Income Taxes

12 Months Ended

Dec. 31, 2020

Note 15. Income Taxes

Income tax expense included in net income consisted of the following components:

	Years Ended December 31,
(in thousands)	2020			2019		2018
Included in net income
Current federal	$	(58,723	)	$	12,172	$	7,594
Current state		(132	)		6,087		5,538
Total current provision		(58,855	)		18,259		13,132
Deferred federal		(17,000	)		46,290		41,078
Deferred state		(3,716	)		810		4,136
Total deferred provision		(20,716	)		47,100		45,214
Total included in net income	$	(79,571	)	$	65,359	$	58,346

Income tax expense (benefit) does not reflect the tax effects of amounts recognized in other comprehensive income and in AOCI, a separate component of stockholders’ equity. These amounts include unrealized gains and losses on securities available for sale or transferred to held to maturity, unrealized gains and losses on derivatives and hedging transactions, and valuation adjustments of defined benefit and other post-retirement benefit plans. Refer to Note 13 – Stockholders’ Equity for additional information.

Temporary differences arise between the tax bases of assets or liabilities and their carrying amounts for financial reporting purposes. The expected tax effects from when these differences are resolved are recorded currently as deferred tax assets or liabilities.

Significant components of the Company’s deferred tax assets and liabilities were as follows:

	December 31,
(in thousands)	2020			2019
Deferred tax assets:
Allowance for loan losses	$	111,170		$	47,008
Loan purchase accounting adjustments		1,681			18,717
Tax credit carryforward		5,700			2,025
Federal/state net operating loss		4,462			7,295
Lease liability		29,352			29,003
Other		17,801			7,893
Gross deferred tax assets		170,166			111,941
State valuation allowance		(3,635	)		(1,415	)
Net deferred tax assets	$	166,531		$	110,526
Deferred tax liabilities:
Employee compensation and benefits	$	(10,044	)	$	(9,662	)
Securities		(51,036	)		(9,589	)
Fixed assets & intangibles		(46,762	)		(48,144	)
Lease Financing		(54,581	)		(41,565	)
Right-of-use Asset		(24,872	)		(24,887	)
Other		(28,642	)		(14,400	)
Gross deferred tax liabilities	$	(215,937	)	$	(148,247	)
Net deferred tax asset (liability)	$	(49,406	)	$	(37,721	)

Reported income tax expense (benefit) differed from amounts computed by applying the statutory income tax rate of 21% for the years ended December 31, 2020, 2019 and 2018 to earnings or loss before income taxes. Historically, the primary differences have been due to tax-exempt income, federal and state tax credits and excess tax benefits from stock-based compensation. The year ended December 31, 2020, also includes an incremental 14% tax benefit totaling $30.2 million associated with the five-year carryback of both the current year net operating loss (“NOL”) and the NOL attribute inherited from an acquired entity to a 35% statutory rate tax year, as allowed by provisions of the CARES Act. The current year NOL was primarily attributable to the energy loan sale loss that closed in the third quarter of 2020, along with tax method changes and/or elections made associated with the timing of income recognition and fixed asset related depreciation deductions. One of the tax method changes requires approval from the Internal Revenue Service, which is expected to occur. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets we serve and directed at tax credits issued under the Qualified Zone Academy Bonds (“QZAB”), Qualified School Construction Bonds (“QSCB”), as well as Federal and State New Market Tax Credit (“NMTC”) and Low-Income Housing Tax Credit (“LIHTC”) programs. A summary of the factors that impacted income tax expense follows.

	Years Ended December 31,
	2020							2019							2018
($ in thousands)	Amount			%				Amount			%				Amount			%
Taxes computed at statutory rate	$	(26,196	)		21.0		%	$	82,475			21.0		%	$	80,244			21.0		%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income tax benefit		(1,269	)		1.0				7,204			1.8				8,770			2.3
Tax-exempt interest		(10,444	)		8.4				(10,435	)		(2.7	)			(10,803	)		(2.8	)
Life insurance contracts		(4,857	)		3.9				(3,901	)		(1.0	)			(2,019	)		(0.5	)
Tax credits		(8,072	)		6.5				(10,293	)		(2.6	)			(11,344	)		(3.0	)
Employee share-based compensation		1,351			(1.1	)			(842	)		(0.2	)			(1,380	)		(0.3	)
FDIC assessment disallowance		2,094			(1.7	)			1,895			0.5				2,818			0.7
Return to provision adjustment		(970	)		0.8				(1,459	)		(0.4	)			(9,942	)		(2.6	)
Net operating loss carryback under CARES act		(30,167	)		24.2				—			—				—			—
Other, net		(1,041	)		0.8				715			0.2				2,002			0.5
Income tax expense	$	(79,571	)		63.8		%	$	65,359			16.6		%	$	58,346			15.3		%

At December 31, 2020, the Company had approximately $2.9 million and $2.8 million, respectively, in federal and state tax credit carryforwards that originated in the tax years from 2017 through 2020 and begin expiring in 2024. These carryforwards are primarily

from investments in federal and state NMTC projects. The Company expects to fully utilize these tax credit carryforwards prior to their respective expiration dates.

The Company had approximately $79.0 million in state net operating loss carryforwards that originated in the tax years 2003 through 2020 and begin expiring in 2023. A $58.2 million gross state valuation allowance has been established for all non-bank entity level state NOL carryforwards, which translates to a net $3.6 million valuation allowance in the Company’s deferred tax inventory. The impact of this valuation allowance is not material to the financial statements. For jurisdictions where the Bank is the reporting/filing entity, no state valuation allowance was recorded for year-ended December 31, 2020. The Company expects future operations to generate sufficient taxable income to fully utilize such losses within the respective expiration periods.

The tax benefit of a position taken or expected to be taken in a tax return should be recognized when it is more likely than not that the position will be sustained on its technical merits. The liability for unrecognized tax benefits was immaterial as of December 31, 2020, 2019 and 2018. The Company does not expect the liability for unrecognized tax benefits to change significantly during 2021. The Company recognizes interest and penalties, if any, related to income tax matters in income tax expense, and the amounts recognized during 2020, 2019 and 2018 were insignificant.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Generally, the returns for years prior to 2017 are no longer subject to examination by taxing authorities.

- 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.

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