NOTE 13 - INCOME TAXES

The 2017 Tax Cuts Jobs Act (“2017 Tax Act”) was signed into law by the President on December 22, 2017. The 2017 Tax Act reduced the corporate Federal tax rate from 35% to 21% effective January 1, 2018. Income tax expense for 2017 includes a revaluation of net deferred tax assets in the amount of $239,000, recorded as a result of the enactment of the 2017 Tax Act.

Income tax expense for the years ended December 31, 2017 and 2016 consists of the following: 

A reconciliation from expected Federal tax expense to actual income tax expense for the years ended December 31, 2017 and 2016 using the base federal tax rates of 35% follows: 

The FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company early adopted the new guidance in the second quarter of 2016. A tax benefit of $1.5 million and $454,000 was recorded during the years ended December 31, 2017 and 2016 as a result of share awards vesting/exercised.

The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2017 and 2016: 

Deferred tax assets are recognized for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carry forwards. A valuation allowance is then established to reduce that deferred tax asset to the level that it is “more likely than not” that the tax benefit will be realized. The realization of a deferred tax benefit by the Company depends upon having sufficient taxable income of an appropriate character in the future periods.

A portion of the annual change in the net deferred income tax asset relates to unrealized gains and losses on debt and equity securities and interest rate swaps. The deferred income tax expense related to the unrealized gains and losses on debt and equity securities and interest rate swaps of $3.4 million and deferred income tax benefit of $1.1 million for the years ended December 31, 2017 and 2016, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. The portion of the change in the tax associated with the accumulated comprehensive income that relates to the newly enacted tax rates was a benefit of $832,000 and was recorded to tax expense in the Consolidated Statement of Operations for the year ended December 31, 2017. The balance of the change in the net deferred tax asset of $8.0 million and $800,000 of deferred tax expense for the years ended December 31, 2017 and 2016 is reflected in the Consolidated Statement of Operations. The valuation allowances relate to state net operating loss carry-forwards. It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not. Tax returns for 2014 and subsequent years are subject to examination by taxing authorities. The Company has analyzed the tax positions taken or expected to be taken on its tax returns and concluded it has no liability related to uncertain tax positions in accordance with ASC Topic 740.

The Company has federal net operating losses of $3.6 million and $3.3 million at December 31, 2017 and 2016, respectively. These net operating losses expire at various times beginning in the year of 2028. The Company has state net operating losses of $16.8 million and $10.7 million at December 31, 2017 and 2016, respectively. These net operating losses expire at various times beginning in the year 2026. The Company has AMT credits of $2.1 million at December 31, 2017. There are no AMT credits at December 31, 2016. As a result of the First South Bancorp, Inc. and Greer Bancshares, Inc. ownership changes in 2017 and Congaree Bancshares, Inc. ownership change in 2016, Section 382 of the Internal Revenue Code places an annual limitation on the amount of federal net operating loss carryforwards which the Company may utilize. The Company expects all Section 382 limited carry-forwards to be realized within the applicable carryforward period.