INCOME TAXES

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



(dollars in thousands)	2018			2017			2016
Federal
Current	$	13,616		$	32,282		$	24,521
Deferred	3,517			13,980			665
Total Federal	17,133			46,262			25,186
State
Current	720			323			248
Deferred	(8		)	(148		)	(129		)
Total State	712			175			119
Total Federal and State	$	17,845		$	46,437		$	25,305

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 established 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, in 2017 we re-measured our deferred tax assets and liabilities and recorded a provisional adjustment of $13.4 million. This re-measurement adjustment was recognized as an increase to our income tax expense in the fourth quarter of 2017. The calculation over the income tax effects of the Tax Act was completed in the third quarter of 2018. We recognized a $3.0 million income tax benefit as a result of finalizing the calculation.

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



	2018		2017		2016
Statutory tax rate	21.0	%	35.0	%	35.0	%
Low income housing tax credits	(2.5	)%	(2.9	)%	(3.8	)%
Tax-exempt interest	(2.1	)%	(4.0	)%	(4.4	)%
Bank owned life insurance	(0.4	)%	(0.8	)%	(0.8	)%
Gain on sale of a majority interest of insurance business	0.7	%	—	%	—	%
Other	0.3	%	0.3	%	0.2	%
Impact of the Tax Act	(2.5	)%	11.3	%	—	%
Effective Tax Rate	14.5	%	38.9	%	26.2	%

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



(dollars in thousands)	2018			2017
Deferred Tax Assets:
Allowance for loan losses	$	13,463		$	12,440
Net unrealized holding losses on securities available-for-sale	1,091			—
Other employee benefits	2,712			3,095
Low income housing partnerships	3,249			3,213
Net adjustment to funded status of pension	5,173			6,481
Impairment of securities	8			300
State net operating loss carryforwards	4,573			3,598
Other	2,848			2,355
Gross Deferred Tax Assets	33,117			31,482
Less: Valuation allowance	(4,573		)	(3,598		)
Total Deferred Tax Assets	28,544			27,884
Deferred Tax Liabilities:
Net unrealized holding gains on securities available-for-sale	—			(638		)
Prepaid pension	(6,164		)	(1,749		)
Deferred loan income	(3,219		)	(2,937		)
Purchase accounting adjustments	(100		)	(100		)
Depreciation on premises and equipment	(477		)	(480		)
Other	(1,375		)	(1,401		)
Total Deferred Tax liabilities	(11,335		)	(7,305		)
Net Deferred Tax Asset	$	17,209		$	20,579

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 $4.6 million in 2018 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $45.8 million and will expire in the years 2020-2039.

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)	2018			2017			2016
Balance at beginning of year	$	909		$	804		$	1,102
Prior period tax positions
Increase	—			—			—
Decrease	(251		)	(37		)	(449		)
Current period tax positions	110			142			151
Reductions for statute of limitations expirations	—			—			—
Balance at End of Year	$	768		$	909		$	804
Amount That Would Impact the Effective Tax Rate if Recognized	$	607		$	770		$	610

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, 2018, no significant changes to UTB are projected, however, tax audit examinations are possible.

During 2018, the IRS completed its examination of our 2015 tax year. The examination was closed with no adjustments. As of December 31, 2018, all income tax returns filed for the tax years 2016 and 2017 remain subject to examination by the IRS, and years 2015-2017 remain open for examination by the New York State Department of Taxation.