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)	2016		2015			2014
Current:
Federal	$	2,400	$	5,113		$	2,509
State	539		829			777
Deferred:
Federal	909		3,877			4,027
State	33		(61		)	135
	$	3,881	$	9,758		$	7,448

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



	For the Years Ended December 31,
(Dollars in thousands)	2016		2015		2014
Expected provision at statutory rate	35.0	%	35.0	%	35.0	%
Difference resulting from:
Tax exempt interest income	(15.6	)	(9.5	)	(11.2	)
Increase in value of bank owned life insurance assets	(4.2	)	(1.2	)	(1.9	)
Stock-based compensation	(1.7	)	0.5		0.6
Non-deductible merger-related expenses	1.2		0.4		0.8
State income taxes, net of federal benefits	(1.5	)	0.9		2.6
Changes in valuation allowance	3.1		0.4		(0.6	)
Other	0.3		(0.1	)	(0.2	)
	16.6	%	26.4	%	25.1	%

During the year December 31, 2015, the Corporation recorded excess tax benefits resulting from the exercise of employee stock options and restricted stock of $73 thousand (includes a 2014 adjustment of $23 thousand) to additional paid-in capital. The Corporation adopted ASU 2016-9, Improvements to Employee Share-Based Payment Accounting, which was issued in March 2016. All excess tax benefits and tax deficiencies for 2016 were recognized as a net income tax benefit in the statement of income. The additional paid-in capital pool was eliminated. The net impact of this adoption was $301 thousand in net income tax benefits recorded in the statement of income for the year ended December 31, 2016.

Retained earnings include $6.0 million at December 31, 2016, 2015 and 2014, which was originally generated by Fox Chase Bank (acquired in 2016), for which no provision for federal income tax has been made. This amount represents deductions for bad debt reserves for tax purposes, which were only allowed to savings institutions that met certain criteria prescribed by the Internal Revenue Code of 1986, as amended. The Small Business Job Protection Act of 1996 (the "Act") eliminated the special bad debt deduction granted solely to thrifts. Under the terms of the Act, there would be no recapture of the pre-1988 (base year) reserves. However, these pre-1988 reserves would be subject to recapture under the rules of the Internal Revenue Code if the Company pays a cash dividend in excess of cumulative retained earnings or liquidates.

At December 31, 2016, 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, 2016, the Corporation’s tax years 2013 through 2015 remain subject to federal examination as well as examination by state taxing jurisdictions.

Deferred income taxes reflect 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 charitable contributions carryover of $606 thousand, resulting in a deferred tax asset of $212 thousand which will expire after December 31, 2021, if not utilized. The Corporation has a state net operating loss carry-forward of $42.0 million which will begin to expire after December 31, 2018 if not utilized. A valuation allowance at December 31, 2016 and 2015 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 $42 thousand were reversed and recorded to additional paid-in capital during the year ended December 31, 2015, as a result of unrecognized restricted stock and non-qualified stock option expense. During 2016, net deferred tax liabilities of $1.2 million were added due to the Fox Chase acquisition.

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



	At December 31,
(Dollars in thousands)	2016			2015
Deferred tax assets:
Loan and lease loss	$	5,984		$	6,012
Deferred compensation	2,541			2,483
Actuarial adjustments on retirement benefits*	7,714			8,525
State net operating losses	2,725			1,986
Other-than-temporary impairments on equity securities	331			317
Alternative minimum tax credits**	3,114			2,156
Net unrealized holding losses on securities available-for-sale and swaps*	2,762			472
Other deferred tax assets	2,676			3,209
Gross deferred tax assets	27,847			25,160
Valuation allowance	(2,341		)	(1,609		)
Total deferred tax assets, net of valuation allowance	25,506			23,551
Deferred tax liabilities:
Mortgage servicing rights	2,302			2,066
Retirement plans	6,265			6,307
Intangible assets	3,543			2,460
Depreciation	1,401			347
Other deferred tax liabilities	2,430			2,192
Total deferred tax liabilities	15,941			13,372
Net deferred tax assets	$	9,565		$	10,179

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

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