Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes [Abstract]

Income Taxes

13.  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)	2020			2019			2018
Current federal income tax expense	$	12,884		$	8,351		$	11,042
Current state income tax expense		786			513			518
Deferred income tax expense (benefit)		(2,900	)		2,030			(246	)
Effect of Kentucky tax legislation benefit		(9	)		(3,442	)		0
Total income tax expense	$	10,761		$	7,452		$	11,314

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

(in thousands)	2020					2019					2018
Computed at the statutory rate	$	14,755		21.00	%	$	15,118		21.00	%	$	14,814		21.00	%
Adjustments resulting from:
Tax-exempt interest		(547	)	(0.78	)		(563	)	(0.78	)		(673	)	(0.95	)
Housing and new markets credits		(4,194	)	(5.97	)		(4,471	)	(6.21	)		(2,635	)	(3.73	)
Dividends received deduction		0		-			0		-			(9	)	(0.01	)
Bank owned life insurance		(277	)	(0.39	)		(284	)	(0.39	)		(599	)	(0.85	)
ESOP dividend deduction		(221	)	(0.32	)		(203	)	(0.28	)		(188	)	(0.27	)
Stock option exercises and restricted stock vesting		(10	)	(0.01	)		(10	)	(0.01	)		(39	)	(0.06	)
Effect of KY tax legislation		(7	)	(0.01	)		(2,719	)	(3.78	)		0		-
State income taxes		621		0.88			405		0.56			409		0.58
Split dollar life insurance		529		0.75			0		-			0		-
Other		112		0.16			179		0.24			234		0.33
Total	$	10,761		15.31	%	$	7,452		10.35	%	$	11,314		16.04	%

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

(in thousands)	2020			2019
Deferred tax assets:
Allowance for credit/loan and lease losses*	$	11,982		$	8,757
Interest on nonaccrual loans		471			485
Accrued expenses		1,444			1,100
Allowance for other real estate owned		593			1,437
State net operating loss carryforward		3,975			3,786
Lease liabilities		3,468			3,859
Other		470			294
Total deferred tax assets		22,403			19,718
Deferred tax liabilities:
Depreciation and amortization		(15,006	)		(15,048	)
FHLB stock dividends		(1,245	)		(1,441	)
Loan fee income		(238	)		(656	)
Mortgage servicing rights		(1,015	)		(814	)
Unrealized gains on AFS securities		(4,807	)		(1,534	)
Limited partnership investments		(414	)		(326	)
Right of use assets		(3,297	)		(3,698	)
Other		(1,068	)		(1,101	)
Total deferred tax liabilities		(27,090	)		(24,618	)
Beginning balance for valuation allowance for deferred tax asset		210			3,957
Change in valuation allowance		(210	)		(3,747	)
Ending balance for valuation allowance for deferred tax asset		0			210
Net deferred tax liability	$	(4,687	)	$	(5,110	)

*Effective January 1, 2020, the allowance for loan and lease losses became the allowance for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.

In 2020 and 2019, CTBI recognized a tax benefit of $9 thousand and $3.4 million respectively, as a result of the tax legislation enacted 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.  The loss carryforward is $100.6 million and expires over varying periods through 2040.

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 2017, and state and local income tax examinations by tax authorities for years before 2016.  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.