17. Income Taxes

Income tax expense, allocated based on a separate tax return basis, consists of the following:


Year Ended December 31	2015			2014		2013
Current income taxes:
Federal taxes	$	69,572		$	18,111	$	33,614
State taxes		989			396		(116	)

		70,561			18,507		33,498
Deferred income taxes:
Federal taxes		63			44,113		11,258
State taxes		(631	)		—		—

		(568	)		44,113		11,258

	$	69,993		$	62,620	$	44,756

Income tax expense related to gains on the sale of securities was $288, $4,101 and $283 for 2015, 2014 and 2013, respectively.

The following table presents the tax effects of temporary differences that give rise to deferred tax assets and liabilities:


December 31	2015			2014
Deferred tax assets:
Allowance for credit losses	$	50,414		$	44,613
Discount on purchased loans		28,503			31,787
Net operating loss/tax credit carryforwards		16,487			15,367
Deferred compensation		8,515			7,785
Securities impairments		252			412
Pension and other defined benefit plans		8,539			6,871
Net unrealized securities losses		1,301			—
Other		8,020			9,503

Total		122,031			116,338
Valuation allowance		(17,179	)		(15,505	)

Total deferred tax assets		104,852			100,833

Deferred tax liabilities:
Loan costs		(2,966	)		(1,497	)
Depreciation		(10,836	)		(11,533	)
Prepaid expenses		(628	)		(705	)
Amortizable intangibles		(12,940	)		(13,842	)
Lease financing		(6,763	)		(7,302	)
Debt discharge income deferral		(2,042	)		(2,829	)
Originated mortgage servicing rights		(1,238	)		(2,721	)
Other		(1,928	)		—

Total deferred tax liabilities		(39,341	)		(40,429	)

Net deferred tax assets	$	65,511		$	60,404

The Corporation establishes a valuation allowance when it is more likely than not that the Corporation will not be able to realize the benefit of the deferred tax assets or when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessment of realizable deferred tax assets. At December 31, 2015, the Corporation reversed $1,872 of the valuation allowance recorded against state deferred taxes due to expansion of operations in the state of Maryland as a result of recent mergers. The remaining balance of the valuation allowance primarily relates to unused state net operating loss carryforwards expiring from 2018 to 2035 and other net deferred tax assets. The Corporation anticipates that neither the state net operating loss carryforwards nor the other net deferred tax assets at certain of its subsidiaries will be utilized and, as such, has recorded a valuation allowance against the deferred tax assets related to these carryforwards.

The effective tax rates for 2015, 2014 and 2013 were all lower than the statutory tax rate due to tax benefits resulting from tax-exempt income on investments and loans, tax credits and income from BOLI.

The following table provides a reconciliation between the statutory tax rate and the actual effective tax rate:


Year Ended December 31	2015			2014			2013
Statutory tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		0.8			0.1			0.2
Valuation allowance reversal		(0.8	)		—			—
Tax-exempt interest		(2.2	)		(1.8	)		(2.9	)
Cash surrender value of life insurance		(1.3	)		(1.3	)		(1.8	)
Tax credits		(1.1	)		(1.4	)		(2.4	)
Other items		0.1			(0.3	)		(0.6	)

Actual effective tax rate		30.5	%		30.3	%		27.5	%

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and the federal income tax benefit of unrecognized state tax benefits) is as follows:


Year Ended December 31	2015			2014
Balance at beginning of year	$	401		$	660
Additions based on tax positions related to current year		134			60
Additions based on tax positions of prior year		—			—
Reductions for tax positions of prior years		—			—
Reductions due to expiration of statute of limitations		(80	)		(319	)

Balance at end of year	$	455		$	401

As of December 31, 2015 and 2014, the Corporation has approximately $455 and $401, respectively, of unrecognized tax benefits, excluding interest and the federal tax benefit of unrecognized state tax benefits. Also, as of December 31, 2015 and 2014, additional unrecognized tax benefits relating to accrued interest, net of the related federal tax benefit, amounted to $18 and $19, respectively. As of December 31, 2015, $313 of these tax benefits would affect the effective tax rate if recognized. The Corporation recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The Corporation files numerous income tax returns in the U.S. federal jurisdiction and in several state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examinations for years prior to 2013. The Internal Revenue Service (IRS) has substantially completed their examination of the Corporation’s consolidated federal income tax returns for 2011 and 2012 and there are no outstanding unresolved issues. With limited exception, the Corporation is no longer subject to state income tax examinations for years prior to 2012. The Corporation anticipates that a reduction in the unrecognized tax benefit of up to $60 may occur in the next twelve months from the expiration of statutes of limitations which would result in a reduction in income taxes.