Income Taxes

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

Note 10. Income Taxes

The current and deferred components of income tax expense (benefit) were as follows:

For the years ended December 31,	2011		2010		2009
Federal income tax
Current	$	2,828,000	$	3,450,000	$	5,520,000
Deferred		730,000		395,000		(1,210,000	)
		3,558,000		3,845,000		4,310,000
State franchise tax		233,000		233,000		237,000
	$	3,791,000	$	4,078,000	$	4,547,000

The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows:

For the years ended December 31,	2011			2010			2009
Expected tax expense	$	5,654,000		$	5,668,000		$	6,156,000
Non-taxable income		(1,794,000	)		(1,527,000	)		(1,555,000	)
State franchise tax, net of federal tax benefit		152,000			151,000			154,000
Tax credits, net of amortization		(383,000	)		(345,000	)		(345,000	)
Other		162,000			131,000			137,000
	$	3,791,000		$	4,078,000		$	4,547,000

Deferred tax assets and liabilities are classified as other assets and other liabilities in the consolidated balance sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2011 and 2010 are as follows:

	2011			2010
Allowance for loan losses	$	4,550,000		$	4,662,000
OREO		153,000			46,000
Assets related to FNB acquisition		5,000			-
Accrued pension and post-retirement		1,293,000			1,187,000
Unrealized loss on securities available for sale		-			1,108,000
Other than temporary impairment of securities available for sale		-			321,000
Other assets		52,000			56,000
Total deferred tax asset		6,053,000			7,380,000
Net deferred loan costs		(664,000	)		(663,000	)
Depreciation		(2,236,000	)		(2,138,000	)
Unrealized gain on securities available for sale		(3,985,000	)		-
Mortgage servicing rights		(421,000	)		(506,000	)
Core deposit intangible		(303,000	)		(401,000	)
Liabilities related to FNB acquisition		-			(1,000	)
Other liabilities		(794,000	)		(204,000	)
Total deferred tax liability		(8,403,000	)		(3,913,000	)
Net deferred tax asset (liability)	$	(2,350,000	)	$	3,467,000

At December 31, 2011, the Company held investments in two limited partnerships with related New Market Tax Credits. These investments are carried at cost and amortized on the effective yield method. The tax credits from these investments are estimated at $589,000 and $530,000 for each of the years ended December 31, 2011 and 2010, respectively, and are recorded as a reduction of income tax expense. Amortization of the investments in the limited partnerships totaled $390,000 and $300,000 for the years ended December 31, 2011 and 2010, respectively, and is recognized as a component of income tax expense in the consolidated statements of income. The carrying value of these

investments was $2,022,000 and $2,412,000 at December 31, 2011 and 2010, respectively, and is recorded in other assets. The Company's total exposure to these limited partnerships was $5,522,000 and $5,912,000, at December 31, 2011 and 2010, respectively, which is comprised of the Company's equity investment in the limited partnerships and the balance of a participated loan receivable.

FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted these provisions and there was no material effect on the financial statements, and no cumulative effect. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2008 through 2010.