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, 2016

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,
	2016		2015			2014
	(In thousands)
Unrecognized tax benefits at beginning of year	$	934	$	1,765		$	1,254
Gross increases for tax positions of prior years	105		—			676
Gross decreases for tax positions of prior years	—		—			(165		)
Lapse of statute of limitations	—		(831		)	—
Unrecognized tax benefits at end of year	$	1,039	$	934		$	1,765

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $1.0 million, $0.9 million and $1.8 million as of December 31, 2016, 2015 and 2014, respectively.

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. For the year ended December 31, 2014, unrecognized tax benefits increased by $676,000 related to California Enterprise Zone interest deduction, offset by $165,000 decrease in connection with the tax position related to non-qualified stock option.

In 2016, 2015 and 2014, the Company accrued interest of $33,000, $20,000 and $52,000 for uncertain tax benefits, respectively. As of December 31, 2016, 2015 and 2014, the total amounts of accrued interest related to uncertain tax positions, net of federal tax benefit, were $101,000, $67,000 and $366,000, 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, 2016, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2008 through 2016. As of December 31, 2016, 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 2016, the Company recognized $614,000 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,
	2016		2015		2014
	(In thousands)
Current expense:
Federal	$	19,802	$	14,755	$	21,037
State	6,503		5,084		5,753
Total current expense	26,305		19,839		26,790
Deferred expense (benefit):
Federal	4,410		13,663		(3,597		)
State	2,184		4,680		(333		)
Total deferred expense	6,594		18,343		(3,930		)
Provision for income taxes	$	32,899	$	38,182	$	22,860

Deferred tax assets and liabilities were as follows:



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Deferred tax assets:
Loan and lease loss provision	$	13,932		$	18,205		$	22,676
Depreciation	—			—			3,491
Purchase accounting	7,492			13,156			13,731
Net operating loss carryforward	16,876			21,511			24,435
Unrealized loss on securities available for sale	1,695			859			287
Indemnified assets	1,441			152			—
Tax credit	3,516			3,939			5,853
State taxes	2,231			1,539			1,951
Other	5,726			5,040			9,234
Total deferred tax assets	52,909			64,401			81,658
Deferred tax liabilities:
Mark to market	(3,960		)	(10,469		)	(6,462		)
Depreciation	(396		)	(705		)	—
Purchase accounting	—			—			—
Indemnified assets	—			—			(2,995		)
Other	(1,190		)	(1,132		)	(2,051		)
Total deferred tax liabilities	(5,546		)	(12,306		)	(11,508		)
Valuation Allowance	(1,031		)	—			—
Net deferred tax assets	$	46,332		$	52,095		$	70,150

As of December 31, 2016 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 $5.8 million primarily due 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 December 31, 2015, the Company’s net deferred tax assets decreased by $18.1 million from 2014 due mainly to the reduction in the allowance for loan and lease losses and an increase 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, 2016, management determined that a valuation allowance of $1.0 million was appropriate against certain state net operating losses. 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, 2015, management determined no valuation allowance was required. Therefore the valuation allowance increased $1.0 million in 2016.

As of December 31, 2016, the Company had net operating loss carryforwards of $5.2 million and $236.6 million for federal and state income tax purposes, respectively, which are available to offset future taxable income, if any, through 2033. As of December 31, 2016, the Company had federal and state low income housing tax credit carryforwards of approximately $2.8 million and $440,000, respectively. The federal low income housing tax credits carry forward through 2031 and state low income housing tax credits carry forward indefinitely. The Company also had federal alternative minimum tax credits of $400,000, which 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,
	2016		2015		2014
Federal statutory income tax rate	35.00	%	35.00	%	35.00	%
State taxes, net of federal tax benefits	7.04	%	8.32	%	5.86	%
Tax-exempt municipal securities	(0.26	)%	(0.26	)%	(0.07	)%
Tax credit - federal	(2.50	)%	(2.51	)%	(2.27	)%
Bargain purchase gain	—	%	—	%	(7.03	)%
Other	(2.48	)%	0.95	%	(0.01	)%
Effective tax rate	36.80	%	41.50	%	31.48	%