Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

12) Income Taxes

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

	2020		2019		2018
	(Dollars in thousands)
Currently payable tax:
Federal	$	9,630	$	7,631	$	9,187
State		5,828		4,689		5,416
Total currently payable		15,458		12,320		14,603
Deferred tax expense (benefit):
Federal		(932)		2,200		(1,133)
State		(757)		1,331		(146)
Total deferred tax		(1,689)		3,531		(1,279)
Income tax expense	$	13,769	$	15,851	$	13,324

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

	2020		2019		2018
Statutory Federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	8.2	%	8.5	%	8.5	%
Low income housing credits, net of investment losses	(0.5)	%	(0.5)	%	(0.8)	%
Increase in cash surrender value of life insurance	(0.8)	%	(0.5)	%	(0.5)	%
Stock option/restricted stock windfall tax benefit	0.6	%	(0.3)	%	(0.9)	%
Non-taxable interest income	(0.8)	%	(0.8)	%	(0.9)	%
Split-dollar term insurance	0.1	%	0.1	%	0.1	%
Merger cost	0.0	%	0.5	%	0.5	%
Other, net	0.3	%	0.1	%	0.4	%
Effective tax rate	28.1	%	28.1	%	27.4	%

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:

	2020		2019
	(Dollars in thousands)
Deferred tax assets:
Allowance for credit losses on loans	$	12,827	$	7,231
Lease accounting		10,537		1,647
Defined postretirement benefit obligation		10,419		9,901
Accrued expenses		2,896		2,562
Federal net operating loss carryforwards		2,846		3,662
Stock compensation		1,894		1,636
State income taxes		1,142		954
California net operating loss carryforwards		1,106		1,489
Premises and equipment		459		695
Nonaccrual interest		101		61
Split-dollar life insurance benefit plan		80		75
Tax credit carryforwards		57		57
Other		469		654
Total deferred tax assets		44,833		30,624
Deferred tax liabilities:
Lease accounting		(10,537)		(1,647)
Loan fees		(1,820)		(1,842)
Securities available-for-sale		(1,764)		(772)
Intangible liabilities		(1,388)		(1,321)
Prepaid expenses		(689)		(289)
FHLB stock		(166)		(177)
I/O strips		(87)		(144)
Other		(161)		(130)
Total deferred tax liabilities		(16,612)		(6,322)
Net deferred tax assets	$	28,221	$	24,302

At December 31, 2020, the Company's federal net operating loss (“NOL”) carryforwards were $13,553,000 and the Company's California net operating loss carryforwards were $12,903,000. These amounts are attributable to the merger 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 carryforwards.  The State tax credit carryforwards, net of Federal tax effects, were $72,567 as of December 31, 2020 which will begin to expire in 2022. Since 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, 2020 and 2019 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, 2020, and December 31, 2019, the Company had net deferred tax assets of $28,221,000 and $24,302,000, respectively. At December 31, 2020, 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 2017, and by the State of California taxing authority for years before 2016.

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,
	2020		2019
	(Dollars in thousands)
Low income housing investments	$	5,246	$	6,126
Future commitments	$	596	$	625

The Company expects $46,000 of the future commitments to be paid in 2021, and $550,000 in 2022 through 2025.

For tax purposes, the Company recognized low income housing tax credits of $839,000 and $511,000 for the years ended December 31, 2020 and December 2019, respectively, and low income housing investment expense of $850,000 and $520,000, respectively.  The Company recognizes low income housing investment expenses as a component of income tax expense.