Note 8. Income Taxes

Total income taxes for the years ended December 31, 2015, 2014 and 2013 were allocated as follows:

($ in thousands)	2015			2014			2013

Allocated to net income	$	14,126			13,535			12,081
Allocated to stockholders' equity, for unrealized holding gain/loss on debt and equity securities for financial reporting purposes		(184	)		518			(2,072	)
Allocated to stockholders' equity, for tax benefit of pension liabilities		(1,716	)		(2,103	)		3,399
Total income taxes	$	12,226			11,950			13,408

The components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as follows:

($ in thousands)		2015		2014		2013

Current	- Federal	$	9,149		1,316		9,812
	- State		1,436		903		(467	)
Deferred	- Federal		3,205		10,104		168
	- State		336		1,212		2,568
Total		$	14,126		13,535		12,081

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2015 and 2014 are presented below:

($ in thousands)	2015			2014

Deferred tax assets:
Allowance for loan losses	$	10,020			14,558
Excess book over tax SERP retirement plan cost		2,528			2,566
Deferred compensation		50			78
Federal & state net operating loss carryforwards		58			1,066
Accruals, book versus tax		2,130			1,779
Pension liability adjustments		1,816			100
Foreclosed real estate		571			1,222
Basis differences in assets acquired in FDIC transactions		1,384			—
Nonqualified stock options		554			521
Partnership investments		164			219
Unrealized gain on securities available for sale		453			270
All other		200			212
Gross deferred tax assets		19,928			22,591
Less: Valuation allowance		(67	)		(125	)
Net deferred tax assets		19,861			22,466
Deferred tax liabilities:
Loan fees		(1,451	)		(1,413	)
Excess tax over book pension cost		(1,857	)		(1,316	)
Depreciable basis of fixed assets		(1,313	)		(1,197	)
Amortizable basis of intangible assets		(11,263	)		(10,582	)
FHLB stock dividends		(416	)		(422	)
Basis differences in assets acquired in FDIC transactions		—			(2,322	)
All other		(12	)		(23	)
Gross deferred tax liabilities		(16,312	)		(17,275	)
Net deferred tax asset (liability) - included in other assets	$	3,549			5,191

A portion of the annual change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related 2015 and 2014 deferred tax expense (benefit) of approximately ($184,000) and $518,000 respectively, has been recorded directly to shareholders' equity. Additionally, a portion of the annual change in the net deferred tax asset relates to pension adjustments. The related 2015 and 2014 deferred tax expense (benefit) of ($1,716,000) and ($2,103,000) respectively, has been recorded directly to shareholders' equity. The balance of the 2015 decrease in the net deferred tax asset of $3,541,000 is reflected as a deferred income tax expense, and the balance of the 2014 decrease in the net deferred tax asset of $11,316,000 is reflected as a deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2015 and 2014 relate primarily to state net operating loss carryforwards. It is management's belief that the realization of the remaining net deferred tax assets is more likely than not. The Company adjusted its net deferred income tax asset as a result of reductions in the North Carolina income tax rate, which reduced the state income tax rate to 4% effective January 1, 2016.

The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if recognized would affect the effective tax rate. The Company's general policy is to record tax penalties and interest as a component of “other operating expenses”.

The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state taxing authorities. The Company's federal tax returns through the year 2013 were audited during the year. The Company's state tax returns are subject to income tax audit by state agencies beginning with the year 2012. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2015 and 2014 includes approximately $6,869,000 representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank's stock.

The following is a reconcilement of federal income tax expense at the statutory rate of 35% to the income tax provision reported in the financial statements.

($ in thousands)	2015			2014			2013

Tax provision at statutory rate	$	14,405			13,486			11,473
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income		(930	)		(832	)		(818	)
Low income housing tax credits		(191	)		(179	)		(150	)
Non-deductible interest expense		11			11			15
State income taxes, net of federal benefit		1,152			1,375			1,366
Change in valuation allowance		(58	)		16			(3	)
Other, net		(263	)		(342	)		198
Total	$	14,126			13,535			12,081