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, 2015

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,
	2015			2014			2013
	(In thousands)
Unrecognized tax benefits at beginning of year	$	1,765		$	1,254		$	1,254
Gross increases for tax positions of prior years	—			676			—
Gross decreases for tax positions of prior years	—			(165		)	—
Lapse of statute of limitations	(831		)	—			—
Unrecognized tax benefits at end of year	$	934		$	1,765		$	1,254

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $0.9 million, $1.5 million and $1.0 million as of December 31, 2015, 2014 and 2013, respectively.

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. For the year ended December 31, 2013, there was no addition in unrecognized tax benefit except increase in accrued interest.

In 2015, 2014 and 2013, the Company accrued interest of $20,000, $52,000 and $45,000 for uncertain tax benefits, respectively. As of December 31, 2015, 2014 and 2013, the total amounts of accrued interest related to uncertain tax positions, net of federal tax benefit, were $67,000, $366,000 and $403,000, 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, 2015, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2008 through 2015. As of December 31, 2015, the Company was subjected to audit or examination by Internal Revenue Service for the 2013 tax year and California FTB 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.

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



	Year Ended December 31,
	2015		2014			2013
	(In thousands)
Current expense:
Federal	$	14,755	$	21,037		$	12,711
State	5,084		5,753			463
Total current expense	19,839		26,790			13,174
Deferred expense (benefit):
Federal	13,663		(3,597		)	8,197
State	4,680		(333		)	1,403
Total deferred expense	18,343		(3,930		)	9,600
Provision for income taxes	$	38,182	$	22,860		$	22,774

Deferred tax assets and liabilities were as follows:



	Year Ended December 31,
	2015			2014			2013
	(In thousands)
Deferred tax assets:
Loan loss provision	$	27,695		$	47,829		$	27,607
Depreciation	—			3,855			1,180
Purchase accounting	6,955			—			—
Net operating loss carryforward	30,155			33,659			31,140
Unrealized loss on securities available for sale	859			287			7,641
Indemnified assets	236			—			—
Tax credit	4,319			6,777			5,661
Other	5,417			5,563			2,831
Total deferred tax assets	75,636			97,970			76,060
Deferred tax liabilities:
Mark to market	(11,346		)	(7,040		)	(10,112		)
Depreciation	(727		)	—			—
Purchase accounting	—			(3,981		)	(3,083		)
State taxes	(10,198		)	(11,316		)	(8,832		)
Indemnified assets	—			(3,263		)	—
Other	(1,270		)	(2,220		)	(2,145		)
Total deferred tax liabilities	(23,541		)	(27,820		)	(24,172		)
Net deferred tax assets	$	52,095		$	70,150		$	51,888

As of December 31, 2015 the Company's net deferred tax assets, which were primarily the result of net operating loss carryforwards, and the allowance for loan losses, decreased by $18.1 million primarily due to the reduction in the allowance for loan losses and an increase in unrealized gain on securities available for sale. As of December 31, 2014, the Company’s net deferred tax assets increased by $18.3 million from 2013 due mainly to the acquisition of CBI.

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, 2015, management determined that no valuation allowance for deferred tax assets was required, as management believes it was more likely than not that deferred tax assets will be realized principally through future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carry-back to prior years or through the reversal of future temporary taxable differences.

As of December 31, 2015, the Company had net operating loss carryforwards of $15.6 million and $248.2 million for federal and state income tax purposes, respectively, which are available to offset future taxable income, if any, through 2033.

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



	Year Ended December 31,
	2015		2014		2013
Federal statutory income tax rate	35.00	%	35.00	%	35.00	%
State taxes, net of federal tax benefits	8.32	%	5.86	%	4.40	%
Tax-exempt municipal securities	(0.26	)%	(0.07	)%	(0.16	)%
Tax credit - federal	(2.51	)%	(2.27	)%	(1.88	)%
Bargain purchase gain	—	%	(7.03	)%	—	%
Other	0.95	%	(0.01	)%	(0.99	)%
Valuation allowance	—	%	—	%	—	%
Effective tax rate	41.50	%	31.48	%	36.37	%