Note 9 — Income Taxes

The following table presents the benefit for income taxes in the consolidated statements of operations which is comprised of the following: (in thousands)

		2012			2011			2010
Current:	Federal	$	(4,126	)	$	751		$	5,043
	State		280			345			848
			(3,846	)		1,096			5,891
Deferred:	Federal		1,412			(4,339	)		(5,691	)
	State		1,162			(980	)		(1,505	)
			2,574			(5,319	)		(7,196	)
Valuation allowance			558			-			-
Total		$	(714	)	$	(4,223	)	$	(1,305	)

The total tax (benefit) expense was different from the amounts computed by applying the federal income tax rate because of the following:

	2012			2011			2010
Federal income tax (benefit) expense at statutory rates		(34	) %		(35	) %		35	%
Tax-exempt interest		(82	)		(56	)		(55	)
State income taxes net of federal benefit		26			(10	)		(8	)
Decrease in deferred tax assets related to tax rates		62			-			-
Other		(1	)		3			2
Total		(29	) %		(98	) %		(26	) %

The effects of temporary differences between tax and financial accounting that create significant deferred tax assets and liabilities, and the recognition of income and expense for purposes of tax and financial reporting, are presented below: (in thousands)

	2012			2011			2010
Deferred tax assets:
Allowance for possible loan losses	$	6,458		$	15,835		$	11,520
Post-retirement benefits		571			551			519
Deferred compensation		1,642			1,941			2,001
Unfunded pension obligation		2,826			7,396			2,299
Alternative Minimum Tax credit carryforward		537			-			-
Net operating loss carryforward		5,277			-			-
Other		1,758			2,003			1,839
Total deferred tax assets before valuation allowance		19,069			27,726			18,178
Valuation allowance		(558	)		-			-
Total deferred tax assets net of valuation allowance		18,511			27,726			18,178
Deferred tax liabilities:
Securities available for sale		(6,019	)		(7,692	)		(4,975	)
Other		(1,107	)		(1,569	)		(1,076	)
Total deferred tax liabilities		(7,126	)		(9,261	)		(6,051	)
Net deferred tax asset	$	11,385		$	18,465		$	12,127

The deferred tax assets and liabilities are netted and presented in a single amount which is included in deferred taxes in the accompanying consolidated statements of condition. The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, the Company considers positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. The Company can apply a carryback of the net operating losses for 2012 which resulted in $5 million included in income tax receivable in the accompanying consolidated statements of condition. The Company has net operating loss carryforwards of approximately $13.9 million and $24.1 million for Federal and New York State ("NYS") income tax purposes, respectively, which may be applied against future taxable income. In 2012 the Company established a full valuation reserve of $558 thousand, tax effected, on the NYS net operating loss due to the Company's significant tax-exempt investment income in NYS. The valuation allowance may be reversed to income in future periods to the extent that the related deferred tax assets are realized or when the Company returns to consistent, taxable earnings in NYS. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. Both the Federal and NYS unused net operating loss carryforwards are expected to expire in varying amounts in the year 2032. It is anticipated that the Federal carryforward will be utilized prior to its expiration based on the Company's future years' projected earnings.

The Company had unrecognized tax benefits including interest of approximately $34 thousand, $38 thousand and $41 thousand at December 31, 2012, 2011 and 2010, respectively. Changes in unrecognized tax benefits consist of the following: (in thousands)

	2012			2011			2010
Balance January 1	$	38		$	41		$	50
Additions from current year tax positions		1			-			-
Reductions for prior year tax positions		(5	)		(3	)		(9	)
Balance December 31	$	34		$	38		$	41

The Company recognizes interest and penalties accrued relating to unrecognized tax benefits in income tax expense. There is no accrued interest relating to uncertain tax positions as of December 31, 2012. The Company files income tax returns in the U.S. federal jurisdiction and in New York State. Federal returns are subject to audits by tax authorities beginning with the 2009 tax year. In 2012, New York State audited the Company and Suffolk Greenway, Inc., a subsidiary of the Bank, for the years 2008, 2009, and 2010 and there was no change as a result of these audits. It is not anticipated that the unrecognized tax benefits will significantly change over the next 12 months.