NOTE 15. INCOME TAXES

Reconciliation from the federal statutory income tax rate to the effective tax rate is as follows:


	For the years ended December 31,
	2016			2015			2014
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Net tax-exempt interest income on securities of state and political subdivisions		(7.0	%)		(6.8	%)		(6.4	%)
State income taxes, net of federal tax effect		1.4	%		1.6	%		1.4	%
Bank-owned life insurance		(1.2	%)		(1.6	%)		(1.7	%)
General business credits		(2.1	%)		(2.1	%)		(3.1	%)
All other—net		0.3	%		(0.1	%)		0.1	%

Effective tax rate		26.4	%		26.0	%		25.3	%

The provision for income taxes applicable to income before taxes consists of the following:


	For the years ended December 31,
*(in thousands)*	2016		2015		2014
Current:
Federal	$	18,053	$	15,661	$	13,346
State		2,159		2,089		1,684
Deferred:
Federal		10,519		10,047		8,337
State		305		618		353

Total	$	31,036	$	28,415	$	23,720

The following income tax amounts were recorded in shareholders’ equity as elements of other comprehensive income:


	For the years ended December 31,
*(in thousands)*	2016			2015			2014
Securities and defined benefit pension plan unrecognized items	$	(3,480	)	$	(1,202	)	$	(3,538	)

Deferred tax assets and liabilities consist of the following:


	December 31,
*(in thousands)*	2016			2015			2014
Deferred tax assets:
Allowance for loan losses	$	16,198		$	15,246		$	16,386
Compensation and benefits		5,444			6,114			8,764
Security gains and losses		2,854			2,964			2,817
Purchase accounting adjustments		—			1,275			1,497
Partnership adjustments		—			1,921			1,158
Non-accrual interest income		2,392			2,254			2,129
Tax credit carryforwards		12,744			13,580			10,163
Federal net operating loss carryforwards		12,020			—			597
Fair value adjustments on securities available-for-sale		5,394			1,979			—
Other		5,194			2,264			2,169

Gross deferred tax assets		62,240			47,597			45,680

Deferred tax liabilities:
Depreciation and amortization		(3,448	)		(1,530	)		(1,900	)
Accretion on securities		(421	)		(2	)		(295	)
Fair value adjustments on securities available-for-sale		—			—			(2,297	)
Purchase accounting adjustments		(149	)		—			—
Partnership adjustments		(1,128	)		—			—
Other		(2,519	)		(1,511	)		(1,728	)

Gross deferred tax liabilities		(7,665	)		(3,043	)		(6,220	)

Net deferred tax assets	$	54,575		$	44,554		$	39,460

WesBanco has a $0.1 million valuation allowance on certain capital loss carryforwards. However, no valuation allowance was established for the remaining deferred tax assets since management believes that deferred tax assets are likely to be realized through a carry-back to taxable income in prior years, future reversals of existing taxable temporary differences and future taxable income.

Under the provisions of the Internal Revenue Code, WesBanco has approximately $3.0 million of general business credit carryforwards which expire between 2031 and 2033. WesBanco also has $9.8 million of alternative minimum tax credits that may be carried forward indefinitely. As a results of the acquisition of YCB, WesBanco has federal net operating loss carryforwards of $31.0 million, which expire between 2030 and 2036; and Indiana net operating loss carryforwards of $27.9 million, which expire between 2027 and 2035.

As a result of the acquisition of YCB in 2016, and the previous acquisitions of ESB, Fidelity, Western Ohio Financial Corporation, Winton Financial Corporation and Oak Hill Financial, Inc., retained earnings at December 31, 2016 and 2015 includes $45.9 million and $32.9 million, respectively, of qualifying and non-qualifying tax bad debt reserves existing as of December 31, 1987, upon which no provision for income taxes has been recorded. The related amount of unrecognized deferred tax liability is $17.1 million and $12.0 million for 2016 and 2015, respectively. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, it will be added to future taxable income.

Federal and state income taxes applicable to securities transactions totaled $0.9 million, $0.3 million, and $0.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.

At December 31, 2016 and 2015, WesBanco had approximately $0.4 million and $0.3 million, respectively, of unrecognized tax benefits and interest. As of December 31, 2016, $0.4 million of these tax benefits would affect the effective tax rate if recognized. At December 31, 2016 and December 31, 2015, accrued interest related to uncertain tax positions was $22 thousand and $15 thousand, respectively, net of the related federal tax benefit. WesBanco provides for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

WesBanco is subject to U.S. federal income tax as well as to tax in various state income tax jurisdictions. WesBanco, ESB and YCB are no longer subject to any income tax examinations for years prior to 2013.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and the federal income tax benefit of unrecognized state tax benefits) is as follows:


	For the years ended December 31,
*(in thousands)*	2016		2015			2014
Balance at beginning of year	$	326	$	701		$	673
Additions based on tax positions related to the current year		110		104			155
Reductions for tax positions of prior years		—		(100	)		—
Reductions due to the statute of limitations		—		(379	)		(127	)
Settlements		—		—			—

Balance at end of year	$	436	$	326		$	701