Income Taxes

12 Months Ended

Dec. 31, 2020

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


	2020		2019		2018
	(dollars in thousands)
Current tax provision:
Federal	$	21,629	$	22,942	$	21,330
State	329		282		298
Total current tax provision	21,958		23,224		21,628
Deferred tax provision (benefit):
Federal	(5,070)		2,284		3,666

State	(132)		8		(20)
Total deferred tax provision	(5,202)		2,292		3,646
Total tax provision	$	16,756	$	25,516	$	25,274

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


	2020				2019				2018
	Amount		% of Pretax Income		Amount		% of Pretax Income		Amount		% of Pretax Income
	(dollars in thousands)
Tax at statutory rate	$	18,943	21	%	$	27,478	21	%	$	27,882	21	%
Increase (decrease) resulting from:
State income tax, net of federal benefit	155		—		229		—		220		—
Income from bank owned life insurance	(1,376)		(1)		(1,260)		(1)		(1,404)		(1)
Tax-exempt interest income, net	(1,117)		(1)		(1,298)		(1)		(1,473)		(1)
Tax credits	(44)		—		(7)		—		(5)		—
Enactment of federal tax reform	—		—		—		—		(346)		—
Other	195		—		374		—		400		—
Total tax provision	$	16,756	19	%	$	25,516	19	%	$	25,274	19	%

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% 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% for each of the years ended December 31, 2020, 2019 and 2018.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduced 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 expected them to be recovered or settled.

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 the 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:


	2020		2019
	(dollars in thousands)
Deferred tax assets:
Lease liability	$	9,928	$	11,203
Allowance for credit losses	21,483		10,937
Postretirement benefits other than pensions	242		275
Alternative minimum tax credit carryforward	—		216


Net operating loss carryforward	385		2,017


Deferred compensation	1,723		1,720

Accrued interest on nonaccrual loans	644		710



Accrued incentives	2,182		2,185
Unfunded loan commitments & other reserves	1,576		964




Other	1,831		1,032
Total deferred tax assets	39,994		31,259
Deferred tax liabilities:

Loan origination fees and costs	(1,280)		(626)

Right of use asset	$	(9,037)	$	(10,302)
Unrealized gain on securities available for sale	(4,629)		(1,386)
Depreciation of assets	(2,103)		(1,470)
Section 197 intangibles	(540)		(45)
Other	(424)		(568)
Total deferred tax liabilities	(18,013)		(14,397)
Net deferred tax asset	$	21,981	$	16,862

The Company has approximately $1.5 million of federal net operating losses 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, 2020, 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, 2020. 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, 2017 are no longer open to examination by federal and state taxing authorities.