Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

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


	Year ended December 31,
($ in thousands)	2020		2019		2018
Current:
Federal	$	25,132	$	15,470	$	9,621
State and local	5,009		2,027		2,432
Total current	30,141		17,497		12,053
Deferred:
Federal	(10,651)		4,262		2,812
State and local	(1,927)		1,538		495
Total deferred	(12,578)		5,800		3,307

Total income tax expense	$	17,563	$	23,297	$	15,360

A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate in 2020, 2019, and 2018 to income before income taxes and the amounts reflected in the consolidated statements of operations is as follows:


	Year ended December 31,
($ in thousands)	2020		2019		2018
Income tax expense at statutory rate	$	19,309	$	24,368	$	21,961
Increase (reduction) in income tax resulting from:
Tax-exempt interest income, net	(2,010)		(962)		(506)
State and local income taxes, net	3,254		2,816		2,423
Bank-owned life insurance, net	(778)		(628)		(452)
Non-deductible expenses	637		749		294


Tax benefit (expense) of LIHTC investments, net	(444)		(278)		(50)
Excess tax benefits	(175)		(526)		(1,631)
Federal tax credits	(1,327)		(913)		(4,627)
Subsidiary dividend timing election	—		—		(2,728)
Non-taxable donation to charitable foundation	—		(420)		—
Other, net	(903)		(909)		676
Total income tax expense	$	17,563	$	23,297	$	15,360

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 $0.4 million for the year ended December 31, 2020. The net amount recognized as a benefit component of income tax expense per the table above was $0.3 million for the year ended December 31, 2019, and $0.1 million for the year ended December 31, 2018. As of December 31, 2020 and 2019, the carrying value of the investments related to low-income housing tax credits was $4.2 million and $4.0 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.

A net deferred income tax asset of $29.8 million and $14.4 million is included in other assets in the consolidated balance sheets at December 31, 2020 and 2019, 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)	2020		2019
Deferred tax assets:
Allowance for loan losses	$	34,031	$	10,692
Acquired loans	—		9,722
Loans held-for-sale	8,058		—
Other real estate	896		657
Deferred compensation	2,585		2,462

Accrued compensation	5,391		1,607

Net operating losses and tax credits	6,460		7,066
Other deferred tax assets	3,086		791
Total deferred tax assets	60,507		32,997

Deferred tax liabilities:

Acquired loans	3,413		—
Unrealized gains on securities	12,189		5,847

Intangible assets	7,800		7,432

Other deferred tax liabilities	4,369		2,407
Total deferred tax liabilities	27,771		15,686
Net deferred tax asset before valuation allowance	32,736		17,311
Less: valuation allowance	2,932		2,932
Net deferred tax asset	$	29,804	$	14,379

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, 2014-2017, and 2019 and will expire in the years between 2032-2037. 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 2021-2023.

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, 2020 and 2019.

The Company and its subsidiaries file income tax returns in the federal jurisdiction and in twenty-nine states. The Company is no longer subject to federal, state or local income tax audits by tax authorities for years before 2017, with the exception of 2016 being an open year by one state taxing authority. Net operating losses generated prior to 2016 that are utilized going forward would still be subject to examination.

As of December 31, 2020, the gross amount of unrecognized tax benefits was $3.2 million and the total amount of net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $3.1 million. As of December 31, 2019 and 2018, the total amount of the net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $1.1 million and $0.9 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 amount accrued for interest and penalties was $0.9 million as of December 31, 2020, and was not significant for 2019 and 2018.

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


($ in thousands)	2020		2019		2018
Balance at beginning of year	$	1,497	$	1,301	$	1,244
Additions based on tax positions related to the current year	395		401		367
Additions for tax positions of prior years	1,556		62		50

Settlements or lapse of statute of limitations	(291)		(267)		(360)
Balance at end of year	$	3,157	$	1,497	$	1,301