On
December 22, 2017,
President Trump signed into law
H.R.1.,
formally known as the “Tax Cuts and Jobs Act,” which among other things, reduce
s the maximum federal corporate income tax rate from
35.0%
to
21.0%
effective
January 1, 2018.
In accordance with GAAP, the enactment of this new tax legislation required FNCB to revalue its deferred tax assets at the new corporate statutory rate of
21.0%
as of
December 31, 2017.
The revaluation of FNCB’s deferred tax assets, net of deferred tax liabilities, resulted in a reduction in its net deferred tax assets of
$8.0
million in the
fourth
quarter of
2017
with a corresponding increase in the income tax expense.
The following table presents a reconciliation between the effective income tax expense (benefit) and the income tax expense that would have been provided at
FNCB’s historic federal statutory tax rate of
for each of the years ended
December 31, 2017,
2016
and
2015:
As of
December 31, 2017
, FNCB had
$40.5
million of net operating loss carryovers resulting in deferred tax assets of
$8.5
million. As of
December 31, 2017,
FNCB also had
$353
thousand of charitable contribution carryovers resulting in gross deferred tax assets of
$74
thousand. These charitable contribution carryovers will begin to expire after
December 31, 2018
if
not
utilized. In addition, FNCB had alternative minimum tax (“AMT”) credit carryovers of
$2.9
million as of
December 31, 2017
that have an indefinite life.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently if necessary, in accordance with guidance set forth in ASC Topic
740
“Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than
not
that some portion, or all, of the deferred tax asset will
not
be realized within its life cycle, based on the weight of available evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards
not
expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both positive and negative evidence currently available. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. If management determines based on available evidence, both positive and negative, that it is more likely than
not
that some portion or all of the deferred tax asset will
not
be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their evaluation of both positive and negative evidence.
Prior to
December 31, 2015,
FNCB had established a full valuation allowance for its deferred tax assets. At
December 31, 2015,
m
anagement performed an evaluation of FNCB’s deferred tax assets and determined that based on its consistent methodology the negative evidence that was previously present to support the full valuation allowance
no
longer existed. FNCB’s core earnings had normalized and it was now in a cumulative
three
-year income position, which management deemed to be positive evidence. In addition, management believed that FNCB’s projected future earnings were sufficient to be able to utilize its available NOL carryforwards prior to their expiration.
This analysis supported the reversal of the valuation allowance established for deferred tax assets at
December 31, 2015
except for the valuation allowance established for charitable contribution carryforwards. At
December 31, 2015,
FNCB had
$1.0
million in contribution carryforwards available. Unlike the expiration period for net operating loss carryforwards (generally
20
years) and AMT credit carryovers (indefinite), the expiration of an excess charitable contribution carryover occurs after the
5th
succeeding tax year for which a charitable contribution is made. Management did
not
believe that enough positive evidence existed
at that time to support the utilization of charitable contribution carryforwards in entirety before expiration at
December 31, 2015.
Accordingly, management believed a valuation allowance in the amount of
$355
thousand was appropriate strictly in the case of the excess charitable contribution carryover deferred tax asset at
December 31, 2015.
Management performed an evaluation of FNCB
’s deferred tax assets at
December 31, 2017
and
2016
taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize deferred tax assets. FNCB’s projected future core earnings will continue to support the recognition of the deferred tax assets based on future growth projections. Accordingly, a valuation allowance for deferred tax assets, including deferred tax assets related to excess charitable contribution carryovers, was
not
required at
December 31, 2017
and
2016.