Entity information:
NOTE
23.
INCOME TAXES
 
The following table presents components of income tax expense included in the
Consolidated Statements of Income
for each of the past
three
years.
 
(Amounts in thousands)
  
Current
    
Deferred
    
Total
  
Year ended December 31, 2017:
                        
Federal
   $
2,005
     $
2,837
     $
4,842
  
State
    
1,474
      
(76
 )    
1,398
  
Affordable housing partnership amortization
    
688
      
—
      
688
  
    $
4,167
     $
2,761
     $
6,928
  
Year ended December 31, 2016:
                        
Federal
   $
283
     $
409
     $
692
  
State
    
582
      
86
      
668
  
Affordable housing partnership amortization
    
598
      
—
      
598
  
    $
1,463
     $
495
     $
1,958
  
Year ended December 31, 2015:
                        
Federal
   $
1,183
     $
509
     $
1,692
  
State
    
981
      
75
      
1,056
  
Affordable housing partnership amortization
    
714
      
—
      
714
  
Total
   $
2,878
     $
584
     $
3,462
  
 
 
Our effective tax rate is derived from provision for income taxes divided by income before provision for income taxes. Income tax expense attributable to income before income taxes differed from the amounts computed by applying the U.S. federal income tax rate of
34%
to income before income taxes.
 
The following table presents a reconciliation of income taxes computed at the federal statutory rate to the actual effective rate for the years ended
December 31, 2017,
2016,
and
2015.
 
   
2017
    
2016
    
2015
  
Income tax at the federal statutory rate
    
34.00
%
    
34.00
%
    
34.00
%
Deferred tax asset write-down
    
17.45
%
    
5.02
%
    
—
%
State franchise tax, net of federal tax benefit
    
6.46
%
    
6.11
%
    
5.79
%
Amortization of affordable housing credit partnerships
    
4.82
%
    
8.11
%
    
5.91
%
Officer life insurance
    
(2.50
%)
    
(2.89
%)
    
(1.81
%)
Tax-exempt interest
    
(5.23
%)
    
(10.85
%)
    
(8.02
%)
Affordable housing credits and benefits
    
(5.68
%)
    
(11.69
%)
    
(6.42
%)
Other
    
(0.78
%)
    
(0.68
%)
    
(0.71
%)
Effective Tax Rate
    
48.54
%
    
27.13
%
    
28.74
%
 
For the year ended
December 31, 2017,
our income tax provision of $
6.9
million on pre-tax income of
$14.3
million was an effective tax rate of
48.5%.
The income tax provision was composed of a
$2.5
million write-down of our deferred tax assets and a
$4.4
million tax provision on pre-tax net operating income of
$14.3
million (
30.8%
). The
$2.5
million write-down occurred when we revalued our deferred tax assets and liabilities to account for the future impact of lower corporate tax rates from a graduated rate of
35%
to a flat rate of
21%
resulting from the Tax Cuts and Jobs Act enacted on
December 22, 2017.
 
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset as of
December 31, 2017
and
2016.
 
(Amounts in thousands)
  
2017
    
2016
  
Deferred tax assets:
                
Loan and lease loss reserves
   $
3,526
     $
4,751
  
Deferred compensation
    
2,365
      
3,285
  
State franchise taxes
    
291
      
260
  
Branch acquisition costs
    
274
      
366
  
Unrealized losses other comprehensive income
    
134
      
553
  
Non accrued interest
    
105
      
341
  
Federal tax credits
    
—
      
525
  
Other
    
484
      
1,093
  
Total deferred tax assets
    
7,179
      
11,174
  
                 
Deferred tax liabilities:
                
Deferred loan origination costs
    
(619
 )    
(904
 )
Unrealized gains other comprehensive income
    
—
      
(92
 )
Basis difference in fixed assets
    
—
      
(164
 )
Other
    
(55
 )    
(472
 )
Total deferred tax liabilities
    
(674
 )    
(1,632
 )
                 
Net deferred tax asset
   $
6,505
     $
9,542
  
 
 
We have determined that we are
not
required to establish a valuation allowance for the deferred tax assets as management believes it is more likely than
not
that the deferred tax assets
of
$7.2
million and
$11.2
million at
December 31, 2017
and
2016,
will be realized principally through future reversals of existing taxable temporary differences. We further believe that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through the reversal of future temporary taxable differences.
 
We have investments in Qualified Zone Academy Bonds (“QZAB
”) of
$4.7
million at
December 31, 2017
and
2016
recorded in
Other Assets
in the
Consolidated Balance Sheets
.
We also have investments in QZAB of
$1.0
million at
December 31, 2017
recorded in
Securities available-for-sale
in the
Consolidated Balance Sheets
. The investments provide funds for capital improvements at local schools and are repaid at maturity in
2031,
2033
and
2046.
In exchange for the investment we receive a federal tax credit at a rate determined at the settlement of the investment by the US Treasury. We account for the benefit for these tax credit investments using the deferred cost reduction method.
 
For the year
s ended
December 31, 2017
and
2016,
we expect to carryforward a California capital loss in the amount of
$53
thousand which will expire in
2020.
 
See Note
24
Qualified Affordable Housing Partnership Investments
in these
Notes to Consolidated Financial Statements
, for further details on our affordable housing project investments.
 
In
September
of
2016,
we filed amended federal and state tax returns for tax years
2011,
2012,
2013,
and
2014.
We recognized
$41
thousand in other noninterest expense during the year ended
December 31, 2017
as interest applied to our amended state tax returns.
 
Additionally, we have
no
unrecognized tax benefits at
December 31, 2017
and
2016.
We recognize interest accrued and penalties related to unrecognized tax benefits in other noninterest expense.
 
We file income tax returns in the U.S. federal jurisdiction, and the State of California. Income tax returns filed are subject to examination by the U.S. federal, state, and local income tax authorities.
While
no
income tax returns are currently being examined, we are
no
longer subject to tax examination by tax authorities for years prior to fiscal year
2014
for federal tax returns and fiscal year
2013
for state and local tax returns.
 
In
September
of
2016,
we filed amended federal and state tax returns for tax years
2011,
2012,
2013,
and
2014.
The amendments were filed to properly recognize tax events in years
2011
and
2013,
that were improperly recognized in years
2011
through
2014.
T
he IRS rejected the
2011
amended tax return citing the statute for assessment had expired. Accordingly,
$988
thousand of taxes due to the taxing authorities pursuant to the
2011
amended federal tax return was returned to us. As of
December 31, 2017
we continue to recognize
100%
of the tax liability relating to our
2011
amended federal tax return because we believe it is more likely than
not,
our tax position would be sustained upon reexamination by the IRS or through the litigation process. We do
not
expect to reconsider or reverse our tax position until the statute of limitations expires on the
2014
amended federal tax return in
September
of
2018,
and until we believe it is more likely than
not
that the taxes due cannot be recouped.  If we reverse our tax position, we will recognize the
$988
thousand in our provision for income taxes and our effective tax rate will be reduced.
 
The following table presents our uncertain tax position at
December 31, 2017
and
2016.
 
(Amounts in thousands)
  
2017
    
2016
  
Balance, beginning of period
   $
988
     $
—
  
Additions for tax positions related to prior years
    
—
      
988
  
balance, end of period
   $
988
     $
988