Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The income tax provision for the years ended December 31 is as follows:

	2019		2018			2017
	(dollars in thousands)
Current tax provision:
Federal	$	22,942	$	21,330		$	29,071
State	282		298			274
Total current tax provision	23,224		21,628			29,345
Deferred tax provision (benefit):
Federal	2,284		3,666			19,237
State	8		(20		)	(21		)
Total deferred tax provision	2,292		3,646			19,216
Total tax provision	$	25,516	$	25,274		$	48,561

The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:

	2019					2018					2017
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
	(dollars in thousands)
Tax at statutory rate	$	27,478		21	%	$	27,882		21	%	$	36,304		35	%
Increase (decrease) resulting from:
State income tax, net of federal benefit	229			—		220			—		164			—
Income from bank owned life insurance	(1,260		)	(1	)	(1,404		)	(1	)	(1,995		)	(2	)
Tax-exempt interest income, net	(1,298		)	(1	)	(1,473		)	(1	)	(2,709		)	(3	)
Tax credits	(7		)	—		(5		)	—		(11		)	—
Enactment of federal tax reform	—			—		(346		)	—		16,709			17
Other	374			—		400			—		99			—
Total tax provision	$	25,516		19	%	$	25,274		19	%	$	48,561		47	%

The total tax provision for financial reporting differs from the amount computed by applying the statutory federal income tax rate to income before taxes. First Commonwealth ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% for the years ended December 31, 2019 and December 31, 2018 and 35% for the year ended December 31, 2017 due to benefits resulting from tax-exempt interest, income from bank owned life insurance, and tax benefits associated with low-income housing tax credits. The consistent level of tax benefits that reduce First Commonwealth’s tax rate below the statutory rate produced an annual effective tax rate of 19%, 19% and 47% for the years ended December 31, 2019, 2018 and 2017, respectively. The annual effective tax rate of 47% for the year ended December 31, 2017, is greater than the 35% statutory rate due to the enactment of federal tax reform.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduces the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result, we are required to re-measure, through income tax expense, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax asset resulted in additional income tax expense of $16.7 million in 2017.

Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Act in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allowed for a measurement period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.

In accordance with SAB 118, the accounting for income tax effects of the Act has been completed as of the year ended December 31, 2018. The completion of the accounting resulted in an immaterial change to the previously recorded re-measurement.

The tax effects of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities that represent significant portions of the deferred tax assets and liabilities at December 31 are presented below:

	2019			2018
	(dollars in thousands)
Deferred tax assets:
Lease liability	$	11,203		$	—
Allowance for credit losses	10,937			10,116
Postretirement benefits other than pensions	275			311
Alternative minimum tax credit carryforward	216			216
Unrealized loss on securities available for sale	—			3,137
Net operating loss carryforward	2,017			3,636
Writedown of other real estate owned	48			711
Deferred compensation	1,720			1,426
Accrued interest on nonaccrual loans	710			629
Accrued incentives	2,185			2,477
Unfunded loan commitments & other reserves	964			1,064
Deferred rent	28			799
Other	956			1,486
Total deferred tax assets	31,259			26,008
Deferred tax liabilities:
Right of use asset	$	(10,302	)	$	—
Unrealized gain on securities available for sale	(1,386		)	—
Depreciation of assets	(1,470		)	(1,378		)
Other	(1,239		)	(1,064		)
Total deferred tax liabilities	(14,397		)	(2,442		)
Net deferred tax asset	$	16,862		$	23,566

The Company has approximately $9.3 million of federal net operating losses and $0.2 million of AMT carryforwards which are subject to an annual limitation under IRC Section 382. The net operating losses expire in 2034 and the Company expects to utilize the losses prior to expiration.

Management assesses all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on our evaluation, as of December 31, 2019, management has determined that no valuation allowance is necessary for the deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and future taxable income.

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” the Company has no material unrecognized tax benefits or accrued interest and penalties as of December 31, 2019. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company records interest and penalties on unrecognized tax benefits as a component of noninterest expense.

First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service (“IRS”) as well as all states in which we conduct business. Generally, tax years prior to the year ended December 31, 2016 are no longer open to examination by federal and state taxing authorities.