11) Income Taxes

On December 22, 2017, the Tax Act was signed into law, which among other items reduces the federal corporate tax rate to 21% from 35%, effective January 1, 2018. U.S. generally accepted accounting principles requires companies to remeasure certain tax-related assets and liabilities as of the date of enactment of the new legislation with resulting tax effects accounted for in the reporting period of enactment. The Company performed an analysis including the remeasurement of their deferred tax assets and liabilities and recorded an additional $7,103,000, non-cash, incremental income tax expense during the fourth quarter of 2017. The impact of the Tax Act on the Company’s 2017 financial results are not necessarily indicative of the results to be achieved for any future periods. The reduced federal corporate tax rate of 21% will decrease the Company’s effective tax rate for financial reporting periods beginning in 2018.

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which addresses the situations where the accounting for changes in tax laws is complete, incomplete but can be reasonably estimated, and incomplete and cannot be reasonably estimated. SAB 118 also permits a measurement period up to one year from the date of enactment to refine the provisional accounting. There were no items for which the Company was unable to make a reasonable estimate for the effects of the tax law change. The Company has completed its accounting for the effects of the Tax Act on its deferred tax assets and liabilities.

Income tax (benefit) consisted of the following for the year ended December 31, as follows:


	2017		2016		2015
	(Dollars in thousands)
Currently payable tax:
Federal	$	12,948	$	13,373	$	5,445
State		4,653		4,748		2,544
Total currently payable		17,601		18,121		7,989
Deferred tax (benefit):
Federal		1,193		(1,029)		2,029
Due to enactment of Tax Reform		7,103		—		—
State		574		(504)		86
Total deferred tax		8,870		(1,533)		2,115
Income tax expense	$	26,471	$	16,588	$	10,104

The effective tax rate differs from the Federal statutory rate for the years ended December 31, as follows:


	2017		2016		2015
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	6.8	%	6.6	%	6.9	%
Low income housing credits, net of investment losses	(0.5)	%	(0.3)	%	—	%
Increase in cash surrender value of life insurance	(1.2)	%	(1.4)	%	(2.2)	%
Non-taxable interest income	(1.5)	%	(1.7)	%	(2.7)	%
Split-dollar term insurance	0.1	%	0.1	%	0.1	%
Due to enactment of Tax Reform	14.1	%	—	%	—	%
Other, net	(0.2)	%	(0.6)	%	0.9	%
Effective tax rate	52.6	%	37.7	%	38.0	%

Deferred tax assets and liabilities that result from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, are as follows:


	2017		2016
	(Dollars in thousands)
Deferred tax assets:
Defined postretirement benefit obligation	$	8,385	$	11,476
Allowance for loan losses		5,671		7,886
Accrued expenses		910		1,787
Federal net operating loss carryforwards		650		1,740
Stock compensation		1,272		1,698
State income taxes		975		1,515
Premises and equipment		649		990
Securities available-for-sale		400		598
Nonaccrual interest		76		—
California net operating loss carryforwards		394		454
Split-dollar life insurance benefit plan		76		102
Tax credit carryforwards		70		101
Other		365		1,069
Total deferred tax assets		19,893		29,416

Deferred tax liabilities:
Intangible assets		(1,357)		(1,614)
Loan fees		(1,079)		(1,278)
Prepaid expenses		(533)		(644)
I/O strips		(406)		(448)
FHLB stock		(171)		(244)
Other		(100)		(130)
Total deferred tax liabilities		(3,646)		(4,358)
Net deferred tax assets	$	16,247	$	25,058

At December 31, 2017, the Company's federal net operating loss carryforwards were $3,096,000 and the Company's California net operating loss carryforwards were $4,707,000. These amounts are attributable to the Focus transaction. The realization of these net operating loss carryforwards for federal and state tax purposes is limited under current tax law with limitations placed on the amount of net operating losses that can be utilized annually. The Company does not, however, believe that its annual limitation of $1,877,000 will impact the ultimate deductibility of the net operating loss carry-forwards. The State tax credit carryforwards, net of Federal tax effects, were $70,000 as of December 31, 2017, which will begin to expire in 2019. As the Company will be able to fully utilize the net operating loss carryforwards before they expire in 2035, no valuation allowance is required against the deferred tax assets. At December 31, 2017, an alternative minimum tax credit carryforward of $43,000, which does not expire has been reclassified to current tax receivable.

Under generally accepted accounting principles, a valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions. As of December 31, 2017 and 2016 the Company’s recorded amount of uncertain tax positions was not considered significant for financial reporting and the Company does not expect this amount to significantly increase or decrease in the next twelve months.

At December 31, 2017, and December 31, 2016, the Company had net deferred tax assets of $16,247,000 and $25,058,000, respectively. At December 31, 2017, the Company determined that a valuation allowance for deferred tax assets was not necessary.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax of the State of California. The Company is no longer subject to examination by Federal and state taxing authorities for years before 2014, and by the State of Californina taxing authority for years before 2013.

The Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The Company quantified the impact of adopting the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization method did not have a material impact to its financial statements. The low income housing investment losses, net of the tax benefits received, are included in income tax expense for all periods reflected on the consolidated income statements.

The following table reflects the carrying amounts of the low income housing investments included in accrued interest receivable and other assets, and the future commitments for the periods indicated:


	December 31,		December 31,
	2017		2016
	(Dollars in thousands)
Low income housing investments	$	3,411	$	3,880
Future commitments	$	302	$	365

The Company expects $14,000 of the future commitments to be paid in 2018, $14,000 in 2019, and $274,000 in 2020 through 2023.

For tax purposes, the Company recognized low income housing tax credits of $439,000 and $459,000 for the years ended December 31, 2017 and December 2016, respectively, and low income housing investment losses of $460,000 and $282,000, respectively. The Company recognizes low income housing investment expenses as a component of income tax expense.