Income Taxes

12 Months Ended

Dec. 31, 2020

The components of income tax expense for the years ended December 31, 2020, 2019, and 2018 are as follows:


($ in thousands)		2020		2019	2018
Current	- Federal	$	27,799	19,920	19,188
	- State	3,909		2,499	3,187
Deferred	- Federal	(8,893)		1,572	1,658
	- State	(1,161)		239	156
Total		$	21,654	24,230	24,189

The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2020 and 2019 are presented below:


($ in thousands)	2020		2019
Deferred tax assets:
Allowance for loan losses	$	12,031	4,916
Excess book over tax pension plan cost	367		241
Deferred compensation	257		293
Federal & state net operating loss and tax credit carryforwards	282		376
Accruals, book versus tax	3,232		2,833
Pension liability adjustments	418		710
Foreclosed real estate	123		87
Basis differences in assets acquired in FDIC transactions	647		416
Equity compensation	661		370
Partnership investments	258		254
Leases	120		—
SBA servicing asset	358		400
All other	3		3
Gross deferred tax assets	18,757		10,899
Less: Valuation allowance	(14)		(40)
Net deferred tax assets	18,743		10,859
Deferred tax liabilities:
Loan fees	(1,011)		(2,428)

Depreciable basis of fixed assets	(4,809)		(4,995)
Amortizable basis of intangible assets	(7,965)		(7,844)
FHLB stock dividends	(236)		(472)
Trust preferred securities	(473)		(548)
Purchase accounting adjustments	—		(84)
Unrealized gain on securities available for sale	(4,699)		(2,239)
Gross deferred tax liabilities	(19,193)		(18,610)
Net deferred tax liability - included in other liabilities	$	(450)	(7,751)

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 2020 and 2019 deferred tax expense (benefit) of approximately $2,460,000 and $5,135,000 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 2020 and 2019 deferred tax expense (benefit) of $292,000 and $42,000 respectively, has been recorded directly to shareholders’ equity. The balance of the 2020 increase in the net deferred tax liability of $10,054,000 is reflected as deferred income tax expense, and the balance of the 2019 increase in the net deferred tax liability of $1,811,000 is reflected as deferred income tax expense in the consolidated statement of income.

The valuation allowances for 2020 and 2019 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 2017. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

Retained earnings at December 31, 2020 and 2019 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, 2020 and December 31, 2019 and December 31, 2018, to the income tax provision reported in the financial statements.


($ in thousands)	2020			2019		2018
Tax provision at statutory rate	$	21,657		24,418		23,830
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income	(1,050)			(1,186)		(1,117)
Low income housing tax credits	(772)			(756)		(698)
Bank-owned life insurance income	(532)			(538)		(532)
Non-deductible interest expense	23			43		27
State income taxes, net of federal benefit	2,117			2,178		2,639
Change in valuation allowance	(20)			4		(8)
Impact of tax reform	—			(73)		—
Other, net	231			140		48
Total	$	21,654	21654000	$	24,230	$	24,189