INCOME TAXES

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



(dollars in thousands)	2017			2016			2015
Federal
Current	$	32,282		$	24,521		$	24,825
Deferred	13,980			665			(427		)
Total Federal	46,262			25,186			24,398
State
Current	323			248			—
Deferred	(148		)	(129		)	—
Total State	175			119			—
Total Federal and State	$	46,437		$	25,305		$	24,398

The Tax Act includes significant changes to the U.S. corporate tax system including: a federal corporate rate reduction from 35 percent to 21 percent. The Tax Act also establishes new tax laws that became effective January 1, 2018. U.S. GAAP requires a company to record the effects of a tax law change in the period of enactment. As a result, we re-measured our deferred tax assets and liabilities and recorded an adjustment of $13.4 million. The re-measurement adjustment was recognized as an increase to our income tax expense in the fourth quarter of 2017. This adjustment incorporates assumptions made based upon our current interpretation of the Tax Act and may change as we receive additional clarification and implementation guidance.

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



	2017		2016		2015
Statutory tax rate	35.0	%	35.0	%	35.0	%
Low income housing tax credits	(2.9	)%	(3.8	)%	(4.4	)%
Tax-exempt interest	(4.0	)%	(4.4	)%	(4.1	)%
Bank owned life insurance	(0.8	)%	(0.8	)%	(0.8	)%
Other	0.3	%	0.2	%	1.0	%
Adjustment to net deferred tax assets for enacted changes in tax laws and rates	11.3	%	—	%	—	%
Effective Tax Rate	38.9	%	26.2	%	26.7	%

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



(dollars in thousands)	2017			2016
Deferred Tax Assets:
Allowance for loan losses	12,440			19,446
Purchase accounting adjustments	—			365
Other employee benefits	3,095			3,983
Low income housing partnerships	3,213			4,845
Net adjustment to funded status of pension	6,481			10,018
Impairment of securities	300			1,318
State net operating loss carryforwards	3,598			3,114
Other	2,355			4,984
Gross Deferred Tax Assets	31,482			48,073
Less: Valuation allowance	(3,598		)	(3,114		)
Total Deferred Tax Assets	27,884			44,959
Deferred Tax Liabilities:
Net unrealized holding gains on securities available-for-sale	$	(638	)	$	(2,557	)
Prepaid pension	(1,749		)	(2,770		)
Deferred loan income	(2,937		)	(3,815		)
Purchase accounting adjustments	(100		)	—
Depreciation on premises and equipment	(480		)	(1,239		)
Other	(1,401		)	(1,766		)
Total Deferred Tax liabilities	(7,305		)	(12,147		)
Net Deferred Tax Asset	$	20,579		$	32,812

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 $3.6 million in 2017 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $36.0 million and will expire in the years 2020-2037.

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)	2017			2016			2015
Balance at beginning of year	$	804		$	1,102		$	284
Prior period tax positions
Increase	—			—			818
Decrease	(37		)	(449		)	—
Current period tax positions	142			151			—
Reductions for statute of limitations expirations	—			—			—
Balance at End of Year	$	909		$	804		$	1,102
Amount That Would Impact the Effective Tax Rate if Recognized	$	770		$	610		$	542

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, 2017, no significant changes to UTB are projected, however, tax audit examinations are possible.

As of December 31, 2017, all income tax returns filed for the tax years 2014 through 2016 remain subject to examination by the IRS. Currently, our income tax return for the 2015 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.