12,272

Effective tax rates differ from the federal statutory rate of 35%, which is applied to income before income tax expense, due to the following:



	For the Year Ended December 31,
	2014					2013					2012
	Amount			% of pretax income		Amount			% of pretax income		Amount			% of pretax income
	(dollars in thousands)
Federal income tax at statutory rate	$	22,185		35.00	%	$	17,604		35.00	%	$	12,631		35.00	%
State income tax	1,355			2.14		353			0.70		184			0.51
Tax-exempt interest	(260		)	(0.41	)	(155		)	(0.31	)	(85		)	(0.24	)
Interest disallowance	11			0.02		7			0.01		4			0.01
Bank-owned life insurance	(1,296		)	(2.04	)	(868		)	(1.73	)	(466		)	(1.29	)
Other	(1,821		)	(2.88	)	663			1.33		4			0.01
Effective income tax rate	$	20,174		31.83	%	$	17,604		35.00	%	$	12,272		34.00	%

Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return purposes. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets.

The Bancorp accounts for income taxes under the liability method of accounting for income taxes. The 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 Bancorp 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.

A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation process, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.



	December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	11,555		$	8,399
Net unrealized losses on securities	—			4,371
OREO expenses	588			403
Non-accrual interest	541			1,236
Net operating losses	1,892			2,003
Deferred compensation	5,112			4,250
Fair value adjustments on acquisitions	—			2,063
Cash flow hedge	681			—
Incentive compensation	1,558			942
Other	1,047			645
Total deferred tax assets	22,974			24,312
Deferred tax liabilities:
Tax basis discount on acquisitions	(1,898		)	(7,998		)
Net unrealized gains on securities	(615		)	—
Deferred loan costs	(4,524		)	(2,438		)
Bank premises and equipment	(991		)	(1,182		)
Other	(1,189		)	(819		)
Total deferred tax liabilities	(9,217		)	(12,437		)
Net deferred tax asset	$	13,757		$	11,875

The Bancorp had approximately $5.4 million of federal net operating loss carryovers at December 31, 2014, that expire in 2023 through 2031.

The Bancorp and its subsidiaries are subject to U.S. federal income tax as well as income tax of various states primarily in the mid-Atlantic region of the U.S. Years that remain open for potential review by the Internal Revenue Service are 2011 through 2013 and the state taxing authorities are 2010 through 2013.

The Bancorp’s policy is to record interest and penalties in other expense. Interest and penalties were immaterial for the years ended December 31, 2014 and 2013.