(

) Income Taxes

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

	For years ended December 31,
(In thousands)	201 8			201 7			201 6

Current income tax expense
Federal	$	11,567		$	12,622		$	14,270
State		732			546			698
Total current income tax expense		12,299			13,168			14,968

Deferred income tax expense (benefit)
Federal		(52	)		3,783			192
State		(44	)		(4	)		36
Total deferred income tax expense (benefit)		(96	)		3,779			228
Change in valuation allowance		(172	)		192			48
Total income tax expense	$	12,031		$	17,139		$	15,244

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

	For years ended December 31,
(In thousands)	201 8			201 7			201 6
Unrealized (loss) gain on securities available for sale	$	(812	)	$	(531	)	$	(1,171	)
Reclassification adjustment for securities losses realized in income		–			81			–
Reclassification adjustment for securities impairment realized in income		–			–			–
Unrealized (loss) gain on derivatives		46			112			24
Minimum pension liability adjustment		46			(9	)		1
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes		–			–			(1,705	)
Total income tax (benefit) expense recorded directly to stockholders’ equity	$	(720	)	$	(347	)	$	(2,851	)

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

	For years ended December 31,
	201 8			201 7			201 6
U.S. federal income tax rate		21.0	%		35.0	%		35.0	%
Tax credits		(1.8	)		(14.4	)		(9.7	)
Stock based compensation		(0.8	)		(2.6	)		–
Net deferred tax asset remeasurement		(0.5	)		10.8			–
Other, net		(0.5	)		0.9			0.3
Cash surrender value of life insurance		(0.4	)		(1.5	)		(0.9	)
Tax exempt interest income		(0.4	)		(1.2	)		(1.2	)
Amortization/impairment of investments in tax credit partnerships		0.4			3.4			2.8
State income taxes		0.8			0.7			0.8
Effective income tax rate		17.8	%		31.1	%		27.1	%

Bancorp’s effective income tax rate decreased to

17.8%

2018

from

31.1%

2017.

The decrease was largely a result of the reduction of the marginal federal tax rate from

35%

21%

effective

January 1, 2018,

as a result of the Tax Cuts and Jobs Act enacted on

December 22, 2017.

That tax reform also resulted in higher taxes in

2017

from a

one

-time

$5.9

million charge to remeasure Bancorp’s net deferred tax asset. The

2017

effective tax rate included significantly more tax savings from stock-based compensation deductions and federal income tax credits.

The increase in effective tax rate from

2016

2017

was the result of the

one

-time, non-cash charge resulting from the remeasurement of deferred taxes as a result of tax reform somewhat offset by higher utilization of tax credits during the year. The Tax Cuts and Jobs Act was enacted in

December 2017

requiring an immediate recalculation of Bancorp’s net deferred tax asset which resulted in

$5.9

million of additional income tax expense in the

fourth

quarter of

2017.

The effective tax rate in

2017

was also reduced by the adoption of ASU

2016

“Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”. The standard requires excess tax benefits and deficiencies related to stock-based payment awards to be reflected in the statement of operations as a component of the provision for income taxes. For

2017

Bancorp recorded a benefit of

$1.5

million for such excess benefits against the provision for income tax expense. Prior to adoption of ASU

2016

09,

these tax benefits were recorded directly to additional paid-in capital. Tax benefits recorded to capital for

2016

were

$1.7

million.

December 2017,

the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin

No.

118

(“SAB

118”

) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of tax reform in situations where a registrant does

not

have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB

118

allows a measurement period

not

to extend beyond

one

year from the tax reform’s enactment date to complete the necessary accounting. Bancorp believes it has completed necessary analyses and recorded income tax effects of tax reform within the measurement period.

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

	December 31,
(In thousands)	201 8			201 7
Deferred tax assets
Allowance for loan and lease loss	$	5,567		$	5,422
Deferred compensation		4,703			4,148
Accrued expenses		968			798
Securities		756			121
Investments in tax credit partnerships		543			565
Loans		434			442
Other assets		181			186
Write-downs and costs associated with OREO		7			39
Total deferred tax assets		13,159			11,721

Deferred tax liabilities
Property and equipment		1,154			764
Loan costs		632			588
Leases		336			149
Other liabilities		267			260
Core deposit intangible		230			267
Mortgage servicing rights		193			161
Total deferred tax liabilities		2,812			2,189
Valuation allowance		(154	)		(326	)
Net deferred tax asset	$	10,193		$	9,206

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. Ultimate realization of deferred tax assets is dependent upon generation of future taxable income during periods in which those temporary differences become deductible. Management considers 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 periods which the temporary differences resulting in 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, 2018.

Realization of deferred tax assets associated with investment in tax credit partnerships is dependent upon generating sufficient taxable capital gain income prior to their expiration. A valuation allowance of

$154

thousand and

$326

thousand to reflect management’s estimate of the temporary deductible differences that

may

expire prior to their utilization has been recorded as of

December 31, 2018

and

2017,

respectively.

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, 2018

and

2017,

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

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

2014.

A reconciliation of the amount of unrecognized tax benefits follows:

(In thousands)	201 8			201 7
Balance as of January 1	$	40		$	40
Increases - current year tax positions		–			11
Increases - prior year tax positions		–			–
Settlements		–			–
Lapse of statute of limitations		(11	)		(11	)
Balance as of December 31	$	29		$	40