Note 12 - Income Taxes
 12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
NOTE
12
– INCOME TAXES
 
Income taxes are provided based on the asset-liability method of accounting, which includes the recognition of a deferred tax asset (“DTA”) or a liability for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, the Company records a DTA when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.
 
The significant components of the provision for income taxes for the years ended
December
31,
2016,
2015
and
2014
are as follows:
 
 
 
  
2016
    
2015
    
2014
  
Current tax provision:
                       
Federal
  $
2,651
    $
445
    $
655
 
State
   
421
     
211
     
195
 
Total current tax provision
   
3,072
     
656
     
850
 
Deferred tax provision:
                       
Federal
   
5,906
     
5,755
     
4,646
 
State
   
643
     
1,731
     
562
 
Total deferred tax provision
   
6,549
     
7,486
     
5,208
 
Net provision for income taxes
  $
9,621
    $
8,142
    $
6,058
 
 
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of
35%
to income before income taxes for the years ended
December
31,
2016,
2015
and
2014
are summarized below:
 
 
 
 
2016
 
 
2015
 
 
2014
 
Tax at the statutory federal rate
  $
10,349
    $
8,662
    $
6,631
 
Increase (decrease) resulting from:
                       
State income taxes, net of federal tax effect
   
691
     
1,262
     
493
 
Nondeductible merger expenses
   
-
     
-
     
72
 
Tax exempt income
   
(1,278
 )    
(1,332
 )    
(1,299
 )
Stock-based compensation
   
(747
 )    
-
     
-
 
Other permanent differences
   
604
     
(450
 )    
161
 
Provision for income taxes
  $
9,620
    $
8,142
    $
6,058
 
 
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,
2016
and
2015
are as follows:
 
 
 
2016
 
 
2015
 
                 
Deferred tax assets relating to:
               
Allowance for loan losses
  $
4,283
    $
3,241
 
Net unrealized loss on securities
   
1,192
     
631
 
Net unrealized losses on cash flow hedges
   
699
     
1,426
 
Fair market value adjustments related to mergers
   
10,742
     
8,703
 
Stock based compensation
   
1,518
     
2,818
 
Pre-opening costs and expenses
   
165
     
204
 
Other real estate writedowns
   
1,066
     
1,875
 
Deferred compensation
   
3,727
     
3,625
 
Tax credit carryforwards
   
3,883
     
2,576
 
Net operating loss carryforwards
   
5,358
     
5,163
 
FDIC acquisitions
   
-
     
5,827
 
Accrued incentive compensation
   
1,442
     
777
 
Other
   
3,393
     
2,047
 
Total deferred tax assets
   
37,468
     
38,913
 
Deferred tax liabilities relating to:
               
Core deposit intangible
   
(4,140
 )    
(3,537
 )
Net unrealized gains on securities
   
-
     
(334
 )
Property and equipment
   
(3,285
 )    
(2,488
 )
Deferred loan costs
   
(2,913
 )    
(2,590
 )
Prepaid expenses
   
(517
 )    
(405
 )
Other
   
(891
 )    
(588
 )
Total deferred tax liabilities
   
(11,746
 )    
(9,942
 )
Net recorded deferred tax asset
  $
25,722
    $
28,971
 
 
As of
December
31,
2016
and
December
31,
2015,
the Company had a net DTA in the amount of approximately
$25.7
million and
$29.0
million, respectively. The decrease is primarily the result of
$19.9
million in earnings during
2016
offset by the acquired and re-measured DTA of First Capital. The Company reduced its net deferred tax asset as a result of a reduction in the North Carolina corporate income tax rate that was enacted
July
23,
2013
but would not go into effect until the North Carolina General Fund tax collections achieved a targeted amount. On
August
4,
2016,
the North Carolina Secretary of Revenue confirmed that the targeted amount of tax collections had been exceeded and, therefore, the corporate income tax rate would be reduced to
3%
effective for tax years beginning on or after
January
1,
2017.
The lower corporate income tax rate did not have a material impact on either the amount of the deferred tax asset or income tax expense for the year ended
December
31,
2016.
 
The Company evaluates the carrying amount of the DTA quarterly in accordance with the guidance provided in ASC
740,
in particular applying the criteria set forth therein to determine whether it is more likely than not (i.e., a likelihood of more than
50%)
that some portion, or all, of the DTA will not be realized within its life cycle, based on the weight of available evidence. In most cases, the realization of the DTA is dependent upon generating a sufficient level of taxable income in future periods, which can be difficult to predict. In addition to projected earnings, the Company also considers projected asset quality, liquidity, its strong capital position, which could be leveraged to increase earning assets and generate taxable income, its growth plans and other relevant factors. Based on the weight of available evidence, the Company determined that as of
December
31,
2016
and
December
31,
2015
that it is more likely than not that it will be able to fully realize the existing DTA and therefore considered it appropriate not to establish a DTA valuation allowance at either
December
31,
2016
or
December
31,
2015.
 
The Company had a federal net operating loss carryforward of
$14.2
million and
$24.8
million for the years ended
December
31,
2016
and
2015,
respectively, which expire in varying amounts through
2033.
As a result of several acquisitions since
2011,
Section
382
of the Internal Revenue Code (“Section
382”)
places an annual limitation on the amount of federal net operating loss carryforwards the Company
may
utilize. Additionally, Section
382
limits the Company’s ability to utilize certain tax deductions such as realized built in losses (“RBIL”) due to the existence of net unrealized built-in losses at the time of the change in control. The Company is allowed to carryforward any such RBIL under terms similar to those related to net operating losses. The Company expects all Section
382
limited carryforwards to be realized within the acceptable carryforward period.
 
 
The Company had state net operating loss carryforwards of
$19.7
million and
$37.4
million for the years ended
December
31,
2016
and
2015,
respectively, which expire in varying amounts through
2031.
 
As of
December
31,
2016
and
2015,
the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties related to income taxes as a component of non-interest expense.
 
Tax years
2013
through
2015
remain open to examination by the Federal and state taxing authorities as of
December
31,
2016.