INCOME TAXES

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



(dollars in thousands)	2015			2014		2013
Current	$	24,825		$	15,979	$	16,836
Deferred	(427		)	1,536		(2,358		)
Total	$	24,398		$	17,515	$	14,478

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:



	2015		2014		2013
Statutory tax rate	35.0	%	35.0	%	35.0	%
Low income housing tax credits	(4.4	)%	(5.8	)%	(6.8	)%
Tax-exempt interest	(4.1	)%	(4.6	)%	(4.5	)%
Bank owned life insurance	(0.8	)%	(0.8	)%	(1.0	)%
Other	1.0	%	(0.6	)%	(0.4	)%
Effective Tax Rate	26.7	%	23.2	%	22.3	%

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



(dollars in thousands)	2015			2014
Deferred Tax Liabilities:
Net unrealized holding gains on securities available-for-sale	$	(3,563	)	$	(3,783	)
Prepaid pension	(2,865		)	(3,472		)
Deferred loan income	(2,847		)	(2,165		)
Purchase accounting adjustments	—			(631		)
Depreciation on premises and equipment	(1,226		)	(1,590		)
Other	(809		)	(812		)
Total Deferred Tax liabilities	(11,310		)	(12,453		)
Deferred Tax Assets:
Allowance for loan losses	17,740			17,567
Purchase accounting adjustments	1,298			—
Other employee benefits	2,556			2,453
Low income housing partnerships	4,531			4,049
Net adjustment to funded status of pension	12,425			11,089
Impairment of securities	1,354			1,313
State net operating loss carryforwards	2,670			2,249
Other	6,155			4,668
Gross Deferred Tax Assets	48,729			43,388
Less: Valuation allowance	(2,670		)	(2,249		)
Total Deferred Tax Assets	46,059			41,139
Net Deferred Tax Asset	$	34,749		$	28,686

The Merger accounted for $12.6 million of gross deferred tax items contributing approximately $4.2 million to the increase in net deferred tax assets of $6.1 million at December 31, 2015.

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 $2.7 million in 2015 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $26.7 million and will expire in the years 2020-2035.

Unrecognized Tax Benefits

The following table reconciles the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31:



(dollars in thousands)	2015		2014			2013
Balance at beginning of year	$	284	$	1,902		$	978
Prior period tax positions
Increase	818		55			924
Decrease	—		(1,673		)	—
Current period tax positions	—		—			—
Reductions for statute of limitations expirations	—		—			—
Balance at End of Year	$	1,102	$	284		$	1,902
Amount That Would Impact the Effective Tax Rate if Recognized	$	542	$	184		$	148

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. As of December 31, 2015, no significant changes to UTB are projected, however, tax audit examinations are possible. The UTB balance for the years ended December 31 include a cumulative amount of $0.1 million related to interest as of December 31, 2015 and 2014 and a cumulative amount of $0.3 million related to interest as of December 31, 2013 in the Consolidated Balance Sheets. We recognized an insignificant amount of interest in 2015 and 2014 and $0.2 million of interest in 2013 in the Consolidated Statements of Net Income.

As of December 31, 2015, all income tax returns filed for the tax years 2012 through 2014 remain subject to examination by the IRS. Currently, our income tax return for the 2013 tax year is under examination by the IRS. We do not expect that the results of this examination will have a material effect on our financial condition or results of operations.