NOTE 12 - INCOME TAXES

Income tax expense was as follows (in thousands):


	2016		2015		2014

Current	$	1,082	$	629	$	853
Deferred		(309)		(99)		44

	$	773	$	530	$	897

Year-end deferred tax assets and liabilities were due to the following (in thousands). No valuation allowance for the realization of deferred tax assets is considered necessary.


	2016		2015

Deferred tax assets
Allowance for loan losses	$	2,589	$	2,233
Other real estate owned		237		295
Nonaccrual loan interest		54		36
Accrued expenses		212		189
Acquisition market value adjustments		571		814
AMT tax credit		92		200
General business tax carryforward		—		244
Net operating loss carryforward		—		116
Unrealized loss on securities		492		—
Low income housing investments		150		—
Unearned income		362		—
Other		88		82
Deferred tax liabilities
Unrealized gain on securities		—		(185)
Bank premises and equipment		(1,041)		(1,109)
FHLB stock		(1,308)		(1,308)
Prepaid expenses		(260)		(263)
Mortgage servicing rights		(434)		(434)
Core deposit intangibles		(180)		(262)
Low income housing investments		—		(69)
Acquisition loan loss recapture		(236)		(193)
Other		(194)		(178)

Net deferred tax asset	$	1,194	$	208

Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:


	2016		2015		2014

U. S. federal income tax rate	34.0	%	34.0	%	34.0	%
Changes from the statutory rate
Tax-exempt interest income	(14.1)		(16.3)		(14.7)
Historic and low income tax credits	(9.4)		(8.2)		(7.0)
Insurance captive	(3.3)		(3.7)		(1.8)
Non-deductible interest expense related to carrying tax-exempt investments	0.4		0.4		0.4
Non-deductible merger expenses	—		0.9		—
Other	0.7		0.1		0.4

	8.3	%	7.2	%	11.3	%

Federal income tax laws provided the First Federal Savings Bank, acquired by the Company in 2003, with additional bad debt deductions through 1987, totaling $1.3 million. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total a $441 thousand liability at December 31, 2016. The Company’s acquisition of First Federal Savings Bank did not require the recapture of the bad debt reserve. However, if Kentucky Bank was liquidated or otherwise ceased to be a bank, or if tax laws were to change, the $441 thousand would be recorded as expense.

Unrecognized Tax Benefits

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

There were no interest and penalties recorded in the income statement or accrued for the years ended December 31, 2016 and 2015.

The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a corporate income tax return in the state of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2013.