19.INCOME TAXES

Allocation of federal income tax between current and deferred portion is as follows:


Years Ended December 31, (in thousands)	2016		2015		2014

Current expense:
Federal	$	24,295	$	18,108	$	22,143
State		465		1,125		2,469

Deferred expense:
Federal		(1,753)		(1,262)		(8,637)
State		53		107		(447)
Total	$	23,060	$	18,078	$	15,528

Effective tax rates differ from federal statutory rate of 35% applied to income before income taxes due to the following:


Years Ended December 31,	2016		2015		2014

Federal statutory rate times financial statement income	35.00	%	35.00	%	35.00	%
Effect of:
State taxes, net of federal benefit	0.49		1.50		2.96
General business tax credits	(0.33)		(0.43)		(0.67)
Nontaxable income	(2.12)		(2.68)		(2.80)
Other, net	0.39		0.56		0.55
Effective tax rate	33.43		33.95		35.04

Year-end deferred tax assets and liabilities were due to the following:


December 31, (in thousands)	2016		2015

Deferred tax assets:
Allowance for loan and lease losses	$	10,824	$	9,595
Accrued expenses		5,733		3,913
Net operating loss carryforward*		5,417		1,574
Depreciation		—		1,289
Other-than-temporary impairment		746		750
Partnership losses		879		842
OREO writedowns		19		20
Fair value of cash flow hedges		138		210
Acquisition fair value adjustments		1,379		—
Other		2,237		2,061
Total deferred tax assets		27,372		20,254

Deferred tax liabilities:
Unrealized investment securities gains		(711)		(1,314)
Federal Home Loan Bank dividends		(4,296)		(4,315)
Deferred loan fees		(162)		(317)
Mortgage servicing rights		(1,870)		(1,781)
Bargain purchase gain		(1,436)		(552)
New market tax credits		(831)		(707)
Depreciation and amortization		(138)		—
Other		(1,127)		(374)
Total deferred tax liabilities		(10,571)		(9,360)

Less: Valuation allowance		(1,635)		(1,564)
Net deferred tax asset	$	15,166	$	9,330

*The Company has federal and state net operating loss carryforwards (acquired in the Cornerstone acquisition) of $10.2 million (federal) and $7.2 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The use of these federal and state carryforwards are each limited under IRC Section 382 to $722,000 annually for federal and $709,000 annually for state. The Company also has a Kentucky net operating loss of $26.6 million, which began to expire in 2013. The Company maintains a valuation allowance, as it does not anticipate generating taxable income in Kentucky to utilize these carryforwards prior to expiration. Finally, the Company has AMT credit carryforwards (acquired in the Cornerstone acquisition) of $84,000 with no expiration date.

Unrecognized Tax Benefits

The Company has not filed tax returns in certain jurisdictions where it has conducted limited lending activity but had no offices; therefore, the Company is open to examination for all years in which the lending activity has occurred. The Company adopted the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, on January 1, 2007 and recognized a liability for the amount of tax which would be due to those jurisdictions should it be determined that income tax filings were required. It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Years Ended December 31, (in thousands)	2016		2015		2014

Balance, beginning of period	$	1,800	$	1,977	$	1,381
Additions based on tax related to the current period		268		109		81
Additions for tax positions of prior periods		—		15		750
Reductions for tax positions of prior periods		(90)		—		—
Reductions due to the statute of limitations		(340)		(301)		(235)
Settlements		(143)		—		—
Balance, end of period	$	1,495	$	1,800	$	1,977

Of the 2016 total, $972,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company plans on recognizing a tax benefit of $357,000 during the first quarter of 2017 as the statute of limitations related to one jurisdiction has closed.

Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2016, 2015 and 2014 and accrued on the balance sheets as of December 31, 2016, 2015 and 2014 are presented below:


Years Ended December 31, (in thousands)	2016		2015		2014

Interest and penalties recorded in the income statement as a component of income tax expense	$	(290)	$	19	$	260
Interest and penalties accrued on balance sheet		557		847		827

The Company files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by taxing authorities for all years prior to and including 2012.

The Company completed an IRS examination of its 2013 corporate income tax return during 2016 and was notified that the examination resulted in no significant adjustments to the Company’s tax liability.