(8)

Income Taxes

Components of income tax expense (benefit) from operations were as follows:

(In thousands)	2016		2015		2014
Current tax expense
Federal	$	14,270	$	15,478	$	14,958
State		698		608		641
Total current tax expense		14,968		16,086		15,599

Deferred tax expense (benefit)
Federal		192		748		(385	)
State		36		54		26
Total deferred tax expense (benefit)		228		802		(359	)
Change in valuation allowance		48		45		41
Total income tax expense	$	15,244	$	16,933	$	15,281

Components of income tax (benefit) expense recorded directly to stockholders' equity were as follows:

(In thousands)	2016			2015			2014
Unrealized (loss) gain on securities available for sale	$	(1,171	)	$	(839	)	$	2,383
Reclassification adjustment for securities losses realized in income		-			-			3
Reclassification adjustment for securities impairment realized in income		-			36			-
Unrealized (loss) gain on derivatives		24			(41	)		-
Minimum pension liability adjustment		1			61			(69	)
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		(1,705	)		(673	)		(378	)
Total income tax (benefit) expense recorded directly to stockholders' equity	$	(2,851	)	$	(1,456	)	$	1,939

An analysis of the difference between the statutory and effective tax rates from operations follows:

	Year ended December 31,
	2016			2015			2014
U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
Tax credits		(9.7	)		(2.5	)		(3.1	)
Tax credit amortization expense		2.8			0.4			-
Tax exempt interest income		(1.2	)		(1.4	)		(1.5	)
Cash surrender value of life insurance		(0.9	)		(0.8	)		(1.4	)
State income taxes		0.8			0.8			0.9
Other, net		0.3			(0.2	)		0.6
Effective tax rate		27.1	%		31.3	%		30.5	%

The decrease in effective tax rate from

2015

2016

was primarily the result of higher utilization of tax credits in

2016.

Bancorp invests in certain partnerships that yield federal income tax credits. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on income. The increase in the effective tax rate from

2014

2015

was the result of lower nontaxable income from municipal securities.

The effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities follows:

	December 31,
(In thousands)	2016		2015
Allowance for loan loss	$	8,581	$	8,029
Deferred compensation		5,589		5,730
Accrued expenses		1,360		1,515
Investments in partnerships		905		1,177
Write-downs and costs associated with other real estate owned		29		435
Loans		685		659
Other-than-temporary impairment		37		347
Other assets		185		187
Total deferred tax assets		17,371		18,079

Securities		438		1,655
Property and equipment		1,409		1,158
Loan costs		923		843
Prepayment penalty on modification of FHLB advances		-		-
Mortgage servicing rights		280		315
Leases		381		611
Core deposit intangible		502		573
Other liabilities		408		473
Total deferred tax liabilities		4,341		5,628
Valuation allowance		134		86
Net deferred tax asset	$	12,896	$	12,365

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion of the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the remaining deferred tax assets are deductible, management believes it is more-likely-than-not that Bancorp will realize the benefits of these deductible differences, net of the valuation allowance, at

December

31,

2016.

Realization of deferred tax assets associated with the investment in tax credit partnerships is dependent upon generating sufficient taxable capital gain income prior to their expiration. A valuation allowance to reflect management’s estimate of the temporary deductible differences that

may

expire prior to their utilization has been recorded as of

December

31,

2016

and

2015.

US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As

December

31,

2016

and

2015,

the gross amount of unrecognized tax benefits, including penalties and interest, was

$40

thousand. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits

may

increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. Federal and state income tax returns are subject to examination for the years after

2011.

A reconciliation of the amount of unrecognized tax benefits follows:

(In thousands)	2016			2015
Balance as of January 1	$	40		$	40
Increases - current year tax positions		11			11
Increases - prior year tax positions		-			-
Settlements		-			-
Lapse of statute of limitations		(11	)		(11	)
Balance as of December 31	$	40		$	40