Income Taxes

12 Months Ended

Dec. 31, 2019

Total income taxes for the years ended December 31, 2019, 2018, and 2017 were allocated as follows:



($ in thousands)	2019		2018		2017
Allocated to net income	$	24,230	24,189		21,767
Allocated to stockholders’ equity, for unrealized holding gain/loss on debt and equity securities for financial reporting purposes	5,135		(2,379	)	321
Allocated to stockholders’ equity, for tax benefit of pension liabilities	42		(5	)	668
Total income taxes	$	29,407	21,805		22,756

The components of income tax expense for the years ended December 31, 2019, 2018, and 2017 are as follows:



($ in thousands)		2019		2018	2017
Current	- Federal	$	19,920	19,188	11,286
	- State	2,499		3,187	1,996
Deferred	- Federal	1,572		1,658	7,742
	- State	239		156	743
Total		$	24,230	24,189	21,767

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2019 and 2018 are presented below:



($ in thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	4,916		4,917
Excess book over tax pension plan cost	241			92
Deferred compensation	293			367
Federal & state net operating loss and tax credit carryforwards	376			631
Accruals, book versus tax	2,833			3,036
Pension liability adjustments	710			752
Foreclosed real estate	87			715
Basis differences in assets acquired in FDIC transactions	416			1,121
Nonqualified stock options	370			240
Partnership investments	254			208
Unrealized loss on securities available for sale	—			2,895
SBA servicing asset	400			310
All other	3			42
Gross deferred tax assets	10,899			15,326
Less: Valuation allowance	(40		)	(36	)
Net deferred tax assets	10,859			15,290
Deferred tax liabilities:
Loan fees	(2,428		)	(2,484	)
Excess book over tax pension plan cost	—			—
Depreciable basis of fixed assets	(4,995		)	(4,278	)
Amortizable basis of intangible assets	(7,844		)	(7,921	)
FHLB stock dividends	(472		)	(721	)
Trust preferred securities	(548		)	(528	)
Purchase accounting adjustments	(84		)	(122	)
Unrealized gain on securities available for sale	(2,239		)	—
Gross deferred tax liabilities	(18,610		)	(16,054	)
Net deferred tax liability - included in other liabilities	$	(7,751	)	(764	)

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 2019 and 2018 deferred tax expense (benefit) of approximately $5,135,000 and ($2,379,000) 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 2019 and 2018 deferred tax expense (benefit) of $42,000 and ($5,000) respectively, has been recorded directly to shareholders’ equity. The balance of the 2019 increase in the net deferred tax liability of $1,881,000 is reflected as deferred income tax expense, and the balance of the 2018 increase in the net deferred tax liability of $1,814,000 is reflected as deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2019 and 2018 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 2.5% effective January 1, 2019.

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 2016. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2019 and 2018 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, 2019 and December 31, 2018 and 35% at 2017, to the income tax provision reported in the financial statements.



($ in thousands)	2019			2018		2017
Tax provision at statutory rate	$	24,418		23,830		23,709
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income	(1,186		)	(1,117	)	(1,461	)
Low income housing tax credits	(756		)	(698	)	(596	)
Non-deductible interest expense	43			27		24
State income taxes, net of federal benefit	2,178			2,639		1,780
Change in valuation allowance	4			(8	)	(1	)
Impact of tax reform	(73		)	—		(1,269	)
Other, net	(398		)	(484	)	(419	)
Total	$	24,230		24,189		21,767