(15.) INCOME TAXES

The income tax expense for the years ended December 31 consisted of the following (in thousands):


		2014			2013		2012
Current tax expense (benefit):
Federal	$	7,546		$	8,917	$	4,021
State		(75	)		1,913		955
Total current tax expense		7,471			10,830		4,976
Deferred tax expense (benefit):
Federal		2,538			1,251		5,262
State		(384	)		296		1,081
Total deferred tax expense		2,154			1,547		6,343
Total income tax expense	$	9,625		$	12,377	$	11,319

Income tax expense differed from the statutory federal income tax rate for the years ended December 31 as follows:


	2014		2013		2012
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Tax exempt interest income	(5.1	)	(4.8	)	(4.6	)
Tax credits and adjustments	(3.5	)	-		-
Non-taxable earnings on company owned life insurance	(1.6	)	(1.6	)	(1.8	)
State taxes, net of federal tax benefit	(0.8	)	3.8		3.8
Nondeductible expenses	0.5		0.2		0.3
Other, net	0.2		0.1		(0.1	)
Effective tax rate	24.7	%	32.7	%	32.6	%

Total income tax expense (benefit) was allocated as follows for the years ended December 31 (in thousands):


		2014		2013			2012
Income tax expense	$	9,625	$	12,377		$	11,319
Shareholder's equity		925		(8,817	)		1,514

The Company recognizes deferred income taxes for the estimated future tax effects of differences between the tax and financial statement bases of assets and liabilities considering enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in other assets in the Company's consolidated statements of condition. The Company also assesses the likelihood that deferred tax assets will be realizable based on, among other considerations, future taxable income and establishes, if necessary, a valuation allowance for those deferred tax assets determined to not likely be realizable. A deferred tax asset valuation allowance is recognized if, based on the weight of available evidence (both positive and negative), it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of deferred tax benefits depends upon the existence of sufficient taxable income within the carry-back and carry-forward periods. Management's judgment is required in determining the appropriate recognition of deferred tax assets and liabilities, including projections of future taxable income.

The Company's net deferred tax asset is included in other assets in the consolidated statements of condition. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at December 31 (in thousands):


		2014		2013
Deferred tax assets:
Allowance for loan losses	$	10,666	$	10,591
Other than temporary impairment of investment securities		1,917		2,728
Deferred compensation		938		873
Investment in limited partnerships		953		287
SERP agreements		704		709
Interest on nonaccrual loans		664		662
Benefit of tax credit carryforwards		569		-
Share-based compensation		565		753
Net unrealized loss on securities available for sale		-		3,501
Other		520		527
Gross deferred tax assets		17,496		20,631
Deferred tax liabilities:
Prepaid pension costs		5,346		6,185
Intangible assets		2,662		63
Depreciation and amortization		1,249		1,606
Net unrealized gain on securities available for sale		1,039		-
Loan servicing assets		525		620
Gross deferred tax liabilities		10,821		8,474
Net deferred tax asset	$	6,675	$	12,157

In March 2014, the New York legislature approved changes in the state tax law that will be phased-in over two years, beginning in 2015. The primary changes that impact us include the repeal of the Article 32 franchise tax on banking corporations ("Article 32A") for 2015, expanded nexus standards for 2015 and a reduction in the corporate tax rate for 2016. The Company expects the repeal of Article 32A and the expanded nexus standards to lower our taxable income apportioned to New York to 85% in 2015 from 100% in 2014. In addition, the New York state income tax rate will be reduced from 7.1% to 6.5% in 2016. The lower New York state taxes going forward reduced the benefit provided by existing deferred tax items, consequently the Company revalued its deferred tax assets as of December 31, 2014, which did not have a material impact on the consolidated statements of income and condition.

Based upon the Company's historical and projected future levels of pre-tax and taxable income, the scheduled reversals of taxable temporary differences to offset future deductible amounts, and prudent and feasible tax planning strategies, management believes it is more likely than not that the deferred tax assets will be realized. As such, no valuation allowance has been recorded as of December 31, 2014 or 2013.

The Company and its subsidiaries are primarily subject to federal and New York State ("NYS") income taxes. The federal income tax years currently open for audit are 2013 and 2014. The NYS income tax years currently open for audit are 2011 through 2014.

At December 31, 2014, the Company had no federal or NYS net operating loss carryforwards. The Company has NYS tax credits of approximately $900 thousand which have an unlimited carryforward period.

The Company's unrecognized tax benefits and changes in unrecognized tax benefits were not significant as of or for the years ended December 31, 2014, 2013 and 2012. There were no interest or penalties recorded in the income statement in income tax expense for the year ended December 31, 2014. As of December 31, 2014 and 2013, there were no amounts accrued for interest or penalties related to uncertain tax positions.