Note 22—Income Taxes

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


	2012		2011			2010
	(dollars in thousands)
Current tax provision for income exclusive of securities transactions:
Federal	$	12,035	$	651		$	3,794
State		72		161			59

Total current tax provision		12,107		812			3,853
Deferred tax provision (benefit)		2,551		(1,192	)		(3,614	)

Total tax provision (benefit)	$	14,658	$	(380	)	$	239

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


	2012						2011						2010
	Amount			% of Pretax Income			Amount			% of Pretax Income			Amount			% of Pretax Income
	(dollars in thousands)
Tax at statutory rate	$	19,814			35	%	$	5,213			35	%	$	8,126			35	%
Decrease resulting from:
Income from bank owned life insurance		(2,048	)		(4	)		(1,959	)		(13	)		(1,866	)		(8	)
Tax-exempt interest income, net		(2,789	)		(5	)		(3,453	)		(23	)		(5,688	)		(25	)
Tax credits		(267	)		0			(270	)		(2	)		(304	)		(1	)
Other		(52	)		0			89			0			(29	)		0

Total tax provision (benefit)	$	14,658			26	%	$	(380	)		(3	)%	$	239			1	%

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 35% 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 35% statutory rate produced an annual effective tax rate of 26% for the year ended December 31, 2012. The relatively low level of annual pretax income produced a tax benefit for the year ended December 31, 2011.

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:


	2012			2011
	(dollars in thousands)
Deferred tax assets:
Allowance for credit losses	$	23,515		$	21,432
Postretirement benefits other than pensions		769			841
Alternative minimum tax credit carryforward		13,026			15,247
Net operating loss carryforward		0			1,626
Writedown of other real estate owned		3,647			2,876
Other tax credit carryforward		0			1,383
Deferred compensation		2,203			2,215
Swap credit risk		772			1,037
Accrued interest on nonaccrual loans		3,887			3,161
Other-than-temporary impairment of securities		15,233			15,764
Capitalization of OREO expenses		847			826
Depreciation of assets		952			0
Unfunded loan commitment allowance		836			536
Other		1,176			2,822

Total deferred tax assets		66,863			69,766
Deferred tax liabilities:
Basis difference in assets acquired		(808	)		(1,213	)
Loan origination fees and costs		(606	)		(392	)
Income from unconsolidated subsidiary		(575	)		(551	)
Unrealized gain on securities available for sale		(592	)		(898	)
Depreciation of assets		0			(242	)
Other		(150	)		(198	)

Total deferred tax liabilities		(2,731	)		(3,494	)

Net deferred tax asset	$	64,132		$	66,272

The net deferred tax asset of $64.1 million as of December 31, 2012 includes a $13.0 million alternative minimum tax credit carryforward with an indefinite life. There is also a $15.2 million deferred tax asset for other-than-temporary impairment of securities, of which $0.3 million are potential capital losses that can only be utilized if capital gains are realized.

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. In evaluating deferred tax assets, future taxable income of $170.6 million, forecasted over the next three years was considered. The amount of future taxable income used in management’s valuation is based upon management approved forecasts, evaluation of historical earnings levels, proven ability to raise capital to support growth or during times of economic stress and consideration of prudent and feasible potential tax strategies. If future events differ from our current forecasts, a valuation allowance may be required, which could have a material impact on our financial condition and results of operations. Based on our evaluation, including the consideration of the weighting of positive and negative evidence, as of December 31, 2012, 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 through future taxable income.

First Commonwealth adopted new authoritative accounting guidance issued under FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” as of January 1, 2007, and had no material unrecognized tax benefits or accrued interest and penalties as of December 31, 2012. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months and will record interest and penalties as a component of noninterest expense.

First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service as well as all states in which we conduct business. Federal and state income tax years 2009 through 2011 are open for examination as of December 31, 2012.