9. INCOME TAXES

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

		2014			2013		2012
Current:	Federal	$	5,208		$	135	$	(4,126	)
	State		223			510		280
			5,431			645		(3,846	)
Deferred:	Federal		(885	)		3,046		1,412
	State		(747	)		31		1,162
			(1,632	)		3,077		2,574
Valuation allowance			(79	)		-		558
Total		$	3,720		$	3,722	$	(714	)

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

	2014			2013			2012
Federal income tax expense (benefit) at statutory rates		35	%		34	%		(34	)%
Surtax exemption		(1	)		-			-
Tax-exempt income		(14	)		(14	)		(82	)
State income taxes, net of federal benefit		1			2			26
Deferred tax asset adjustment		(2	)		-			62
Other		1			1			(1	)
Total		20	%		23	%		(29	)%

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):

	2014			2013			2012
Deferred tax assets:
Allowance for loan losses	$	7,576		$	6,269		$	6,458
Post-retirement benefits		-			-			571
Deferred compensation		1,652			1,588			1,642
Stock-based compensation		459			668			458
Unrealized losses on securities available for sale		-			2,336			-
Realized losses on securities reclassed from available for sale to held to maturity		1,180			-			-
Unfunded pension obligation		2,496			94			2,826
Alternative Minimum Tax credit		3,925			668			537
Net operating loss carryforward		1,169			2,864			5,277
Other		992			961			1,300
Total deferred tax assets		19,449			15,448			19,069
Deferred tax liabilities:
Unrealized gains on securities available for sale		(1,724	)		-			(6,019	)
Other		(842	)		(961	)		(1,107	)
Total deferred tax liabilities		(2,566	)		(961	)		(7,126	)
Valuation allowance		(1,169	)		(534	)		(558	)
Net deferred tax asset	$	15,714		$	13,953		$	11,385

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 (“DTAs”) (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carry back losses to available tax years. In assessing the need for a valuation allowance, the Company considers positive and negative evidence, including taxable income in carryback years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. At December 31, 2014, the Company had no remaining Federal net operating loss carryforwards and had net operating loss carryforwards of approximately $26.2 million for New York State (“NYS”) income tax purposes, which may be applied against future taxable income. The Company has a full valuation allowance of $1.2 million, tax effected, on the NYS net operating loss carryforward due to the Company’s significant tax-exempt investment income. The valuation allowance may be reversed to income in future periods to the extent that the related DTAs are realized or when the Company returns to consistent, taxable earnings in NYS. The NYS unused net operating loss carryforwards are expected to expire in varying amounts through the year 2032.

On March 31, 2014, the Governor of NYS signed legislation to implement the NYS fiscal plan for 2014 – 2015. This legislation encompasses significant changes to New York’s bank tax regime, most notably by merging the bank tax into the general corporate tax law. In addition, the new budget law simplifies the code by setting forth a single apportionment factor. The corporate tax rate will be lowered from 7.1% to 6.5% in 2016. Furthermore, for community banks (all banks and thrifts with $8 billion or less in assets) there is a subtraction modification for a portion of interest earned on all residential and small business loans with a principal amount of up to $5 million made to New York borrowers. All banks in this category that have a REIT on April 1, 2014, and in the applicable tax year would instead get a deduction based on their REIT's dividends paid deduction. The Company had a qualifying REIT on April 1, 2014 and has less than $8 billion in assets. If a change in a tax law or rate occurs, any existing deferred tax liability or asset must be adjusted. The effect is reflected in operations in the period of the enactment of the change in the tax law or rate. As such, the Company made an adjustment to increase its DTAs resulting in a net income tax benefit of $818 thousand in 2014.

For regular Federal income tax purposes, a system of graduated marginal tax rates is applied to all taxable income, including capital gains. The rate is 34% of taxable income up to $10 million and 35% for amounts exceeding $10 million and less than $15 million. Because the Company’s full year taxable income exceeded $10 million, the DTA was adjusted in the fourth quarter of 2014 based on the federal tax rates expected to be in effect during the periods in which the temporary differences reverse. The increase in the effective rate equates to a $172 thousand income tax benefit to increase the deferred tax asset from the change in the Federal statutory rate of 34% to 35%.

Offsetting the net income tax benefits was a $454 thousand income tax expense related to an adjustment of the Company’s stock based compensation included in the DTA, primarily for stock options that had expired or been forfeited by former employees. The adjustment relates primarily to prior periods, but management has determined that it is not material, and as such, included it in the 2014 first quarter’s results.

Excluding the cumulative net tax benefit of $536 thousand arising from these transactions, the Company’s full year 2014 effective tax rate would have been 22.4% as compared to 22.6% for the full year 2013.

The Company had unrecognized tax benefits of approximately $34 thousand at December 31, 2014, 2013 and 2012. Changes in unrecognized tax benefits consist of the following (in thousands):

	2014		2013		2012
Balance January 1	$	34	$	34	$	38
Additions from current year tax positions		-		-		1
Reductions for prior year tax positions		-		-		(5	)
Balance December 31	$	34	$	34	$	34

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, 2014. 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. The Company’s Federal tax returns were audited for the tax years 2010 through 2012. There was no change in income taxes as a result of these audits. 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.