INCOME TAXES

12 Months Ended

Dec. 31, 2019

The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 (in thousands):



	Years Ended December 31
	2019		2018		2017
Current
Federal	$	25,278	$	21,869	$	30,961
State	2,494		4,130		3,085
Total Current	27,772		25,999		34,046

Deferred
Federal	7,738		2,021		58,646
State	1,344		575		(2,204		)
Total Deferred	9,082		2,596		56,442

Provision for income taxes	$	36,854	$	28,595	$	90,488

The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2019, 2018 and 2017:



	Years Ended December 31
	2019		2018		2017
Federal income tax statutory rate	21.0	%	21.0	%	35.0	%
Increase (decrease) in tax rate due to:
Tax-exempt interest	(2.2	)	(2.0	)	(2.6	)
Investment in life insurance	(0.5	)	(0.6	)	(1.1	)
State income taxes, net of federal tax offset	2.0		2.3		2.0
Tax credits	(1.2	)	(0.8	)	(0.6	)
Merger and acquisition costs	0.1		0.1		—
Valuation reserve release	—		(2.5	)	—
Federal law change	—		—		28.2
State audits and amended returns	(0.5	)	—		—
Other	1.4		(0.2	)	(1.1	)
Effective income tax rate	20.1	%	17.3	%	59.8	%

The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31, 2019 and 2018 (in thousands):



	December 31
	2019			2018
Deferred tax assets:
Loan loss and REO	$	24,285		$	24,156
Deferred compensation	17,470			15,991
Net operating loss carryforward	32,093			37,828
Federal and state tax credits	7,517			7,614
State net operating losses	5,632			6,105
Loan discount	5,466			5,756
Lease liability	15,485			—
Unrealized loss on securities - available for sale	349			983
Total deferred tax assets	108,297			98,433
Deferred tax liabilities:
Depreciation	(5,373		)	(3,771		)
Deferred loan fees, servicing rights and loan origination costs	(11,525		)	(10,197		)
Intangibles	(7,756		)	(8,428		)
Right of use asset	(14,531		)	—
Financial instruments accounted for under fair value accounting	(1,143		)	(833		)
Other	(8,146		)	—
Total deferred tax liabilities	(48,474		)	(23,229		)
Deferred income tax asset	59,823			75,204
Valuation allowance	(184		)	(184		)
Deferred tax asset, net	$	59,639		$	75,020

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recognized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. In December 2017, the federal government enacted the Tax Cuts and Jobs Act (2017 Tax Act). Among other provisions, the 2017 Tax Act reduced the federal marginal corporate income tax rate from 35% to 21%. As a result of the passage of the 2017 Tax Act, the Company recorded a $42.6 million charge for the revaluation of its net deferred tax asset to account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation. The charge was recorded as an increase to tax expense and reduction of the net deferred tax asset for the year ended December 31, 2017. The $42.6 million charge recorded by the Company included $4.2 million of provisional income tax expense related to AMT credits that are limited under Section 382 of the Code, which resulted in a reduction in the AMT deferred tax asset. The adjustments to deferred tax assets and receivables related to the refundable nature of AMT credits were provisional amounts estimated based on information available as of December 31, 2017. During 2018, the Company determined the Section 382 alternative minimum tax credits carried forward indefinitely and therefore released the provisional $4.2 million valuation reserve recorded in 2017 against the tax credits. The release was recorded as a reduction to current tax expense and an increase to the net deferred tax assets.

At December 31, 2019, the Company has federal net operating loss carryforwards of approximately $152.8 million. The Company also has $80.1 million of state net operating loss carryforwards, against which the Company has established a $184,000 valuation reserve. The federal and state net operating losses will expire, if unused, by the end of 2034. The Company has federal general business credit carryforwards at December 31, 2019 of $3.3 million, which will expire, if unused, by the end of 2031. The Company also has federal alternative minimum tax credit carryforwards of $4.2 million, which are available to reduce future federal regular income taxes, if any, over an indefinite period. At December 31, 2018, the Company had federal and state net operating loss carryforwards of approximately $180.1 million and $86.8 million, respectively, and federal general business credits carryforwards of $3.4 million. At that same date, the Company also had federal alternative minimum tax credit carryforwards of approximately $4.2 million.

As a consequence of our 2015 acquisition of Starbuck Bancshares, Inc., the Company experienced a change in control within the meaning of Section 382 of the Code. In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc.'s level continue to apply to the Company. Section 382 limits the ability of a corporate taxpayer to use net operating loss carryforwards, general business credits, and recognized built-in-losses, on an annual basis, incurred prior to the change in control against income earned after the change in control. As a result of the Section 382 limitations, the Company is limited to utilizing $21.5 million on an annual basis (after the application of the Section 382 limitations carried over from Starbuck Bancshares, Inc.) of federal net operating loss carryforwards, general business credits, and recognized built-in losses. The applicable state Section 382 limitations range from $525,000 to $21.5 million. In 2017, the Company established a $184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believed it is more likely than not that it would not realize the benefit because the application of the Section 382 limitations at the state level is based on future apportionment rates. For non-Section 382 limited alternative minimum tax credits, there is a five year carryover period.

As a consequence of Banner's capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the Code. As a result of the Section 382 limitations, the Company is limited to utilizing $6.9 million of net operating loss carryforwards which existed prior to the acquisition of Starbuck Bancshares, Inc., on an annual basis. Based on its analysis, the Company believes it is more likely than not that the June 2010 change in control will not impact its ability to utilize all of the related available net operating loss carryforwards, general business credits, and recognized built-in-losses.

As a consequence of our 2019 acquisition of AltaPacific and AltaPacific Bank, the Company did not experience a change in control within the meaning of Section 382 of the Code. However, the underlying Section 382 limitations at AltaPacific and AltaPacific Bank level continue to apply to the Company. As a result of the Section 382 limitations, the Company is limited to utilizing $110,000 of the federal net operating loss carryovers and general business credits acquired from AltaPacific and AltaPacific Bank based on underlying limits carried over. Based on its analysis, the Company believes it is more likely than not that the Section 382 limitations will not impact its ability to utilize all of the related available net operating loss carryforwards and general business credits.

Retained earnings at December 31, 2019 and 2018 included approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate, established as $1.1 million at December 31, 2019.

As of December 31, 2019, the Company had $275,000 of unrecognized tax benefits for uncertain tax positions compared to an insignificant amount as of December 31, 2018, none of which if recognized would materially affect the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2019, 2018 and 2017 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah, Montana and Idaho and for federal purposes. The Company is no longer subject to tax examination for tax years before 2016, except for Idaho for which it is no longer subject to examination for tax years before 2015.

Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes.

The following table presents the balances of the Company's tax credit investments and related unfunded commitments at December 31, 2019 and 2018 (in thousands):



	December 31, 2019		December 31, 2018
Tax credit investments	$	29,620	$	17,360
Unfunded commitments—tax credit investments	20,235		12,726

The following table presents other information related to the Company's tax credit investments for the years ended December 31, 2019, 2018 and 2017 (in thousands):



	For the years ended December 31,
	2019		2018		2017
Tax credits and other tax benefits recognized	$	1,916	$	1,456	$	1,140
Tax credit amortization expense included in provision for income taxes	1,633		1,151		1,144