12.

INCOME TAXES

New tax legislation, referred to as the Tax Reform Act, was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. Beginning in 2018, the Tax Reform Act reduces the federal tax rate for corporations from 35% to 21% and changes or limits certain tax deductions. During the fourth quarter of 2017, a $13.2 million one-time charge to income tax expense was recorded due to the tax rate reduction and re-measurement of our deferred taxes assets (“DTA”).

The current and deferred amounts of income tax expense (benefit) consist of the following.


	For the Year Ended December 31,
	2017		2016		2015
	(Dollars in thousands)
Current provision:
Federal	$	44,153	$	41,195	$	40,021
State		17,151		17,944		17,040

		61,304		59,139		57,061

Deferred provision/(benefit):
Federal		20,926		1,208		(3,443)
State		2,154		510		(1,397)

		23,080		1,718		(4,840)

Total	$	84,384	$	60,857	$	52,221

Income tax asset consists of the following.


	As of December 31,
	2017		2016
	(Dollars in thousands)
Current:
Federal	$	11,713	$	4,399
State		2,946		538

		14,659		4,937

Deferred:
Federal		16,557		31,566
State		8,830		8,926

		25,387		40,492

Total	$	40,046	$	45,429

Temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities resulted in deferred taxes. The components of the net deferred tax asset are as follows.


	As of December 31,
	2017		2016
		(Dollars in thousands)

Deferred tax assets:
Bad debt and credit loss deduction	$	19,911	$	31,284
Net operating loss carryforward		207		453
Deferred compensation		5,501		5,296
PCI loans		3,098		12,147
California franchise tax		1,618		3,269
Accrued expense		1,365		5,299
Other, net		3,353		2,110

Gross deferred tax asset		35,053		59,858


Deferred tax liabilities:
Depreciation		975		2,168
Intangibles - acquisitions		3,404		3,543
FHLB Stock		2,400		3,421
Deferred income		2,112		4,099
Unrealized gain on investment securities, net		775		6,135

Gross deferred tax liability		9,666		19,366

Net deferred tax asset	$	25,387	$	40,492

Annual Effective Tax Rate

The annual consolidated effective tax rate for the periods presented, is reconciled to the U.S. statutory income rate as follows.


	For the Year Ended December 31,
	2017				2016				2015
	Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Federal income tax at statutory rate	$	66,078		35.0%	$	56,800		35.0%	$	52,978		35.0%
State franchise taxes, net of federal benefit		12,903		6.9%		11,299		7.0%		10,457		6.9%
Tax-exempt income		(4,450)		(2.4%)		(5,848)		(3.6%)		(7,619)		(5.0%)
Tax credits		(1,096)		(0.6%)		(846)		(0.5%)		(1,014)		(0.7%)
Deferred tax asset revalution adjustment		13,208		7.0%		-		0.0%		-		0.0%
Other, net		(2,259)		(1.2%)		(548)		(0.4%)		(2,581)		(1.7%)

Provision for income taxes	$	84,384		44.7%	$	60,857		37.5%	$	52,221		34.5%

The change in unrecognized tax benefits in 2017 and 2016 follows.


	For the Year Ended December 31,
	2017		2016
	(Dollars in thousands)
Balance, beginning of period	$	1,675	$	1,675
Additions for tax positions related to prior years		-		-
Reductions due to lapse of statue of limitations		(716)		-
Settlement with tax authorities		(959)		-

Balance, end of period	$	-	$	1,675

There were no unrecognized tax benefits at December 31, 2017. The Company records interest and penalties related to uncertain tax positions as part of other operating expense. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

The Company is subject to federal income tax and franchise tax of the state of California. Our federal income tax returns for the years ended December 31, 2014 through 2016 are open to audit by the federal authorities and our California state tax returns for the years ended December 31, 2012 through 2016 are open to audit by state authorities.