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INCOME TAXES | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
INCOME TAXES | 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) |  | 2019 |  | 2018 |  | 2017
Current income taxes: |  |  |  |  |  |
Federal |  | $ | 3,900 |  |  | $ | 5,720 |  |  | $ | (2,215 | )
State |  | 941 |  |  | 5,035 |  |  | 6,006 |
Total current income tax expense |  | 4,841 |  |  | 10,755 |  |  | 3,791 |
Deferred income taxes: |  |  |  |  |  |
Federal |  | (1,492 | ) |  | (4,418 | ) |  | (25,938 | )
State |  | 870 |  |  | (1,493 | ) |  | (4,434 | )
Total deferred income tax expense |  | (622 | ) |  | (5,911 | ) |  | (30,372 | )
Income tax expense (benefit) |  | $ | 4,219 |  |  | $ | 4,844 |  |  | $ | (26,581 | )
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 21.0% to income from continuing operations before income taxes for the year ended December 31, 2019 and 2018, and 35.0% for the year ended December 31, 2017:
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Computed expected income tax expense (benefit) at Federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 35.0 | %
Increase (decrease) resulting from: |  |  |  |  |  |
Proportional amortization |  | 12.6 | % |  | 4.3 | % |  | 5.1 | %
Other permanent book-tax differences |  | (2.4 | )% |  | 0.4 | % |  | (2.1 | )%
State tax expense, net of federal benefit |  | 5.1 | % |  | 5.9 | % |  | 3.7 | %
Income tax credits (investment tax credits and other) |  | (21.3 | )% |  | (25.4 | )% |  | (149.5 | )%
Basis reduction in investment in alternative energy partnership |  | 1.3 | % |  | 2.2 | % |  | 24.9 | %
Write-off of Goodwill for discontinued operations |  | — | % |  | — | % |  | 2.7 | %
Bank owned life insurance policies |  | (1.7 | )% |  | (1.0 | )% |  | (3.0 | )%
Equity compensation shortfall (windfall) tax impact |  | 0.6 | % |  | (0.5 | )% |  | (7.0 | )%
Remeasurement from the Tax Cuts and Jobs Act |  | — | % |  | — | % |  | (7.8 | )%
Reserve for uncertain tax positions |  | (1.0 | )% |  | 0.1 | % |  | 1.9 | %
Other, net |  | 0.9 | % |  | 3.3 | % |  | (2.7 | )%
Effective tax rates |  | 15.1 | % |  | 10.3 | % |  | (98.8 | )%
Our effective tax rate of continuing operations for the year ended December 31, 2019 was higher than the effective tax rate of continuing operations for the year ended December 31, 2018 mainly due to the reduction in the recognition of tax credits on investments in alternative energy partnerships of $3.4 million, partially offset by tax expense from tax basis reduction of $362 thousand related to investments in alternative energy partnerships for the year ended December 31, 2019, compared to $9.6 million of tax credits recognized, partially offset by tax expense from tax basis reduction of $1.0 million for the year ended December 31, 2018. The reduction in tax credits received by the Bank is due to fewer investments in alternative energy partnerships. Our effective tax rate of continuing operations for the year ended December 31, 2018 was higher than the effective tax rate of continuing operations for the year ended December 31, 2017 mainly due to the reduction in the recognition of tax credits on investments in alternative energy partnerships of $9.6 million, partially offset by tax expense from tax basis reduction of $1.0 million related to investments in alternative energy partnerships for the year ended December 31, 2018, compared to $38.2 million of tax credits recognized, partially offset by tax expense from tax basis reduction of $6.7 million for the year ended December 31, 2017. The reduction in tax credits received by the Bank on the investments in alternative energy partnerships is due to less new equipment being placed into service by the investments. The higher effective tax rate was also partially offset by the decrease in the federal statutory tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, which became effective on January 1, 2018. We use the flow-through income statement method to account for the tax credits earned on investments in alternative energy partnership. 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. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the United States. 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% to 21% and changes or limitations to certain tax deductions. As of December 31, 2017, we remeasured our deferred tax assets and liabilities based on the reduced federal corporate income tax rate of 21% which resulted in an income tax benefit of $2.1 million to continuing operations. At December 31, 2017, we were able to make reasonable estimates of the tax effects on enactment of the Tax Cuts and Jobs Act and completed our analysis for the tax effects of enactment of the Tax Act on all items. At December 31, 2019, we had $1.8 million of available unused federal net operating loss (NOL) carryforwards that may be applied against future taxable income through 2031. We had available at December 31, 2019, $8.6 million of unused state NOL carryforwards that may be applied against future taxable income through 2031. Utilization of these NOL carryforwards are subject to annual limitations set forth in Section 382 of the U.S. Internal Revenue Code (IRC). The tax attributes acquired in the Gateway Bancorp acquisition are subject to an annual IRC Section 382 limitation of $474 thousand. In addition, as of December 31, 2019 and 2018, we had income tax credit carryforwards of $30.5 million and $26.9 million. The tax credits, if unused, will expire in 2037. The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of the dates indicated:
|  | December 31,
($ in thousands) |  | 2019 |  | 2018
Deferred tax assets: |  |  |  |
Allowance for loan losses |  | $ | 15,874 |  |  | $ | 18,813 |
Stock-based compensation expense |  | 2,222 |  |  | 2,249 |
Accrued expenses |  | 3,831 |  |  | 2,678 |
Reserve for loss on repurchased loans |  | 1,826 |  |  | 736 |
Federal net operating losses |  | 372 |  |  | 471 |
State net operating losses |  | 725 |  |  | 759 |
Federal income tax credits |  | 30,661 |  |  | 27,087 |
Unrealized loss on securities available-for-sale |  | 4,968 |  |  | 10,046 |
Deferred loan fees |  | 2,104 |  |  | 2,446 |
Amortization of intangible assets |  | 1,248 |  |  | 1,101 |
Prior year state tax deduction |  | 85 |  |  | 1,272 |
Lease liability |  | 6,978 |  |  | — |
Other deferred tax assets |  | 2,835 |  |  | 3,456 |
Total deferred tax assets |  | 73,729 |  |  | 71,114 |
Deferred tax liabilities: |  |  |  |
Investments in partnerships |  | (7,455 | ) |  | (5,317 | )
Mortgage servicing rights |  | (341 | ) |  | (520 | )
Deferred loan costs |  | (6,623 | ) |  | (8,528 | )
Depreciation on premises and equipment |  | (5,796 | ) |  | (4,710 | )
Right of use asset |  | (6,638 | ) |  | — |
Other deferred tax liabilities |  | (1,970 | ) |  | (2,635 | )
Total deferred tax liabilities |  | (28,823 | ) |  | (21,710 | )
Valuation allowance |  | — |  |  | — |
Net deferred tax assets |  | $ | 44,906 |  |  | $ | 49,404 |
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 considering the four possible sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future 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, we recorded no valuation allowance against net deferred tax assets at December 31, 2019 and 2018. During the year ended December 31, 2019, estimated taxable income before utilization of NOLs of $12.2 million allowed us to utilize $474 thousand of both federal and state NOLs (representing approximately 9.2% of the total NOLs included in our deferred tax assets), $1.9 million of federal low income housing tax credits, $350 thousand of state research credits, $369 thousand of state film tax credits, and $151 thousand of state low income housing tax credits. We believe that the utilization of tax credits in 2019, along with our projection of future taxable income should be considered significant positive evidence that the deferred tax assets for income tax credits will be realized in future periods prior to its expiration dates. 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. We had unrecognized tax benefits of $977 thousand and $1.2 million at December 31, 2019 and 2018. We do not believe that the unrecognized tax benefits will change materially within the next twelve months. As of December 31, 2019, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $767 thousand. At December 31, 2019 and 2018, we had no accrued interest or penalties, respectively. The table below summarizes the activity related to our unrecognized tax benefits for the periods indicated:
|  | Year Ended December 31,
($ in thousands) |  | 2019 |  | 2018 |  | 2017
Beginning balance |  | $ | 1,227 |  |  | $ | 1,047 |  |  | $ | — |
Increase related to prior year tax positions |  | — |  |  | — |  |  | 867 |
Decrease related to prior year tax positions |  | (101 | ) |  | — |  |  | — |
Increase in current year tax positions |  | 120 |  |  | 180 |  |  | 180 |
Decrease related to lapsing of statute of limitations |  | (269 | ) |  | — |  |  | — |
Ending balance |  | $ | 977 |  |  | $ | 1,227 |  |  | $ | 1,047 |
In the event we are 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. We are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. We are no longer subject to examination by U.S. federal taxing authorities for years before 2016. The statute of limitations for the assessment of California franchise taxes has expired for tax years before 2014 (other state income and franchise tax statutes of limitations vary by state). We account for qualified affordable housing investments under the proportional amortization method. The gross investments in these limited partnerships amounted to $49.3 million and the unfunded portion was $22.4 million at December 31, 2019. The balances of these investments were $36.5 million and $20.0 million as of December 31, 2019 and 2018. We utilized $6.2 million of tax deductions from these investments in 2019, but $400 thousand of low income housing tax credits generated in 2019 were limited and not utilized in 2019. Thus, there were $3.1 million and $2.7 million of unused tax credit carryforwards as of December 31, 2019 and 2018. Investment book proportional amortization amounted to $3.5 million, $2.0 million and $1.4 million for the years ended December 31, 2019, 2018 and 2017.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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