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Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Note 8. Income Taxes

Total income taxes for the years ended December 31, 2018, 2017, and 2016 were allocated as follows:

($ In thousands)		2018				2017				2016

Allocated to net income		$	24,189				21,767				14,624
Allocated to stockholders’ equity, for unrealized holding gain/loss on debt and equity securities for financial reporting purposes			(2,379	)			321				(685	)
Allocated to stockholders’ equity, for tax benefit of pension liabilities			(5	)			668				(36	)
Total income taxes		$	21,805				22,756				13,903

The components of income tax expense for the years ended December 31, 2018, 2017, and 2016 are as follows:

($ In thousands)			2018				2017				2016

Current	- Federal		$	19,188				11,286				12,827
	- State			3,187				1,996				1,679
Deferred	- Federal			1,658				7,742				16
	- State			156				743				102
Total			$	24,189				21,767				14,624

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2018 and 2017 are presented below:

($ In thousands)		2018				2017

Deferred tax assets:
Allowance for loan losses		$	4,917				5,448
Excess book over tax pension plan cost			92				—
Deferred compensation			367				1,220
Federal & state net operating loss and tax credit carryforwards			631				2,125
Accruals, book versus tax			3,036				2,546
Pension liability adjustments			752				748
Foreclosed real estate			715				740
Basis differences in assets acquired in FDIC transactions			1,121				1,311
Nonqualified stock options			240				248
Partnership investments			208				232
Unrealized gain on securities available for sale			2,895				517
SBA servicing asset			310				139
All other			42				42
Gross deferred tax assets			15,326				15,316
Less: Valuation allowance			(36	)			(44	)
Net deferred tax assets			15,290				15,272
Deferred tax liabilities:
Loan fees			(2,484	)			(1,880	)
Excess book over tax pension plan cost			—				(95	)
Depreciable basis of fixed assets			(4,278	)			(3,122	)
Amortizable basis of intangible assets			(7,921	)			(7,915	)
FHLB stock dividends			(721	)			(658	)
Trust preferred securities			(528	)			(616	)
Purchase accounting adjustments			(122	)			(2,133	)
All other			—				(28	)
Gross deferred tax liabilities			(16,054	)			(16,447	)
Net deferred tax asset (liability) - included in other assets		$	(764	)			(1,175	)

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 2018 and 2017 deferred tax expense (benefit) of approximately ($2,379,000) and $321,000 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 2018 and 2017 deferred tax expense (benefit) of ($5,000) and $668,000 respectively, has been recorded directly to shareholders’ equity. The change in the net deferred tax liability was also impacted by the recording of a net deferred tax liability of approximately $159,000 relating to adjustments made to acquisition transactions that occurred during the prior year. The balance of the 2018 increase in the net deferred tax liability of $1,814,000 is reflected as deferred income tax expense, and the balance of the 2017 increase in the net deferred tax liability of $8,485,000 is reflected as deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2018 and 2017 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 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 tax returns are subject to income tax audit by federal and state agencies beginning with the year 2015. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2018 and 2017 include 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 21% at December 31, 2018 and 35% at December 31, 2017 and 2016, to the income tax provision reported in the financial statements.

($ In thousands)		2018				2017				2016

Tax provision at statutory rate		$	23,830				23,709				14,746
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income			(1,117	)			(1,461	)			(1,202	)
Low income housing and AMT tax credits			(698	)			(596	)			(192	)
Non-deductible interest expense			27				24				16
State income taxes, net of federal benefit			2,639				1,780				1,158
Change in valuation allowance			(8	)			(1	)			(24	)
Impact of tax reform			—				(1,269	)			—
Other, net			(484	)			(419	)			122
Total		$	24,189				21,767				14,624

On December 22, 2017, the Tax Cut and Jobs Act was signed into law. Among other things, this Act permanently reduced the corporate tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, companies were required to revalue their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the fourth quarter of 2017. Accordingly, during the fourth quarter of 2017, the Company recorded $1.3 million in tax benefit as a result of this revaluation.