Income Taxes

12 Months Ended

Dec. 31, 2019

14. Income Taxes

The components of the provision for income taxes, exclusive of tax effect of unrealized AFS securities gains and losses, are as follows:

(in thousands)	2019			2018			2017
Current income tax expense	$	8,864		$	11,560		$	20,108
Deferred income tax expense (benefit)		2,030			(246	)		(259	)
Effect of Tax Cuts & Jobs Act benefit		0			0			(2,831	)
Effect of Kentucky tax legislation benefit		(3,442	)		0			0
Total income tax expense	$	7,452		$	11,314		$	17,018

The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent. As of December 31, 2018, we completed our accounting for the tax effects of enactment of the Act. The effect of the Tax Cuts and Jobs Act (benefit) listed above for the year 2017, reflects the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent.

A reconciliation of income tax expense at the statutory rate to our actual income tax expense is shown below:

(in thousands)	2019					2018					2017
Computed at the statutory rate	$	15,118		21.00	%	$	14,814		21.00	%	$	23,979		35.00	%
Adjustments resulting from:
Tax-exempt interest		(563	)	(0.78	)		(673	)	(0.95	)		(1,259	)	(1.84	)
Housing and new markets credits		(4,471	)	(6.21	)		(2,635	)	(3.73	)		(2,579	)	(3.76	)
Dividends received deduction		0		-			(9	)	(0.01	)		(129	)	(0.19	)
Bank owned life insurance		(284	)	(0.39	)		(599	)	(0.85	)		(492	)	(0.72	)
ESOP dividend deduction		(203	)	(0.28	)		(188	)	(0.27	)		(319	)	(0.47	)
Stock option exercises and restricted stock vesting		(10	)	(0.01	)		(39	)	(0.06	)		(170	)	(0.25	)
Effect of Tax Cuts & Jobs Act		0		-			0		-			(2,831	)	(4.13	)
Effect of KY tax legislation		(2,719	)	(3.78	)		0		-			0		-
State income taxes		405		0.56			409		0.58			429		0.63
Other		179		0.24			234		0.33			389		0.57
Total	$	7,452		10.35	%	$	11,314		16.04	%	$	17,018		24.84	%

The components of the net deferred tax liability as of December 31 are as follows:

(in thousands)	2019			2018
Deferred tax assets:
Allowance for loan and lease losses	$	8,757		$	7,541
Interest on nonperforming loans		485			531
Accrued expenses		1,100			1,093
Allowance for other real estate owned		1,437			1,435
Unrealized losses on AFS securities		0			1,757
State net operating loss carryforward		3,786			3,957
Lease liabilities		3,859			0
Other		294			164
Total deferred tax assets		19,718			16,478

Deferred tax liabilities:
Depreciation and amortization		(15,048	)		(12,210	)
FHLB stock dividends		(1,441	)		(1,704	)
Loan fee income		(656	)		(419	)
Mortgage servicing rights		(814	)		(757	)
Right of use assets		(3,698	)		0
Unrealized gains on AFS securities		(1,534	)		0
Limited partnership investments		(326	)		(257	)
Other		(1,101	)		(537	)
Total deferred tax liabilities		(24,618	)		(15,884	)

Beginning balance for valuation allowance for deferred tax asset		3,957			3,930
Change in valuation allowance		(3,747	)		27
Ending balance for valuation allowance for deferred tax asset		210		$	3,957

Net deferred tax liability	$	(5,110	)	$	(3,363	)

CTBI recognized a gross tax benefit of $3.4 million in 2019 as a result of the recently enacted tax legislation by the Commonwealth of Kentucky. As a result of HB 458 on combined reporting, CTBI recorded a deferred tax asset for the Kentucky net operating loss carryforward. The losses are expected to be utilized when CTBI begins filing a combined Kentucky income tax return with CTB and CTIC. A valuation allowance is maintained for the loss that will expire in 2020. The loss carryforward is $96.0 million and expires over varying periods through 2039.

The Kentucky deferred tax asset amounts and related valuation allowance for holding company net operating losses were previously reported at net due to a full valuation allowance and the immaterial nature of amounts. The 2018 amounts reported herein have been revised to report the items gross.

CTBI accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. CTBI determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

With a few exceptions, CTBI is no longer subject to U.S. federal tax examinations by tax authorities for years before 2016, and state and local income tax examinations by tax authorities for years before 2015. For federal tax purposes, CTBI recognizes interest and penalties on income taxes as a component of income tax expense.

CTBI files consolidated income tax returns with its subsidiaries.