Note 22 - Income Taxes

The components of consolidated income tax expense are as follows:

 

		2015				2014				2013
		(in thousands)
Current tax expense
Federal		$	21,076			$	14,485			$	11,618
State			7,139				5,016				4,261
			28,215				19,501				15,879
Deferred tax expense (benefit)
Federal			408				(794	)			1,976
State			273				(199	)			550
			681				(993	)			2,526
Total tax expense		$	28,896			$	18,508			$	18,405

A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense for financial and tax reporting purposes. The net change during the year in the deferred tax asset or liability results in a deferred tax expense or benefit.

Taxes recorded directly to shareholders’ equity are not included in the preceding table. These taxes (benefits) relating to changes in unfunded status of the supplemental retirement plans amounting to $904,000 in 2015, $(2,984,000) in 2014, and $1,269,000 in 2013, taxes (benefits) related to unrealized gains and losses on available-for-sale investment securities amounting to $(797,000) in 2015, $(68,000) in 2014, and $(1,780,000) in 2013, taxes (benefits) related to employee stock options of $479,000 in 2105, $97,000 in 2014, and $138,000 in 2013, were recorded directly to shareholders’ equity.

The Company recognized $354,000 of tax credits and other tax benefits relating to our investments in Qualified Affordable Housing Projects for the year ended December 31, 2015. The amortization expense related to our investment in Qualified Affordable Housing Projects for the year ended December 31, 2015 was $277,000. Prior to 2015, the Company had no investments in Qualified Affordable Housing Projects.

The carrying value of Low Income Housing Tax Credit Funds as of December 31, 2015 was $4,223,000. As of December 31, 2015, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of $3,330,000, and these contributions are expected to be made over the next several years.

The temporary differences, tax effected, which give rise to the Company’s net deferred tax asset recorded in other assets are as follows as of December 31 for the years indicated:

 

		2015				2014
		(in thousands)
Deferred tax assets:
Allowance for losses and reserve for unfunded commitments		$	16,182			$	16,284
Deferred compensation			2,827				3,115
Accrued pension liability			8,597				7,925
Accrued bonus			1,326				1,149
Other accrued expenses			143				124
Unfunded status of the supplemental retirement plans			2,411				3,315
State taxes			2,297				1,713
Share based compensation			2,701				2,534
Nonaccrual interest			1,979				2,714
OREO write downs			241				198
Acquisition cost basis			5,118				6,017
Tax credits			491				490
Net operating loss carryforwards			5,252				7,128
Other			889				625
Total deferred tax assets			50,454				53,331
Deferred tax liabilities:
Securities income			(1,362	)			(1,362	)
Unrealized gain on securities			(902	)			(1,699	)
Depreciation			(2,654	)			(3,072	)
Merger related fixed asset valuations			(54	)			(54	)
Securities accretion			(485	)			(287	)
Mortgage servicing rights valuation			(3,118	)			(2,977	)
Indemnification asset			219				147
Core deposit intangible			(2,331	)			(2,802	)
Junior subordinated debt			(2,699	)			(2,782	)
Prepaid expenses and other			(628	)			(737	)
Total deferred tax liability			(14,014	)			(15,625	)
Net deferred tax asset		$	36,440			$	37,706

 

As part of the merger with North Valley in 2014, TriCo acquired federal and state net operating loss carryforwards, capital loss carryforwards, and tax credit carryforwards. These tax attribute carryforwards will be subject to provisions of the tax law that limit the use of such losses and credits generated by a company prior to the date certain ownership changes occur. The amount of the Company’s net operating loss carryforwards that would be subject to these limitations as of December 31, 2015 were $9.2 million and $30.7 million for federal and California, respectively. The amount of the Company’s capital loss carryforwards that would be subject to these limitations as of December 31, 2015 were $78,000 and $356,000 for federal and California, respectively. The amount of the Company’s tax credits that would be subject to these limitations as of December 31, 2015 are $69,000 and $2.7 million for federal and California, respectively. Due to the limitation, a significant portion of the state tax credits will expire regardless of whether the Company generates future taxable income. As such, the Company has recorded the future benefit of these tax credits on the books at the value which is more likely than not to be realized. These tax loss and tax credit carryforwards expire at various dates beginning in 2018.

The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, including the tax attribute carryforwards acquired as part of the North Valley merger.

As part of the North Valley merger, TriCo inherited an unrecognized tax benefit for tax positions claimed on prior year tax returns filed by North Valley. The Company had an unrecognized tax benefit of $182,000 as of December 31, 2015, the recognition of which would reduce the Company’s tax expense by $116,000. Management does not expect the unrecognized tax benefit will materially change in the next 12 months. A summary of changes in the Company’s unrecognized tax benefit (including interest and penalties) in 2015 is as follows:

 

(in thousands)		UTB				Interest/Penalties				Total
As of December 31, 2014			227				18				245
Lapse of the applicable statute of limitations			(59	)			(4	)			(63	)
As of December 31, 2015			168				14				182

During the year ended December 31, 2015 and December 31, 2014, the Company recognized no interest and penalties related to taxes. The Company files income tax returns in the U.S. federal jurisdiction, and California. With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years before 2012 and 2011, respectively.

The provisions for income taxes applicable to income before taxes for the years ended December 31, 2015, 2014 and 2013 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as follows:

 

		Years Ended December 31,
		2015				2014				2013
Federal statutory income tax rate			35.0	%			35.0	%			35.0	%
State income taxes, net of federal tax benefit			6.6				7.0				6.8
Tax-exempt interest on municipal obligations			(0.7	)			(0.4	)			(0.4	)
Tax-exempt life insurance related income			(1.3	)			(1.5	)			(1.3	)
Non-deductible joint beneficiary agreement expense			0.1				0.2				0.2
Non-deductible merger expense			—				1.0				—
Other			—				0.2				(0.1	)
Effective Tax Rate			39.7	%			41.5	%			40.2	%