Income Taxes

12 Months Ended

Dec. 31, 2019

The following presents the components of income tax expense for the years ended December 31:



	2019		2018			2017
	(dollars in thousands)
Current income tax provision:
Federal	$	34,124	$	19,787		$	18,644
State	16,415		13,178			7,062
Total current income tax provision	50,539		32,965			25,706
Deferred income tax provision (benefit):
Federal	4,645		8,142			8,294
Effect of the Tax Act	—		(1,441		)	5,633
State	2,851		2,574			2,493
Total deferred income tax provision (benefit)	7,496		9,275			16,420
Total income tax provision	$	58,035	$	42,240		$	42,126

A reconciliation from statutory federal income taxes, which are based on a statutory rate of 21% for 2019 and 2018 and 35% for 2017, to the Company’s total effective income tax provisions for the years ended December 31 is as follows:



	2019			2018			2017
	(dollars in thousands)
Statutory federal income tax provision	$	45,729		$	34,803		$	35,778
State taxes, net of federal income tax effect	15,764			12,724			6,720
Cash surrender life insurance	(565		)	(582		)	(645		)
Tax exempt interest	(1,503		)	(1,135		)	(1,660		)
Non-deductible merger costs	—			375			824
LIHTC investments	(1,570		)	(761		)	(1,031		)
Effect of the Tax Act	—			(1,441		)	5,633
Excess tax benefit of stock-based compensation	(728		)	(1,811		)	(1,995		)
Prior year true-up	—			—			(1,108		)
Other	908			68			(390		)
Total income tax provision	$	58,035		$	42,240		$	42,126

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Among other changes, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The Company performed an initial assessment and reasonably estimated the effects of the Tax Act on its deferred tax amounts to be approximately $5.6 million, which was recorded as a charge to income tax expense in the fourth quarter of 2017, in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”). As required by SAB 118, the Company continued to reassess and refine the effects of the Tax Act on its deferred tax amounts during 2018. As a result, the Company recorded an income tax benefit of $1.4 million during the year ended December 31, 2018. As of December 31, 2018, the Company had completed the accounting for the income tax effects of the Tax Act.

Deferred tax assets (liabilities) were comprised of the following temporary differences between the financial statement carrying amounts and the tax basis of assets at December 31:



	2019			2018
	(dollars in thousands)
Deferred tax assets:
Accrued expenses	$	2,126		$	3,239
Net operating loss	4,765			6,115
Allowance for loan losses, net of bad debt charge-offs	10,415			10,709
Deferred compensation	3,616			3,649
State taxes	3,746			2,707
Loan discount	11,634			17,677
Stock-based compensation	3,535			3,234
Unrealized loss on available for sale securities	—			2,308
Operating lease liabilities	13,334			—
AMT credit and other state tax credit carryovers	416			96
Total deferred tax assets	53,587			49,734
Deferred tax liabilities:
Operating lease right-of-use assets	$	(12,382	)	$	—
Deferred FDIC gain	(228		)	(364		)
Core deposit intangibles	(22,415		)	(27,388		)
Loan origination costs	(4,828		)	(4,760		)
Depreciation	(1,814		)	(1,192		)
Unrealized gain on available for sale securities	(8,639		)	—
Other	(4,652		)	(403		)
Total deferred tax liabilities	(54,958		)	(34,107		)
Valuation allowance	—			—
Net deferred tax (liabilities) asset	$	(1,371	)	$	15,627

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2019 and December 31, 2018.

Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to use any net unrealized built in losses and other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% ownership change over a designated testing period. The Company has a Section 382 limited net operating loss carry forward of approximately $20.2 million for federal income tax purposes, which is scheduled to expire at various dates from 2026 to 2032. In addition, the Company has a Section 382 limited net operating loss carry forward of approximately $6.9 million for California franchise tax purposes, which is scheduled to expire at various dates from 2026 to 2031. The Company is expected to fully utilize the federal and California net operating loss carryforward before it expires with the application of the Section 382 annual limitation.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2015. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. The Company is currently not under examination in any taxing jurisdiction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2019 and 2018 is as follows:



	2019		2018
	(dollars in thousands)
Balance at January 1,	$	2,906	$	2,906
Additions based on tax positions related to prior years	—		—
Balance at December 31,	$	2,906	$	2,906

The total amount of unrecognized tax benefits was $2.9 million and $2.9 million at December 31, 2019 and 2018, respectively, and is primarily comprised of unrecognized tax benefits from an acquisition during 2017. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at December 31, 2019. The Company does not believe that the unrecognized tax benefits will change significantly within the next twelve months.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company had accrued for $424,000 and $246,000 of the interest and penalties at December 31, 2019 and 2018, respectively.