Entity information:
NOTE
1
2
– INCOME TAXES
 
The Company has had a full valuation allowance against its net deferred tax asset since
2011.
The Company
’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the
fourth
quarter of
2017,
management concluded it was more-likely-than-
not
the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. The positive evidence that outweighed the negative evidence evaluated by management in arriving at the conclusion to remove the valuation allowance included, but was
not
limited to, the following:
 
 
●
positive cumulative pre-tax
earnings over the prior
three
-year period ended
December 31, 2017
 
●
growth in net interest income, stable non-interest income trends, and lower non-interest expense trends
 
●
improvement in asset quality which increases management
’s ability to forecast future taxable income and achieve forecasted results
 
●
the Company
’s net operating loss (“NOLs”) carryforwards do
not
begin to expire until
2032,
and
 
●
the Bank
’s Consent Order was terminated in the
fourth
quarter of
2017
 
As a result of the conclusion to reverse the valuation allowance, the Company recorded an income tax benefit of
$54.0
million for the year ended
December 31, 2017.
 
On
December 22, 2017,
the Tax Cuts and Jobs Act of
2017
was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from
35%
to
21%
beginning in
2018.
As a result, the Company revalued its net deferred tax asset at the new
21%
rate. Due to this revaluation, the Company recorded a
$20.3
million charge to income tax expense for the year ended
December 31, 2017.
 
The combination of the reversal of the valuation allowance and the change in federal corporate tax rates
, as well as income tax expense for the year, resulted in an income tax benefit of
$31.9
million for the year ended
December 31, 2017.
 
Income tax expense (benefit) was as follows:
   
201
7
    
201
6
    
20
1
5
  
   
(in thousands)
  
Current
   $
—
     $
21
     $
—
  
Deferred
    
2,523
      
2,771
      
5,258
  
Net operating loss
    
(647
)
    
(4,009
)
    
(5,975
)
Change in federal statutory rate
    
20,274
      
—
      
—
  
Change in
valuation allowance
    
(54,049
)
    
1,238
      
717
  
    $
(31,899
)
   $
21
     $
—
  
 
Effective tax rates differ from federal statutory rate of
35%
applied to income
(loss) before income taxes due to the following:
 
   
201
7
    
201
6
    
20
1
5
  
   
(in thousands)
  
Federal statutory rate times financial statement income (loss)
   $
2,294
     $
(956
)
   $
(1,125
)
Effect of:
                        
V
aluation allowance
    
(54,049
)
    
1,238
      
717
  
Tax-exempt income
    
(196
)
    
(211
)
    
(264
)
Non
-taxable life insurance income
    
(144
)
    
(146
)
    
(103
)
Restricted stock vesting
    
(121
)
    
—
      
—
  
Change in federal statutory rate
    
20,274
      
—
      
—
  
Other, net
    
43
      
96
      
775
  
Total
   $
(31,899
)
   $
21
     $
—
  
 
Year-end deferred tax assets and liabil
ities were due to the following:
 
   
201
7
    
201
6
  
   
(in thousands)
  
Deferred tax assets:
                
Net operating
loss carry-forward
   $
25,645
     $
42,094
  
Allowance for loan losses
    
1,723
      
3,139
  
O
REO write-down
    
2,432
      
3,366
  
Alternative minimum tax credit carry-forward
    
692
      
692
  
Net assets from acquisitions
    
358
      
674
  
Net unrealized loss on securities
    
169
      
867
  
New market tax credit carry-forward
    
208
      
208
  
Nonaccrual loan interest
    
271
      
481
  
Accrued expenses
    
172
      
3,860
  
Deferred compensation
    
277
      
465
  
Other
    
241
      
360
  
     
32,188
      
56,206
  
                 
Deferred tax liabilities:
                
FHLB stock dividends
    
557
      
928
  
Fixed assets
    
68
      
89
  
Deferred loan costs
    
152
      
274
  
Other
    
98
      
866
  
     
875
      
2,157
  
Net deferred tax
assets before valuation allowance
    
31,313
      
54,049
  
Valuation allowance
    
—
      
(54,049
)
Net deferred tax asset
   $
31,313
     $
—
  
 
At
December 31, 2017,
the Company had net operating loss carryforwards ("NOLs") of
$122.1
million, which will begin to expire in
2031.
 
The Company does
not
have any beginning and ending unrecognized tax benefits
. The Company does
not
expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next
twelve
months. There were
no
interest and penalties recorded in the income statement or accrued for
2017
or
2016
related to unrecognized tax benefits.
 
U
nder Section
382
of the Internal Revenue Code, as amended (“Section
382”
), the Company’s net operating loss carryforwards and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section
382.
This would occur if shareholders owning (or deemed to own under the tax rules)
5%
or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than
50
percentage points over a defined period of time.
 
In
2015,
the Company took
two
measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of
one
preferred stock purchase right for each common share outstanding as of the close of business on
July 10, 2015.
Any shareholder or group that acquires beneficial ownership of
5%
or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does
not
approve such acquisition. Existing shareholders holding
5%
or more of the Company will
not
be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board
not
to jeopardize the Company's deferred tax assets. The rights will expire upon the earlier of (i)
June 29, 2018, (
ii) the beginning of a taxable year with respect to which the Board of Directors determines that
no
tax benefits
may
be carried forward, (iii) the repeal or amendment of Section
382
or any successor statute, if the Board of Directors determines that the plan is
no
longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
 
On
September 23, 2015,
the Company
’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section
382.
The transfer restrictions will expire on the earlier of (i)
September 23, 2018, (
ii) the beginning of a taxable year with respect to which the Board of Directors determines that
no
tax benefit
may
be carried forward, (iii) the repeal of Section
382
or any successor statute if our Board determines that the transfer restrictions are
no
longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are
no
longer necessary.
 
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to incom
e tax in the Commonwealth of Kentucky. The Company is
no
longer subject to examination by taxing authorities for years before
2014.