Income Taxes
The components of income tax (benefit) expense from continuing operations consisted of the following for the years ended December 31:
|
| | | | | | | | | | | |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
Current taxes: | | | | | |
Federal | $ | (125 | ) | | $ | — |
| | $ | 5 |
|
State | 34 |
| | (5 | ) | | 4 |
|
Total current taxes | (91 | ) | | (5 | ) | | 9 |
|
Deferred taxes: | | | | | |
Federal | — |
| | 10,044 |
| | (8,490 | ) |
State | — |
| | 6,793 |
| | (3,070 | ) |
Total deferred taxes | — |
| | 16,837 |
| | (11,560 | ) |
Total income tax (benefit) expense | $ | (91 | ) | | $ | 16,832 |
| | $ | (11,551 | ) |
The reasons for the differences between the statutory federal income tax rates and our effective tax rates are summarized in the following table:
|
| | | | | | | | |
| Year Ended December 31, |
2017 | | 2016 | | 2015 |
Federal income tax based on statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State franchise tax net of federal income tax benefit | 7.2 |
| | 7.2 |
| | 7.1 |
|
Permanent differences | (0.4 | ) | | — |
| | — |
|
Other | 1.4 |
| | (0.1 | ) | | 3.9 |
|
Valuation allowance | (43.1 | ) | | (135.6 | ) | | (1,343.5 | ) |
Total effective tax rate | (0.9 | )% | | (94.5 | )% | | (1,298.5 | )% |
At December 31, 2017 and December 31, 2016, we have a net deferred tax asset of $0 and $0, respectively, as a result of the full valuation allowance recorded against our gross deferred tax asset in each period. Adjustments to our deferred tax valuation allowance could be required in the future if we were to conclude, on the basis of our assessment of the realizability of the deferred tax asset, that the amount of that asset which is more-likely-than-not, to be available to offset or reduce future taxes has increased. Any such increase would result in an income tax benefit. The components of our net deferred tax asset are as follows at:
|
| | | | | | | |
(Dollars in thousands) | December 31, |
2017 | | 2016 |
Deferred tax asset: | | | |
Allowance for loan and lease losses | $ | 4,207 |
| | $ | 6,932 |
|
Other than temporary impairment on securities | 56 |
| | 78 |
|
Deferred compensation | 693 |
| | 1,033 |
|
Litigation reserve | 131 |
| | — |
|
Other accrued expenses | 927 |
| | 2,075 |
|
Charitable contributions | 241 |
| | 244 |
|
Reserve for unfunded commitments | 103 |
| | 144 |
|
Tax credits | 60 |
| | 158 |
|
Net operating loss carry forward | 9,754 |
| | 13,410 |
|
Stock based compensation | 363 |
| | 747 |
|
Depreciation and amortization | — |
| | 166 |
|
Unrealized losses on securities and deferred compensation | 338 |
| | 758 |
|
Total deferred tax assets | 16,873 |
| | 25,745 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (133 | ) | | — |
|
Other | (803 | ) | | (741 | ) |
Total deferred tax liabilities | (936 | ) | | (741 | ) |
Valuation allowance | (15,937 | ) | | (25,004 | ) |
Total net deferred tax asset | $ | — |
| | $ | — |
|
During the year ended December 31, 2015, we recorded an income tax benefit of $11.6 million. Management evaluated the positive and negative evidence and determined that there was enough positive evidence to support the full realization of the deferred tax asset and that no valuation allowance was needed. Positive evidence included projected taxable income utilizing objective assumptions based on 2015 actual results, tax planning strategies, improvement in economic conditions and at least 17 years remaining on the life of our $8.3 million deferred tax asset generated from our net operating loss carryforward. Additionally, the Company had generated positive core earnings for the trailing six quarters which demonstrated the ability to be profitable in what is considered to be the Company's core business. While the decision to exit the mortgage business in 2013 did not necessarily ensure that the Company would become profitable, the results provided positive evidence that the decision to exit the unprofitable business was sufficient to overcome the losses incurred in recent years. Negative evidence we considered in making this determination included our three-year cumulative loss deficit and our accumulated deficit. Management determined that the expectation of future taxable income supported by our recent history of positive core earnings after adjusting for aberrational items that caused our cumulative loss condition, including discontinued operations, provided enough positive evidence to outweigh the negative evidence. Therefore, we concluded that it was more-likely-than-not that the existing $17.6 million net deferred tax asset would be realized, resulting in the reversal of the entire valuation allowance against the Company's deferred tax asset. Although we did not expect to be required to pay income tax to the appropriate taxing authorities of any sizeable amount until we had depleted our net operating loss carryforwards, we expected to recognize income tax expense in our financial statements beginning in 2016 at a combined rate of approximately 41% on our pretax income.
During the year ended December 31, 2016, we had income tax expense of $16.8 million as a result of the establishment of a full valuation allowance during 2016 on the balance of our deferred tax asset, which includes current and historical losses that may be used to offset taxes on future profits. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. Negative evidence included the significant losses incurred during the second and third quarters of 2016, an increase in our nonperforming assets from December 31, 2015, and our accumulated deficit. Positive evidence included our forecast of our taxable income, the time period in which we have to utilize our deferred tax asset and the current economic conditions. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believed that the Company would be able to realize the deferred tax asset within that period, we were unable to assert the timing as to when that realization would occur. As a result of this conclusion and due to the hierarchy of evidence that the accounting rules specify, a valuation allowance had been recorded as of December 31, 2016 to offset the deferred tax asset.
During the year ended December 31, 2017, we had an income tax benefit of $91 thousand. The income tax benefit for the year ended December 31, 2017 represents the reclassification of the alternative minimum tax credit carryforward from a deferred tax asset to an income tax receivable as required by the Tax Cuts and Jobs Act signed into law on December 22, 2017. This was partially offset by the payment to the State of California for the cost of doing business within the state. No additional income tax expense was recorded as a result of our full valuation allowance, discussed further below. The year ended December 31, 2017 results reflect the estimated impact of the enactment of the new tax law, which resulted in a minimal increase in net income due to the elimination of the corporate alternative minimum tax. Additionally, as part of the newly enacted tax law, the decrease in our deferred tax asset and corresponding valuation allowance as of December 31, 2017 is primarily attributable to the Federal corporate tax rate decreasing from 35% to 21%, which caused us to decrease our gross deferred tax asset and the related valuation allowance to $15.9 million from $21.7 million as of September 30, 2017. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward, we are unable to assert the timing as to when that realization will occur. Due to the hierarchy of evidence that the accounting rules specify, management determined that a full valuation allowance that was previously established on the balance of our deferred tax asset was still required at December 31, 2017.
As of December 31, 2017, we had net operating loss carryforwards of $30.6 million and $56.0 million for federal and state tax purposes, respectively, which are available to offset future taxable income. If not used, these carryforwards begin expiring in 2032 and would fully expire in 2036. Refer to the table below for the amount and expiration of our net operating loss carryforwards:
|
| | | | | | | | | | |
| | Federal | | State | | Expiration |
| | (amounts in thousands) | | |
2008(1) | | $ | — |
| | $ | 4,608 |
| | 12/31/2032 |
2009(1) | | — |
| | 21,324 |
| | 12/31/2032 |
2010(1) | | — |
| | 5,258 |
| | 12/31/2032 |
2012 | | 852 |
| | 774 |
| | 12/31/2032 |
2013 | | 14,977 |
| | 8,967 |
| | 12/31/2033 |
2015 | | 288 |
| | 571 |
| | 12/31/2035 |
2016 | | 14,436 |
| | 14,453 |
| | 12/31/2036 |
| | $ | 30,553 |
| | $ | 55,955 |
| | |
| |
(1) | California net operating loss carryforwards were suspended by the Franchise Tax Board during these periods and the carryover was extended. |
We file income tax returns with the U.S. federal government and the State of California. As of December 31, 2017, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal tax returns for the 2014 to 2016 tax years and the Franchise Tax Board for California state income tax returns for the 2013 to 2016 tax years. Net operating losses on our U.S. federal and California state income tax returns may be carried forward up to 20 years. As of December 31, 2017, we do not have any unrecognized tax benefits.
Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was recognized during the years ended December 31, 2017, 2016 and 2015.