INCOME TAXES

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



	Year Ended December 31,
($ in thousands)	2017			2016			2015
Current income taxes:
Federal	$	(2,215	)	$	(3,044	)	$	16,681
State	6,006			11,180			4,088
Total current income tax expense	3,791			8,136			20,769
Deferred income taxes:
Federal	(25,938		)	6,699			4,754
State	(4,434		)	(1,086		)	2,525
Total deferred income tax expense	(30,372		)	5,613			7,279
Change in valuation allowance	—			—			—
Income tax expense (benefit)	$	(26,581	)	$	13,749		$	28,048

The following table presents a reconciliation of the recorded income tax expense (benefit) of continuing operations to the amount of taxes computed by applying the applicable statutory Federal income tax rate of 35.0 percent to earnings or loss before income taxes of continuing operations for the years ended December 31, 2017, 2016, and 2015:



	Year Ended December 31,
	2017		2016		2015
Computed expected income tax expense (benefit) at Federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Proportional amortization	5.1	%	0.4	%	1.1	%
Other permanent book-tax differences	(2.1	)%	0.2	%	(0.1	)%
State tax expense, net of federal benefit	3.7	%	6.4	%	5.9	%
Income tax credits	(149.5	)%	(33.9	)%	(0.9	)%
Initial book-tax difference on investments in alternative energy partnership	24.9	%	5.8	%	—	%
Write-off of Goodwill for discontinued operations	2.7	%	—	%	—	%
Bank owned life insurance policies	(3.0	)%	(0.8	)%	(0.5	)%
Equity compensation windfall tax benefits	(7.0	)%	—	%	—	%
Remeasurement from the Tax Cuts and Jobs Act	(7.8	)%	—	%	—	%
Reserve for uncertain tax positions	1.9	%	—	%	—	%
Other, net	(2.7	)%	0.6	%	0.1	%
Effective tax rates	(98.8	)%	13.7	%	40.6	%

The Company’s effective tax rate of continuing operations for the year ended December 31, 2017 was lower than the effective tax rate of continuing operations for the year ended December 31, 2016 due to recognition of an income tax benefit of $2.1 million from remeasurement of the Company’s deferred tax assets and liabilities as a result of the enactment of H.R. 1, originally known as the "Tax Cuts and Jobs Act", an income tax benefit of $2.2 million for excess tax benefits from stock compensation, and tax credits on investments in alternative energy partnerships of $38.2 million, partially offset by tax expense from tax basis reduction of $6.7 million related to investments in alternative energy partnerships for the year ended December 31, 2017. The Company’s effective tax rate of continuing operations for the year ended December 31, 2016 was lower than the effective tax rate of continuing operations for the year ended December 31, 2015 due to the tax credits on investments in alternative energy partnerships of $33.4 million, partially offset by tax expense from tax basis reduction of $5.8 million related to investments in alternative energy partnerships for the year ended December 31, 2016. The Company uses the flow-through income statement method to account for the tax credits earned on investments in alternative energy partnerships. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-tax difference in the basis of the investments are recognized as additional tax expense in the year they are earned.

At December 31, 2017, the Company had $2.7 million of available unused federal net operating loss (NOL) carryforwards that may be applied against future taxable income through 2031.Utilization of these NOL carryforwards is subject to annual limitations set forth in Section 382 of the IRC. The tax attributes acquired in the Company's 2012 acquisitions of Beach Business Bank and Gateway Bancorp are subject to an annual IRC Section 382 limitation of $1.3 million and $474 thousand, respectively. In addition, as of December 31, 2017 and 2016, the Company had qualified affordable housing investments tax credit carryforwards of $849 thousand and $0, research credit carryforwards of $320 thousand and $0 (net of reserve for uncertain tax positions), and alternative energy investment tax credit carryforwards of $26.2 million and $0, respectively. All of these tax credits, if unused, will expire on December 31, 2037. At December 31, 2017, the Company also had $10.5 million of unused state NOL carryforwards available to be applied against future state taxable income through 2031.

On December 22, 2017, H.R. 1, originally known as the "Tax Cuts and Jobs Act" was enacted into law. The legislation provides for significant changes to the IRC that impact corporate taxation requirements, such as the reduction of the federal income tax rate for corporations from 35 percent to 21 percent and changes or limitations to certain tax deductions. The Company remeasured its deferred tax assets and liabilities based on the reduced federal corporate income tax rate of 21 percent. This remeasurement resulted in an income tax benefit of $2.1 million, which is included as a component of income tax expense from continuing operations.

The following table presents the Company's deferred tax assets and deferred tax liabilities as of the dates indicated:



	December 31,
($ in thousands)	2017			2016
Deferred tax assets:
Allowance for loan and lease losses	$	15,178		$	18,921
Stock-based compensation expense	2,899			6,118
Accrued expenses	1,465			10,209
Reserve for loss on repurchased loans	2,031			3,426
Federal net operating losses	571			1,162
State net operating losses	871			810
Federal income tax credits	27,550			—
Unrealized loss on securities available-for-sale	—			6,438
Amortization of intangible assets	732			—
Prior year state tax deduction	1,527			5,555
Other deferred tax assets	3,468			3,617
Total deferred tax assets	56,292			56,256
Deferred tax liabilities:
Derivative instruments adjustment	—			(6,559		)
Investments in partnerships	(237		)	(1,945		)
Mortgage servicing rights	(9,337		)	(31,658		)
Amortization of intangible assets	—			(30		)
Deferred loan fees and costs	(7,005		)	(2,760		)
Depreciation on premises and equipment	(3,797		)	(129		)
Unrealized gain on securities available-for-sale	(2,368		)	—
Other deferred tax liabilities	(2,474		)	(3,186		)
Total deferred tax liabilities	(25,218		)	(46,267		)
Valuation allowance	—			—
Net deferred tax assets	$	31,074		$	9,989

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, the Company recorded no valuation allowance against net deferred tax assets at December 31, 2017 and 2016, respectively.

During the year ended December 31, 2017, estimated taxable income before utilization of NOLs of $46.2 million allowed the Company to utilize $474 thousand and $1.8 million, respectively, of federal and state NOLs (representing approximately 16.9 percent of the total NOLs included in the Company’s deferred tax assets), $12.0 million of alternative energy investment tax credits and $500 thousand of state research 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 2017, along with the Company’s projection of future taxable income should be considered significant positive evidence that the 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, 2017, 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 $1.0 million and $0, respectively, at December 31, 2017 and 2016. The Company does not believe that the unrecognized tax benefits will change within the next twelve months. As of December 31, 2017, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $1.0 million.

At December 31, 2017 and 2016, the Company had no accrued interest or penalties, respectively. The table below summarizes the activity related to the Company's unrecognized tax benefits for the periods indicated:



	Year Ended December 31,
($ in thousands)	2017		2016		2015
Beginning balance	$	—	$	—	$	5,421
(Decrease) increase related to prior year tax positions	867		—		(5,421		)
Increase in current year tax positions	180		—		—
Ending balance	$	1,047	$	—	$	—

In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified on 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 2014. The statute of limitations for the assessment of California franchise taxes has expired for tax years before 2013 (other state income and franchise tax statutes of limitations vary by state).

The Company accounts for qualified affordable housing investments under the proportional amortization method. The cumulative funded contributions to these limited partnerships amounted to $29.3 million and the unfunded portion was $15.6 million at December 31, 2017. The balances of these investments were $22.0 million and $23.2 million as of December 31, 2017 and 2016, respectively. The Company utilized $1.7 million of tax deductions from these investments in 2017, but $849 thousand of low income housing tax credits generated in 2017 were limited and not utilized in 2017. Thus, there were $849 thousand of unused tax credits carryforward as of December 31, 2017. Tax expense from the amortization of the recorded investments under the proportional amortization method amounted to $1.4 million, $394 thousand and $727 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company adopted ASU 2016-09 during the three months ended March 31, 2017. As a result of the adoption, the Company recorded $2.2 million of income tax benefits for the year ended December 31, 2017 related to excess tax benefits from stock compensation. Prior to 2017, such excess tax benefits were generally recorded directly in stockholders’ equity. This new accounting standard may increase the volatility in the Company’s effective tax rates.