INCOME TAXES

12 Months Ended

Dec. 31, 2018

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 years ended December 31.


(Dollars in thousands)	2018		2017		2016

Current expense	$	1,097	$	1,260	$	1,498



Deferred expense (benefit)	543		443		(232)

Expense due to enactment of federal tax reform legislation	0		2,635		0


Income tax expense	$	1,640	$	4,338	$	1,266

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


	2018		2017		2016

Statutory federal tax rate	21.0	%	34.0	%	34.0	%
Increase (decrease) resulting from:


Tax exempt interest income	(7.7)	%	(13.0)	%	(16.0)	%

Income from life insurance	(1.7)	%	(2.4)	%	(4.7)	%
Disallowed interest expense	0.8	%	1.0	%	1.0	%
Low-income housing credits and related expense	(2.5)	%	(4.6)	%	(7.2)	%
Merger related	0.6	%	0.0	%	0.0	%
Expense due to enactment of federal tax reform legislation	0.0	%	21.2	%	0.0	%
Regulatory settlement	0.0	%	0.0	%	4.3	%
Change in statutory federal tax rate	0.0	%	0.0	%	2.3	%

Other	0.9	%	(1.3)	%	2.3	%
Effective income tax rate	11.4	%	34.9	%	16.0	%

Income tax expense includes $211,000, $405,000 and $483,000 related to net security gains for the years ended December 31, 2018, 2017, and 2016.

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. 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 Company's deferred tax asset related to low-income housing credit carryforwards was not impacted by the change in statutory tax rate, as it is treated as payments on future federal income taxes due and 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, 2018, 2017 and 2016 and no amounts accrued for penalties as of December 31, 2018 and 2017.

The following table summarizes the Company's deferred tax assets and liabilities at December 31.


(Dollars in thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	3,143	$	2,919
Deferred compensation	723		355
Retirement and salary continuation plans	1,416		1,301
Share-based compensation	742		597
Off-balance sheet reserves	219		207
Nonaccrual loan interest	537		258
Net unrealized losses on securities available for sale	791		0
Purchase accounting adjustments	1,795		39
Bonus accrual	470		25
Low-income housing credit carryforward	641		2,313



Other	321		390
Total deferred tax assets	10,798		8,404
Deferred tax liabilities:
Depreciation	458		488
Net unrealized gains on securities available for sale	0		757
Mortgage servicing rights	590		536
Purchase accounting adjustments	1,021		251
Other	150		122
Total deferred tax liabilities	2,219		2,154
Net deferred tax asset, included in Other Assets	$	8,579	$	6,250

At December 31, 2018, the Company has low-income housing credit carryforwards that expire through 2038. A deferred tax asset is recognized for these carryforwards because the benefit is more likely than not to be realized.