Entity information:
NOTE L - INCOME TAXES
 
The significant components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Current tax provision:
 
 
 
 
 
 
 
 
 
 
Federal
 
$
3,059
 
$
2,998
 
$
2,094
 
State
 
 
328
 
 
498
 
 
354
 
Total current tax provision
 
 
3,387
 
 
3,496
 
 
2,448
 
 
 
 
 
 
 
 
 
 
 
 
Deferred tax provision:
 
 
 
 
 
 
 
 
 
 
Federal
 
 
2,328
 
 
52
 
 
752
 
State
 
 
(3)
 
 
99
 
 
218
 
Total deferred tax provision
 
 
2,325
 
 
151
 
 
970
 
 
 
 
 
 
 
 
 
 
 
 
Net income tax provision
 
$
5,712
 
$
3,647
 
$
3,418
 
 
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
 
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Income tax at federal statutory rate
 
$
3,025
 
$
3,536
 
$
3,390
 
Increase (decrease) resulting from:
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal tax effect
 
 
214
 
 
394
 
 
377
 
Tax-exempt interest income
 
 
(128)
 
 
(151)
 
 
(172)
 
Income from life insurance
 
 
(195)
 
 
(201)
 
 
(213)
 
Incentive stock option expense
 
 
39
 
 
24
 
 
13
 
Merger expenses
 
 
209
 
 
-
 
 
-
 
Impact of changes in tax rates
 
 
2,591
 
 
-
 
 
-
 
Other permanent differences
 
 
(43)
 
 
45
 
 
23
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
5,712
 
$
3,647
 
$
3,418
 
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2017 and 2016 are as follows:
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Deferred tax assets relating to:
 
 
 
 
 
 
 
Allowance for loan losses
 
$
2,030
 
$
3,026
 
Deferred compensation
 
 
172
 
 
294
 
Supplemental executive retirement plan
 
 
-
 
 
17
 
Net operating loss carryforwards
 
 
1,446
 
 
-
 
Acquisition accounting
 
 
1,738
 
 
986
 
Core deposit intangible
 
 
-
 
 
165
 
Write-downs on foreclosed real estate
 
 
116
 
 
53
 
Other
 
 
143
 
 
184
 
Total deferred tax assets
 
 
5,645
 
 
4,725
 
Deferred tax liabilities relating to:
 
 
 
 
 
 
 
Premises and equipment
 
 
(654)
 
 
(1,287)
 
Deferred loan fees/costs
 
 
(54)
 
 
(70)
 
Unrealized gains on available-for-sale securities
 
 
(119)
 
 
(204)
 
Core deposit intangible
 
 
(319)
 
 
-
 
Other
 
 
-
 
 
(32)
 
Total deferred tax liabilities
 
 
(1,146)
 
 
(1,593)
 
 
 
 
 
 
 
 
 
Net recorded deferred tax asset, included in other assets
 
$
4,499
 
$
3,132
 
 
Deferred income taxes are measured at the enacted tax rate for the period in which they are expected to reverse. In December 2017 the U.S. Congress passed and the President signed legislation which reduced the statutory corporate tax rate to 21% effective January 1, 2018 and for all taxable years ending after that date. North Carolina also enacted legislation to reduce its corporate tax rate from 3.0% to 2.5% effective January 1, 2019. Therefore, deferred income taxes as of December 31, 2017 have been measured using the tax rate enacted for subsequent years of 21% and 2.5%. The impact of this change in tax rate is additional income tax expense of $2.6 million.
 
The Company had $7.0 million of net operating losses which can be carried forward and applied against future taxable income. If unused, these net operating losses will expire in 2027 through 2036. The Company’s policy is to report interest and penalties, if any, related to uncertain tax positions in income tax expense in the Consolidated Statements of Operations. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014. As of December 31, 2017 and 2016, the Company has no uncertain tax positions.
 
The Company’s net deferred tax asset was $4.5 million and $3.2 million at December 31, 2017 and 2016. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of December 31, 2017, management concluded that the Company’s net deferred tax assets were fully realizable. As a result of the reduction in the federal corporate tax rate in December 2017 deferred taxes were adjusted to reflect this change. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations or other factors could impact the realization of the deferred tax asset in the future.