14. TAXES ON INCOME

We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Our income tax provision consists of the following:


Year Ended December 31,	2013			2012		2011
(In Thousands)
Current income taxes:
Federal taxes	$	21,242		$	11,136	$	6,648
State and local taxes		2,759			2,256		1,849
Deferred income taxes:
Federal taxes		875			3,591		2,978
State and local taxes		(120	)		—		—

Total	$	24,756		$	16,983	$	11,475

Current federal income taxes include taxes on income that cannot be offset by net operating loss carryforwards.

Deferred income taxes reflect the net 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. The following is a summary of the significant components of our deferred tax assets and liabilities as of December 31, 2013 and 2012:


	2013			2012
(In Thousands)
Deferred tax assets:
Unrealized losses on available-for-sale securities		12,762			—
Allowance for loan losses		14,436			15,373
Reserves and other		8,854			7,511
Deferred gains		453			480
Net operating losses		1,196			—
Reverse mortgages		3,686			—

Total deferred tax assets before valuation allowance		41,387			23,364

Less: valuation allowance		(4,882	)		—

Total Deferred tax assets		36,505			23,364

Deferred tax liabilities:
Unrealized gains on available-for-sale securities	$	—		$	(8,053	)
Accelerated depreciation		(1,506	)		(2,115	)
Other		(2,132	)		(397	)
Prepaid expenses		(1,112	)		(1,590	)
Deferred loan costs		(1,843	)		(1,866	)
Intangibles		(1,765	)		(1,256	)

Total deferred tax liabilities before valuation allowance		(8,358	)		(15,277	)

Net deferred tax asset	$	28,147		$	8,087

Included in the table above is the effect of certain temporary differences for which no deferred tax expense or benefit was recognized. In 2013, such items consisted primarily of $12.8 million of unrealized losses on certain investments in debt and equity securities accounted for under ASC 320 along with $550,000 related to postretirement benefit obligations accounted for under ASC 715. In 2012, they consisted primarily of $8.1 million of unrealized gains on certain investments in debt and equity securities, partially offset by $550,000 related to postretirement benefit obligations.

Based on our history of prior earnings and our expectations of the future, it is anticipated that operating income and the reversal pattern of our temporary differences will, more likely than not, be sufficient to realize a net deferred tax asset of $28.1 million at December 31, 2013.

A reconciliation showing the differences between our effective tax rate and the U.S. Federal statutory tax rate is as follows:


Year Ended December 31,	2013			2012			2011
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State tax, net of federal tax benefit		2.4			3.0			3.4
Interest income 50% excludable		—			(0.5	)		(2.1	)
Tax-exempt interest		(1.2	)		(0.5	)		(0.4	)
Bank-owned life insurance income		(0.1	)		(1.1	)		(2.0	)
Incentive stock option and other nondeductible compensation		0.3			0.6			0.9
Settlement of prior year charitable donation		—			—			(1.2	)
Federal tax credits		(1.7	)		(1.4	)		(0.5	)
Other		(0.1	)		0.1			0.5

Effective tax rate		34.6	%		35.2	%		33.6	%

We account for income taxes in accordance with FASB Accounting Standards Codification (“ASC”) 740, Income Taxes (formerly Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109). ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Benefits from tax positions are recognized in the financial statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

As a result of the consolidation for accounting purposes of the SASCO reverse mortgage securitization trust during 2013, a deferred tax asset (“DTA”) of approximately $4.9 million was recorded. However, because SASCO is not consolidated for income tax purposes since it is subject to taxation on a separate entity basis as a real estate investment trust (“REIT”) as of and for the year ended December 31, 2013, a full valuation allowance was also recorded on this DTA due to the uncertainty of its realization. Realization of the DTA is dependent on future taxable income which is not assured as of December 31, 2013 with SASCO as a separate entity. On January 27, 2014 SASCO’s REIT tax structure was eliminated, which will permit tax consolidation within the Bank’s tax return filings on a prospective basis. At this date, the uncertainty surrounding the realization of the DTA was eliminated since the Bank’s Consolidated group is projected to have sufficient taxable income. Accordingly, we expect to remove the $4.9 million valuation allowance along with elimination of a $1.7 million deferred tax liability associated with our original investment in SASCO, which will result in an overall income tax benefit of $6.6 million in 2014. Finally, SASCO has $3.4 million of Federal net operating losses (“NOL’s”) that the Bank will acquire upon SASCO’s liquidation. Such NOL’s expire beginning in 2030.

Related to the move of our corporate headquarters, during 2007, we donated (to the local Historical Society, for the purpose of community viewing) an N.C. Wyeth mural which was previously displayed in our former headquarters. Pursuant to an appraisal by a nationally recognized art appraisal firm, the estimated fair value of the mural was $6.0 million, which was recorded as a charitable contribution expense. We recognized a related offsetting gain on the transfer of the asset during 2007. The expense and offsetting gain was shown net in our Consolidated Financial Statements. As the gain on the transfer of the asset is permanently excludible from taxation, the charitable contribution transaction results in a permanent deduction for income tax purposes. The amount of the deduction represented an income tax uncertainty because it was subject to evaluation by the Internal Revenue Service (“IRS”). The IRS did not audit our 2007 income tax return and the statute of limitations on this tax year expired in 2011. Accordingly, we recorded a $416,000 tax benefit in 2011 related to the resolution of this uncertainty.

We record interest and penalties on potential income tax deficiencies as income tax expense. Federal tax years 2010 through 2013 remain subject to examination as of December 31, 2013, while tax years 2010 through 2013 remain subject to examination by state taxing jurisdictions. During 2013, the audit of our 2010 federal tax return was completed by the IRS. We recorded a $186,000 tax benefit as a result of settling this audit. No state income tax return examinations are currently in process. We do not expect to record or realize any material unrecognized tax benefits during 2014.

ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations. There are no longer any unrecognized tax benefits related to ASC 740 as of December 31, 2013. A reconciliation of the total amounts of unrecognized tax benefits during 2013 and 2012 is as follows:


	2013		2012
(In Thousands)
Unrecognized tax benefits at January 1	$	—	$	88
Tax positions taken during prior years		—		(3	)
Tax positions taken during current year		—		—
Reductions relating to settlements with taxing authorities		—		(85	)
Reductions as a result of a lapse of statutes of limitations		—		—

Unrecognized tax benefits at December 31	$	—	$	—