Entity information:

19.INCOME TAXES

 

On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (“TCJA”).  The TCJA, among other things, reduces the federal corporate tax rate from 35% to 21%, effective January 1, 2018.  As a result of the reduced tax rate, the Company incurred a charge of $6.3 million to income tax expense during 2017 representing the decrease in value of its net DTA upon enactment of the TCJA.  With the exception of deferred taxes related to depreciation on a portion of its property and equipment, the Company has materially completed its accounting for the tax effects upon enactment of the TCJA. Regarding its deferred taxes related to depreciation, the Company awaits the completion of a cost segregation study.  For the year ended December 31, 2017, the Company did not have the necessary information available, analyzed or prepared to make a reasonable estimate of the impact of the cost segregation study on its deferred taxes related to depreciation. The cost segregation study is scheduled to be completed in the latter half of 2018, prior to the Company’s filing of its 2017 income tax returns.  The cost segregation study is expected to provide the Company with the necessary information to complete the accounting for the deferred taxes related to depreciation. 

 

Allocation of federal income tax between current and deferred portion is as follows:

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, (in thousands)

    

2017

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

Current expense:

 

 

 

 

 

 

 

 

 

Federal

 

$

26,983

 

$

24,295

 

$

18,108

State

 

 

486

 

 

465

 

 

1,125

 

 

 

 

 

 

 

 

 

 

Deferred expense:

 

 

 

 

 

 

 

 

 

Impact of TCJA

 

 

6,326

 

 

 —

 

 

 —

Federal - other

 

 

(965)

 

 

(1,753)

 

 

(1,262)

State

 

 

(76)

 

 

53

 

 

107

Total

 

$

32,754

 

$

23,060

 

$

18,078

 

 

Effective tax rates differ from federal statutory rate of 35% applied to income before income taxes due to the following:

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

    

2017

    

2016

    

2015

    

 

 

 

 

 

 

 

 

Federal statutory rate times financial statement income

 

35.00

%  

35.00

%  

35.00

%  

Effect of:

 

 

 

 

 

 

 

Enactment of TCJA

 

8.07

 

 —

 

 —

 

State taxes, net of federal benefit

 

0.34

 

0.49

 

1.50

 

General business tax credits

 

 —

 

(0.33)

 

(0.43)

 

Nontaxable income

 

(1.90)

 

(2.12)

 

(2.68)

 

Other, net

 

0.28

 

0.39

 

0.56

 

Effective tax rate

 

41.79

 

33.43

 

33.95

 

 

 

 

 

 

 

 

 

 

 

Year-end DTAs and DTLs were due to the following:

 

 

 

 

 

 

 

 

 

December 31, (in thousands)

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

$

9,057

 

$

10,824

 

Accrued expenses

 

 

3,009

 

 

5,733

 

Net operating loss carryforward(1)

 

 

3,934

 

 

5,417

 

Other-than-temporary impairment

 

 

462

 

 

746

 

Partnership losses

 

 

156

 

 

879

 

OREO writedowns

 

 

17

 

 

19

 

Fair value of cash flow hedges

 

 

19

 

 

138

 

Acquisition fair value adjustments

 

 

748

 

 

1,379

 

Other

 

 

1,620

 

 

2,237

 

Total deferred tax assets

 

 

19,022

 

 

27,372

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Unrealized investment securities gains

 

 

(130)

 

 

(508)

 

Federal Home Loan Bank dividends

 

 

(2,659)

 

 

(4,296)

 

Deferred loan fees

 

 

(7)

 

 

(162)

 

Mortgage servicing rights

 

 

(1,127)

 

 

(1,870)

 

Bargain purchase gain

 

 

(599)

 

 

(1,436)

 

New market tax credits

 

 

 —

 

 

(831)

 

Depreciation and amortization(2)

 

 

(783)

 

 

(138)

 

Other

 

 

(1,656)

 

 

(1,127)

 

Total deferred tax liabilities

 

 

(6,961)

 

 

(10,368)

 

 

 

 

 

 

 

 

 

Less: Valuation allowance

 

 

(1,718)

 

 

(1,635)

 

Net deferred tax asset

 

$

10,343

 

$

15,369

 

 

(1)

The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $9.5 million (federal) and $6.4 million (state).  These carryforwards begin to expire in 2029 for both federal and state purposes.  The use of these federal and state carryforwards are each limited under IRC Section 382 to $722,000 annually for federal and $709,000 annually for state.  The Company also has a Kentucky net operating loss carryforward of $27.8 million which began expiring in 2013.  The company maintains a valuation allowance as it does not anticipate generating taxable income in Kentucky to utilize this carryforward prior to expiration.   Finally, the Company has AMT credit carryforwards of $87,000 with no expiration date.

 

(2)

The Company lacked the necessary information available, analyzed or prepared to complete the accounting for a portion of this item.  Additional information needed includes the completion of a cost segregation study that is expected to be in the latter part of 2018, prior to the filing of the Company’s 2017 federal and state income tax returns.

Unrecognized Tax Benefits

 

The Company has not filed tax returns in certain jurisdictions where it has conducted limited lending activity but had no offices; therefore, the Company is open to examination for all years in which the lending activity has occurred. The Company adopted the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, on January 1, 2007 and recognized a liability for the amount of tax which would be due to those jurisdictions should it be determined that income tax filings were required. It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, (in thousands)

    

2017

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,495

 

$

1,800

 

$

1,977

 

Additions based on tax related to the current period

 

 

259

 

 

268

 

 

109

 

Additions for tax positions of prior periods

 

 

 —

 

 

 —

 

 

15

 

Reductions for tax positions of prior periods

 

 

(42)

 

 

(90)

 

 

—

 

Reductions due to the statute of limitations

 

 

(800)

 

 

(340)

 

 

(301)

 

Settlements

 

 

 —

 

 

(143)

 

 

—

 

Balance, end of period

 

$

912

 

$

1,495

 

$

1,800

 

 

Of the 2017 total, $721,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.  

 

Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2017, 2016 and 2015 and accrued on the balance sheets as of December 31, 2017, 2016 and 2015 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, (in thousands)

    

2017

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

Interest and penalties recorded in the income statement as a component of income tax expense

 

$

(258)

 

$

(290)

 

$

19

 

Interest and penalties accrued on balance sheet

 

 

299

 

 

557

 

 

847

 

 

The Company files income tax returns in the U.S. federal jurisdiction.  The Company is no longer subject to U.S. federal income tax examinations by taxing authorities for all years prior to and including 2013.