INCOME TAXES

12 Months Ended

Dec. 31, 2021

INCOME TAXES

INCOME TAXES

19. INCOME TAXES

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

Years Ended December 31, (in thousands)	2021		2020		2019
Current expense:
Federal	$	19,122	$	25,762	$	18,906
State		4,116		2,450		1,751
Deferred expense:
Federal		(246)		(7,249)		1,880
State		560		(1,576)		(1,043)
Total	$	23,552	$	19,387	$	21,494

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

Years Ended December 31,	2021		2020		2019
Federal corporate tax rate	21.00	%	21.00	%	21.00	%
Effect of:
State taxes, net of federal benefit	3.35		1.43		1.43
General business tax credits	(1.80)		(2.01)		(1.14)
Nontaxable income	(1.09)		(0.75)		(0.85)
Reversal of valuation allowance/establishment of net operating loss DTA	—		(0.04)		(0.74)
Tax benefit of vesting employee benefits	(0.20)		(0.15)		(0.42)
Deferred tax asset due to KY HB354	—		(0.97)		(0.20)
Other, net	0.08		0.38		(0.09)
Effective tax rate	21.34		18.89		18.99

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

December 31, (in thousands)	2021		2020
Deferred tax assets:
Allowance for credit losses	$	16,071	$	14,999
Operating lease liabilities		9,884		10,911
Accrued expenses		5,721		5,062
Net operating loss carryforward(1)		1,550		2,577
Acquisition fair value adjustments		124		181
Other-than-temporary impairment		402		448
Paycheck Protection Program Fees		337		2,159
Other		2,079		1,655
Total deferred tax assets		36,168		37,992
Deferred tax liabilities:
Right of use assets - operating leases		(9,673)		(10,667)
Depreciation and amortization		(3,682)		(3,612)
Federal Home Loan Bank dividends		(709)		(1,161)
Deferred loan costs		(2,275)		(2,235)
Lease Financing Receivables		(2,094)		(2,154)
Mortgage servicing rights		(2,291)		(1,746)
Unrealized investment securities gains		(625)		(2,836)
Bargain purchase gain		—		(659)
Total deferred tax liabilities		(21,349)		(25,070)
Less: Valuation allowance		—		—
Net deferred tax asset	$	14,819	$	12,922

(1) The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $6.6 million (federal) and $3.9 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. Finally, the Company has state AMT credit carryforwards of $15,000 with no expiration date and a state tax credit carryforward of $142,000 that is expected to be fully utilized in 2022.

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)	2021		2020		2019
Balance, beginning of period	$	1,941	$	1,707	$	1,327
Additions based on tax related to the current period		433		455		364
Additions for tax positions of prior periods		253		24		55
Reductions for tax positions of prior periods		—		(72)		—
Reductions due to the statute of limitations		(436)		(82)		(39)
Settlements		—		(91)		—
Balance, end of period	$	2,191	$	1,941	$	1,707

Of the 2021 total, $1.8 million represented 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, 2021, 2020, and 2019 and accrued on the balance sheets as of December 31, 2021, 2020, and 2019 are presented below:

Years Ended December 31, (in thousands)	2021		2020		2019
Interest and penalties recorded in the income statement as a component of income tax expense	$	267	$	57	$	173
Interest and penalties accrued on balance sheet		777		510		514

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 2017.

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)		2021				2020
					Unfunded				Unfunded
Investment	Accounting Method		Investment		Commitment		Investment		Commitment
Low income housing tax credit investments - Gross	Proportional amortization	$	33,417	$	23,383	$	18,909	$	27,891
Life-to-date amortization			(6,181)		NA		(2,701)		NA
Low income housing tax credit investments - Net		$	27,236	$	23,383	$	16,208	$	27,891