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 and six months ended June 30, 2017 and 2016.



	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Current year expense (benefit):
Federal	$	145		$	238		$	202		$	126
State	(9		)	(1		)	(7		)	(3		)
	136			237			195			123
Deferred expense:
Federal	371			10			735			732
State	9			5			10			11
	380			15			745			743
Income tax expense	$	516		$	252		$	940		$	866

The provision for income taxes includes $222,000 and $0 of applicable income tax expense related to net securities gains for the three months ended June 30, 2017 and 2016, and $223,000 and $497,000 of applicable income tax expense related to net securities gains for the six months ended June 30, 2017 and 2016.

The base federal statutory rate used in determining the estimated annual effective tax rate for the quarter ended June 30, 2017 was 34%. The estimated annual effective tax rate used to determine tax expense in the quarter ended June 30, 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)	June 30, 2017		December 31, 2016
Deferred tax assets:
Allowance for loan losses	$	4,719	$	4,725
Deferred compensation	548		545
Retirement plans and salary continuation	2,018		1,942
Share-based compensation	730		583
Off-balance sheet reserves	337		313
Nonaccrual loan interest	466		370
Net unrealized losses on securities available for sale	0		600
Goodwill	77		92
Bonus accrual	321		236
Low-income housing credit carryforward	2,148		1,983
Alternative minimum tax credit carryforward	4,348		4,048
Net operating loss carryforward	804		2,520
Other	523		479
Total deferred tax assets	17,039		18,436
Deferred tax liabilities:
Depreciation	694		771
Net unrealized gains on securities available for sale	1,472		0
Mortgage servicing rights	814		777
Purchase accounting adjustments	420		435
Other	198		195
Total deferred tax liabilities	3,598		2,178
Net deferred tax asset	$	13,441	$	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 June 30, 2017, the Company had low-income housing and net operating loss carryforwards that expire through 2036 and 2032, respectively.