INCOME TAXES

12 Months Ended

Dec. 31, 2011

IncomeTaxesAbstract

INCOME TAXES

11. INCOME TAXES

The income tax expense included in the consolidated financial statements for the years ended December 31, is allocated as follows:

(In Thousands)	2011			2010			2009
Federal:
Current Expense	$	3,856		$	4,752		$	3,447
Deferred Expense/(Benefit)		1,364			(1,874	)		(674	)
State:
Current Expense		1			627			146
Deferred Benefit		(431	)		(306	)		(209	)
Reversal of Valuation Allowance		(2,976	)		32			344
Total Income Tax Expense	$	1,814		$	3,231		$	3,054

Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35 percent to income before taxes as a result of the following:

(In Thousands)	2011			2010			2009
Computed “Expected” Tax Expense	$	4,894		$	3,813		$	3,563
(Decrease)/Increase in Taxes Resulting From:
Tax-Exempt Income		(350	)		(386	)		(580	)
State Income Taxes		(2,200	)		229			(21	)
Bank Owned Life Insurance Income		(413	)		(225	)		(223	)
Interest Disallowance		23			33			66
Stock-Based Compensation		65			61			94
Rate Adjustment		(100	)		(100	)		(100	)
Other		(105	)		(194	)		255
Total Income Tax  Expense	$	1,814		$	3,231		$	3,054

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows:

(In Thousands)	2011			2010
Deferred Tax Assets:
Allowance for Loan Losses	$	5,402		$	5,834
Valuation Allowance for OREO Losses		353			—
State Net Operating Loss Carry Forward		274			1,071
Lease Adjustment		185			180
Post Retirement Benefits		253			238
Prepaid Alternative Minimum Assessment		283			283
Contribution Limitation		56			58
Other Than Temporary Impairment		20,924			20,940
Unrealized Loss on Market Adjustment on Other-Than-Temporary Impaired Securities		1,866			1,905
State Capital Loss		21			—
Stock Option Expense		212			139
Nonaccrued Interest		1,781			1,698
Accrued Compensation		204			157
Capital Leases		62			—
Valuation Allowance-Other-Than-Temporary Impairment State Tax		(12	)		(3,260	)
Total Gross Deferred Tax Assets	$	31,864		$	29,243

Deferred Tax Liabilities:
Bank Premises and Equipment, Principally Due to Difference in Depreciation	$	1,843	$	1,474
Unrealized Gain on Securities Available for Sale		1,931		661
Deferred Loan Origination Costs and Fees		1,090		835
Deferred Income		130		404
Nonmonetary Gain		97		97
Investment Securities, Principally due to the Accretion of Bond Discount		42		47
Total Gross Deferred Tax Liabilities		5,133		3,518
Net Deferred Tax Asset	$	26,731	$	25,725

The net deferred asset includes the tax effect of $4.7 million of New Jersey net operating loss carryforwards that expire from 2012 through 2029.

During 2008, the Corporation recorded a $56.1 million other-than-temporary impairment on its trust preferred pooled securities. The impairment was recorded at the Bank level and resulted in a deferred state tax benefit of approximately $3.3 million. At December 31, 2008, the Corporation concluded that it was more likely than not that it would not realize this state tax benefit before the expiration of the net operating loss carryforward period and recorded a full valuation allowance against the state tax benefit. At the time, the analysis was based on numerous factors, including the State of New Jersey tax statutes, the ongoing performance and related forecasts of the Corporation and the Bank and the status of the economy and its impact on the forecasts.

The Corporation concluded, during the third quarter of 2011, that it was more likely than not that the 2008 state tax benefit was realizable and as such reversed the full valuation allowance, which resulted in an income tax benefit recognized in the third quarter of $3.0 million. The determination was based on the trends in state taxable income of the Bank and the five-year earnings forecast that was completed during the third quarter of 2011.

Based upon taxes paid and projected future taxable income, Management believes that it is more likely than not that the gross deferred tax assets will be realized.