Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The components of income tax expense for the years ended December 31 are as follows:



	Year ended December 31,
($ in thousands)	2019		2018		2017
Current:
Federal	$	15,470	$	9,621	$	15,845
State and local	2,027		2,432		1,377
Total current	17,497		12,053		17,222
Deferred:
Federal	4,262		2,812		20,989
State and local	1,538		495		116
Total deferred	5,800		3,307		21,105
Total income tax expense	$	23,297	$	15,360	$	38,327

A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate in 2019, 2018, and 2017 to income before income taxes and the amounts reflected in the consolidated statements of operations is as follows:



	Year ended December 31,
($ in thousands)	2019			2018			2017
Income tax expense at statutory rate	$	24,368		$	21,961		$	30,281
Increase (reduction) in income tax resulting from:
Tax-exempt income, net	(962		)	(506		)	(961		)
State and local income taxes, net	2,816			2,423			1,676
Bank-owned life insurance, net	(628		)	(452		)	(715		)
Non-deductible expenses	749			294			407
Change in estimated rate for deferred taxes	—			—			12,117
Tax benefits of LIHTC investments, net	(278		)	(50		)	(257		)
Excess tax benefits	(526		)	(1,631		)	(2,141		)
Federal tax credits	(913		)	(4,627		)	(1,701		)
Subsidiary dividend timing election	—			(2,728		)	—
Non-taxable donation to charitable foundation	(420		)	—			—
Other, net	(909		)	676			(379		)
Total income tax expense	$	23,297		$	15,360		$	38,327

The net amount recognized as a component of tax expense for tax credits, other tax benefits, and amortization from low-income housing tax credit (“LIHTC”) investments recognized per the table above was $0.3 million for the year ended December 31, 2019. The net amount recognized as a component of income tax expense per the table above was $0.1 million for the year ended December 31, 2018, and $0.3 million for the year ended December 31, 2017. As of December 31, 2019 and 2018, the carrying value of the investments related to low-income housing tax credits was $4.0 million and $1.4 million, respectively. No impairment losses have been recognized from forfeiture or ineligibility of tax credits or other circumstances during the life of any of the investments. As of December 31, 2019, the Company has future capital commitments of $0.7 million related to low-income housing tax credit investments. The capital commitments are expected to be called in 2020.

A net deferred income tax asset of $14.4 million and $20.7 million is included in other assets in the consolidated balance sheets at December 31, 2019 and 2018, respectively. The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities is as follows:



	Year ended December 31,
($ in thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	10,692		$	10,742
Acquired loans	9,722			3,677
Other real estate	657			81
Deferred compensation	2,462			2,480
Intangible assets	—			989
Accrued compensation	1,607			1,130
Unrealized losses on securities	—			3,019
Net operating losses and tax credits	7,066			—
Other deferred tax assets	791			1,786
Total deferred tax assets	32,997			23,904

Deferred tax liabilities:
Unrealized gains on securities	5,847			—
Intangible assets	7,432			2,112
Other deferred tax liabilities	2,407			1,068
Total deferred tax liabilities	15,686			3,180
Net deferred tax asset before valuation allowance	17,311			20,724
Less: valuation allowance	2,932			—
Net deferred tax asset	$	14,379		$	20,724
Deferred tax rate	24.7		%	24.7		%

As part of the Trinity Capital Corporation acquisition in 2019, the company acquired net operating loss, tax credit, and capital loss deferred tax assets. Net operating losses originated in the years 2012, 2014, 2015, 2016, 2017, and 2019 and will expire in the years between 2032-2037. The 2019 net operating loss can be carried forward indefinitely. Tax credit carryforwards originated in years 2010-2015 and will expire in the years between 2030-3035. Capital losses originated in 2015, 2016, & 2018 and will expire in the years between 2020-2023.

A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. In 2019, as part of the Trinity Capital Corporation acquisition, the company acquired net operating loss, tax credit, and capital loss deferred tax assets. The company determined that it was more likely than not that some of the assets would not be realized. As such, the company recorded a $2.9 million valuation allowance as of December 31, 2019. The company did not record a valuation allowance for any federal or state deferred income tax assets as of December 31, 2018.

The Company and its subsidiaries file income tax returns in the federal jurisdiction and in eleven states. The Company is no longer subject to federal, state or local income tax audits by tax authorities for years before 2016, with the exception of 2015 being an open year by one state taxing authority. Net operating losses generated prior to 2015 that are utilized going forward would still be subject to examination.

As of December 31, 2019, the gross amount of unrecognized tax benefits was $1.5 million and the total amount of net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $1.1 million. As of December 31, 2018 and 2017, the total amount of the net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $0.9 million and $0.8 million, respectively. The Company believes it is reasonably possible that the

gross amount of unrecognized benefits will be reduced by approximately $0.3 million as a result of a lapse of statute of limitations in the next 12 months.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits. The amounts accrued for interest and penalties as of December 31, 2019, 2018, and 2017 were not significant.

The activity in the gross liability for unrecognized tax benefits was as follows:



($ in thousands)	2019			2018			2017
Balance at beginning of year	$	1,301		$	1,244		$	1,180
Additions based on tax positions related to the current year	401			367			331
Additions for tax positions of prior years	62			50			41
Settlements or lapse of statute of limitations	(267		)	(360		)	(308		)
Balance at end of year	$	1,497		$	1,301		$	1,244