NOTE 15. INCOME TAXES
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 WesBanco’s corporate federal rate from 35% to 21% effective January 1, 2018. As a result, WesBanco is required to remeasure deferred tax assets and liabilities using the enacted rate at which WesBanco expects them to be recovered or settled. The effect of this remeasurement is recorded to income tax expense in the year the tax law is enacted. For 2017, the remeasurement of WesBanco’s net deferred tax asset resulted in additional income tax expense of $12.8 million. WesBanco recorded the remeasurement in accordance with SEC Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
Reconciliation from the federal statutory income tax rate to the effective tax rate is as follows:
| For the years
ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
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Federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Tax reform remeasurement |
8.6 | % | 0.0 | % | 0.0 | % | ||||||
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Net tax-exempt interest income on securities of state and political subdivisions |
(6.0 | %) | (7.0 | %) | (6.8 | %) | ||||||
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State income taxes, net of federal tax effect |
1.3 | % | 1.4 | % | 1.6 | % | ||||||
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Bank-owned life insurance |
(1.1 | %) | (1.2 | %) | (1.6 | %) | ||||||
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General business credits |
(1.7 | %) | (2.1 | %) | (2.1 | %) | ||||||
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All other—net |
0.2 | % | 0.3 | % | (0.1 | %) | ||||||
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Effective tax rate |
36.3 | % | 26.4 | % | 26.0 | % | ||||||
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The provision for income taxes applicable to income before taxes consists of the following:
| For the years ended December 31, | ||||||||||||
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(in thousands) |
2017 | 2016 | 2015 | |||||||||
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Current: |
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Federal |
$ | 24,634 | $ | 18,053 | $ | 15,661 | ||||||
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State |
2,061 | 2,159 | 2,089 | |||||||||
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Deferred: |
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Tax reform remeasurement |
12,765 | — | — | |||||||||
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Federal |
13,329 | 10,519 | 10,047 | |||||||||
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State |
1,018 | 305 | 618 | |||||||||
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Total |
$ | 53,807 | $ | 31,036 | $ | 28,415 | ||||||
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The following income tax amounts were recorded in shareholders’ equity as elements of other comprehensive income:
| For the years
ended December 31, |
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(in thousands) |
2017 | 2016 | 2015 | |||||||||
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Securities and defined benefit pension plan unrecognized items |
$ | 345 | $ | (3,480 | ) | $ | (1,202 | ) | ||||
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Deferred tax assets and liabilities consist of the following:
| December 31, | ||||||||||||
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(in thousands) |
2017 | 2016 | 2015 | |||||||||
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Deferred tax assets: |
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Allowance for loan losses |
$ | 10,389 | $ | 16,198 | $ | 15,246 | ||||||
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Compensation and benefits |
2,536 | 5,444 | 6,114 | |||||||||
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Security gains and losses |
821 | 2,854 | 2,964 | |||||||||
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Purchase accounting adjustments |
1,565 | — | 1,275 | |||||||||
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Partnership adjustments |
— | — | 1,921 | |||||||||
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Non-accrual interest income |
1,389 | 2,392 | 2,254 | |||||||||
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Tax credit carryforwards |
5,204 | 12,744 | 13,580 | |||||||||
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Net operating loss carryforwards |
6,062 | 12,020 | — | |||||||||
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Fair value adjustments on securities available-for-sale |
3,962 | 5,394 | 1,979 | |||||||||
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Other |
1,118 | 5,194 | 2,264 | |||||||||
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Gross deferred tax assets |
33,046 | 62,240 | 47,597 | |||||||||
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Deferred tax liabilities: |
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Depreciation and amortization |
(1,883 | ) | (3,448 | ) | (1,530 | ) | ||||||
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Accretion on securities |
(266 | ) | (421 | ) | (2 | ) | ||||||
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Deferred fees and costs |
(2,989 | ) | — | — | ||||||||
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Purchase accounting adjustments |
— | (149 | ) | — | ||||||||
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Partnership adjustments |
(674 | ) | (1,128 | ) | — | |||||||
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Other |
(120 | ) | (2,519 | ) | (1,511 | ) | ||||||
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Gross deferred tax liabilities |
(5,932 | ) | (7,665 | ) | (3,043 | ) | ||||||
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Net deferred tax assets |
$ | 27,114 | $ | 54,575 | $ | 44,554 | ||||||
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At December 31, 2017 and 2016, WesBanco has a $0.1 million valuation allowance on certain capital loss carryforwards. No valuation allowance was established for the remaining deferred tax assets since management believes that deferred tax assets are likely to be realized through future reversals of existing taxable temporary differences and future taxable income.
Under the provisions of the Internal Revenue Code, WesBanco has approximately $5.2 million of alternative minimum tax credits that may be carried forward indefinitely. As a result of the acquisition of YCB, WesBanco has federal net operating loss carryforwards of $25.9 million, which expire between 2030 and 2036; and Indiana net operating loss carryforwards of $20.8 million, which expire between 2031 and 2036.
As a result of the previous acquisitions of YCB, ESB, Fidelity, Western Ohio Financial Corporation, Winton Financial Corporation and Oak Hill Financial, Inc., retained earnings at December 31, 2017 and 2016 includes $45.9 million 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 $10.5 million and $17.1 million for 2017 and 2016, 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 $0.2 million, $0.9 million, and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017 and 2016, WesBanco had approximately $0.5 million and $0.4 million, respectively, of unrecognized tax benefits and interest. As of December 31, 2017, $0.5 million of these tax benefits would affect the effective tax rate if recognized. At December 31, 2017 and December 31, 2016, accrued interest related to uncertain tax positions was $23 thousand and $22 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 2014.
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, |
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(in thousands) |
2017 | 2016 | 2015 | |||||||||
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Balance at beginning of year |
$ | 436 | $ | 326 | $ | 701 | ||||||
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Additions based on tax positions related to the current year |
101 | 110 | 104 | |||||||||
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Reductions for tax positions of prior years |
— | — | (100 | ) | ||||||||
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Reductions due to the statute of limitations |
(70 | ) | — | (379 | ) | |||||||
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Settlements |
— | — | — | |||||||||
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Balance at end of year |
$ | 467 | $ | 436 | $ | 326 | ||||||
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