10.

INCOME TAXES

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

(In thousands)	2014			2013		2012
Federal:
Current expense/(benefit)	$	10,251		$	2,811	$	(7,942	)
Deferred (benefit)/expense		(2,626	)		1,299		12,887
State:
Current expense/(benefit)		625			21		(3	)
Deferred expense		1,146			1,371		1,463
Total income tax expense	$	9,396		$	5,502	$	6,405

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)	2014			2013			2012
Computed “expected” tax expense	$	8,500		$	5,167		$	5,635
(Decrease)/increase in taxes resulting from:
Tax-exempt income		(152	)		(317	)		(341	)
State income taxes		1,102			901			949
Bank owned life insurance income		(152	)		(243	)		(112	)
Interest disallowance		9			10			16
Meals and entertainment expense		69
Stock-based compensation		60			54			58
Rate adjustment		—			(100	)		200
Other		(40	)		(30	)		—
Total income tax expense	$	9,396		$	5,502		$	6,405

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)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	7,957	$	6,280
Valuation allowance for OREO losses		989		825
Federal and state net operating loss carryforward		9		1,110
Lease adjustment		149		167
Federal AMT credit carryforward		540		540
Post retirement benefits		427		414
Prepaid alternative minimum assessment		283		283
Contribution limitation		34		34
Charitable contribution carryforward		32		32
Organization costs		26		26
Cash flow hedge		69		—
Stock option expense		372		347
Nonaccrued interest		181		181
Accrued compensation		2,422		1,473
Capital leases		952		756
Total gross deferred tax assets	$	14,442	$	12,468
Deferred tax liabilities:
Bank premises and equipment, principally due to differences in depreciation	$	920	$	668
Unrealized gain on securities available for sale		835		15
Deferred loan origination costs and fees		1,555		1,565
Deferred income		603		438
Investment securities, principally due to the accretion of bond discount		19		20
Other		19		—
Total gross deferred tax liabilities		3,951		2,706
Net deferred tax asset	$	10,491	$	9,762

The net deferred tax asset in 2013 includes the tax effect of nearly $19.0 million of New Jersey net operating loss carryforwards, which was used in 2014.

In 2012, the Company sold the pooled trust preferred securities resulting in a federal tax loss carryback refund claim of $8.1 million. The remaining deferred tax asset for OTTI was converted to deferred tax assets relating to federal and state net operating loss carryforwards.

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.

At December 31, 2014 and 2013, the Company had no unrecognized tax benefits. The Company does not expect the amount of unrecognized tax benefits to significantly change in the next twelve months.

The Company is subject to U.S. Federal income tax as well as New Jersey income tax. The Company is no longer subject to federal examination for tax years prior to 2011. The tax years of 2011, 2012 and 2013 remains open to federal examination. The Company is no longer subject to New Jersey examination for tax years prior to 2010. The tax years of 2010, 2011, 2012 and 2013 remain open for state examination.