12) Income Taxes

On December 22, 2017, the Tax Act was signed into law, which among other things reduces the federal corporate tax rate to 21% from 35%, effective January 1, 2018. The enactment of the Tax Act caused our net deferred tax assets to be revalued at the new lower tax rate with resulting tax effects accounted for in the fourth quarter of 2017. The Company performed an analysis and determined the value of the net DTA was reduced by $7,103,000, which was recognized as a one-time, non-cash, incremental income tax expense for the fourth quarter of 2017.

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


	2018		2017		2016
	(Dollars in thousands)
Currently payable tax:
Federal	$	9,187	$	12,948	$	13,373
State		5,416		4,653		4,748
Total currently payable		14,603		17,601		18,121
Deferred tax expense (benefit):
Federal		(1,133)		1,193		(1,029)
Due to enactment of Tax Reform		—		7,103		—
State		(146)		574		(504)
Total deferred tax		(1,279)		8,870		(1,533)
Income tax expense	$	13,324	$	26,471	$	16,588

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


	2018		2017		2016
Statutory Federal income tax rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	8.5	%	6.8	%	6.6	%
Low income housing credits, net of investment losses	(0.8)	%	(0.5)	%	(0.3)	%
Increase in cash surrender value of life insurance	(0.5)	%	(1.2)	%	(1.4)	%
Stock option/restricted stock windfall tax benefit	(0.9)	%	(0.3)	%	N/A
Non-taxable interest income	(0.9)	%	(1.5)	%	(1.7)	%
Split-dollar term insurance	0.1	%	0.1	%	0.1	%
Due to enactment of Tax Reform	0.0	%	14.1	%	N/A
Other, net	0.9	%	0.1	%	(0.6)	%
Effective tax rate	27.4	%	52.6	%	37.7	%

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:


	2018		2017
	(Dollars in thousands)
Deferred tax assets:
Defined postretirement benefit obligation	$	7,877	$	8,385
Allowance for loan losses		7,697		5,671
Federal net operating loss carryforwards		5,093		650
Securities available-for-sale		2,184		400
California net operating loss carryforwards		2,128		394
Accrued expenses		1,939		910
Stock compensation		1,244		1,272
State income taxes		1,117		975
Premises and equipment		642		649
Split-dollar life insurance benefit plan		80		76
Tax credit carryforwards		71		70
Nonaccrual interest		55		76
Other		716		365
Total deferred tax assets		30,843		19,893

Deferred tax liabilities:
Intangible liabilities		(1,671)		(1,357)
Loan fees		(1,089)		(1,079)
Prepaid expenses		(554)		(533)
I/O strips		(163)		(406)
FHLB stock		(174)		(171)
Other		(103)		(100)
Total deferred tax liabilities		(3,754)		(3,646)
Net deferred tax assets	$	27,089	$	16,247

At December 31, 2018, the Company's federal net operating loss (“NOL”) carryforwards were $24,200,000 and the Company's California net operating loss carryforwards were $24,800,000. These amounts are attributable to the Focus, Tri-Valley and United American transactions. The realization of these NOL carryforwards for federal and state tax purposes are limited on the amount of net operating losses that can be utilized annually under the current tax law. The Company does not believe that its annual limitation on each acquisition will impact the ultimate deductibility of the NOL carry-forwards. The State tax credit carryforwards, net of Federal tax effects, were $71,000 as of December 31, 2018, which will begin to expire in 2019. As the Company will be able to fully utilize the net operating loss carryforwards before they begin to expire in 2029, no valuation allowance is required against the deferred tax assets.

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, 2018 and 2017 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, 2018, and December 31, 2017, the Company had net deferred tax assets of $27,089,000 and $16,247,000, respectively. At December 31, 2018, 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 2015, and by the State of California taxing authority for years before 2014.

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 included in accrued interest payable and other liabilities for the periods indicated:


	December 31,		December 31,
	2018		2017
	(Dollars in thousands)
Low income housing investments	$	3,172	$	3,411
Future commitments	$	273	$	302

The Company expects $15,000 of the future commitments to be paid in 2019, $15,000 in 2020, and $243,000 in 2021 through 2023.

For tax purposes, the Company recognized low income housing tax credits of $425,000 and $439,000 for the years ended December 31, 2018 and December 2017, respectively, and low income housing investment expense of $437,000 and $460,000, respectively. The Company recognizes low income housing investment expenses as a component of income tax expense.