Income Taxes

12 Months Ended

Dec. 31, 2019

NOTE 12 - INCOME TAXES

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income tax expense consists of the following:

(dollars in thousands)	2019		2018			2017
Current:
Federal	$	8,074	$	6,616		$	12,097
State		5,614		3,451			3,773
		13,688		10,067			15,870
Deferred		1,503		(131	)		2,492
Deferred tax adjustment for change in tax rate		21		(479	)		2,591
Amortization of investment in affordable housing tax credits		900		644			316
	$	16,112	$	10,101		$	21,269

A comparison of the federal statutory income tax rates to the Company's effective income tax rates as of December 31 follows:

	2019						2018						2017
(dollars in thousands)	Amount			Rate			Amount			Rate			Amount			Rate
Statutory federal tax	$	11,617			21.0	%	$	9,703		21.0%			$	16,379			35.0	%
State franchise tax, net of federal benefit		5,322			9.6	%		3,488		7.5%				3,135			6.7	%
Tax-exempt income		(25	)		0.0	%		(27	)	-0.1%				(297	)		-0.6	%
Tax impact from change in tax rate		17			0.0	%		(479	)	-1.0%				2,591			5.5	%
Stock-based compensation		(27	)		0.0	%		(2,643	)	-5.7%				—			0.0	%
Other items, net		(792	)		-1.4	%		59		0.1%				(539	)		-1.2	%
Actual tax expense	$	16,112			29.2	%	$	10,101			21.8	%	$	21,269			45.4	%

Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying balance sheets as of December 31:

(dollars in thousands)	2019			2018
Deferred tax assets:
Pre-opening expenses	$	122		$	154
Allowance for loan losses		5,883			5,545
Stock-based compensation		1,346			1,419
Off balance sheet reserve		258			217
Operating loss carryforwards		1,253			1,688
Other real estate owned		37			10
Unrealized loss on AFS securities		—			600
Mark to market on held for sale mortgage loans		359			2,451
Other		1,594			1,220
		10,852			13,304
Deferred tax liabilities:
Depreciation		(282	)		(521	)
Unrealized gain on AFS securities		(106	)		—
Acquisition accounting fair value adjustments		(2,671	)		(2,067	)
Mortgage servicing rights		(3,745	)		(3,586	)
Other		(1,722	)		(2,488	)
		(8,526	)		(8,662	)
Net deferred tax assets	$	2,326		$	4,642

At December 31, 2019, the Company has net operating loss carryforwards from acquisitions of approximately $32,000 for federal, zero for California, $9.6 million for New York State and $8.8 million for New York City income tax purposes. Net operating loss carry forwards, to the extent not used will begin to expire in 2028. Net operating loss carryforwards available from acquisitions are substantially limited by Section 382 of the Internal Revenue Code and benefits not expected to be realized due to the limitation have been excluded from the deferred tax asset and net operating loss carryforward amounts noted above. The Company acquired operating loss carryforwards in its acquisitions that were subject to limitations under Section 382 of the Internal Revenue Code. The amount of net operating loss carry forwards subject to the 382 limitations amounts to $3.8 million, $11.4 million, $12.3 million and $9.3 million for federal, California, New York State and New York City income tax purposes, respectively.

The Company is subject to federal income tax and franchise tax of the state of California and New York. Income tax returns for the years ended after December 31, 2015 are open to audit by the federal and New York authorities and for the years ended after December 31, 2014 are open to audit by California state authorities.

There were no recorded interest or penalties related to uncertain tax positions as part of income tax for the years ended December 31, 2019, 2018, and 2017, respectively. The Company has determined that as of December 31, 2019 all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the consolidated financial statements.