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 2015.

The following table summarizes income tax expense for the three and nine months ended September 30, 2018 and 2017.



	Three months ended September 30,					Nine months ended September 30,
(Dollars in thousands)	2018		2017			2018		2017
Current expense	$	406	$	892		$	754	$	1,087
Deferred expense	238		(516		)	756		229
Income tax expense	$	644	$	376		$	1,510	$	1,316

Income tax expense includes $6,000 and $181,000 related to net securities gains for the three months ended September 30, 2018 and 2017, and $187,000 and $405,000 related to net security gains for the nine months ended September 30, 2018 and 2017.

The base federal statutory rate used in determining the estimated annual effective tax rate for periods ending in 2018 was 21% and for periods ending in 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. Adjustment between our estimates and the actual amounts determined during the measurement period did not have a material impact to our consolidated financial statements.

The following table summarizes deferred tax assets and liabilities at September 30, 2018 and December 31, 2017.



(Dollars in thousands)	September 30, 2018		December 31, 2017
Deferred tax assets:
Allowance for loan losses	$	3,135	$	2,919
Deferred compensation	354		355
Retirement and salary continuation plans	1,386		1,301
Share-based compensation	667		597
Off-balance sheet reserves	193		207
Nonaccrual loan interest	344		258
Net unrealized losses on securities available for sale	1,454		0
Goodwill	25		39
Bonus accrual	354		25
Low-income housing credit carryforward	847		2,313
Other	321		390
Total deferred tax assets	9,080		8,404
Deferred tax liabilities:
Depreciation	414		488
Net unrealized gains on securities available for sale	0		757
Mortgage servicing rights	574		536
Purchase accounting adjustments	238		251
Other	149		122
Total deferred tax liabilities	1,375		2,154
Net deferred tax asset, included in Other Assets	$	7,705	$	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 September 30, 2018, the Company had low-income housing credit carryforwards that expire through 2037.