INCOME TAXES

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2016, 2015, and 2014 were, as follows:



(In thousands)	2016			2015			2014
Current:
Federal tax expense	$	6,758		$	4,696		$	294
State tax expense	1,101			(1,631		)	305
Total current expense	7,859			3,065			599
Deferred:
Federal tax expense	9,438			2,023			8,685
State tax expense	1,591			(24		)	2,509
Total deferred tax expense	11,029			1,999			11,194
Change in valuation allowance	(104		)	—			(30		)
Total income tax expense	$	18,784		$	5,064		$	11,763

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, 2016, 2015, and 2014:



	2016					2015					2014
(In thousands, except rates)	Amount			Rate		Amount			Rate		Amount			Rate
Statutory tax rate	$	27,108		35.0	%	$	19,104		35.0	%	$	15,928		35.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	1,675			2.2		(974		)	(1.8	)	1,810			4.0
Tax exempt income - investments, net	(3,849		)	(5.0	)	(3,463		)	(6.3	)	(2,796		)	(6.1	)
Bank-owned life insurance	(1,364		)	(1.8	)	(1,284		)	(2.4	)	(1,070		)	(2.4	)
Disallowed merger costs	542			0.7		422			0.8		206			0.5
Non-deductible goodwill on disposal operations sale	—			—		313			0.6		—			—
Tax credits, net of basis reduction	(6,225		)	(8.0	)	(8,308		)	(15.2	)	(1,658		)	(3.6	)
Change in valuation allowance	125			0.2		—			—		—			—
Other, net	772			1.0		(746		)	(1.4	)	(657		)	(1.5	)
Effective tax rate	$	18,784		24.3	%	$	5,064		9.3	%	$	11,763		25.9	%

Deferred Tax Liabilities and Assets

As of December 31, 2016 and 2015, significant components of the Company’s deferred tax asset and liabilities were, as follows:



(In thousands)	2016			2015
Deferred tax assets:
Allowance for loan losses	$	17,747		$	16,303
Tax credit carryforwards	4,100			7,295
Unrealized capital loss on tax credit investments	6,999			2,892
Net unrealized loss on swaps, securities available for sale, and pension in OCI	—			2,371
Employee benefit plans	7,813			8,776
Purchase accounting adjustments	23,520			10,755
Net operating loss and capital loss carryforwards	2,643			3,317
Other	4,997			2,527
Deferred tax assets, net before valuation allowances	67,819			54,236
Valuation allowance	(125		)	(229		)
Deferred tax assets, net of valuation allowances	$	67,694		$	54,007

Deferred tax liabilities:
Net unrealized gain on swaps, securities available for sale, and pension in OCI	$	(5,884	)	$	—
Premises and equipment	(2,519		)	(2,577		)
Loan servicing rights	(4,546		)	—
Intangible amortization	(11,543		)	(8,904		)
Other	(2,074		)	—
Deferred tax liabilities	$	(26,566	)	$	(11,481	)
Deferred tax assets, net	$	41,128		$	42,526

The Company’s net deferred tax asset decreased by $1.4 million during 2016, including $8.3 million deferred tax expense recognized as an decrease in shareholder's equity, and $17.8 million from the acquisition of First Choice resulting in a reduction in goodwill. Refer to Note 2 for more information about the acquisition.

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, 2016 and 2015 were, as follows:



(in thousands)	2016			2015
State tax basis difference, net of Federal tax benefit (of 35%)	$	(125	)	$	(229	)
Valuation allowances	$	(125	)	$	(229	)

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.

During 2016, the valuation allowance decreased by $104 thousand. A $125 thousand change was recorded as an increase to income tax expense and $229 thousand was recorded as a reduction in state tax basis upon sale of a partnership interest.

The valuation allowances as of December 31, 2016 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, 2016, the Company has $7.5 million of federal net operating loss carryforwards, $6.1 million of New Jersey net operating losses, and $13.9 million of Connecticut net operating losses available that were obtained through acquisition, the utilization of which are limited under Internal Revenue Code 382. No deferred tax asset has been recorded on the Connecticut net operating loss since the state of Connecticut does not currently allow a deduction for net operating losses. These net operating losses begin to expire in 2024. The related deferred tax asset is $2.6 million. In addition, the Company has alternative minimum tax credit carryforwards of $4.1 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, 2016, 2015, and 2014:



(In thousands)	2016			2015			2014
Unrecognized tax benefits at January 1	$	307		$	553		$	477
Increase in gross amounts of tax positions related to prior years	270			—			55
Increase in gross amounts of tax positions related to current year	—			—			93
Decrease due to lapse in statute of limitations	(117		)	(246		)	(72		)
Unrecognized tax benefits at December 31	$	460		$	307		$	553

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 or any years presented.

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 2013 including any related income tax filings from its recent acquisitions. The Company has been selected for audit in the state of New York for tax years 2013-2014.