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 income tax expense for the three and six months ended June 30, 2016 and 2015 are summarized as follows:



	Three months ended June 30,					Six months ended June 30,
(Dollars in thousands)	2016			2015		2016			2015
Current year provision (benefit):
Federal	$	238		$	56	$	126		$	41
State	(1		)	4		(3		)	8
	237			60		123			49
Deferred tax expense
Federal	10			257		732			977
State	5			4		11			10
	15			261		743			987
Net income tax expense	$	252		$	321	$	866		$	1,036

The provision for income taxes includes zero and $123,000 of applicable income tax expense related to net security gains for the three months ended June 30, 2016 and 2015. The provision for income taxes includes $497,000 and $659,000 of applicable income tax expense related to net securities gains for the six months ended June 30, 2016 and 2015.

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



(Dollars in thousands)	June 30, 2016		December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	5,084	$	5,111
Deferred compensation	544		547
Retirement plans and salary continuation	1,905		1,824
Share-based compensation	439		343
Off balance sheet reserves	275		218
Nonaccrual loan interest	369		246
Goodwill	109		124
Bonus accrual	117		359
Low income housing credit carryforward	1,818		1,652
Alternative minimum tax credit carryforward	2,462		2,195
Charitable contribution carryforward	69		211
Net operating loss carryforward	3,193		4,431
Other	272		182
Total deferred tax assets	16,656		17,443
Deferred tax liabilities:
Depreciation	744		815
Net unrealized gains on securities available for sale	3,996		646
Mortgage servicing rights	711		669
Purchase accounting adjustments	329		352
Other	189		181
Total deferred tax liabilities	5,969		2,663
Net deferred tax asset	$	10,687	$	14,780

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 June 30, 2016, the Company had charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 2036 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. 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 that no valuation allowance was required at June 30, 2016 or December 31, 2015.