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 for the three months ended March 31, 2017 and 2016.



	Three months ended March 31,
(Dollars in thousands)	2017		2016
Current year expense (benefit):
Federal	$	57	$	(112	)
State	2		(2		)
	59		(114		)
Deferred expense:
Federal	364		722
State	1		6
	365		728
Income tax expense	$	424	$	614

The provision for income taxes includes $1,000 and $497,000 of applicable income tax expense related to net securities gains for the three months ended March 31, 2017 and 2016.

The base federal statutory rate used in determining the estimated annual effective tax rate for the quarter ended March 31, 2017 was 34%. The estimated annual effective tax rate used to determine tax expense in the quarter ended March 31, 2016 was based on a federal statutory rate of 35%. In the third quarter of 2016, the Company reassessed its estimated annual effective tax rate and changed the base federal statutory rate to 34% in expectation that the Company would not be in the higher tax bracket.

The following table presents the components of the net deferred tax asset, included in Other assets on the consolidated balance sheets.



(Dollars in thousands)	March 31, 2017		December 31, 2016
Deferred tax assets:
Allowance for loan losses	$	4,685	$	4,725
Deferred compensation	551		545
Retirement plans and salary continuation	1,980		1,942
Share-based compensation	684		583
Off-balance sheet reserves	284		313
Nonaccrual loan interest	474		370
Net unrealized losses on securities available for sale	50		600
Goodwill	85		92
Bonus accrual	132		236
Low-income housing credit carryforward	2,120		1,983
Alternative minimum tax credit carryforward	4,048		4,048
Net operating loss carryforward	2,054		2,520
Other	335		479
Total deferred tax assets	17,482		18,436
Deferred tax liabilities:
Depreciation	740		771
Mortgage servicing rights	778		777
Purchase accounting adjustments	427		435
Other	194		195
Total deferred tax liabilities	2,139		2,178
Net deferred tax asset	$	15,343	$	16,258

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.

At March 31, 2017, the Company has low-income housing and net operating loss carryforwards that expire through 2036 and 2032, respectively.