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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

Note 16.  Income Taxes

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, were as follows:

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2019

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

58,652

 

 

$

65,840

 

 

$

60,902

 

State

 

 

10,510

 

 

 

12,066

 

 

 

14,426

 

Total Current

 

 

69,162

 

 

 

77,906

 

 

 

75,328

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

2,254

 

 

 

(31,783

)

 

 

(9,630

)

State

 

 

766

 

 

 

(10,803

)

 

 

(5,785

)

Total Deferred

 

 

3,020

 

 

 

(42,586

)

 

 

(15,415

)

Provision for Income Taxes

 

$

72,182

 

 

$

35,320

 

 

$

59,913

 

 

The tax effects of fair value adjustments on AFS investment securities, the amortization of unrealized gains and losses related to investment securities transferred to HTM, and the minimum pension liability adjustment are recorded directly to consolidated shareholders’ equity.  The Company elected to adopt ASU No. 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the first quarter of 2017, which requires the Company to record excess tax benefits related to stock options as a reduction of the provision for income taxes, whereas they were previously recognized in equity.  The net tax benefit recorded directly to consolidated shareholders’ equity was $26.8 million for the year ended December 31, 2021.  The net tax charge recorded directly to consolidated shareholders’ equity was $16.2 million and $7.1 million for the year ended December 31, 2020, and December 31, 2019, respectively.

Deferred Tax Liabilities and Assets

As of December 31, 2021, and December 31, 2020, significant components of the Company’s deferred tax liabilities and assets were as follows:

 

 

December 31,

 

(dollars in thousands)

 

2021

 

 

2020

 

Deferred Tax Liabilities:

 

 

 

 

 

 

 

 

Accelerated Depreciation

 

$

(8,131

)

 

$

(8,042

)

Accrued Pension Cost

 

 

(11,270

)

 

 

(11,270

)

Federal Home Loan Bank of Des Moines Stock

 

 

(2,885

)

 

 

(3,416

)

Lease Transactions

 

 

(37,585

)

 

 

(41,726

)

Operating Lease Liabilities

 

 

(25,348

)

 

 

(26,387

)

Energy Tax Credits

 

 

—

 

 

 

(674

)

Net Unrealized Gains on Investments Securities

 

 

—

 

 

 

(18,407

)

Investment in Variable Interest Entities

 

 

(1,657

)

 

 

(2,725

)

Deferred Loan Fees

 

 

(3,845

)

 

 

(4,736

)

Originated Mortgage Servicing Rights

 

 

(6,068

)

 

 

(5,579

)

Other

 

 

(915

)

 

 

(1,124

)

Gross Deferred Tax Liabilities

 

 

(97,704

)

 

 

(124,086

)

Deferred Tax Assets:

 

 

 

 

 

 

 

 

Allowance for Credit Losses

 

 

43,348

 

 

 

57,840

 

Minimum Pension Liability

 

 

12,082

 

 

 

13,430

 

Accrued Expenses

 

 

22,416

 

 

 

17,629

 

Postretirement Benefit Obligations

 

 

7,170

 

 

 

7,980

 

Capital Lease Expenses

 

 

2,163

 

 

 

2,168

 

Operating Lease Right-of-Use Assets

 

 

27,360

 

 

 

28,473

 

Restricted Stock

 

 

4,442

 

 

 

3,669

 

Net Unrealized Losses on Investments Securities

 

 

11,868

 

 

 

—

 

Deductible State and Local Taxes

 

 

3,239

 

 

 

3,366

 

Low Income Housing Investments

 

 

3,007

 

 

 

3,648

 

Other

 

 

6,089

 

 

 

6,204

 

Gross Deferred Tax Assets Before Valuation Allowance

 

 

143,184

 

 

 

144,407

 

Valuation Allowance

 

 

(3,203

)

 

 

(3,597

)

Gross Deferred Tax Assets After Valuation Allowance

 

 

139,981

 

 

 

140,810

 

Net Deferred Tax Assets

 

$

42,277

 

 

$

16,724

 

 

Both positive and negative evidence were considered by management in determining the need for a valuation allowance.  Negative evidence included the uncertainty regarding the generation of capital gains in future years and restrictions on the ability to sell low-income housing investments during periods when carrybacks/carryforwards of capital losses are allowed.  Positive evidence included capital gains in the carryback years.  After considering all available evidence, management determined that a valuation allowance to offset deferred tax assets related to low-income housing investments that can only be used to offset capital gains was appropriate.  Management determined that a valuation allowance was not required for the remaining deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing taxable temporary differences, and there will be sufficient future taxable income exclusive of reversing temporary differences. As of December 31, 2021, and December 31, 2020, the Company carried a valuation allowance of $3.2 million and $3.6 million, respectively, related to the deferred tax assets established in connection with the low-income housing investments.

Certain events covered by Internal Revenue Code Section 593(e) will trigger a recapture of base year reserves of acquired thrift institutions.  The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes.  The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, shareholders.  As of December 31, 2021, retained earnings included $18.2 million of base year reserves for which the deferred federal income tax liability of $4.8 million has not been recognized.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2021, December 31, 2020, and December 31, 2019:

 

 

 

2021

 

 

2020

 

 

2019

 

Statutory Federal Income Tax Rate

 

 

21.00

%

 

 

21.00

%

 

 

21.00

%

Increase (Decrease) in Income Tax Rate Resulting From:

 

 

 

 

 

 

 

 

 

 

 

 

State Taxes, Net of Federal Income Tax

 

 

2.85

 

 

 

0.81

 

 

 

2.53

 

Low-Income Housing Investments

 

 

0.77

 

 

 

0.82

 

 

 

0.60

 

Investment Tax Credits

 

 

(0.35

)

 

 

(1.24

)

 

 

(0.84

)

Bank-Owned Life Insurance

 

 

(0.48

)

 

 

(0.82

)

 

 

(0.51

)

Tax-Exempt Income

 

 

(0.24

)

 

 

(0.50

)

 

 

(0.53

)

Leveraged Lease

 

 

(0.10

)

 

 

(0.56

)

 

 

(1.54

)

Other

 

 

(1.28

)

 

 

(0.83

)

 

 

0.25

 

Effective Tax Rate

 

 

22.17

%

 

 

18.68

%

 

 

20.96

%

 

Unrecognized Tax Benefits

The Company is required to record a liability, referred to as an unrecognized tax benefit (“UTB”), for the entire amount of benefit taken in a prior or future income tax return when the Company determines that a tax position has a less than 50% likelihood of being accepted by the taxing authority.  The following presents a reconciliation of the Company’s liability for UTBs for the years ended December 31, 2021, December 31, 2020, and December 31, 2019:

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2019

 

Unrecognized Tax Benefits at Beginning of Year

 

$

5,403

 

 

$

6,120

 

 

$

5,541

 

Gross Increases, Related to Tax Positions Taken in a Prior Period

 

 

261

 

 

 

374

 

 

 

673

 

Gross Decreases, Related to Tax Positions Taken in a Prior Period

 

 

(1,285

)

 

 

—

 

 

 

—

 

Gross Increases, Related to Current Period Tax Positions

 

 

234

 

 

 

222

 

 

 

715

 

Lapse of Statute of Limitations

 

 

(598

)

 

 

(1,313

)

 

 

(809

)

Unrecognized Tax Benefits at End of Year

 

$

4,015

 

 

$

5,403

 

 

$

6,120

 

 

As of December 31, 2021, and December 31, 2020, $4.0 million and $5.4 million, respectively, in liabilities for UTBs were related to UTBs that if reversed would have an impact on the Company’s effective tax rate.

Management believes that it is reasonably possible that the Company’s liability for UTBs could further decrease as a result of the expiration of statutes of limitations within the next 12 months.  However, management is currently not able to estimate a range of possible change in the amount of the liability for UTBs recorded as of December 31, 2021.

The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes.  The recorded net tax benefit for interest and penalties was less than $0.1 million for the year ended December 31, 2021.  For the years ended, December 31, 2020 and December 31, 2019, the Company recorded a net tax provision of less than $0.1 million and $0.5 million, respectively, for interest and penalties.  As of December 31, 2021, and December 31, 2020, the balance of the accrual for possible interest and penalties was $1.5 million.

The federal tax returns for 2018 through 2020 remain subject to examination.  The Company's State of Hawaii income tax returns for 2016 through 2020 remain subject to examination by the taxing authorities.