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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Impact of Tax Cuts and Jobs Act of 2017 On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted, resulting in significant changes to the Internal Revenue Code. U.S. GAAP requires companies to recognize the effect of tax law changes on deferred tax assets and liabilities and other recognized assets in the period of enactment. In December 2017, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No.118 (“SAB 118”). SAB 118 allows the recording of a provisional estimate to reflect the income tax impact of the U.S. tax legislation and provides a measurement period up to one year from the enactment date. During the year ended December 31, 2017, the Company recorded $41.7 million in income tax expense related to the impact of the Tax Act, of which this amount was primarily related to the remeasurements of certain deferred tax assets and liabilities of $33.1 million, as well as the remeasurements of tax credits and other tax benefits related to qualified affordable housing partnerships of $7.9 million. During the year ended December 31, 2018, management finalized its assessment of the initial impact of the Tax Act, which resulted in an increase in income tax expense of $985 thousand ensuing from the remeasurement of deferred tax assets and liabilities. The overall impact of the Tax Act was a one-time increase in income tax expense of $42.7 million. Impact of Investment in DC Solar Tax Credit Funds Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. Between 2014 and 2018, the Company had invested in four DC Solar energy tax credit funds and claimed tax credits of approximately $53.9 million, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact of $48.2 million to the Consolidated Financial Statements. ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. A subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the latest quarterly reporting date. A change in judgment that results in a subsequent derecognition or change in measurement of a tax position is recognized as a discrete item in the period in which the change occurs. In February 2019, an affidavit from a FBI special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to have been received by DC Solar might not have existed. The Company, in coordination with other fund investors, engaged an unaffiliated third-party inventory firm to investigate the actual number of mobile solar generators in existence. Based on the inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information, as well as management’s best judgments regarding the future settlement of the related tax positions with the Internal Revenue Service (“IRS”), the Company concluded that a portion of the previously claimed tax credits would be recaptured. During the year ended December 31, 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense. The Company continues to conduct an ongoing investigation related to this matter. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K. The following table presents the components of income tax expense for the years ended December 31, 2019, 2018 and 2017:
($ in thousands) |  | Year Ended December 31,
| 2019 |  | 2018 |  | 2017
Current income tax expense (benefit): |  |  |  |  |  |
Federal |  | $ | 107,393 |  |  | $ | 63,035 |  |  | $ | 120,968 |
State |  | 86,578 |  |  | 64,917 |  |  | 72,837 |
Foreign |  | (2,485 | ) |  | 3,513 |  |  | 1,815 |
Total current income tax expense |  | 191,486 |  |  | 131,465 |  |  | 195,620 |
Deferred income tax (benefit) expense: |  |  |  |  |  |
Federal |  | (8,801 | ) |  | (11,870 | ) |  | 40,057 |
State |  | (16,390 | ) |  | (4,600 | ) |  | (6,201 | )
Foreign |  | 3,587 |  |  | — |  |  | — |
Total deferred income tax (benefit) expense |  | (21,604 | ) |  | (16,470 | ) |  | 33,856 |
Income tax expense |  | $ | 169,882 |  |  | $ | 114,995 |  |  | $ | 229,476 |
The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2019, 2018 and 2017:
|  | Year Ended December 31,
| 2019 |  | 2018 |  | 2017
Statutory U.S. federal tax rate |  | 21.0 | % |  | 21.0 | % |  | 35.0 | %
U.S. state income taxes, net of U.S. federal income tax effect |  | 7.1 |  |  | 5.8 |  |  | 5.9 |
The Tax Act |  | — |  |  | 0.1 |  |  | 4.5 |
Tax credits and affordable housing, net of amortization |  | (10.4 | ) |  | (13.3 | ) |  | (15.1 | )
Other, net |  | 2.4 |  |  | 0.4 |  |  | 0.9 |
Effective tax rate |  | 20.1 | % |  | 14.0 | % |  | 31.2 | %
The 6.1% increase in effective tax rate to 20.1% in 2019, from 14.0% in 2018 was primarily due to the $30.1 million of income tax expense recorded to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar, as well as $14.7 million decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit projects. The 2018 effective income tax rate reflected the reduction to the U.S. federal income tax rate from 35% to 21% resulting from the Tax Act. The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities as of December 31, 2019 and 2018 are presented below:
($ in thousands) |  | December 31,
| 2019 |  | 2018
Deferred tax assets: |  |  |  |
Allowance for loan losses |  | $ | 109,903 |  |  | $ | 96,876 |
Investments in qualified affordable housing partnerships, tax credit and other investments, net |  | 11,190 |  |  | 3,691 |
Deferred compensation |  | 23,816 |  |  | 18,724 |
Interest income on nonaccrual loans |  | 9,527 |  |  | 8,602 |
State taxes |  | 5,848 |  |  | 4,506 |
Unrealized gains/losses on securities |  | 324 |  |  | 20,233 |
Tax credit carryforwards |  | — |  |  | 26,831 |
Premises and equipment |  | 1,578 |  |  | 1,887 |
Deferred gain |  | — |  |  | 4,476 |
Lease liability |  | 35,948 |  |  | 2,604 |
Other |  | 641 |  |  | 6,178 |
Total gross deferred tax assets |  | 198,775 |  |  | 194,608 |
Valuation allowance |  | (21 | ) |  | (128 | )
Total deferred tax assets, net of valuation allowance |  | $ | 198,754 |  |  | $ | 194,480 |
Deferred tax liabilities: |  |  |  |
Equipment lease financing |  | $ | 30,669 |  |  | $ | 30,523 |
Investments in qualified affordable housing partnerships, tax credit and other investments, net |  | 12,301 |  |  | 30,706 |
Core deposit intangibles |  | 3,032 |  |  | 4,427 |
FHLB stock dividends |  | 1,854 |  |  | 1,866 |
Mortgage servicing assets |  | 1,839 |  |  | 2,390 |
Acquired debt |  | 1,679 |  |  | 1,771 |
Prepaid expenses |  | 1,100 |  |  | 1,207 |
Premises and equipment |  | 1,890 |  |  | 1,078 |
Operating lease right-of-use assets |  | 34,313 |  |  | — |
Other |  | 3,590 |  |  | 2,872 |
Total gross deferred tax liabilities |  | $ | 92,267 |  |  | $ | 76,840 |
Net deferred tax assets |  | $ | 106,487 |  |  | $ | 117,640 |
The tax benefits of deductible temporary differences and tax carryforwards are recorded as an asset to the extent that management assesses the utilization of such temporary differences and carryforwards to be more-likely-than-not. A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more-likely-than-not to be realized. Evidence the Company considers includes the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes), and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company expects to have sufficient taxable income in future years to fully realize its deferred tax assets. The Company also performed an overall assessment by weighing all positive evidence against all negative evidence and concluded that it is more-likely-than-not that all of the benefits of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state net operating losses (“NOL”) carryforwards. For states other than California, Georgia, Massachusetts and New York, because management believes that the state NOL carryforwards may not be fully utilized, a valuation allowance of $21 thousand and $128 thousand was recorded for such carryforwards as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company recorded net deferred tax assets of $106.5 million and $117.6 million, respectively, in Other assets on the Consolidated Balance Sheet. In 2018, the Company early adopted ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits companies to reclassify the stranded tax effects resulting from the Tax Act from AOCI to retained earnings on a retrospective basis. The adoption of the guidance resulted in a cumulative-effect adjustment as of January 1, 2018 that increased retained earnings by $6.7 million and reduced AOCI by the same amount. For additional information refer to Note 19 — Accumulated Other Comprehensive Income (Loss). The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:
($ in thousands) |  | Year Ended December 31,
| 2019 |  | 2018 |  | 2017
Beginning balance |  | $ | 4,378 |  |  | $ | 10,419 |  |  | $ | 10,419 |
Additions for tax positions related to prior years |  | 30,103 |  |  | — |  |  | — |
Deductions for tax positions related to prior years |  | (34,481 | ) |  | (3,969 | ) |  | — |
Settlements with taxing authorities |  | — |  |  | (2,072 | ) |  | — |
Ending balance |  | $ | — |  |  | $ | 4,378 |  |  | $ | 10,419 |
The Company believes that adequate provisions have been made for all income tax uncertainties consistent with the standards of ASC 740-10. The Company recognizes interest and penalties, as applicable, related to the underpayment of income taxes as a component of Income tax expense on the Consolidated Statement of Income. The Company recorded a (reversal) charge of $(6.3) million, $(2.0) million and $450 thousand of interest and penalties for the years ended December 31, 2019, 2018 and 2017, respectively. Total accrued interest and penalties included in Accrued expenses and other liabilities on the Consolidated Balance Sheet was $6.3 million as of December 31, 2018. There was no liability for accrued interest and penalties as of December 31, 2019. Beginning with its 2012 tax year, the Company has executed a Memorandum of Understanding (“MOU”) with the IRS to voluntarily participate in the IRS Compliance Assurance Process (“CAP”). Under the CAP, the IRS audits the tax position of the Company to identify and resolve any tax issues that may arise throughout the tax year. The objective of the CAP is to resolve issues in a timely and contemporaneous manner and eliminate the need for a lengthy post-filing examination. The Company has executed a MOU with the IRS for the 2019 tax year. For federal tax purposes, the IRS had completed the 2017 and earlier tax years’ corporate income tax return examination. The state of Oregon is also conducting an audit of the Company’s corporate income tax return for the 2017 tax year and the City of New York is auditing the Company’s corporate income tax return for the 2015 and 2016 tax years. In addition, the state of New York has initiated an audit of the Company’s 2016 to 2018 corporate income tax returns. The Company does not believe that the outcome of unresolved issues or claims in any tax jurisdiction is likely to be material to the Company’s financial position, cash flows or results of operations. The Company believes that adequate provisions have been recorded for all income tax uncertainties consistent with ASC 740, Income Taxes as of December 31, 2019.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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