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 generally no longer subject to U.S. federal, state or local income tax examination by tax authorities for years before 2011.

The components of income tax expense for the three months ended March 31, 2015 and 2014 are summarized as follows:



	Three months ended March 31,
(Dollars in thousands)	2015			2014
Current year provision:
Federal	$	(15	)	$	0
State	4			0
	(11		)	0
Deferred tax expense
Federal	720			253
State	6			2
	726			255
Change in valuation allowance on deferred taxes	0			(255		)
Net federal income tax expense (benefit)	$	715		$	0

The provision for income taxes includes $535,000 and $209,000 of applicable income tax expense related to net security gains for the three months ended March 31, 2015 and 2014.

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



(Dollars in thousands)	March 31, 2015		December 31, 2014
Deferred tax assets:
Allowance for loan losses	$	5,284	$	5,424
Deferred compensation	530		528
Retirement plans and salary continuation	1,724		1,695
Share-based compensation	147		102
Off balance sheet reserves	195		205
Nonaccrual loan interest	351		210
Goodwill	146		154
Bonus Accrual	210		396
Low income housing credit carryforward	1,405		1,322
Alternative minimum tax credit carryforward	1,331		1,291
Charitable contribution carryforward	188		209
Net operating loss carryforward	5,829		6,606
Other	228		237
Total deferred tax assets	17,568		18,379
Deferred tax liabilities:
Depreciation	888		955
Net unrealized gains on securities available for sale	1,896		848
Mortgage servicing rights	606		606
Purchase accounting adjustments	402		421
Other	175		174
Total deferred tax liabilities	3,967		3,004
Net deferred tax asset	$	13,601	$	15,375

The provision for income taxes differs from that computed by applying statutory rates to income before income taxes primarily due to the effects of tax-exempt income, non-deductible expenses and tax credits.

As of March 31, 2015, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2020, 2035 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 at that time 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 of the valuation allowance 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. As a result of the recapture of the valuation allowance at December 31, 2014, the Company began recording income tax expense.