Hanmi Financial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

In accordance with the provisions of FASB 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:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
Unrecognized tax benefits at beginning of year	$	1,039	$	934	$	1,765
Gross increases for tax positions of prior years	—		105		—
Lapse of statute of limitations	—		—		(831		)
Unrecognized tax benefits at end of year	$	1,039	$	1,039	$	934

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $1.0 million, $1.0 million and $0.9 million as of December 31, 2017, 2016 and 2015, respectively.

For the year ended December 31, 2017, unrecognized tax benefits in connection with California Enterprise Zone interest deductions did not change. For the year ended December 31, 2016, unrecognized tax benefits increased by $105,000 in connection with California Enterprise Zone interest deductions. For the year ended December 31, 2015, unrecognized tax benefits decreased by $831,000 in connection with the tax position taken on expense related to Section 195 and FRB Stock dividend.

In 2017, 2016 and 2015, the Company accrued interest of $34,000, $33,000 and $20,000 for uncertain tax benefits, respectively. As of December 31, 2017, 2016 and 2015, the total amounts of accrued interest related to uncertain tax positions, net of federal tax benefit, were $132,000, $101,000 and $67,000, 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 the related tax liability line on the Consolidated Balance Sheets.

Unrecognized tax benefit primarily includes state exposures from California Enterprise Zone interest deductions. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.

As of December 31, 2017, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2008 through 2017. As of December 31, 2017, the Company was subjected to audit or examination by Internal Revenue Service for the 2013 and 2014 tax years and California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements due to the result of the audits.

The Company adopted ASU 2016-09, Compensation - Stock Compensation. In accordance with this standard the Company recognizes excess tax benefits as income tax expense or benefit in the income statement. During 2017 and 2016, the Company recognized $1.8 million and $614,000, respectively, of income tax deductions due to excess tax benefits arising from exercises and vesting.

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



	Year Ended December 31,
	2017			2016		2015
	(In thousands)
Current expense:
Federal	$	20,924		$	19,802	$	14,755
State	6,804			6,503		5,084
Total current expense	27,728			26,305		19,839
Deferred expense (benefit):
Federal	14,623			4,410		13,663
State	(1,727		)	2,184		4,680
Total deferred expense	12,896			6,594		18,343
Provision for income taxes	$	40,624		$	32,899	$	38,182

Deferred tax assets and liabilities were as follows:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	9,282		$	13,932		$	18,205
Depreciation	192			—			—
Purchase accounting	4,685			7,492			13,156
Net operating loss carryforward	18,648			16,876			21,511
Unrealized loss on securities available for sale	919			1,695			859
Indemnified assets	701			1,441			152
Tax credit	1,241			3,516			3,939
State taxes	1,489			2,231			1,539
Other	3,724			5,726			5,040
Total deferred tax assets	40,881			52,909			64,401
Deferred tax liabilities:
Mark to market	(4,879		)	(3,960		)	(10,469		)
Depreciation	—			(396		)	(705		)
Other	(797		)	(1,190		)	(1,132		)
Total deferred tax liabilities	(5,676		)	(5,546		)	(12,306		)
Valuation Allowance	(2,750		)	(1,031		)	—
Net deferred tax assets	$	32,455		$	46,332		$	52,095

As of December 31, 2017 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 $13.9 million from 2016 primarily due to the reduction in the allowance for loan and lease losses, tax credits and the impact of the reduction to the federal tax rate resulting from the Tax Act. As of December 31, 2016, the Company’s net deferred tax assets decreased by $5.8 million from 2015 due mainly to the reduction in the allowance for loan and lease losses, net operating loss carryforwards and purchase accounting, offset by a reduction in mark to market.

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, 2017, management determined that a valuation allowance of $2.8 million was appropriate against certain state net operating losses and certain 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, 2016, management determined a valuation allowance of $1.0 million was appropriate against certain state net operating losses and certain tax credits.

As of December 31, 2017, the Company had net operating loss carryforwards of $223.0 million state income tax purposes, which are available to offset future taxable income, if any, through 2033. As of December 31, 2017, the Company had federal and state low income housing tax credit carryforwards of approximately $1.0 million and $200,000, respectively. The federal low income housing tax credits carry forward through 2031 and 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:



	Year Ended December 31,
	2017		2016		2015
Federal statutory income tax rate	35.00	%	35.00	%	35.00	%
State taxes, net of federal tax benefits	6.64	%	7.04	%	8.32	%
Tax-exempt municipal securities	(0.24	)%	(0.26	)%	(0.26	)%
Tax credit - federal	(2.37	)%	(2.50	)%	(2.51	)%
Federal rate adjustment, net of federal benefit of state	4.18	%	—	%	—	%
Other	(0.58	)%	(2.48	)%	0.95	%
Effective tax rate	42.63	%	36.80	%	41.50	%

The Tax Cuts and Jobs Act (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 effects 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.

Those aspects of the Tax Act for which the accounting under ASC 740 is complete is to be reflected in the financial statements under SAB 118. To the extent that the company's accounting for certain income taxes effects of the Tax Act is incomplete, however where a reasonable estimate is determinable, SAB 118 provides that a provisional estimate should be included in the financial statements. Finally, if a provisional estimate cannot be determined, a company should continue to apply ASC 740 based on the tax laws that were in effect immediately before the enactment of the Tax Act. The amounts described below are subject to revisions as the Company completes its analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, or IRS, FASB, and other standard- setting and regulatory bodies.

For certain of its deferred tax assets and liabilities, the Company has recorded a decrease of $3.9 million, with a corresponding net adjustment to deferred income tax expense of $3.9 million for the year ended December 31, 2017, which relates to the remeasurement of deferred balances for the reduction in US federal corporate tax rate.