XML 33 R16.htm IDEA: XBRL DOCUMENT

Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Note 8. Income Taxes

Total income taxes for the years ended December 31, 2016, 2015, and 2014 were allocated as follows:

($ in thousands)		2016				2015				2014

Allocated to net income		$	14,624				14,126				13,535
Allocated to stockholders’ equity, for unrealized holding gain/loss on debt and equity securities for financial reporting purposes			(685	)			(184	)			518
Allocated to stockholders’ equity, for tax benefit of pension liabilities			(36	)			(1,716	)			(2,103	)
Total income taxes		$	13,903				12,226				11,950

The components of income tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 are as follows:

($ in thousands)		2016				2015				2014

Current - Federal		$	12,827				9,149				1,316
- State			1,679				1,436				903
Deferred - Federal			16				3,205				10,104
- State			102				336				1,212
Total		$	14,624				14,126				13,535

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2016 and 2015 are presented below:

($ in thousands)		2016				2015

Deferred tax assets:
Allowance for loan losses		$	8,758				10,020
Excess book over tax pension & SERP retirement plan cost			290				2,528
Deferred compensation			36				50
Federal & state net operating loss carryforwards			868				58
Accruals, book versus tax			2,287				2,130
Pension liability adjustments			1,852				1,816
Foreclosed real estate			610				571
Basis differences in assets acquired in FDIC transactions			2,539				1,384
Nonqualified stock options			545				554
Partnership investments			160				164
Unrealized gain on securities available for sale			1,138				453
All other			191				200
Gross deferred tax assets			19,274				19,928
Less: Valuation allowance			(43	)			(67	)
Net deferred tax assets			19,231				19,861
Deferred tax liabilities:
Loan fees			(1,548	)			(1,451	)
Excess tax over book pension cost			—				(1,857	)
Depreciable basis of fixed assets			(954	)			(1,313	)
Amortizable basis of intangible assets			(12,156	)			(11,263	)
FHLB stock dividends			(409	)			(416	)
All other			(12	)			(12	)
Gross deferred tax liabilities			(15,079	)			(16,312	)
Net deferred tax asset (liability) - included in other assets		$	4,152				3,549

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 2016 and 2015 deferred tax expense (benefit) of approximately ($685,000) and ($184,000) 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 2016 and 2015 deferred tax expense (benefit) of ($36,000) and ($1,716,000) respectively, has been recorded directly to shareholders’ equity. The balance of the 2016 decrease in the net deferred tax asset of $118,000 is reflected as a deferred income tax expense, and the balance of the 2015 decrease in the net deferred tax asset of $3,541,000 is reflected as a deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2016 and 2015 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 state income tax rate, which reduced the state income tax rate to 5% in 2015 and 4% in 2016. The North Carolina state income tax rate further declines to 3% effective January 1, 2017.

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 are subject to income tax audit by state agencies beginning with the year 2014. The Company’s state tax returns are subject to income tax audit by state agencies beginning with the year 2013. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2016 and 2015 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)		2016				2015				2014

Tax provision at statutory rate		$	14,746				14,405				13,486
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income			(1,202	)			(930	)			(832	)
Low income housing tax credits			(192	)			(191	)			(179	)
Non-deductible interest expense			16				11				11
State income taxes, net of federal benefit			1,158				1,152				1,375
Change in valuation allowance			(24	)			(58	)			16
Other, net			122				(263	)			(342	)
Total		$	14,624				14,126				13,535