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 2012.

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



(Dollars in thousands)	2015			2014			2013
Current year provision (benefit):
Federal	$	844		$	81		$	60
State	(7		)	10			(266		)
	837			91			(206		)
Deferred tax expense
Federal	779			2,723			1,253
State	18			18			18
	797			2,741			1,271
Change in valuation allowance on deferred taxes	0			(18,964		)	(1,271		)
Net federal income tax expense (benefit)	$	1,634		$	(16,132	)	$	(206	)

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



	2015		2014		2013

Statutory federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) resulting from:
State taxes, net of federal benefit	0.1	%	0.1	%	(1.8	)%
Tax exempt interest income	(11.3	)%	(7.3	)%	(11.9	)%
Valuation allowance on deferred tax assets	0.0	%	(145.8	)%	(13.0	)%
Earnings from life insurance	(3.8	)%	(2.6	)%	(3.4	)%
Disallowed interest	0.4	%	0.2	%	0.3	%
Low-income housing credits	(5.0	)%	(3.7	)%	(2.2	)%
Benefit of operating loss carryforward	0.0	%	0.0	%	(3.8	)%
Other	1.8	%	0.1	%	(1.3	)%
Effective income tax rate	17.2	%	(124.0	)%	(2.1	)%

The provision for income taxes includes $673,000, $677,000 and $116,000 of applicable income tax expense related to net security gains for the years ended December 31, 2015, 2014, and 2013.

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



(Dollars in thousands)	2015		2014
Deferred tax assets:
Allowance for loan losses	$	5,111	$	5,424
Deferred compensation	547		528
Retirement plans and salary continuation	1,824		1,695
Share-based compensation	343		102
Off-balance sheet commitment reserves	218		205
Nonaccrual loan interest	246		210
Goodwill	124		154
Bonus accrual	359		396
Low income housing credit carryforward	1,652		1,322
Alternative minimum tax credit carryforward	2,195		1,291
Charitable contribution carryforward	211		209
Net operating loss carryforward	4,431		6,606
Other	182		237
Total deferred tax assets	17,443		18,379
Deferred tax liabilities:
Depreciation	815		955
Net unrealized gains on securities available for sale	646		848
Mortgage servicing rights	669		606
Purchase accounting adjustments	352		421
Other	181		174
Total deferred tax liabilities	2,663		3,004
Net deferred tax asset	$	14,780	$	15,375

As of December 31, 2015, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 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 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 concluded based on the Company’s profitable operations over the prior nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, and the improvement in economic conditions, that a full valuation allowance was no longer necessary. 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. As a result of the recapture of the valuation allowance at December 31, 2014, the Company began recording income tax expense.