Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

16. Income Taxes

On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act made many significant amendments to the Internal Revenue Code of 1986, as amended (the “Code”), including reducing the corporate tax rate from 35% to 21%, effective January 1, 2018. GAAP requires that companies record and reflect the impact of the Tax Act in their financial statements for the quarter during which the Tax Act becomes law, even if provisions of the Tax Act become effective at a future date. Accordingly, the Company reported the impact of the Tax Act on its results of operations in its consolidated financial statements for the fourth quarter and year ended December 31, 2017. The reduction in the corporate tax rate under the Tax Act required a one-time revaluation of certain tax-related assets, which resulted in the Company recording $47.6 million in additional income tax expense in our consolidated statements of income in the fourth quarter of 2017.

For the years ended December 31, 2019, 2018 and 2017, the provision for income taxes was comprised of the following:

	Year Ended December 31,
(dollars in thousands)	2019		2018		2017
Current:
Federal	$	56,450	$	69,477	$	101,162
State and local		23,796		27,909		24,595
Total current		80,246		97,386		125,757
Deferred:
Federal		14,047		(2,043)		58,732
State and local		3,013		(1,559)		184
Total deferred		17,060		(3,602)		58,916
Total provision for income taxes	$	97,306	$	93,784	$	184,673

The Company files Federal and state income tax returns for its subsidiaries. The Company’s subsidiary also files income tax returns in Guam and Saipan. The Company had a current income tax receivable due from various jurisdictions of $24.4 million and $25.3 million as of December 31, 2019 and 2018, respectively, for its share of consolidated and combined tax overpayments that had not yet been received.

The components of net deferred income tax assets and liabilities at December 31, 2019 and 2018, were as follows:

	December 31,
(dollars in thousands)	2019		2018
Assets:
Deferred compensation expense	$	56,148	$	56,989
Allowance for loan and lease losses and nonperforming assets		35,195		38,245
Lease liabilities		11,951		—
Investment securities		2,474		45,846
State income taxes		3,338		5,378
Total deferred income tax assets before valuation allowance		109,106		146,458
Valuation allowance		(1,393)		(1,901)
Total deferred income tax assets after valuation allowance		107,713		144,557
Liabilities:
Leases		(14,873)		(10,597)
Deferred income		(16,069)		(15,471)
Lease right-of-use assets		(11,931)		—
Intangible assets		(500)		(788)
Other		(10,570)		(9,852)
Total deferred income tax liabilities		(53,943)		(36,708)
Net deferred income tax assets	$	53,770	$	107,849

Net deferred income tax assets were included in other assets in the consolidated balance sheets as of December 31, 2019 and 2018.

Management evaluated the deferred income tax assets for recoverability by considering negative and positive evidence. Negative evidence included the uncertainty of generating future capital gains and restrictions on the ability to sell low-income housing investments during periods when carrybacks of capital losses are allowed. Positive evidence included the generation of capital gains in the current year and carryback years. Based on the weight of all available evidence, management determined a valuation allowance to offset deferred tax assets related to investments in low-income housing projects that can only be utilized to offset capital gains was required. Management further concluded it is more likely than not that the remaining deferred tax assets will be realized through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, and projected future taxable income. Consequently, the remaining deferred income tax assets are not subject to a valuation allowance.  

The following analysis reconciles the Federal statutory income tax rate to the effective income tax rate for the years ended December 31, 2019, 2018 and 2017:

	Year Ended December 31,
	2019				2018				2017
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Federal statutory income tax expense and rate	$	80,157	21.00	%	$	75,217	21.00	%	$	128,924	35.00	%
State and local taxes, net of federal income tax benefit		21,179	5.55			20,817	5.81			16,106	4.37
Impact of Tax Reform		—	—			—	—			47,598	12.92
Nontaxable income		(3,269)	(0.86)			(2,037)	(0.57)			(4,974)	(1.35)
Other		(761)	(0.20)			(213)	(0.06)			(2,981)	(0.81)
Income tax expense and effective income tax rate	$	97,306	25.49	%	$	93,784	26.18	%	$	184,673	50.13	%

The Company is subject to examination by the Internal Revenue Service (“IRS”) and tax authorities in states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The Company’s 2016 tax returns are currently under IRS examination. In addition, refund claims and tax returns for certain years are being reviewed by state jurisdictions. No material adjustments are anticipated as a result of these examinations and reviews. The Company’s income tax returns for 2016 and subsequent tax years generally remain subject to examination by U.S. federal and foreign jurisdictions, and 2015 and subsequent years are subject to examination by state taxing authorities.

A reconciliation of the amount of unrecognized tax benefits is as follows for the years ended December 31, 2019, 2018 and 2017:

	Year Ended December 31,
	2019						2018						2017
			Interest						Interest						Interest
			and						and						and
(dollars in thousands)	Tax		Penalties		Total		Tax		Penalties		Total		Tax		Penalties		Total
Balance at beginning of year	$	131,570	$	12,524	$	144,094	$	130,619	$	10,660	$	141,279	$	127,085	$	9,965	$	137,050
Additions for current year tax positions		1,038		—		1,038		2,260		—		2,260		2,727		—		2,727
Additions for Reorganization Transactions		—		986		986		—		832		832		—		226		226
Additions for prior years' tax positions:
New uncertain tax positions identified		1,894		—		1,894		—		—		—		—		—		—
Accrual of interest and penalties		—		1,280		1,280		—		1,159		1,159		—		621		621
Other		—		—		—		—		—		—		1,152		—		1,152
Reductions for prior years' tax positions:
Expiration of statute of limitations		(190)		(89)		(279)		(280)		(127)		(407)		(345)		(152)		(497)
Other		—		—		—		(1,029)		—		(1,029)		—		—		—
Balance at December 31,	$	134,312	$	14,701	$	149,013	$	131,570	$	12,524	$	144,094	$	130,619	$	10,660	$	141,279

Included in the balance of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017, was $19.1 million, $16.2 million and $14.9 million, respectively, of unrecognized tax benefits that, if recognized, would impact the effective tax rate.

In connection with the Reorganization Transactions discussed below, the Company recorded unrecognized tax benefits and interest and penalties of $121.4 million and $7.0 million, respectively. Included in the balance of the unrecognized tax benefits as of both December 31, 2019 and 2018, was $93.9 million attributable to tax refund claims with respect to tax years 2005 through 2012 in the State of California. Such refund claims were filed by the Company in 2015, on behalf of the Company and its affiliates, including BOW, concerning the determination of taxes for which no benefit is currently recognized. It is reasonably possible that the amount of unrecognized tax benefits could decrease within the next 12 months by as much as $1.4 million of taxes and $0.9 million of accrued interest and penalties as a result of settlements and the expiration of the statute of limitations in various states.

The Company recognizes interest and penalties attributable to both unrecognized tax benefits and undisputed tax adjustments in the provision for income taxes. For the years ended December 31, 2019, 2018 and 2017, the Company recorded $2.4 million, $1.0 million and $0.7 million, respectively, of net expense attributable to interest and penalties. The Company had a liability of $16.3 million and $13.8 million as of December 31, 2019 and 2018, respectively, accrued for interest and penalties, of which $14.7 million and $12.5 million as of December 31, 2019 and 2018, respectively, were attributable to unrecognized tax benefits and the remainder was attributable to tax adjustments which are not expected to be in dispute.

Prior to the Reorganization Transactions, the Company filed consolidated U.S. Federal and combined state tax returns that incorporated the tax receivables and unrecognized tax benefits of FHB and BOW. The consummation of the Reorganization Transactions did not relieve the Company of the pre-Reorganization Transactions tax receivables and unrecognized tax benefits recognized by BOW that were included in the Company's consolidated and combined tax returns. As a result, on April 1, 2016, the Company recorded $72.8 million related to current tax receivables, $116.6 million related to unrecognized tax benefits, and an indemnification payable of $28.6 million. As of both December 31, 2019 and 2018, the Company maintained balances of $93.1 million related to current tax receivables. As of December 31, 2019 and 2018, the Company maintained balances of $118.1  million and $117.3 million, respectively, related to unrecognized tax benefits, and an indemnification receivable of  $25.0 million and $24.2 million, respectively. Additionally, in connection with the Reorganization Transactions, the Company has incurred certain tax-related liabilities related to the distribution of its interest in BWHI amounting to $95.4 million. The amount necessary to pay the distribution taxes (net of the expected federal tax benefit of $33.4 million) was paid by BNPP to the Company on April 1, 2016. The Company reported total

distribution taxes of $92.1 million in the 2016 tax returns of various state and local jurisdictions, and reimbursed BWHI approximately $2.1 million pursuant to a tax sharing agreement entered into on April 1, 2016 and pursuant to certain tax allocation agreements entered into among the parties. The Company expects that any future adjustment to such taxes will be similarly reimbursed to, or funded by, BWHI or its affiliates. Accordingly, the assumption of the pre-Reorganization Transactions tax receivables, unrecognized tax benefits and distribution tax liabilities and the offsetting indemnification receivables or payables were reflected as equity contributions and distributions on April 1, 2016. The reimbursement of distribution taxes to BWHI was also reflected as an adjustment to equity. If there are any future adjustments to the indemnified tax receivables or unrecognized tax benefits, including as a result of the IRS audit of the Company’s 2016 income tax returns, an offsetting adjustment to the indemnification receivables or payables will be recorded to the provision for income taxes and other noninterest income or expense. For the years ended December 31, 2019, 2018 and 2017, the Company recorded nil, $1.5 million and $3.9 million, respectively, of such adjustments through the provision for income taxes and noninterest income.