Income Taxes

ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there are no unrecognized tax benefits to be reported in the Corporation’s consolidated financial statements.

The Corporation utilizes the asset and liability method of accounting for income taxes whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. 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 assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. The provision for income taxes for the periods indicated consisted of the following:



(In Thousands)		Year Ended June 30,
(In Thousands)		2016		2015		2014

Current:
	Federal	$	3,801	$	5,365	$	4,272
	State	1,354		1,877		1,773
		5,155		7,242		6,045
Deferred:
	Federal	183		17		(611		)
	State	34		18		(430		)
		217		35		(1,041		)
Provision for income taxes		$	5,372	$	7,277	$	5,004

The Corporation's tax (benefit) expense from non-qualified equity compensation in fiscal 2016, 2015 and 2014 was $(222,000), $(397,000) and $315,000, respectively.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to net income before income taxes as a result of the following differences for the periods indicated:



		Year Ended June 30,
		2016					2015						2014
(In Thousands)		Amount			Tax Rate		Amount			Tax Rate			Amount			Tax Rate

Federal income tax at statutory rate		$	4,496		35.0	%	$	5,892			34.5	%	$	3,982			34.3	%
State income tax		902			7.0	%	1,239				7.3	%	813				7.0	%
Changes in taxes resulting from:
	Bank-owned life insurance	(65		)	(0.5	)%	(65		)		(0.4	)%	(65		)		(0.6	)%
	Non-deductible expenses	45			0.4	%	43				0.3	%	30				0.3	%
	Non-deductible stock-based compensation	(6		)	(0.1	)%	139				0.8	%	(22		)		(0.2	)%
	Other	—			—	%	29				0.1	%	266				2.3	%
Effective income tax		$	5,372		41.8	%	$	7,277			42.6	%	$	5,004			43.1	%

Deferred tax assets at June 30, 2016 and 2015 by jurisdiction were as follows:



(In Thousands)	June 30,
(In Thousands)	2016		2015

Deferred taxes - federal	$	4,032	$	4,204
Deferred taxes - state	1,357		1,389
Total net deferred tax assets	$	5,389	$	5,593

Net deferred tax assets at June 30, 2016 and 2015 were comprised of the following:



(In Thousands)		June 30,
		2016			2015

Loss reserves		$	5,185		$	6,170
Non-accrued interest		635			701
Deferred compensation		3,535			3,229
Accrued vacation		385			318
Depreciation		41			—
State taxes		—			138
Unrealized loss on equity investment		—			42
Other		644			663
	Total deferred tax assets	10,425			11,261

FHLB - San Francisco stock cash dividends		(956		)	(956		)
Unrealized gain on derivative financial instruments, at fair value		(270		)	(1,115		)
Unrealized gain on investment securities		(207		)	(255		)
Unrealized gain on interest-only strips		(20		)	(26		)
Deferred loan costs		(3,555		)	(3,076		)
Depreciation		—			(240		)
State tax		(28		)	—
	Total deferred tax liabilities	(5,036		)	(5,668		)
	Net deferred tax assets	$	5,389		$	5,593

The net deferred tax assets were included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition. The Corporation analyzes the deferred tax assets to determine whether a valuation allowance is required based on the more likely than not criteria that such assets will be realized principally through future taxable income. This criteria takes into account the actual earnings and the estimates of profitability. The Corporation may carryback net federal tax losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At June 30, 2016 and 2015, the Corporation had no federal and state net tax loss carryforwards. Based on management's consideration of historical and anticipated future income before income taxes, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance was not considered necessary at June 30, 2016 and 2015 and management believes it is more likely than not the Corporation will realize its deferred tax asset.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended June 30, 2016, 2015 and 2014 is as follows:



(In Thousands)	2016		2015		2014
Balance of prior fiscal year end	$	1,961	$	1,961	$	1,961
Additions based on tax positions related to the current year	—		—		—
Addition for tax positions of prior years	—		—		—
Reduction for tax positions of prior years	—		—		—
Settlements	—		—		—
Balance at June 30	$	1,961	$	1,961	$	1,961

Retained earnings at June 30, 2016 and 2015 included approximately $9.0 million (pre-1988 bad debt reserve for tax purposes) for which federal income tax of $3.1 million had not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank.

The Corporation files income tax returns for the United States and California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2009 and 2010. Tax fiscal years 2013 and forward remain subject to federal examination, while the California state tax returns for fiscal years 2012 and forward are subject to examination by state taxing authorities.

It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the fiscal years ended June 30, 2016, 2015 and 2014, there were no tax penalties or interest charges.