Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following presents the components of income tax expense for the years ended December 31:

	2020		2019		2018
	(Dollars in thousands)
Current income tax provision:
Federal	$	32,129	$	34,124	$	19,787
State	22,743		16,415		13,178
Total current income tax provision	54,872		50,539		32,965
Deferred income tax (benefit) provision:
Federal	(26,554)		4,645		8,142
Effect of the Tax Act	—		—		(1,441)
State	(16,068)		2,851		2,574
Total deferred income tax (benefit) provision	(42,622)		7,496		9,275
Total income tax provision	$	12,250	$	58,035	$	42,240

A reconciliation from statutory federal income taxes, which are based on a statutory rate of 21% for 2020, 2019, and 2018, to the Company’s total effective income tax provisions for the years ended December 31 is as follows:

	2020		2019		2018
	(Dollars in thousands)
Statutory federal income tax provision	$	15,246	$	45,729	$	34,803
State taxes, net of federal income tax effect	4,757		15,764		12,724
Cash surrender life insurance	(1,163)		(565)		(582)
Tax exempt interest	(4,073)		(1,503)		(1,135)
Non-deductible merger costs	703		—		375
LIHTC investments	(2,259)		(1,570)		(761)
Effect of the Tax Act	—		—		(1,441)
Stock-based compensation shortfall (windfall) tax impact	407		(728)		(1,811)
Effect of the CARES Act	(2,636)		—		—
Section 162(m) of the Internal Revenue Code	968		530		145
Other	300		378		(77)
Total income tax provision	$	12,250	$	58,035	$	42,240

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 reduced 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 had completed the accounting for the income tax effects of the Tax Act.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, provided taxpayer the ability to carry back net operating loss (“NOL”) incurred in 2018, 2019, or 2020 to each of the five tax years preceding the tax year of such loss. The Company is permitted to carryback 2018 NOL of an acquired entity, Grandpoint, to its prior tax years, which have income tax rates ranging from 34% to 35%. As a result, the Company recorded an income tax benefit of $2.6 million attributable to the Grandpoint NOL carryback during the year ended December 31, 2020.

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:

	2020		2019
	(Dollars in thousands)
Deferred tax assets:
Accrued expenses	$	1,307	$	2,126
Net operating loss	6,614		4,765
Allowance for credit losses, net of bad debt charge-offs	85,700		10,415
Deferred compensation	3,489		3,616
State taxes	4,395		3,746
Loan discount	32,484		11,634
Stock-based compensation	4,618		3,535
Operating lease liabilities	24,463		13,334
Federal and state credit carryovers	3,750		416
Other	1,782		—
Total deferred tax assets	168,602		53,587
Deferred tax liabilities:
Operating lease right-of-use assets	$	(21,756)	$	(12,382)
Deferred FDIC gain	(108)		(228)
Core deposit intangibles	(21,828)		(22,415)
Loan origination costs	(5,176)		(4,828)
Depreciation	(6,551)		(1,814)
Unrealized gain on available for sale securities	(24,127)		(8,639)
Other	—		(4,652)
Total deferred tax liabilities	(79,546)		(54,958)
Valuation allowance	—		—
Net deferred tax asset (liabilities)	$	89,056	$	(1,371)

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, 2020 and December 31, 2019.

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 $29.0 million for federal income tax purposes, which is scheduled to expire at various dates from 2026 to 2032. The Company also has a Section 382 limited net operating loss carry forward of approximately $7.0 million for California franchise tax purposes, which is scheduled to expire at various dates from 2029 to 2034 with the carryover period extension from California Assembly Bill 85 (“A.B. 85”). On June 29, 2020, A.B. 85 was signed into law, and among other changes, A.B. 85 suspends the use of the California NOL for the 2020, 2021, and 2022 tax years. For NOL incurred in tax years before 2020 for which a deduction is denied, the carryover period is extended by three years. In addition, the Company has a Section 382 limited tax credit carryforward of $3.3 million, which is scheduled to expire from 2039. 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 2016. 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, 2020 and 2019 is as follows:

	2020		2019
	(Dollars in thousands)
Balance at January 1,	$	2,906	$	2,906
Increases based on tax positions related to prior years	233		—
Decreases related to lapse of statute of limitation	(2,884)		—
Balance at December 31,	$	255	$	2,906

The total amount of unrecognized tax benefits was $255,000 and $2.9 million at December 31, 2020 and 2019, 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 $184,000 and $0 at December 31, 2020 and 2019, respectively. The Company does not believe that the unrecognized tax benefits will change significantly 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 $22,000 and $424,000 of the interest and penalties at December 31, 2020 and 2019, respectively.