INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Pennsylvania. The Bank also files an income tax return in the State of Maryland. The Company is no longer subject to U.S. federal, state or local income tax examination by tax authorities for years before 2011.

The components of federal income tax expense for the years ended December 31 are summarized as follows:



(Dollars in thousands)	2014			2013			2012
Current year provision (benefit):
Federal	$	81		$	60		$	(12,383	)
State	10			(266		)	(46		)
	91			(206		)	(12,429		)
Deferred tax expense (benefit)
Federal	2,723			1,253			143
State	18			18			6
	2,741			1,271			149
Change in valuation allowance on deferred taxes	(18,964		)	(1,271		)	20,235
Net federal income tax expense (benefit)	$	(16,132	)	$	(206	)	$	7,955

A reconciliation of the effective applicable income tax rate to the federal statutory rate for the years ended December 31, is as follows:



	2014		2013		2012
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) resulting from:
State taxes, net of federal benefit	0.1	%	(1.8	)%	0.1	%
Tax exempt interest income	(7.3	)%	(11.9	)%	4.8	%
Valuation allowance on deferred tax assets	(145.8	)%	(13.0	)%	(66.4	)%
Earnings from life insurance	(2.6	)%	(3.4	)%	1.2	%
Disallowed interest	0.2	%	0.3	%	(0.1	)%
Low-income housing credits	(3.7	)%	(2.2	)%	0.0	%
Benefit of operating loss carryforward	0.0	%	(3.8	)%	0.0	%
Other	0.1	%	(1.3	)%	(0.7	)%
Effective income tax rate	(124.0	)%	(2.1	)%	(26.1	)%

The provision for income taxes includes $677,000, $116,000 and $1,688,000 of applicable income tax expense related to net security gains for the years ended December 31, 2014, 2013, and 2012.

The components of the net deferred tax asset, included in other assets, at December 31, are as follows:



(Dollars in thousands)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	5,424	$	7,776
Deferred compensation	528		510
Retirement plans and salary continuation	1,695		1,585
Share-based compensation	102		191
Off balance sheet commitment reserves	205		204
Nonaccrual loan interest	210		341
Net unrealized losses on securities available for sale	0		2,592
Goodwill	154		184
Bonus accrual	396		0
Low income housing credit carryforward	1,322		1,022
Alternative minimum tax credit carryforward	1,291		664
Charitable contribution carryforward	209		333
Net operating loss carryforward	6,606		8,169
Other	237		178
Total deferred tax assets	18,379		23,749
Valuation allowance	0		(18,964		)
	18,379		4,785
Deferred tax liabilities:
Depreciation	955		1,116
Net unrealized gains on securities available for sale	848		0
Mortgage servicing rights	606		582
Purchase accounting adjustments	421		495
Other	174		0
Total deferred tax liabilities	3,004		2,193
Net deferred tax asset	$	15,375	$	2,592

As of December 31, 2014, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 2034, and 2032, respectively.

In assessing whether or not some or all of our deferred tax asset is more likely than not to be realized in the future, management considers all positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results. Based upon our evaluation of both positive and negative evidence, a full valuation on the net deferred tax assets was established as of September 30, 2012. Specifically, it was felt that the negative evidence, which included recent cumulative history of operating losses, deterioration in asset quality and resulting impact on profitability, and that we had exhausted our carryback availability, outweighed the positive evidence, and the reserve was established.

Each subsequent quarter-end, the Company continued to weigh both positive and negative evidence and re-analyzed its position that a valuation allowance was required. At December 31, 2014, management noted the Company’s profitable operations over the past nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, as well as improvement in economic conditions. Based on this analysis, management determined that a full valuation allowance was no longer necessary, and the full amount was recaptured as of December 31, 2014. The ultimate realization of deferred tax assets is dependent upon existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred tax assets would be realized, and recaptured the full valuation allowance at December 31, 2014.