Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 17 — Income Taxes

The Company elected to be treated as a corporation, for tax purposes, effective January 1, 2018. As a result, the Company calculated its deferred tax balance as of January 1, 2018 and, per U.S. GAAP, recognized a deferred tax liability of $5.5 million with a corresponding increase to income tax expense in January 2018, the period in which the change was made.

The following table details the Company’s income tax expense (benefit) (in thousands):

	December 31,
	2022			2021			2020
Current tax expense (benefit):
Federal	$	(90	)	$	15,042		$	4,454
State		552			5,477			(769	)
Total current tax expense	$	462		$	20,519		$	3,685
Deferred tax expense (benefit):
Federal	$	8,553		$	(7,362	)	$	564
State		3,018			(2,588	)		1,103
Total deferred tax expense (benefit)	$	11,571		$	(9,950	)	$	1,667
Total income tax expense	$	12,033		$	10,569		$	5,352

The following table contains a reconciliation of the Company’s provision for income taxes at the federal statutory tax rate to the provision for income taxes at the effective tax rate as of December 31, 2022, 2021, and 2020:

	December 31,
	2022				2021				2020
Federal income tax provision at statutory rate		21.0		%		21.0		%		21.0		%
State income taxes, net of federal tax benefit		6.3				5.6				8.6
Permanent items		0.2				0.1				0.1
Federal true-ups		—				—				0.5
Tax credits		(0.3	)			(0.2	)			(0.4	)
Change in unrecognized tax benefit		—				—				(7.9	)
Other		—				0.1				1.2
Effective tax rate		27.2		%		26.6		%		23.1		%

The changes in state income taxes and unrecognized tax benefit in the reconciliation are primarily due to changes in state apportionment and the related valuation impacts on taxes payable as well as the deferred tax asset in the prior year.

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of December 31, 2022 and 2021 are presented below (in thousands):

	December 31,
	2022			2021
Deferred tax assets:
REMIC book-tax basis difference	$	—		$	10,433
Net operating loss		8,451			—
Mark-to-market on loans		355			7,066
Lease liability		783			1,151
Stock compensation		1,485			888
Accrued vacation		283			226
Intangibles		5			7
REO		—			225
Deferred state taxes		696			—
Other		154			82
Gross deferred tax assets		12,212			20,078
Deferred tax liabilities:
REMIC book-tax basis difference		(4,941	)		—
Right-of-use assets		(717	)		(1,064	)
Deferred origination costs		(138	)		(1,306	)
Property and equipment		(595	)		(710	)
REO		(30	)		—
Deferred state taxes		—			(394	)
MSR valuation		(758	)		—
Gross deferred tax liabilities		(7,179	)		(3,474	)
Total net deferred tax asset	$	5,033		$	16,604

The Company’s main temporary difference is due to the difference between the U.S. income tax and U.S. GAAP treatment with respect to its REMIC securities. For tax purposes, the issuances are considered taxable sales; whereas, for U.S. GAAP purposes, the REMIC issuances are considered financings.

Federal net operating loss ("NOL") carryforwards of $6.4 million generated after 2017 are available to offset future U.S. federal taxable income over an indefinite period. State NOL carryforwards totaling $2.0 million are available to offset future taxable income and began to expire in 2027. NOL carryforward periods for the various states jurisdictions generally range from 5 to 20 years.

The Company had no valuation allowance as of December 31, 2022 and 2021. Based on the Company’s estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local jurisdictions, where applicable. As of December 31, 2022, the Company is no longer subject to U.S. tax examinations for years before 2019 and is no longer subject to state tax examinations for years before 2018.

The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities' examinations of the Company's tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

The Company had gross unrecognized tax benefits in the amount of $1.9 million recorded as of December 31, 2022 and 2021. If recognized, $1.5 million of the unrecognized tax benefit would affect the 2022 annual effective tax rate. Interest and penalties on unrecognized tax benefits is reported by the Company as a component of tax expense, and the Company recorded interest and penalties in its consolidated statements of income in the amount of $0.1 million, $0.1 million, and $(0.5) million as of December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022 and 2021, the accrued interest and penalties related to unrecognized tax benefits remained at $0.6 million.

There are no positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.

Detailed below is a reconciliation of the Company's gross unrecognized tax benefits for the years ended December 31, 2022 and 2021, respectively (in thousands):

	December 31,
	2022			2021
Beginning balance	$	1,911		$	1,860
Changes related to current year tax positions		68			49
Changes related to prior year tax positions		19			2
Decreases due to lapsed statutes of limitations		(58	)		—
Ending balance	$	1,940		$	1,911