Note 11 — Income Taxes

In accordance with the provisions of ASC 740, the Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $73,000, $202,000 and $1.0 million as of December 31, 2019, 2018 and 2017, respectively.

For the year ended December 31, 2019, unrecognized tax benefits decreased by $129,000 related to state taxes, primarily in connection with the settlement of the California Franchise Tax Board 2008 and 2009 examinations. For the year ended December 31, 2018, unrecognized tax benefits decreased by $837,000 in connection with California Enterprise Zone interest deductions as result of the lapse of the statute of limitations. For the year ended December 31, 2017, unrecognized tax benefits in connection with California Enterprise Zone interest deductions did not change.

In 2019, 2018 and 2017, the Company accrued interest of $0, $10,000 and $34,000 for uncertain tax benefits, respectively. As of December 31, 2019, 2018 and 2017, the total amounts of accrued interest related to uncertain tax positions, were $0, $57,000 and $132,000, respectively. We account for interest and penalties related to uncertain tax positions as part of our provision for federal and state income taxes. Accrued interest and penalties are included within accrued expenses and other liabilities on the Consolidated Balance Sheets.

Unrecognized tax benefit primarily includes state tax exposure. The Company expects the currently open uncertain tax positions to be settled in the next twelve months.

As of December 31, 2019, the Company is subject to examination by federal and various tax authorities for certain years ending December 31, 2015 through 2018.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU eliminates the stranded tax effects in other comprehensive income resulting from the Tax Cuts and Jobs Act (the “Tax Act”). Because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations was not affected. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The Company adopted this standard as of January 1, 2018, and recorded the impact as an adjustment, which increased retained earnings by $399,000 as of the date of adoption.

A summary of the provision for income taxes was as follows:

Deferred tax assets and liabilities were as follows:

As of December 31, 2019, the Company’s net deferred tax assets, which primarily consists of net operating loss carryforwards and the allowance for loan and lease losses, increased by $9.3 million from 2018 primarily due to the increase in the allowance for loan and lease losses. As of December 31, 2018, the Company’s net deferred tax assets, which primarily consists of net operating loss carryforwards and the allowance for loan and lease losses, decreased by $5.0 million from 2017 primarily due to the reduction in purchase accounting and an increase in the valuation allowance related to state net operating losses.

As of each reporting date, management considers the realization of deferred tax assets based on management’s judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be realized. As of December 31, 2019, management determined that a valuation allowance of $4.9 million was appropriate against certain state net operating losses and certain state tax credits. For all other deferred tax assets, management believes it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. As of December 31, 2018, management determined a valuation allowance of $4.9 million was appropriate against certain state net operating losses and certain state tax credits. Therefore the valuation allowance did not change in 2019.

As of December 31, 2019, the Company had net operating loss carryforwards of $17.3 million and $216.4 million for federal and state income tax purposes, respectively. The federal net operating loss carryforwards of $17.3M expire at various dates from 2034 to 2035. The material state net operating loss carryforwards include California of $152.3M which expire at various dates from 2026 through 2035, and Illinois of $63.7M which expire at various dates from 2024 to 2025. Management determined a valuation allowance was required against the Illinois net operating loss carryforwards. As of December 31, 2019, the Company had state low income housing tax credit carryforwards of approximately $251,000. The state low income housing tax credits carry forward indefinitely.

Reconciliation between the federal statutory income tax rate and the effective tax rate is shown in the following table:

The Tax Act was enacted into U.S. tax law on December 22, 2017. The Tax Act makes numerous changes to the U.S. tax code, including (although not limited to) reducing the U.S. federal corporate tax rate to 21 percent, eliminating the corporate alternative minimum tax (“AMT”), limiting deductible interest expense, increasing limitations on certain executive compensation, and enhancing bonus depreciation to provide for full expensing of qualified property. On that same date, the SEC staff also issued Staff Accounting Bulletin (“SAB”) 118, which provided guidance regarding financial statement accounting of the Tax Act. SAB 118 provides for the completion of the accounting related effects of the Tax Act in accordance with a measurement period of one year from the Tax Act enactment date.

In 2017, the Company reported certain provisional amounts based on reasonable estimates as permitted under SAB 118 for which the accounting under ASC 740 was incomplete. Upon filing the 2017 income tax returns in 2018, the Company recorded a change of $1.1 million to the provisional amount related to the re-measurement of the ending deferred tax assets and liabilities from 35.0 percent to 21.0 percent. During the fourth quarter of 2018, the Company completed the accounting required under ASC 740.