INCOME TAXES

The following table presents the components of income tax (benefit) expense for the periods indicated:



	Year Ended December 31,
	2015		2014			2013
	(In thousands)
Current income taxes:
Federal	$	27,555	$	11,070		$	400
State	7,360		2,348			19
Total current income tax expense	34,915		13,418			419
Deferred income taxes:
Federal	4,754		(235		)	2,646
State	2,525		762			858
Total deferred income tax expense	7,279		527			3,504
Change in valuation allowance	—		(17,684		)	4,069
Income tax expense (benefit)	$	42,194	$	(3,739	)	$	7,992

The following table presents a reconciliation of the recorded income tax expense (benefit) to the amount of taxes computed by applying the applicable statutory Federal income tax rate of 35 percent to earnings or loss before income taxes for the years ended December 31, 2015 and 2014 and the applicable statutory Federal income tax rate of 34 percent to earnings or loss before income taxes for the year ended December 31, 2013:



	Year Ended December 31,
	2015		2014		2013
Computed expected income tax expense (benefit) at Federal statutory rate	35.0	%	35.0	%	34.0	%
Increase (decrease) resulting from:
Proportional amortization	0.7	%	2.1	%	6.8	%
Other permanent book-tax differences	(0.4	)%	0.3	%	3.4	%
State tax expense, net of federal benefit	6.2	%	8.1	%	7.2	%
Income tax credits	(0.6	)%	—	%	—	%
Change in valuation allowance	—	%	(66.8	)%	51.5	%
Federal effect of state tax deferred due to the change in valuation allowance	—	%	7.2	%	—	%
Other, net	(0.4	)%	—	%	(1.8	)%
Effective tax rates	40.5	%	(14.1	)%	101.1	%

The Company had net income taxes payable of $637 thousand and $56 thousand at December 31, 2015 and 2014, respectively, on its Consolidated Statements of Financial Condition. The Company had available at December 31, 2015, $3.8 million of unused Federal net operating loss carryforwards that may be applied against future taxable income through 2031. The Company had available at December 31, 2015, $13.2 million of unused state net operating loss carryforwards that may be applied against future taxable income through 2031. Utilization of the net operating loss and other carryforwards are subject to annual limitations set forth in Section 382 of the Internal Revenue Code. The tax attributes acquired in the Beach Business Bank and Gateway Bancorp acquisitions are subject to an annual Internal Revenue Code (IRC) Section 382 limitation of $1.3 million and $474 thousand, respectively. Additionally, the Company's tax attributes are limited to an annual IRC Section 382 limitation of $9.8 million.

The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of the dates indicated:



	December 31,
	2015			2014
	(In thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	20,684		$	17,923
Stock options and awards	4,660			3,991
Accrued expenses	2,090			2,898
Valuation allowance on other real estate owned	29			13
Reserve for loss on repurchased loans	4,028			3,491
Federal net operating losses	1,328			1,494
State net operating losses	869			973
Federal credits	10			10
Unrealized loss on securities available-for-sale	2,177			—
Other deferred tax assets	10,690			2,374
Total deferred tax assets	46,565			33,167
Deferred tax liabilities:
Unrealized gain on securities available-for-sale	—			(307		)
Derivative instruments adjustment	(3,409		)	(1,421		)
Mortgage servicing rights	(20,735		)	(8,023		)
FHLB stock dividends	(564		)	(571		)
Intangible amortization	(857		)	(3,595		)
Other deferred tax liabilities	(9,659		)	(2,877		)
Total deferred tax liabilities	(35,224		)	(16,794		)
Valuation allowance	—			—
Net deferred tax assets	$	11,341		$	16,373

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, and tax planning strategies. Based on this analysis, management determined that it was more likely than not that all of the deferred tax assets would be realized therefore no valuation allowance against net deferred tax assets of $11.3 million was required at December 31, 2015. The Company had recorded no valuation allowance against net deferred tax assets of $16.4 million at December 31, 2014.

The positive evidence supporting the reversal of the Company’s deferred tax asset valuation allowance as of December 31, 2015 included: (i) pretax book income of $104.3 million and estimated taxable income before net operating losses (NOL) of $82.1 million for the year ended December 31, 2015, (ii) four consecutive quarters of positive and accelerating pretax book income from core earnings, (iii) cumulative pretax book income of approximately $138.6 million over the previous 36 month period, (iv) projections of pretax book income for the 2016, 2017 and 2018 years, (v) projection of significant taxable income for the 2016, 2017, and 2018 years, (vi) utilization of $474 thousand and $8.5 million of Federal and State NOL (representing approximately 31 percent of the total NOL’s included in the Company’s deferred tax assets) during the year ended December 31, 2015, and (vii) acquisitions which strengthened the Company’s position in primary existing and new markets. Generally, to the extent the Company has book income it will also have taxable income (with the exception of book/tax differences related to the timing of loan charge-offs versus loan loss provisions and the timing of certain mortgage banking gains and losses). Continued profitability from core banking operations through 2015, without significant loan losses, suggests that pretax book income should be sustainable for future years absent a significant increase in loan losses.

The negative evidence that management considered included: (i) uncertainty in accurately and consistently projecting earnings from operations for tax years ending after December 31, 2015, and (ii) taxable losses generated for the 2012 and 2013 years.

During the year ended December 31, 2015, estimated taxable income before utilization of NOLs of $82.1 million allowed the Company to utilize $474 thousand and $8.5 million of Federal and State NOL (representing approximately 31 percent of the total NOLs included in the Company’s deferred tax assets), and all of its $632 thousand of Federal low income housing tax credits. The remaining NOLs are limited under IRC Section 382 and will expire if not used by 2031. In order to utilize all of its existing NOL carryover, the Company would only need taxable income of approximately $1.4 million in 2018 and approximately $474 thousand in each year from 2019 to 2031. The Company believes that the utilization of a significant portion of the NOL and tax credits in 2015, along with the Company’s projection of future taxable income should be considered significant positive evidence that the NOL deferred tax assets will be realized in future periods. Taking all of the foregoing information into account, management believes that it is “more likely than not” that all of the Company’s federal and state net deferred assets will be realized in future years and that, as of December 31, 2015, no valuation allowance against its federal and state deferred tax assets is required.

ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had unrecognized tax benefits of $0 and $5.4 million at December 31, 2015 and 2014, respectively. The Company has changed its tax accounting method for various items and filed amended state income tax returns to reflect audit adjustments. As a result, the total amount of unrecognized tax benefits has decreased by $5.4 million during the year ended December 31, 2015. The Company does not believe that the unrecognized tax benefits will change within the next twelve months. As of December 31, 2015, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $0.

At December 31, 2015 and 2014, the Company had $0 and $23 thousand accrued interest or penalties, respectively. The table below summaries the activity related to our unrecognized tax benefits:



	Year Ended December 31,
	2015			2014		2013
	(In thousands)
Beginning balance	$	5,421		$	2,203	$	—
(Decrease) increase related to prior year tax positions	(5,421		)	369		345
Increase in current year tax positions	—			2,849		1,858
Ending balance	$	—		$	5,421	$	2,203

In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2012 (with the exception of Gateway Bancorp, a predecessor entity, which is currently under exam by the Internal Revenue Service for the 2008 and 2009 tax years).The statute of limitations for the assessment of California Franchise taxes has expired for tax years before 2011 (other state income and franchise tax statutes of limitations vary by state).

ASU 2014-01 was adopted effective January 1, 2015. Under this standard, amortization of investments in Qualified Affordable Housing Projects is reported within income tax expense.