Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

16. Income Taxes

For the years ended December 31, 2020, 2019 and 2018, the provision (benefit) for income taxes was comprised of the following:

	Year Ended December 31,
(dollars in thousands)	2020		2019		2018
Current:
Federal	$	55,535	$	56,450	$	69,477
State and local		21,831		23,796		27,909
Total current		77,366		80,246		97,386
Deferred:
Federal		(10,638)		14,047		(2,043)
State and local		(8,758)		3,013		(1,559)
Total deferred		(19,396)		17,060		(3,602)
Total provision for income taxes	$	57,970	$	97,306	$	93,784

The Company files Federal and state income tax returns for its subsidiaries. The Company’s subsidiary also files income tax returns in Guam, Saipan and certain other state jurisdictions. The Company had a current income tax receivable due from various jurisdictions of $19.0 million and $24.4 million as of December 31, 2020 and 2019, 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, 2020 and 2019, were as follows:

	December 31,
(dollars in thousands)	2020		2019
Assets:
Deferred compensation expense	$	57,727	$	56,148
Allowance for credit losses and nonperforming assets		63,899		35,195
Lease liabilities		10,839		11,951
Investment securities		—		2,474
State income taxes		4,243		3,338
Total deferred income tax assets before valuation allowance		136,708		109,106
Valuation allowance		(1,675)		(1,393)
Total deferred income tax assets after valuation allowance		135,033		107,713
Liabilities:
Leases		(18,583)		(14,873)
Investment securities		(19,965)		—
Deferred income		(11,399)		(16,069)
Lease right-of-use assets		(10,736)		(11,931)
Intangible assets		(604)		(500)
Other		(19,222)		(10,570)
Total deferred income tax liabilities		(80,509)		(53,943)
Net deferred income tax assets	$	54,524	$	53,770

Net deferred income tax assets were included in other assets in the consolidated balance sheets as of December 31, 2020 and 2019.

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, 2020, 2019 and 2018:

	Year Ended December 31,
	2020				2019				2018
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Federal statutory income tax expense and rate	$	51,182	21.00	%	$	80,157	21.00	%	$	75,217	21.00	%
State and local taxes, net of federal income tax benefit		10,327	4.24			21,179	5.55			20,817	5.81
Tax credits		(3,914)	(1.60)			(400)	(0.10)			(61)	(0.02)
Nontaxable income		(3,678)	(1.51)			(3,269)	(0.86)			(2,037)	(0.57)
Other		4,053	1.66			(361)	(0.10)			(152)	(0.04)
Income tax expense and effective income tax rate	$	57,970	23.79	%	$	97,306	25.49	%	$	93,784	26.18	%

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 2010, 2011, 2016 and 2017 first short-period 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 2017 and subsequent tax years generally remain subject to examination by U.S. federal and foreign jurisdictions, and 2016 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, 2020, 2019 and 2018:

	Year Ended December 31,
	2020						2019						2018
			Interest						Interest						Interest
			and						and						and
(dollars in thousands)	Tax		Penalties		Total		Tax		Penalties		Total		Tax		Penalties		Total
Balance at beginning of year	$	134,312	$	14,701	$	149,013	$	131,570	$	12,524	$	144,094	$	130,619	$	10,660	$	141,279
Additions for current year tax positions		1,426		—		1,426		1,038		—		1,038		2,260		—		2,260
Additions for Reorganization Transactions		—		1,479		1,479		—		986		986		—		832		832
Additions for prior years' tax positions:
New uncertain tax positions identified		—		—		—		1,894		—		1,894		—		—		—
Accrual of interest and penalties		—		2,812		2,812		—		1,280		1,280		—		1,159		1,159
Other		—		—		—		—		—		—		—		—		—
Reductions for prior years' tax positions:
Expiration of statute of limitations		(143)		(66)		(209)		(190)		(89)		(279)		(280)		(127)		(407)
Other		—		—		—		—		—		—		(1,029)		—		(1,029)
Balance at December 31,	$	135,595	$	18,926	$	154,521	$	134,312	$	14,701	$	149,013	$	131,570	$	12,524	$	144,094

Included in the balance of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018, was $22.2 million, $19.1 million and $16.2 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 December 31, 2020 and 2019, 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 $2.4 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, 2020, 2019 and 2018, the Company recorded $4.4 million, $2.4 million and $1.0 million, respectively, of net expense attributable to interest and penalties. The Company had a liability of $20.6 million and $16.3 million as of December 31, 2020 and 2019, respectively, accrued for interest and penalties, of which $18.9 million and $14.7 million as of December 31, 2020 and 2019, 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, 2020 and 2019, the Company maintained balances of $93.1 million related to current tax receivables. As of December 31, 2020 and 2019, the Company maintained balances of $119.3  million and $118.1 million, respectively, related to unrecognized tax benefits, and an indemnification receivable of  $26.1 million and $25.0 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 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, 2020, 2019 and 2018, the Company recorded $1.2 million, nil and $1.5 million, respectively, of such adjustments through the provision for income taxes and noninterest income.