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 2014.

The following table summarizes income tax expense for the three and nine months ended September 30, 2017 and 2016.



	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Current year expense (benefit):
Federal	$	888		$	1,066		$	1,090		$	1,192
State	4			8			(3		)	5
	892			1,074			1,087			1,197
Deferred expense (benefit):
Federal	(521		)	(948		)	214			(216		)
State	5			(1		)	15			10
	(516		)	(949		)	229			(206		)
Income tax expense	$	376		$	125		$	1,316		$	991

The provision for income taxes includes $181,000 and $0 of applicable income tax expense related to net securities gains for the three months ended September 30, 2017 and 2016, and $405,000 and $483,000 of applicable income tax expense related to net securities gains for the nine months ended September 30, 2017 and 2016.

The base federal statutory rate used in determining the estimated annual effective tax rate for the quarter ended September 30, 2017 and 2016 was 34%. In the third quarter of 2016, the Company reassessed its estimated annual effective tax rate and changed the base federal statutory rate from 35% 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)	September 30, 2017		December 31, 2016
Deferred tax assets:
Allowance for loan losses	$	4,726	$	4,725
Deferred compensation	553		545
Retirement plans and salary continuation	2,055		1,942
Share-based compensation	851		583
Off-balance sheet reserves	368		313
Nonaccrual loan interest	462		370
Net unrealized losses on securities available for sale	0		600
Goodwill	70		92
Bonus accrual	405		236
Low-income housing credit carryforward	2,231		1,983
Alternative minimum tax credit carryforward	5,343		4,048
Net operating loss carryforward	0		2,520
Other	602		479
Total deferred tax assets	17,666		18,436
Deferred tax liabilities:
Depreciation	786		771
Net unrealized gains on securities available for sale	815		0
Mortgage servicing rights	841		777
Purchase accounting adjustments	412		435
Other	198		195
Total deferred tax liabilities	3,052		2,178
Net deferred tax asset	$	14,614	$	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 September 30, 2017, the Company had low-income housing credit carryforwards that expire through 2036.