Income Taxes

For the first quarter of 2017, the Company had an income tax provision totaling $23.0 million on pretax income of $59.2 million, representing an effective tax rate of 38.84%, compared with an income tax provision of $16.2 million on pretax income of $39.8 million, representing an effective tax rate of 40.69% for the first quarter of 2016.

A reconciliation of the difference between the federal statutory income tax rate and the effective tax rate is shown in the following table for the three months ended March 31, 2017 and March 31, 2016:



	March 31, 2017		March 31, 2016
Statutory tax rate	35.00	%	35.00	%
State taxes-net of federal tax effect	7.18	%	7.32	%
Affordable housing partnership investment tax credit	(2.93	)%	(1.29	)%
Bank owned life insurance	(0.16	)%	(0.24	)%
Municipal securities	(0.25	)%	(0.21	)%
Nondeductible transaction costs	0.08	%	0.48	%
Other	(0.08	)%	(0.37	)%
Effective income tax rate	38.84	%	40.69	%

The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income taxes. The Company had total unrecognized tax benefits of $2.2 million at March 31, 2017 and December 31, 2016 that relate to uncertainties associated with federal and state income tax matters. Other than the accrued interest of $100 thousand related to uncertain tax positions from an acquired entity, the Company recognizes interest and penalties on income tax matters in income tax expense. The Company recorded approximately $331 thousand and $306 thousand for accrued interest and penalties (no portion was related to penalties) at March 31, 2017 and December 31, 2016, respectively.

Management believes it is reasonably possible that the unrecognized tax benefits may decrease by approximately $1.0 million in the next twelve months.

The statute of limitations for the assessment of income taxes related to the consolidated Federal income tax returns is closed for all tax years up to and including 2012. The expiration of the statute of limitations for the assessment of income and franchise taxes related to the various state income and franchise tax returns varies by state. The Company is currently under examination by the California Franchise Tax Board (FTB) for the 2011, 2012 and 2013 tax years and by the New York State Department of Taxation and Finance for the 2013, 2014, and 2015 tax years. Wilshire Bancorp, Inc., an acquired entity, is currently under examination by the California Franchise Tax Board (FTB) for the 2011, 2012, and 2013 tax years and by the New York State Department of Taxation and Finance for the 2011, 2012, 2013, and 2014 tax years. While the outcome of the examinations is unknown, the Company expects no material adjustments.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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 evaluates both positive and negative evidence, 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, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of March 31, 2017.

The Company adopted ASU 2016-09 , “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting” during the first quarter of 2017. As a result of the adoption, the Company recorded $73 thousand of income tax benefits for the three months ended March 31, 2017 related to excess tax benefits from stock compensation. Prior to 2017, such excess tax benefits were generally recorded in additional paid-in capital as part of stockholders’ equity. This new accounting standard may potentially increase the volatility in the Company’s effective tax rates in future quarters.