Income Taxes

Income taxes for the years ended December 31 consisted of the following:



	2018			2017		2016
	(dollars in thousands)
Current income tax provision:
Federal	$	19,787		$	18,644	$	16,928
State	13,178			7,062		4,655
Total current income tax provision	32,965			25,706		21,583
Deferred income tax provision (benefit):
Federal	8,142			8,294		2,379
Effect of Tax Act	(1,441		)	5,633		—
State	2,574			2,493		1,253
Total deferred income tax provision (benefit)	9,275			16,420		3,632
Total income tax provision	$	42,240		$	42,126	$	25,215

A reconciliation from statutory federal income taxes, which are based on a statutory rate of 21% for 2018 and 35% for 2017 and 2016, to the Company’s effective income taxes for the years ended December 31 is as follows:



	2018			2017			2016
	(dollars in thousands)
Statutory federal income tax provision	$	34,803		$	35,778		$	22,863
State taxes, net of federal income tax effect	12,724			6,720			4,135
Cash surrender life insurance	(582		)	(645		)	(407		)
Tax exempt interest	(1,135		)	(1,660		)	(764		)
Merger costs	375			824			533
LIHTC investments	(761		)	(1,031		)	(909		)
Effect of the Tax Act	(1,441		)	5,633			—
Excess tax benefit of stock-based compensation	(1,811		)	(1,995		)	—
Prior year true-up	—			(1,108		)	—
Other	68			(390		)	(236		)
Total income tax provision	$	42,240		$	42,126		$	25,215

Deferred tax assets (liabilities) were comprised of the following temporary differences between the financial statement carrying amounts and the tax basis of assets at December 31:



	2018			2017			2016
	(dollars in thousands)
Deferred tax assets:
Accrued expenses	$	3,239		$	2,463		$	2,839
Net operating loss	6,115			4,834			3,977
Allowance for loan losses, net of bad debt charge-offs	10,709			8,400			8,061
Deferred compensation	3,649			3,074			2,348
State taxes	2,707			1,500			1,879
Depreciation	—			—			1,090
Loan discount	17,677			8,642			3,477
Stock-based compensation	3,234			1,914			1,108
Unrealized loss on available for sale securities	2,308			—			1,939
Capital loss carryover	—			380			—
AMT credit	96			107			—
Total deferred tax assets	49,734			31,314			26,718
Deferred tax liabilities:
Deferred FDIC gain	(364		)	(524		)	(1,675		)
Core deposit intangibles	(27,388		)	(11,691		)	(3,331		)
Loan origination costs	(4,760		)	(3,368		)	(4,208		)
Depreciation	(1,192		)	(699		)	—
Unrealized gain on available for sale securities	—			(188		)	—
Other	(403		)	(1,199		)	(697		)
Total deferred tax liabilities	(34,107		)	(17,669		)	(9,911		)
Valuation allowance	—			(380		)	—
Net deferred tax asset	$	15,627		$	13,265		$	16,807

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Among other changes, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The Company performed an initial assessment and reasonably estimated the effects of the Tax Act on its deferred tax amounts to be approximately $5.6 million, which was recorded as a charge to income tax expense in the fourth quarter of 2017, in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”). As required by SAB 118, the Company continued to reassess and refine the effects of the Tax Act on its deferred tax amounts during 2018. As a result, the Company recorded an income tax benefit of $1.4 million during the year ended December 31, 2018. As of December 31, 2018, the Company has completed the accounting for the income tax effects of the Tax Act.

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. 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 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 December 31, 2016 and December 31, 2018. As of December 31, 2017, the Company recorded a valuation allowance of $380,000 against the capital loss carryover deferred tax asset, as the Company does not believe it will generate sufficient capital gain before the capital loss carryover expires.

Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to use any net unrealized built in losses and other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% ownership change over a designated testing period. The Company has a Section 382 limited net operating loss carry forward of approximately $25.7 million for federal income tax purposes, which is scheduled to expire in 2026. In addition, the Company has a Section 382 limited net operating loss carry forward of approximately $8.9 million for California franchise tax purposes, which is scheduled to expire in 2020. The Company is expected to fully utilize the federal and California net operating loss carryforward before it expires with the application of the Section 382 annual limitation.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2013. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. The Company is currently not under examination in any taxing jurisdiction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018 and 2017 is as follows:



	2018		2017
	(dollars in thousands)
Balance at January 1,	$	2,906	$	—
Additions based on tax positions related to prior years	—		2,906
Balance at December 31,	$	2,906	$	2,906

The total amount of unrecognized tax benefits was $2.9 million and $2.9 million at December 31, 2018 and 2017, respectively, and is primarily comprised of unrecognized tax benefits from an acquisition during 2017. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at December 31, 2018. The Company does not believe that the unrecognized tax benefits will change within the next twelve months.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company had accrued for $246,000 and $104,000 of the interest and penalties at December 31, 2018 and 2017, respectively.