INCOME TAXES

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



(dollars in thousands)	2016			2015			2014
Federal
Current	$	24,521		$	24,825		$	15,979
Deferred	665			(427		)	1,536
Total Federal	25,186			24,398			17,515
State
Current	248			—			—
Deferred	(129		)	—			—
Total State	119			—			—
Total Federal and State	$	25,305		$	24,398		$	17,515

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 federal 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:



	2016		2015		2014
Statutory tax rate	35.0	%	35.0	%	35.0	%
Low income housing tax credits	(3.8	)%	(4.4	)%	(5.8	)%
Tax-exempt interest	(4.4	)%	(4.1	)%	(4.6	)%
Bank owned life insurance	(0.8	)%	(0.8	)%	(0.8	)%
Other	0.2	%	1.0	%	(0.6	)%
Effective Tax Rate	26.2	%	26.7	%	23.2	%

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



(dollars in thousands)	2016			2015
Deferred Tax Liabilities:
Net unrealized holding gains on securities available-for-sale	$	(2,557	)	$	(3,563	)
Prepaid pension	(2,770		)	(2,865		)
Deferred loan income	(3,815		)	(2,847		)
Depreciation on premises and equipment	(1,239		)	(1,226		)
Other	(1,766		)	(809		)
Total Deferred Tax liabilities	(12,147		)	(11,310		)
Deferred Tax Assets:
Allowance for loan losses	19,446			17,740
Purchase accounting adjustments	365			1,298
Other employee benefits	3,983			2,556
Low income housing partnerships	4,845			4,531
Net adjustment to funded status of pension	10,018			12,425
Impairment of securities	1,318			1,354
State net operating loss carryforwards	3,114			2,670
Other	4,984			6,155
Gross Deferred Tax Assets	48,073			48,729
Less: Valuation allowance	(3,114		)	(2,670		)
Total Deferred Tax Assets	44,959			46,059
Net Deferred Tax Asset	$	32,812		$	34,749

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 $3.1 million in 2016 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $31.2 million and will expire in the years 2020-2036.

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)	2016			2015		2014
Balance at beginning of year	$	1,102		$	284	$	1,902
Prior period tax positions
Increase	—			818		55
Decrease	(449		)	—		(1,673		)
Current period tax positions	151			—		—
Reductions for statute of limitations expirations	—			—		—
Balance at End of Year	$	804		$	1,102	$	284
Amount That Would Impact the Effective Tax Rate if Recognized	$	610		$	542	$	184

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, 2016, no significant changes to UTB are projected, however, tax audit examinations are possible. The UTB balance for the years ended December 31, 2016, 2015 and 2014 include a cumulative amount of $0.1 million related to interest in the Consolidated Balance Sheets. We recognized insignificant amounts of interest in 2016, 2015 and 2014 in the Consolidated Statements of Net Income.

During 2016, the IRS completed its examination of our 2013 tax year. The examination was closed with no material adjustments impacting tax expense. As of December 31, 2016, all income tax returns filed for the tax years 2014 and 2015 remain subject to examination by the IRS.