Income Taxes

Income tax expense consists of:



	June 30,
	2016		2015		2014
Current:
Federal	$	266	$	219	$	126
State	54		53		9
Total current expense	320		272		135
Deferred:
Federal	4,038		1,966		2,853
State	543		320		1,525
Total deferred expense	4,581		2,286		4,378
Total income tax expense	$	4,901	$	2,558	$	4,513

Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations before income taxes as a result of the following:



	Year Ended June 30,
	2016					2015					2014
	$			Rate		$			Rate		$			Rate
Tax at federal income tax rate	$	5,561		34	%	$	3,598		34	%	$	5,051		34	%
Increase (decrease) resulting from:
Tax exempt income	(1,486		)	(9	)%	(1,575		)	(15	)%	(1,740		)	(12	)%
Nondeductible merger expenses	—			—	%	40			—	%	162			1	%
Change in valuation allowance for deferred tax assets, allocated to income tax expense	(459		)	(3	)%	(2		)	—	%	(1,160		)	(8	)%
State tax, net of federal benefit	394			2	%	246			2	%	1,012			7	%
Other	891			6	%	251			2	%	1,188			8	%
Total	$	4,901		30	%	$	2,558		23	%	$	4,513		30	%

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at June 30, 2016 and 2015 are presented below:



	June 30,
	2016			2015
Deferred tax assets:
Alternative minimum tax credit	$	4,156		$	3,853
Allowance for loan losses	7,451			8,264
Deferred compensation and post-retirement benefits	15,579			16,194
Accrued vacation and sick leave	29			29
Impairments on real estate owned	1,334			1,451
Other than temporary impairment on investments	3,635			3,712
Net operating loss carryforward	21,647			25,354
Discount from business combination	4,856			6,061
Stock compensation plans	1,644			833
Other	1,735			1,323
Total gross deferred tax assets	62,066			67,074
Less valuation allowance	(553		)	(1,012		)
Deferred tax assets	61,513			66,062
Deferred tax (liabilities):
Depreciable basis of fixed assets	(1,787		)	(1,944		)
Deferred loan fees	(488		)	(518		)
FHLB stock, book basis in excess of tax	(142		)	(144		)
Unrealized gain on securities available for sale	(1,249		)	(489		)
Other	(3,694		)	(3,474		)
Total gross deferred tax liabilities	(7,360		)	(6,569		)
Net deferred tax assets	$	54,153		$	59,493

The Company had federal net operating loss ("NOL") carry forwards of $62,041 and $71,458 as of June 30, 2016 and June 30, 2015, respectively, with a recorded tax benefit of $21,647 and $25,354 included in deferred tax assets. The majority of these NOLs will expire for federal tax purposes from 2022 through 2032.

The Company adjusted its net deferred tax asset as a result of reductions in the North Carolina corporate income tax rates that were enacted July 23, 2013, and effective January 1, 2014 and January 1, 2015. The lower corporate income tax rate resulted in a reduction in the deferred tax assets as of June 30, 2016 and June 30, 2014 and an increase in the current period income tax expense for the years ended June 30, 2016 and June 30, 2014.

The valuation allowance for deferred tax assets as of June 30, 2016 and 2015 was $553 and $1,012, respectively. The net decrease in the total valuation allowance for June 30, 2016 and 2015 was $459 and $2, respectively, which relates to North Carolina state income taxes due to limitations on state net operating loss carry forwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management performed a robust evaluation of the Company’s deferred tax assets at June 30, 2016 and June 30, 2015. Management considered all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial performance in making this assessment. Based upon this evaluation, management believes there is more positive evidence than negative evidence and it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2016 and June 30, 2015. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if negative trends occur with credit quality and earnings during the carryforward period.

Retained earnings at June 30, 2016 and 2015 include $19,570 representing pre-1988 tax bad debt reserve base year amounts for which no deferred tax liability has been provided since these reserves are not expected to reverse and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a failure to meet the definition of a bank, dividend payments in excess of current year or accumulated earnings and profits, or other distributions in dissolution or liquidation of the Bank. The Company is no longer subject to examination for federal and state purposes for tax years prior to 2012.