NOTE

23.

INCOME TAXES

The following table presents components of income tax expense included in the

Consolidated Statements of Income

for each of the past

three

years.

(Amounts in thousands)	Current		Deferred			Total
Year ended December 31, 2017:
Federal	$	2,005	$	2,837		$	4,842
State		1,474		(76	)		1,398
Affordable housing partnership amortization		688		—			688
	$	4,167	$	2,761		$	6,928
Year ended December 31, 2016:
Federal	$	283	$	409		$	692
State		582		86			668
Affordable housing partnership amortization		598		—			598
	$	1,463	$	495		$	1,958
Year ended December 31, 2015:
Federal	$	1,183	$	509		$	1,692
State		981		75			1,056
Affordable housing partnership amortization		714		—			714
Total	$	2,878	$	584		$	3,462

Our effective tax rate is derived from provision for income taxes divided by income before provision for income taxes. 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, 2017,

2016,

and

2015.

	2017			2016			2015
Income tax at the federal statutory rate		34.00	%		34.00	%		34.00	%
Deferred tax asset write-down		17.45	%		5.02	%		—	%
State franchise tax, net of federal tax benefit		6.46	%		6.11	%		5.79	%
Amortization of affordable housing credit partnerships		4.82	%		8.11	%		5.91	%
Officer life insurance		(2.50	%)		(2.89	%)		(1.81	%)
Tax-exempt interest		(5.23	%)		(10.85	%)		(8.02	%)
Affordable housing credits and benefits		(5.68	%)		(11.69	%)		(6.42	%)
Other		(0.78	%)		(0.68	%)		(0.71	%)
Effective Tax Rate		48.54	%		27.13	%		28.74	%

For the year ended

December 31, 2017,

our income tax provision of $

6.9

million on pre-tax income of

$14.3

million was an effective tax rate of

48.5%.

The income tax provision was composed of a

$2.5

million write-down of our deferred tax assets and a

$4.4

million tax provision on pre-tax net operating income of

$14.3

million (

30.8%

). The

$2.5

million write-down occurred when we revalued our deferred tax assets and liabilities to account for the future impact of lower corporate tax rates from a graduated rate of

35%

to a flat rate of

21%

resulting from the Tax Cuts and Jobs Act enacted on

December 22, 2017.

The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset as of

December 31, 2017

and

2016.

(Amounts in thousands)	2017			2016
Deferred tax assets:
Loan and lease loss reserves	$	3,526		$	4,751
Deferred compensation		2,365			3,285
State franchise taxes		291			260
Branch acquisition costs		274			366
Unrealized losses other comprehensive income		134			553
Non accrued interest		105			341
Federal tax credits		—			525
Other		484			1,093
Total deferred tax assets		7,179			11,174

Deferred tax liabilities:
Deferred loan origination costs		(619	)		(904	)
Unrealized gains other comprehensive income		—			(92	)
Basis difference in fixed assets		—			(164	)
Other		(55	)		(472	)
Total deferred tax liabilities		(674	)		(1,632	)

Net deferred tax asset	$	6,505		$	9,542

We have determined that we are

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

$7.2

million and

$11.2

million at

December 31, 2017

and

2016,

will be realized principally through future reversals of existing taxable temporary differences. We further believe 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.

We have investments in Qualified Zone Academy Bonds (“QZAB

”) of

$4.7

million at

December 31, 2017

and

2016

recorded in

Other Assets

in the

Consolidated Balance Sheets

We also have investments in QZAB of

$1.0

million at

December 31, 2017

recorded in

Securities available-for-sale

in the

Consolidated Balance Sheets

. The investments provide funds for capital improvements at local schools and are repaid at maturity in

2031,

2033

and

2046.

In exchange for the investment we receive a federal tax credit at a rate determined at the settlement of the investment by the US Treasury. We account for the benefit for these tax credit investments using the deferred cost reduction method.

For the year

s ended

December 31, 2017

and

2016,

we expect to carryforward a California capital loss in the amount of

$53

thousand which will expire in

2020.

See Note

Qualified Affordable Housing Partnership Investments

in these

Notes to Consolidated Financial Statements

, for further details on our affordable housing project investments.

September

2016,

we filed amended federal and state tax returns for tax years

2011,

2012,

2013,

and

2014.

We recognized

$41

thousand in other noninterest expense during the year ended

December 31, 2017

as interest applied to our amended state tax returns.

Additionally, we have

unrecognized tax benefits at

December 31, 2017

and

2016.

We recognize interest accrued and penalties related to unrecognized tax benefits in other noninterest expense.

We file income tax returns in the U.S. federal jurisdiction, and the State of California. Income tax returns filed are subject to examination by the U.S. federal, state, and local income tax authorities.

While

income tax returns are currently being examined, we are

longer subject to tax examination by tax authorities for years prior to fiscal year

2014

for federal tax returns and fiscal year

2013

for state and local tax returns.

September

2016,

we filed amended federal and state tax returns for tax years

2011,

2012,

2013,

and

2014.

The amendments were filed to properly recognize tax events in years

2011

and

2013,

that were improperly recognized in years

2011

through

2014.

he IRS rejected the

2011

amended tax return citing the statute for assessment had expired. Accordingly,

$988

thousand of taxes due to the taxing authorities pursuant to the

2011

amended federal tax return was returned to us. As of

December 31, 2017

we continue to recognize

100%

of the tax liability relating to our

2011

amended federal tax return because we believe it is more likely than

not,

our tax position would be sustained upon reexamination by the IRS or through the litigation process. We do

not

expect to reconsider or reverse our tax position until the statute of limitations expires on the

2014

amended federal tax return in

September

2018,

and until we believe it is more likely than

not

that the taxes due cannot be recouped. If we reverse our tax position, we will recognize the

$988

thousand in our provision for income taxes and our effective tax rate will be reduced.

The following table presents our uncertain tax position at

December 31, 2017

and

2016.

(Amounts in thousands)	2017		2016
Balance, beginning of period	$	988	$	—
Additions for tax positions related to prior years		—		988
balance, end of period	$	988	$	988