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 months ended March 31, 2018 and 2017.



	Three months ended March 31,
(Dollars in thousands)	2018		2017
Current expense	$	223	$	59
Deferred expense	269		365
Income tax expense	$	492	$	424

Income tax expense includes $171,000 and $1,000 related to net security gains for the three months ended March 31, 2018 and 2017.

The base federal statutory rate used in determining the estimated annual effective tax rate for the quarter ended March 31, 2018 is 21% and for March 31, 2017 was 34%. The 21% base federal statutory rate became effective for the Company on January 1, 2018, as a result of federal tax reform legislation enacted in December 2017. SEC Staff Accounting Bulletin No. 118, issued in December 2017, provided for a measurement period that should not extend beyond one year from the tax reform legislation's enactment date for companies to complete the accounting under ASC 740, Income Taxes. In measuring the impact of the tax reform legislation on our net deferred tax asset in 2017, 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 our consolidated financial statements.

The following table summarizes deferred tax assets and liabilities at March 31, 2018 and December 31, 2017.



(Dollars in thousands)	March 31, 2018		December 31, 2017
Deferred tax assets:
Allowance for loan losses	$	2,962	$	2,919
Deferred compensation	354		355
Retirement plans and salary continuation	1,328		1,301
Share-based compensation	643		597
Off-balance sheet reserves	193		207
Nonaccrual loan interest	280		258
Net unrealized losses on securities available for sale	595		0
Goodwill	34		39
Bonus accrual	127		25
Low-income housing credit carryforward	1,868		2,313
Other	309		390
Total deferred tax assets	8,693		8,404
Deferred tax liabilities:
Depreciation	447		488
Net unrealized gains on securities available for sale	0		757
Mortgage servicing rights	543		536
Purchase accounting adjustments	247		251
Other	123		122
Total deferred tax liabilities	1,360		2,154
Net deferred tax asset, included in Other Assets	$	7,333	$	6,250

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, 2018, the Company had low-income housing credit carryforwards that expire through 2037.