INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Pennsylvania and the State of Maryland. The Company is no longer subject to tax examination by tax authorities for years before 2013.

The following table summarizes income tax expense (benefit) for years ended December 31.



(Dollars in thousands)	2016			2015			2014
Current expense:
Federal	$	1,499		$	844		$	81
State	(1		)	(7		)	10
	1,498			837			91
Deferred expense (benefit):
Federal	(249		)	779			2,723
State	17			18			18
	(232		)	797			2,741
Change in valuation allowance on deferred taxes	0			0			(18,964		)
Income tax expense (benefit)	$	1,266		$	1,634		$	(16,132	)

The following table reconciles the effective income tax rate to the statutory federal rate for years ended December 31.



	2016		2015		2014

Statutory federal tax rate	34.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
State taxes, net of federal benefit	0.1	%	0.1	%	0.1	%
Tax exempt interest income	(16.0	)%	(11.3	)%	(7.3	)%
Valuation allowance on deferred tax assets	0.0	%	0.0	%	(145.8	)%
Earnings from life insurance	(4.7	)%	(3.8	)%	(2.6	)%
Disallowed interest expense	1.0	%	0.4	%	0.2	%
Low-income housing credits and related expense	(7.2	)%	(5.0	)%	(3.7	)%
Regulatory settlement	4.3	%	0.0	%	0.0	%
Change in statutory federal tax rate	2.3	%	0.0	%	0.0	%
Other	2.2	%	1.8	%	0.1	%
Effective income tax rate	16.0	%	17.2	%	(124.0	)%

Income tax expense includes $483,000, $673,000 and $677,000 related to net security gains for the years ended December 31, 2016, 2015, and 2014.

Effective January 1, 2016, the Company changed the statutory federal tax rate from 35% to 34% to reflect its assessment that it will not be in the higher tax bracket. As a result, income tax expense for 2016 increased $185,000 due to the application of the new rate to existing deferred balances.

The following table summarizes deferred tax assets and liabilities at December 31.



(Dollars in thousands)	2016		2015
Deferred tax assets:
Allowance for loan losses	$	4,725	$	5,111
Deferred compensation	545		547
Retirement plans and salary continuation	1,942		1,824
Share-based compensation	583		343
Off-balance sheet reserves	313		218
Nonaccrual loan interest	370		246
Net unrealized losses on securities available for sale	600		0
Goodwill	92		124
Bonus accrual	236		359
Low-income housing credit carryforward	1,983		1,652
Alternative minimum tax credit carryforward	4,048		2,195
Charitable contribution carryforward	50		211
Net operating loss carryforward	2,520		4,431
Other	429		182
Total deferred tax assets	18,436		17,443
Deferred tax liabilities:
Depreciation	771		815
Net unrealized gains on securities available for sale	0		646
Mortgage servicing rights	777		669
Purchase accounting adjustments	435		352
Other	195		181
Total deferred tax liabilities	2,178		2,663
Net deferred tax asset, included in Other Assets	$	16,258	$	14,780

At December 31, 2016, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 2036, and 2032, respectively. Deferred tax assets are recognized for these carryforwards because the benefit is more likely than not to be realized.

In assessing whether or not some or all of the Company's deferred tax assets are 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. A valuation allowance to reflect management's estimate of the temporary deductible differences that may expire was recorded in 2012. In 2014, that valuation allowance was reversed based on management's conclusion that profitable operations, improvements in asset quality, strengthened capital position, reduced regulatory risk and improvement in economic conditions made the allowance no longer necessary.