19.INCOME TAXES

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


Years Ended December 31, (in thousands)	2019		2018		2017

Current expense:
Federal	$	18,906	$	10,638	$	26,983
State		1,751		1,532		486

Deferred expense:
SAB 118 related discrete items		—		(2,762)		—
Deferred tax asset devaluation upon enactment of TCJA		—		—		6,326
Federal		1,880		6,815		(965)
State		(1,043)		188		(76)
Total	$	21,494	$	16,411	$	32,754

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


Years Ended December 31,	2019		2018		2017

Federal corporate tax rate	21.00	%	21.00	%	35.00	%
Effect of:
SAB 118 related discrete items*	—		(2.93)		—
Deferred tax asset devaluation upon enactment of TCJA	—		—		8.07
State taxes, net of federal benefit	1.43		1.44		0.34
General business tax credits	(1.14)		(1.44)		—
Nontaxable income	(0.85)		(0.99)		(1.90)
Reversal of valuation allowance on net operating loss carryforward	(0.74)		—		—
Tax benefit of vesting employee benefits	(0.42)		(0.20)		(0.31)
Establishment of deferred tax asset due to KY HB354	(0.20)		—		—
Other, net	(0.09)		0.53		0.59
Effective tax rate	18.99		17.41		41.79

*Discrete items include the impact of a cost-segregation study, a research and development tax-credit study, and a tax-accounting-method change related to the immediate recognition of loan origination costs.

The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. 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. At December 31, 2017, except for a planned cost-segregation study, based on facts and circumstances known at that time, the Company believed it had substantially completed its accounting for the tax effects of the TCJA.

The following items provided $2.8 million in federal income tax benefits during 2018 and primarily drove the Total Company’s effective tax rate for that period lower than the federal corporate tax rate of 21%:

During the third quarter of 2018 the Company completed a cost-segregation study and assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. Tax benefits related to the cost-segregation study were primarily attributed to the Company’s Traditional Banking segment.

The Company adopted an automatic tax-accounting-method change related to loan origination costs during the third quarter of 2018, as it was preparing its 2017 federal tax return. This tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The change in tax-accounting-method resulted in a further impact from the TCJA, as it affected the Company’s 2017 federal tax return due October 15, 2018. Tax benefits related to the tax-accounting-method change were 100% attributed to the Company’s Traditional Banking segment.

The Company completed an R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. Tax benefits related to the R&D tax-credit study were attributed to the Company’s Traditional Banking, TRS, and RCS segments.

The following items provided $2.8 million in federal income tax benefits during 2019 and drove the Total Company’s effective tax rate for that period lower than the federal corporate tax rate of 21%:

As a financial institution doing business in Kentucky, the Bank is subject to a capital-based Kentucky bank franchise tax and exempt from Kentucky corporate income tax. In March 2019, however, Kentucky enacted HB354, which will transition the Bank from the bank franchise tax to a corporate income tax beginning January 1, 2021. The current Kentucky corporate income tax rate is 5%. As of December 31, 2019, the Company recorded a deferred tax asset, net of the federal benefit, of $224,000 due to the enactment of HB354, with the majority of this benefit attributed to the Company’s Traditional Banking segment.

In April 2019, Kentucky enacted HB458, which allows for sharing of certain tax attributes between Republic Bancorp and the Bank, including net operating losses. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance and record the deferred tax asset for these losses is approximately $840,000 and is fully attributed to the Company’s Traditional Banking segment.

The Company recognized $480,000 in income tax benefits associated with equity compensation during 2019. Substantially all of this benefit was attributed to the Company’s Traditional Banking segment.

The Company recognized $1.3 million in income tax benefits for low-income-housing investments and R&D credits during 2019. The low-income-housing investments were attributable to the Company’s Traditional Banking segment, while the R&D credits were attributed to the Traditional Banking, TRS, and RCS segments.

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


December 31, (in thousands)	2019		2018

Deferred tax assets:
Allowance for loan and lease losses	$	9,672	$	9,746
Operating lease liabilities		8,186		—
Accrued expenses		3,332		3,802
Net operating loss carryforward(1)		2,705		2,858
Acquisition fair value adjustments		443		580
Other-than-temporary impairment		397		478
Unrealized investment security losses		—		289
Fair value of cash flow hedges		26		—
Other		1,741		1,644
Total deferred tax assets		26,502		19,397

Deferred tax liabilities:
Right of use assets - operating leases		(7,889)		—
Depreciation and amortization		(4,018)		(3,970)
Federal Home Loan Bank dividends		(2,667)		(2,676)
Deferred loan fees		(2,068)		(1,921)
Lease Financing Receivables		(2,245)		(1,839)
Mortgage servicing rights		(1,319)		(1,106)
Unrealized investment securities gains		(1,058)		—
Bargain purchase gain		(648)		(553)
Fair value of cash flow hedges		—		(24)
Other		(246)		(11)
Total deferred tax liabilities		(22,158)		(12,100)

Less: Valuation allowance		—		(819)
Net deferred tax asset	$	4,344	$	6,478

(1)

The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $8.0 million (federal) and $5.1 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The use of these federal and state carryforwards is each limited under IRC Section 382 to $722,000 annually for federal and $634,000 annually for state. The Company also has a Kentucky net operating loss carryforward of $21.2 million, which the Company expects to begin utilizing in 2021 due to the passage of Kentucky HB354 and HB458. The Company expects to file a combined Kentucky income tax return beginning in 2021 and to utilize these previously generated net operating losses. The Company previously maintained a valuation allowance as it did 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.

Unrecognized Tax Benefits

The following table shows a reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Years Ended December 31, (in thousands)	2019		2018		2017

Balance, beginning of period	$	1,327	$	912	$	1,495
Additions based on tax related to the current period		364		306		259
Additions for tax positions of prior periods		55		339		—
Reductions for tax positions of prior periods		—		(34)		(42)
Reductions due to the statute of limitations		(39)		(196)		(800)
Settlements		—		—		—
Balance, end of period	$	1,707	$	1,327	$	912

Of the 2019 total, $1.5 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.

It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits. Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2019, 2018, and 2017 and accrued on the balance sheets as of December 31, 2019, 2018, and 2017 are presented below:


Years Ended December 31, (in thousands)	2019		2018		2017

Interest and penalties recorded in the income statement as a component of income tax expense	$	173	$	42	$	(258)
Interest and penalties accrued on balance sheet		514		341		299

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.

Low Income Housing Tax Credits

The Company is a limited partner in several low-income housing partnerships whose purpose is to invest in qualified affordable housing. The Company expects to recover its remaining investments in these partnerships through the use of tax credits that are generated by the investments.

The following table summarizes information related to the Company’s qualified low-income housing investments and commitments:


December 31, (in thousands)		2019				2018
					Unfunded				Unfunded
Investment	Accounting Method		Investment		Commitment		Investment		Commitment
Low income housing tax credit investments - Gross	Proportional amortization	$	11,912	$	24,888	$	3,971	$	14,029
Life-to-date amortization			(1,218)		NA		(347)		NA
Low income housing tax credit investments - Net		$	10,694	$	24,888	$	3,624	$	14,029