NOTE 11: INCOME TAXES

The components of the provision for income taxes were as follows for the years ended December 31, 2014, 2013 and 2012:



(In thousands)	2014		2013		2012
Current	$	3,707	$	733	$	4,721
Deferred		(175)		4,329		772
Provision for income taxes	$	3,532	$	5,062	$	5,493

Not included in the above table is the income tax impact associated with the unrealized gain or loss on securities available for sale and the income tax impact associated with the funded status of the pension plan, which are recorded directly in shareholders’ equity as a component of accumulated other comprehensive loss.

The tax effects of temporary differences and tax credits that give rise to deferred tax assets and liabilities at December 31, 2014 and 2013 are presented below:



(In thousands)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	4,773	$	4,427
Postretirement benefit obligation		1,797		951
Deferred compensation		1,427		1,369
Installment sales		0		71
Core deposit intangible		0		31
Interest rate swap		165		251
Qualified School Bond Tax Credits		919		919
Affordable Housing/Other Tax Credits		1,170		1,244
Other		189		284
Net Operating Loss		0		288
Investment in real estate limited partnerships, net		335		121
Unrealized loss on securities available for sale		0		99
Unrealized loss on securities held to maturity		1,475		1,726
Total deferred tax assets	$	12,250	$	11,781
Deferred tax liabilities:
Loan mark-to-market adjustment	$	(3,736)	$	(3,756)
Deferred compensation		0		(3)
Installment sales		(30)		0
Unrealized gain on securities available for sale		(797)		0
Depreciation		(1,175)		(1,442)
Accrued pension cost		(3,106)		(2,963)
Total deferred tax liabilities	$	(8,844)	$	(8,164)
Net deferred tax asset	$	3,406	$	3,617

In assessing the realizability of our total deferred tax assets, Management considers whether it is more likely than not that some portion or all of those assets will not be realized. Based upon Management’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at December 31, 2014 and 2013. However, factors beyond management’s control, such as the general state of the economy, can affect future levels of taxable income and there can be no assurances that sufficient taxable income will be generated to fully realize the deferred tax assets in the future.

The following is a reconciliation of the federal income tax provision, calculated at the statutory rate of 35%, to the recorded provision for income taxes:



(In thousands)	2014		2013		2012
Applicable statutory Federal income tax	$	5,402	$	6,972	$	7,241
(Reduction) increase in taxes resulting from:
Low Income Housing Projects		858		705		985
Tax-exempt income		(729)		(708)		(719)
Tax credits		(1,936)		(1,798)		(2,164)
Bank owned life insurance		(107)		0		0
Other, net		44		(109)		150
Provision for income taxes	$	3,532	$	5,062	$	5,493

We have not identified any of our tax positions that contain significant uncertainties. Housing tax credits are recognized using the flow through method. We are subject to federal and state income tax examinations for years after December 31, 2011.

The State of Vermont assesses a franchise tax for banks in lieu of income tax. The franchise tax is assessed based on deposits. Vermont franchise taxes, net of state credits amounted to approximately $1.43 million, $1.44 million and $1.30 million in 2014, 2013 and 2012, respectively, which is included as noninterest expense in the accompanying consolidated statement of income.