15. INCOME TAXES

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2012, 2011, and 2010 were, as follows:

(In thousands)	2012			2011		2010

Current:
Federal tax expense	$	2,298		$	2,113	$	6,634
State tax expense	1,278			572		2,004
Total current expense	3,576			2,685		8,638
Deferred :
Federal tax expense (benefit)	9,247			1,977		(4,639		)
State tax expense (benefit)	912			992		(1,579		)
Total deferred tax expense (benefit)	10,159			2,969		(6,218		)
Decrease in valuation allowance	(136		)	—		—
Total income tax expense	$	13,599		$	5,654	$	2,420

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2012, 2011, and 2010:

	2012				2011				2010
(In thousands, except percentages)	Amount		Rate		Amount		Rate		Amount		Rate

Statutory tax rate	16,375		35.0	%	8,051		35.0	%	5,612		35.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	1,715		3.7		1,017		4.4		276		1.7
Tax exempt income - investments, net	(2,187	)	(4.7	)	(2,222	)	(9.7	)	(2,222	)	(13.9	)
Bank-owned life insurance	(950	)	(2.0	)	(804	)	(3.5	)	(455	)	(2.8	)
Disallowed merger costs	523		1.1		572		2.5		132		0.8
Gain on Rome and Legacy	—		—		(736	)	(3.2	)	—		—
Non-deductible goodwill on branch divestiture	419		0.9		1,622		7.1		—		—
Tax credits, net of basis reduction	(1,148	)	(2.5	)	(1,688	)	(7.3	)	(948	)	(5.9	)
Reduction in valuation allowance	(428	)	(0.9	)	—		—		—		—
Other, net	(720	)	(1.5	)	(158	)	(0.7	)	25		0.2

Effective tax rate	13,599		29.1	%	5,654		24.6	%	2,420		15.1	%

Deferred Tax Liabilities and Assets

As of December 31, 2012 and 2011, significant components of the Company’s deferred tax assets and liabilities were, as follows:

(In thousands)	2012			2011
Deferred tax assets:
Allowance for loan losses	$	16,971		$	17,439
Investments	(1,174		)	209
Investment tax credits	8,537			8,612
Net unrealized loss on swaps and securities available for sale in OCI	2,549			3,510
Employee benefit plans	5,201			2,776
Purchase accounting adjustments	27,900			12,178
Net operating loss and capital loss carryforwards	9,216			6,125
Other	3,554			1,609
Deferred tax assets, net before valuation allowances	72,754			52,458
Valuation allowance	(2,749		)	(2,140		)
Deferred tax assets, net of valuation allowances	$	70,005		$	50,318

Deferred tax liabilities:
Bonus depreciation on premises and equipment	$	(3,172	)	$	(1,186	)
Intangible amortization	(9,104		)	(8,388		)
Deferred tax liabilities	$	(12,276	)	$	(9,574	)
Deferred tax assets, net	$	57,729		$	40,744

Net deferred tax assets increased during 2012 by $19.1 million, $8.5 million, and $437 thousand due to the acquisitions of Beacon, CBT, and Greenpark, respectively. Refer to Note 3 for more information about those acquisitions. Net deferred tax assets in 2011 included $19.8 million, and $2.8 million in net deferred assets from the acquisitions of Legacy Bancorp, Inc., and Rome Bancorp, Inc., respectively. Deferred tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income.

In 2012, the Company recorded a net increase in its valuation allowance of $609 thousand. The net increase includes a $745 thousand increase for a state net operating loss (NOL) carry-forward, net of federal impact, which was recorded in connection with the CBT acquisition. That valuation allowance is based on management’s assessment that it is more likely than not that the Company will be unable to utilize the NOL carry-forwards to offset future taxable earnings in the state of Connecticut. The valuation allowance was recorded in accordance with the guidance for business combinations as an increase to goodwill.

The 2012 valuation allowance was also increased by $292 thousand, net of federal impact, due to management’s assessment that it is more likely than not that certain deferred tax assets recorded for the difference between the book basis and the Massachusetts state tax basis in certain tax credit limited partnership investments will not be realized. Management anticipates that the excess state tax basis will be realized as a capital loss upon disposition, and that it is unlikely that the Company will have capital gains against which to offset such capital losses.

Additionally, the 2012 valuation allowance also includes a $428 thousand decrease associated with a partial release of a $2.1 million valuation allowance against a federal capital loss carry-forward that was recorded in connection with the Company’s acquisition of Legacy Bancorp, Inc. during 2011. The release is due to having more capital gains against which to offset the capital loss carry-forward during 2012 than were expected at the time of the acquisition. The reduction in the valuation allowance was recorded in accordance with the applicable guidance for income taxes as a decrease to the provision for income taxes.

The valuation allowances as of December 31, 2012 are subject to change in the future as the Company continues to periodically assess the likelihood of realizing its deferred tax assets.

Tax Attributes

At December 31, 2012, the Company had net operating loss carryforwards of $20.7 million that expire beginning in 2031, capital loss carryforwards of $4.9 million that expire beginning in 2016, general business tax credit carryforwards of $5.6 million that expire beginning in 2027, and alternative minimum tax credit carryforwards of $2.9 million that do not expire.

Unrecognized Tax Benefits

On a periodic basis, the Company evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of taxing authorities’ current examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to tax-advantaged transactions.

The following table presents changes in unrecognized tax benefits for the years ended December 31, 2012, 2011, and 2010:

(In thousands)	2012			2011		2010

Unrecognized tax benefits at January 1	$	774		$	—	$	—
Increase in gross amounts of tax positions related to prior years	173			774		—
Decrease in gross amounts of tax positions related to prior years	(140		)	—		—
Increase in gross amounts of tax positions related to current year	50			—		—
Decrease due to settlement with taxing authority	(240		)	—		—
Decrease due to lapse in statute of limitations	(125		)	—		—
Unrecognized tax benefits at December 31	$	492		$	774	$	—

As of December 31, 2012, the Company had $492 thousand of unrecognized Federal and state tax benefits that would have impacted the effective tax rate if recognized. The Company classifies interest and penalties, if any, related to the liability for unrecognized tax benefits as a component of the provision for income taxes. Accruals for interest and penalties were not material in 2012 and 2011.

The Company’s income tax returns, including the tax histories acquired through business combinations, remain subject to examination by the Federal Internal Revenue Service for tax years from 2010 forward, and for tax years 2009 forward by the tax authorities of Massachusetts, New York, and Connecticut.