NOTE 10. INCOME TAXES

The following table presents components of income tax expense included in the Consolidated Statements of Operations for the years ended December 31 for each of the past three years.


(Dollars in thousands)	Current			Deferred			Total
Year ended December 31, 2013:
Federal	$	4,107		$	(809	)	$	3,298
State		1,422			(321	)		1,101

	$	5,529		$	(1,130	)	$	4,399

Year ended December 31, 2012:
Federal	$	4,520		$	(1,643	)	$	2,877
State		1,063			(500	)		563

	$	5,583		$	(2,143	)	$	3,440

Year ended December 31, 2011:
Federal	$	2,154		$	567		$	2,721
State		(47	)		162			115

Total	$	2,107		$	729		$	2,836

The Company’s effective tax rate is derived from the sum of income tax expense for continuing operations divided by the sum of income from continuing operations. Income tax expense attributable to income before income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes.

The following table presents a reconciliation of income taxes computed at the federal statutory rate to the actual effective rate for the years ended December 31, 2012, 2011, and 2010:


	2013			2012			2011
Income tax at the federal statutory rate		34.00	%		34.00	%		34.00	%
Return to provision adjustment for 2012 taxable gain on sale of subsidiary		6.34	%		0.00	%		0.00	%
State franchise tax, net of federal tax benefit		5.89	%		3.74	%		(0.01	)%
Officer life insurance		(1.47	)%		(1.30	)%		(1.45	)%
Affordable housing credits		(1.80	)%		(1.59	)%		(2.03	)%
Tax-exempt interest		(7.02	)%		(7.74	)%		(7.16	)%
Other		(0.27	)%		2.03	%		3.42	%

Effective Tax Rate		35.67	%		29.14	%		26.77	%

The increase in the effective tax rate during 2013 was primarily driven by increased income tax expense recognized during the third and fourth quarter of 2013. Income tax expense for the third and fourth quarter of 2013 included the correction of an immaterial under-accrual of income tax expense resulting from incorrectly accounting for the book/tax timing differences relating to the sale of the Company’s former mortgage subsidiary. As a result, during the third and fourth quarter of 2013, the Company recognized additional income tax expense totaling $864 thousand, relating to the 2012 tax year. Consequently, during the third quarter of 2013, the Company recognized $88 thousand of interest and penalties relating to 2012 tax year. Interest and/or penalties related to income taxes are reported as a component of income tax expense.

The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset (recorded in other assets on the Consolidated Balance Sheets) as of December 31, 2013 and 2012.


(Dollars in thousands)	2013			2012
Deferred tax assets:
Loan loss reserves	$	6,639		$	5,048
Deferred compensation		2,967			3,019
Unrealized losses other comprehensive income		1,939			652
State franchise taxes		319			317
Other		1,432			1,899

Total deferred tax assets	$	13,296		$	10,935
Deferred tax liabilities:
Deferred state taxes	$	(885	)	$	(776	)
Deferred loan origination costs		(444	)		(428	)
Unrealized gains other comprehensive income		(255	)		(875	)
Depreciation		(59	)		(124	)
Other		0			(121	)

Total deferred tax liabilities	$	(1,643	)	$	(2,324	)
Net deferred tax asset	$	11,653		$	7,959

The Company has determined that it is not required to establish a valuation allowance for the deferred tax assets as management believes it is more likely than not that the deferred tax assets of $13.3 million and $10.3 million at December 31, 2013 and 2012, will be realized principally through future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through the reversal of future temporary taxable differences.

In October 2006, the Company invested in the California Affordable Housing Fund – 2006 I, LLC in return for federal and state tax credits. The Company invested $2.5 million as of December 31, 2009. The Company received federal and state tax credits through the years ended December 31, 2011. Beginning in 2012, the state tax credits benefits expired, however the Company will continue to receive federal tax credit benefits through 2023. The Company received $158 and $0 thousand, $158 thousand and $0, $158 and $28 thousand in federal and state tax credits relating to these funds for the years ended December 31, 2013, 2012, and 2011, respectively.

During 2013, the Company invested in three affordable housing funds in return for federal and state tax credits. The Company has committed to $5.5 million in aggregate contributions through 2023. During 2013, the Company received $64 thousand and $3 thousand in federal and state tax credits relating to these funds, respectively. The Company will continue to receive federal tax credit benefits through 2025, and state tax credit benefits through 2016 relating to these investments.

Additionally, the Company has no unrecognized tax benefits at December 31, 2013 and 2012. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.

The Company files income tax returns in the U.S. federal jurisdiction, and the State of California. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for the years before 2008.