NOTE 15.INCOME TAXES

Provision for Income Taxes

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

(In thousands)	2014			2013			2012

Current:
Federal tax expense	$	294		$	5,124		$	2,298
State tax expense	305			2,171			1,278
Total current expense	599			7,295			3,576
Deferred:
Federal tax expense	8,685			9,445			9,247
State tax expense	2,509			2,115			912
Total deferred tax expense	11,194			11,560			10,159
Decrease in valuation allowance	(30		)	(1,751		)	(136		)
Total income tax expense	$	11,763		$	17,104		$	13,599

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, 2014, 2013, and 2012:

	2014					2013					2012
(In thousands, except rates)	Amount			Rate		Amount			Rate		Amount			Rate

Statutory tax rate	$	15,928		35.0	%	$	20,387		35.0	%	$	16,375		35.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	1,810			4.0		2,760			4.7		1,715			3.7
Tax exempt income - investments, net	(2,796		)	(6.1	)	(2,211		)	(3.8	)	(2,187		)	(4.7	)
Bank-owned life insurance	(1,070		)	(2.4	)	(631		)	(1.1	)	(950		)	(2.0	)
Disallowed merger costs	206			0.5		—			—		523			1.1
Non-deductible goodwill on branch divestiture	—			—		—			—		419			0.9
Tax credits, net of basis reduction	(1,658		)	(3.6	)	(995		)	(1.7	)	(1,148		)	(2.5	)
Reduction in valuation allowance	—			—		(1,712		)	(2.9	)	(428		)	(0.9	)
Other, net	(657		)	(1.5	)	(494		)	(0.9	)	(720		)	(1.5	)

Effective tax rate	$	11,763		25.9	%	$	17,104		29.3	%	$	13,599		29.1	%

Deferred Tax Liabilities and Assets

As of December 31, 2014 and 2013, significant components of the Company’s deferred tax asset and liabilities were, as follows:

(In thousands)	2014			2013
Deferred tax assets:
Allowance for loan losses	$	14,710		$	14,391
Tax credit carryforwards	11,238			9,867
Net unrealized loss on swaps, securities available for sale, and pension in OCI	—			5,740
Employee benefit plans	6,103			5,331
Purchase accounting adjustments	7,126			18,350
Net operating loss and capital loss carryforwards	5,538			7,731
Other	2,134			2,256
Deferred tax assets, net before valuation allowances	46,849			63,666
Valuation allowance	(968		)	(998		)
Deferred tax assets, net of valuation allowances	$	45,881		$	62,668

Deferred tax liabilities:
Investments	$	(773	)	$	(896	)
Premises and equipment	(4,575		)	(2,836		)
Net unrealized gain on swaps, securities available for sale, and pension in OCI	(3,823		)	—
Intangible amortization	(7,934		)	(8,225		)
Deferred tax liabilities	$	(17,105	)	$	(11,957	)
Deferred tax assets, net	$	28,776		$	50,711

The Company’s net deferred tax asset decreased by $21.9 million during 2014, reflecting an $11.2 million deferred tax expense and $10.8 million expense recognized as a decrease in shareholder’s equity.

Deferred tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income.

Valuation Allowances

The components of the Company’s valuation allowance on its deferred tax asset, net as of December 31, 2014 and 2013 were, as follows:

(in thousands)	2014			2013
State net operating loss carry-forward, net of Federal tax benefit (of 35%)	$	(739	)	$	(762	)
State tax basis difference, net of Federal tax benefit (of 35%)	(229		)	(236		)
Valuation allowances	$	(968	)	$	(998	)

The state net operating loss carry-forward, net of Federal tax benefit was originally recorded in 2012 in connection with the Connecticut Bank and Trust Company acquisition. That valuation allowance is based on management’s assessment that is it more likely than not that the Company will not be able to utilize the net operating loss carry-forwards to offset future taxable earnings in the state of Connecticut.

The state tax basis difference, net of Federal tax benefit was also originally recorded in 2012, 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 state tax basis in certain tax credit limited partnership investments (LPs) will not be realized. Management anticipates that the remaining 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.

The valuation allowances as of December 31, 2014 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, 2014, the Company has $13.3 million of federal US net operating loss carryforwards, $11.3 million of New York State net operating losses and $13.9 million of Connecticut net operating losses available that were obtained through acquisitions, the utilization of which are limited under Internal Revenue Code 382. These net operating losses begin to expire in 2024. The related deferred tax asset is $5.5 million which is comprised of a federal deferred tax asset of $4.6 million and a state deferred tax asset of $0.9m. The state deferred tax asset reflects the impact of state apportionment and state statutory rates that are applied to the state net operating losses. We believe that it is more likely than not that the benefits of the Connecticut net operating loss carryforwards will not be realized and, accordingly, we have recorded a valuation allowance of $0.7 million as of December 31, 2014. In addition, the Company has general business tax credit carryforwards of $7.5 million available that expire beginning in 2027, and alternative minimum tax credit carryforwards of $3.8 million with no expiration date. The Company anticipates utilizing these carryforwards prior to their expirations.

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 uncertain tax positions.

The following table presents changes in unrecognized tax benefits for the years ended December 31, 2014, 2013, and 2012:

(In thousands)	2014			2013			2012

Unrecognized tax benefits at January 1	$	477		$	492		$	774
Increase in gross amounts of tax positions related to prior years	55			321			173
Decrease in gross amounts of tax positions related to prior years	—			(150		)	(140		)
Decrease due to settlement with taxing authority	—			(186		)	(240		)
Increase in gross amounts of tax positions related to current year	93			—			50
Decrease due to lapse in statute of limitations	(72		)	—			(125		)
Unrecognized tax benefits at December 31	$	553		$	477		$	492

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. The Company does not expect any significant changes in unrecognized tax benefits during the next twelve months.

All of the Company’s unrecognized tax benefits, if recognized, would be recorded as a component of income tax expense, therefore, affecting the effective tax rate. The Company recognizes interest and penalties, if any, related to the liability for uncertain tax positions as a component in income tax expense. The accrual for interest and penalties was not material in all years.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states. In the normal course of business, the Company is subject to U.S. federal, state and local income tax examinations by tax authorities. The Company is no longer subject to examination for tax years prior to 2010 including any related income tax filings from its recent acquisitions. The Company is currently under audit in the state of New York for tax years 2010-2012.