INCOME TAXES

Income tax expense (benefit) for the years ended December 31 are comprised of:



(dollars in thousands)	2014		2013			2012
Current	$	15,979	$	16,836		$	6,223
Deferred	1,536		(2,358		)	1,038
Total	$	17,515	$	14,478		$	7,261

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 35 percent primarily due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on BOLI and tax benefits associated with LIHTC from certain partnership investments.

The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:



	2014		2013		2012
Statutory tax rate	35.0	%	35.0	%	35.0	%
Low income housing tax credits	(5.8	)%	(6.8	)%	(10.5	)%
Tax-exempt interest	(4.6	)%	(4.5	)%	(6.7	)%
Bank owned life insurance	(0.8	)%	(1.0	)%	(1.2	)%
Other	(0.6	)%	(0.4	)%	0.9	%
Effective Tax Rate	23.2	%	22.3	%	17.5	%

Significant components of our temporary differences were as follows at December 31:



(dollars in thousands)	2014			2013
Deferred Tax Liabilities:
Net unrealized holding gains on securities available-for-sale	$	(3,783	)	$	—
Prepaid pension	(3,472		)	(3,730		)
Deferred loan income	(2,165		)	(1,614		)
Purchase accounting adjustments	(631		)	(801		)
Depreciation on premises and equipment	(1,590		)	(1,061		)
Other	(812		)	(823		)
Total Deferred Tax liabilities	(12,453		)	(8,029		)
Deferred Tax Assets:
Net unrealized holding losses on securities available-for-sale	—			361
Allowance for loan losses	17,567			18,890
Other employee benefits	2,453			2,369
Low income housing partnerships	4,049			3,147
Net adjustment to funded status of pension	11,089			6,495
Impairment of securities	1,313			1,313
Delinquent interest on nonaccrual loans	—			1,626
State net operating loss carryforwards	2,249			1,828
Other	4,668			3,950
Gross Deferred Tax Assets	43,388			39,979
Less: Valuation allowance	(2,249		)	(2,199		)
Total Deferred Tax Assets	41,139			37,780
Net Deferred Tax Asset	$	28,686		$	29,751

We establish a valuation allowance when it is more likely than not that we will not be able to realize the benefit of the deferred tax assets. Except for Pennsylvania net operating losses, or NOLs, we have determined that a valuation allowance is unnecessary for the deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. The valuation allowance is reviewed quarterly and adjusted based on management’s assessments of realizable deferred tax assets. Gross deferred tax assets were reduced by a valuation allowance of $2.2 million in 2014 related to Pennsylvania income tax NOLs. The PA NOL carryforwards total $22.5 million and will expire in the years 2020-2034.

Unrecognized Tax Benefits

A reconciliation of the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31:



(dollars in thousands)	2014			2013		2012
Balance at beginning of year	$	1,902		$	978	$	200
Prior period tax positions
Increase	55			924		—
Decrease	(1,673		)	—		—
Current period tax positions	—			—		913
Reductions for statute of limitations expirations	—			—		(135		)
Balance at End of Year	$	284		$	1,902	$	978
Amount That Would Affect the Effective Tax Rate if Recognized	$	184		$	148	$	147

We classify interest and penalties as an element of tax expense. We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. In 2014, we reduced our reserve for tax and interest by $1.7 million to eliminate our UTB relating to Bad Debts that existed at December 31, 2013. Upon review of Large Business & International Directive 04-1014-008 issued October 24, 2014, we determined it is more likely than not upon examination our filing position, for which we previously maintained a reserve for UTB, would be upheld. As of December 31, 2014, no other significant changes to UTB are projected, however, tax audit examinations are possible.

We recognized $0.1 million related to interest in 2014, $0.2 million related to interest in 2013 and 2012 in the Consolidated Statements of Net Income.

During 2013, the IRS completed its examination of our 2010 tax year. The examination was closed with no material adjustments impacting tax expense. As of December 31, 2014, all income tax returns filed for the tax years 2011 through 2013 remain subject to examination by the IRS.