Note 8. Income Taxes

Total income taxes for the years ended December 31, 2014, 2013 and 2012 were allocated as follows:

(In thousands)	2014		2013			2012

Allocated to net income	$	13,535		12,081			(16,952	)
Allocated to stockholders' equity, for unrealized holding gain/loss on debt and equity securities for financial reporting purposes		518		(2,072	)		(237	)
Allocated to stockholders' equity, for tax benefit of pension liabilities		(2,103)		3,399			5,824
Total income taxes	$	11,950		13,408			(11,365	)

The components of income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012 are as follows:

(In thousands)	2014		2013			2012

Current - Federal	$	1,316		9,812			(8,401	)
- State		903		(467	)		(43	)
Deferred - Federal		10,104		168			(5,914	)
- State		1,212		2,568			(2,594	)
Total	$	13,535		12,081			(16,952	)

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2014 and 2013 are presented below:

(In thousands)	2014			2013

Deferred tax assets:
Allowance for loan losses	$	14,558			18,459
Excess book over tax SERP retirement plan cost		2,566			2,572
Deferred compensation		78			94
Federal & state net operating loss carryforwards		1,066			10,901
Accruals, book versus tax		1,779			1,604
Pension liability adjustments		100			—
Foreclosed real estate		1,222			2,781
Nonqualified stock options		521			522
Partnership investments		219			237
Unrealized gain on securities available for sale		270			789
All other		212			618
Gross deferred tax assets		22,591			38,577
Less: Valuation allowance		(125	)		(109	)
Net deferred tax assets		22,466			38,468
Deferred tax liabilities:
Loan fees		(1,413	)		(1,536	)
Excess tax over book pension cost		(1,316	)		(806	)
Depreciable basis of fixed assets		(1,197	)		(1,835	)
Amortizable basis of intangible assets		(10,582	)		(9,732	)
Pension liability adjustments		—			(2,003	)
FHLB stock dividends		(422	)		(423	)
Basis differences in assets acquired in FDIC transactions		(2,322	)		(7,163	)
All other		(23	)		(48	)
Gross deferred tax liabilities		(17,275	)		(23,546	)
Net deferred tax asset - included in other assets	$	5,191			14,922

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 2014 and 2013 deferred tax expense (benefit) of approximately $518,000 and ($2,072,000), 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 2014 and 2013 deferred tax expense (benefit) of ($2,103,000) and $3,399,000, respectively, has been recorded directly to shareholders' equity. The balance of the 2014 decrease in the net deferred tax asset of $11,316,000 is reflected as a deferred income tax expense, and the balance of the 2013 decrease in the net deferred tax asset of $2,736,000 is reflected as a deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2014 and 2013 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 corporate income tax rate, which reduced the state income tax rate to 5% effective January 1, 2015.

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.”

We are subject to routine audits of our tax returns by the Internal Revenue Service and various state taxing authorities. The Company's tax returns are subject to income tax audit by federal and state agencies beginning with the year 2010. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2014 and 2013 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)	2014			2013			2012

Tax provision at statutory rate	$	13,486			11,473			(14,125	)
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income		(832	)		(818	)		(831	)
Low income housing tax credits		(179	)		(150	)		(181	)
Non-deductible interest expense		11			15			23
State income taxes, net of federal benefit		1,375			1,366			(1,714	)
Change in valuation allowance		16			(3	)		31
Other, net		(342)			198			(155	)
Total	$	13,535			12,081			(16,952	)