Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

(Dollars in thousands)	2021		2020		2019
Current income tax provision:
Federal	$	59,333	$	32,129	$	34,124
State	32,794		22,743		16,415
Total current income tax provision	92,127		54,872		50,539
Deferred income tax provision (benefit):
Federal	18,753		(26,554)		4,645
State	10,054		(16,068)		2,851
Total deferred income tax provision (benefit)	28,807		(42,622)		7,496
Total income tax provision	$	120,934	$	12,250	$	58,035

A reconciliation from statutory federal income taxes, which are based on a statutory rate of 21% for 2021, 2020, and 2019, to the Company’s total effective income tax provisions for the years ended December 31 is as follows:

(Dollars in thousands)	2021		2020		2019
Statutory federal income tax provision	$	96,773	$	15,246	$	45,729
State taxes, net of federal income tax effect	34,001		4,757		15,764
Cash surrender life insurance	(1,890)		(1,163)		(565)
Tax-exempt interest	(6,803)		(4,073)		(1,503)
Non-deductible merger costs	—		703		—
LIHTC investments	(2,716)		(2,259)		(1,570)
Stock-based compensation shortfall (windfall)	(1,356)		407		(728)
Effect of the CARES Act	—		(2,636)		—
Section 162(m) of the Internal Revenue Code	2,015		968		530
Other	910		300		378
Total income tax provision	$	120,934	$	12,250	$	58,035

On March 27, 2020, the U.S. government enacted the CARES Act, which among other things, provided taxpayers 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:

(Dollars in thousands)	2021		2020
Deferred tax assets:
Accrued expenses	$	3,681	$	1,307
Net operating loss	5,681		6,614
Allowance for credit losses, net of bad debt charge-offs	64,628		85,700
Deferred compensation	3,338		3,489
State taxes	6,834		4,395
Loan net discounts	21,980		32,484
Stock-based compensation	4,030		4,618
Operating lease liabilities	20,708		24,463
Unrealized loss on available-for-sale securities	3,156		—
Federal and state credit carryovers	2,242		3,750
Other	—		1,782
Total deferred tax assets	136,278		168,602
Deferred tax liabilities:
Operating lease right-of-use assets	$	(18,272)	$	(21,756)
Deferred FDIC gain	(69)		(108)
Core deposit intangibles	(17,676)		(21,828)
Loan origination costs	(7,547)		(5,176)
Depreciation	(4,897)		(6,551)
Unrealized gain on available-for-sale securities	—		(24,127)
Other	(473)		—
Total deferred tax liabilities	(48,934)		(79,546)
Valuation allowance	—		—
Net deferred tax assets	$	87,344	$	89,056

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 the 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, 2021 and December 31, 2020.

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 $24.7 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 $6.6 million for California franchise tax purposes, which is scheduled to expire at various dates from 2029 to 2033 with the carryover period extension from California Assembly Bill 85 (“A.B. 85”) and Senate Bill 113 (“S.B. 113”). 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. On February 9, 2022, S.B. 113 was signed into law, and among other changes, S.B. 113 reinstates the California NOL deductions for tax years beginning in 2022, in effect shortening the suspension period from A.B. 85 by one year for NOL deductions. For NOL incurred in tax years before 2020 for which a deduction is denied, the carryover period is extended by two years. In addition, the Company has a Section 382 limited tax credit carryforward of $1.8 million, which is scheduled to expire by 2040. 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 2017. The expirations of the statutes of limitations related to the various state income and franchise tax returns vary 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 is as follows:

(Dollars in thousands)	2021		2020
Balance at January 1,	$	255	$	2,906
Increases based on tax positions related to prior years	1,437		233
Decreases related to settlements with taxing authorities	(233)		—
Decreases related to lapse of statute of limitation	(22)		(2,884)
Balance at December 31,	$	1,437	$	255

The total amount of unrecognized tax benefits was $1.4 million and $255,000 at December 31, 2021 and 2020, respectively, and is primarily comprised of unrecognized tax benefits related to the Opus acquisition in 2020. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $563,000 and $184,000 at December 31, 2021 and 2020, 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 related to unrecognized tax benefits in income tax expense. The Company had accrued for $31,000 and $22,000 of such interest at December 31, 2021 and 2020, respectively. No amounts for penalties were accrued at December 31, 2021 and 2020.