Note 13
Income Taxes

The components of income tax expense (benefit) are as follows:

	For the Years Ended December 31,
(In thousands)	2013		2012		2011
Current:
Federal	$	6,729	$	6,195	$	5,372
State		448		718		980
Deferred:
Federal		39		933		1,983
State		18		41		162
Total income tax expense	$	7,234	$	7,887	$	8,497

A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 35% for each of 2013, 2012 and 2011 to income before income tax expense, to reported income tax expense is as follows:

	For the Years Ended December 31,
(In thousands)	2013			2012			2011
Expected income tax expense	$	10,756		$	10,917		$	11,027
(Reductions) increases resulting from:
Tax-exempt income		(3,297	)		(3,633	)		(3,760	)
State taxes, net of federal benefit		303			493			742
Other, net		(528	)		110			488
Total income tax expense	$	7,234		$	7,887		$	8,497

The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
(In thousands)	2013			2012
Deferred tax assets:
Allowance for loan losses	$	4,368		$	4,599
ASC 715 pension funding liability		5,444			11,744
Net operating loss carryforward¹		298			341
Stock compensation		337			139
Supplemental executive retirement plan accrual		1,130			829
Other		569			488
Total deferred tax assets	$	12,146		$	18,140
Deferred tax liabilities:
Premises and equipment		(1,767	)		(863	)
Pension		(6,233	)		(6,081	)
Intangible/assets		(996	)		(867	)
Unrealized gain on investment in securities available-for-sale		(2,086	)		(6,947	)
Other		(353	)		(298	)
Total deferred tax liabilities	$	(11,435	)	$	(15,056	)
Net deferred tax assets	$	711		$	3,084

¹ As of December 31, 2013, the Company had approximately $852,000 of net operating loss carry forwards as a result of the acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal Revenue Code and limits the Company's use to approximately $122,000 per year during the carry forward period, which expires in 2020.

A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance at December 31, 2013 or 2012, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets.

The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table:

(In thousands)	2013			2012			2011
Balance at January 1	$	1,885		$	2,069		$	1,877
Changes in unrecognized tax benefits as a result of tax
positions taken during a prior year		(666	)		(140	)		287
Changes in unrecognized tax benefits as a result of tax
position taken during the current year		374			419			475
Decreases in unrecognized tax benefits relating to
settlements with taxing authorities		-			-			-
Reductions to unrecognized tax benefits as a result of a
lapse of the applicable statute of limitations		(385	)		(463	)		(570	)
Balance at December 31	$	1,208		$	1,885		$	2,069

At December 31, 2013, 2012 and 2011, the balance of the Company's unrecognized tax benefits which would, if recognized, affect the Company's effective tax rate was $861,000, $1,357,000 and $1,496,000, respectively. These amounts are net of the offsetting benefits from other taxing jurisdictions.

As of December 31, 2013, 2012 and 2011, the Company had $41,000, $89,000 and $95,000, respectively, in accrued interest related to unrecognized tax benefits. During 2013 and 2012, the Company recorded a net reduction in accrued interest of $48,000 and $6,000, respectively, as a result of settlements with taxing authorities and other prior-year adjustments.

The Company believes it is reasonably possible that the total amount of tax benefits will decrease by approximately $251,000 over the next twelve months. The reduction primarily relates to the anticipated lapse in the statute of limitations. The unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax jurisdictions.

The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction. The Company's federal income tax returns for tax years 2010 through 2012 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2009 through 2012.