Income Taxes
Income tax expense consists of:
|
| | | | | | | | | | | |
| June 30, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 191 |
| | $ | 266 |
| | $ | 219 |
|
State | 54 |
| | 54 |
| | 53 |
|
Total current expense | 245 |
| | 320 |
| | 272 |
|
Deferred: | | | | | |
Federal | 4,561 |
| | 4,038 |
| | 1,966 |
|
State | 386 |
| | 543 |
| | 320 |
|
Total deferred expense | 4,947 |
| | 4,581 |
| | 2,286 |
|
Total income tax expense | $ | 5,192 |
| | $ | 4,901 |
| | $ | 2,558 |
|
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations before income taxes as a result of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
| 2017 | | 2016 | | 2015 |
| $ | | Rate | | $ | | Rate | | $ | | Rate |
Tax at federal income tax rate | $ | 5,793 |
| | 34 | % | | $ | 5,561 |
| | 34 | % | | $ | 3,598 |
| | 34 | % |
Increase (decrease) resulting from: | | | | | | | | | | | |
Tax exempt income | (1,391 | ) | | (8 | )% | | (1,486 | ) | | (9 | )% | | (1,575 | ) | | (15 | )% |
Nondeductible merger expenses | 91 |
| | 1 | % | | — |
| | — | % | | 40 |
| | — | % |
Change in valuation allowance for deferred tax assets, allocated to income tax expense | (327 | ) | | (2 | )% | | (459 | ) | | (3 | )% | | (2 | ) | | — | % |
State tax, net of federal benefit | 290 |
| | 2 | % | | 394 |
| | 2 | % | | 246 |
| | 2 | % |
Other | 736 |
| | 4 | % | | 891 |
| | 6 | % | | 251 |
| | 2 | % |
Total | $ | 5,192 |
| | 31 | % | | $ | 4,901 |
| | 30 | % | | $ | 2,558 |
| | 23 | % |
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at June 30, 2017 and 2016 are presented below:
|
| | | | | | | |
| June 30, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Alternative minimum tax credit | $ | 4,418 |
| | $ | 4,156 |
|
Allowance for loan losses | 7,452 |
| | 7,451 |
|
Deferred compensation and post-retirement benefits | 16,055 |
| | 15,579 |
|
Accrued vacation and sick leave | 29 |
| | 29 |
|
Impairments on real estate owned | 1,337 |
| | 1,334 |
|
Other than temporary impairment on investments | 3,617 |
| | 3,635 |
|
Net operating loss carryforward | 21,443 |
| | 21,647 |
|
Discount from business combination | 3,645 |
| | 4,856 |
|
Stock compensation plans | 2,884 |
| | 1,644 |
|
Other | 2,687 |
| | 1,735 |
|
Total gross deferred tax assets | 63,567 |
| | 62,066 |
|
Less valuation allowance | (238 | ) | | (553 | ) |
Deferred tax assets | 63,329 |
| | 61,513 |
|
Deferred tax (liabilities): | |
| | |
|
Depreciable basis of fixed assets | (670 | ) | | (1,787 | ) |
Deferred loan fees | (493 | ) | | (488 | ) |
FHLB stock, book basis in excess of tax | (143 | ) | | (142 | ) |
Unrealized gain on securities available for sale | (152 | ) | | (1,249 | ) |
Other | (4,484 | ) | | (3,694 | ) |
Total gross deferred tax liabilities | (5,942 | ) | | (7,360 | ) |
Net deferred tax assets | $ | 57,387 |
| | $ | 54,153 |
|
The Company had federal net operating loss ("NOL") carry forwards of $62,368 and $62,041 as of June 30, 2017 and June 30, 2016, respectively, with a recorded tax benefit of $21,443 and $21,647 included in deferred tax assets. The majority of these NOLs will expire for federal tax purposes from 2024 through 2036.
The Company adjusted its net deferred tax asset as a result of additional reductions in the North Carolina corporate income tax rates that were enacted July 23, 2013, and effective January 1, 2014 through 2017. The lower corporate income tax rate resulted in a reduction in the deferred tax assets as of June 30, 2017 and June 30, 2016 and an increase in the current period income tax expense for the years ended June 30, 2017 and June 30, 2016.
The valuation allowance for deferred tax assets as of June 30, 2017 and 2016 was $238 and $553, respectively. The net decrease in the total valuation allowance for June 30, 2017 and 2016 was $315 and $459, respectively, which relates to North Carolina state income taxes due to limitations on state net operating loss carry forwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management performed a robust evaluation of the Company’s deferred tax assets at June 30, 2017 and June 30, 2016. Management considered all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial performance in making this assessment. Based upon this evaluation, management believes there is more positive evidence than negative evidence and it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2017 and June 30, 2016. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if negative trends occur with credit quality and earnings during the carryforward period.
Retained earnings at June 30, 2017 and 2016 include $19,570 representing pre-1988 tax bad debt reserve base year amounts for which no deferred tax liability has been provided since these reserves are not expected to reverse and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a failure to meet the definition of a bank, dividend payments in excess of current year or accumulated earnings and profits, or other distributions in dissolution or liquidation of the Bank. The Company is no longer subject to examination for federal and state purposes for tax years prior to 2013.