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 years ended December 31.



(Dollars in thousands)	2017		2016			2015
Current expense	$	1,260	$	1,498		$	837
Deferred expense (benefit)	443		(232		)	797
Expense due to enactment of federal tax reform legislation	2,635		0			0
Income tax expense	$	4,338	$	1,266		$	1,634

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



	2017		2016		2015

Statutory federal tax rate	34.0	%	34.0	%	35.0	%
Increase (decrease) resulting from:
Tax exempt interest income	(13.0	)%	(16.0	)%	(11.3	)%
Earnings from life insurance	(2.4	)%	(4.7	)%	(3.8	)%
Disallowed interest expense	1.0	%	1.0	%	0.4	%
Low-income housing credits and related expense	(4.6	)%	(7.2	)%	(5.0	)%
Regulatory settlement	0.0	%	4.3	%	0.0	%
Change in statutory federal tax rate	0.0	%	2.3	%	0.0	%
Expense due to enactment of federal tax reform legislation	21.2	%	0.0	%	0.0	%
Other	(1.3	)%	2.3	%	1.9	%
Effective income tax rate	34.9	%	16.0	%	17.2	%

Income tax expense includes $405,000, $483,000 and $673,000 related to net security gains for the years ended December 31, 2017, 2016, and 2015.

Effective January 1, 2016, the Company changed its 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.

On December 22, 2017, federal tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), was enacted. Among other things, the Tax Act reduced the Company's statutory federal tax rate from 34% to 21% effective January 1, 2018. As a result, we were required to remeasure, through income tax expense, certain deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The remeasurement of our net deferred tax asset resulted in additional federal deferred tax expense of $2,635,000, which is included in total tax expense for 2017. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided for a measurement period that should not extend beyond one year from the Tax Act's enactment date for companies to complete the accounting under ASC 740, Income Taxes. In remeasuring our net deferred tax asset, we estimated the income in 2017 for our limited partnership investments in affordable housing real estate partnerships and interest income on nonperforming loans. Any adjustment between our estimates and the actual amounts determined during the measurement period are not expected to have a material impact to the consolidated financial statements.

The Company's deferred tax assets related to low-income housing credit and alternative minimum tax credit carryforwards were not impacted by the change in statutory tax rate, as they are treated as payments on future federal income taxes due and are not subject to remeasurement. However, the Tax Act did change alternative minimum tax credit carryforwards to be refundable credits. To reflect this change, the Company reclassed its alternative minimum tax credit carryforwards, totaling $5,343,000 at December 31, 2017, from deferred tax assets to other assets in the consolidated balance sheets.

There were no penalties or interest related to income taxes recorded in the income statement for the years ended December 31, 2017, 2016 and 2015 and no amounts accrued for penalties as of December 31, 2017 and 2016.

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



(Dollars in thousands)	2017		2016
Deferred tax assets:
Allowance for loan losses	$	2,919	$	4,725
Deferred compensation	355		545
Retirement plans and salary continuation	1,301		1,942
Share-based compensation	597		583
Off-balance sheet reserves	207		313
Nonaccrual loan interest	258		370
Net unrealized losses on securities available for sale	0		600
Goodwill	39		92
Bonus accrual	25		236
Low-income housing credit carryforward	2,313		1,983
Alternative minimum tax credit carryforward	0		4,048
Net operating loss carryforward	0		2,520
Other	390		479
Total deferred tax assets	8,404		18,436
Deferred tax liabilities:
Depreciation	488		771
Net unrealized gains on securities available for sale	757		0
Mortgage servicing rights	536		777
Purchase accounting adjustments	251		435
Other	122		195
Total deferred tax liabilities	2,154		2,178
Net deferred tax asset, included in Other Assets	$	6,250	$	16,258

At December 31, 2017, the Company has low-income housing credit carryforwards that expire through 2037. Deferred tax assets are recognized for these carryforwards because the benefit is more likely than not to be realized.