Income Taxes

The following table presents the components of income tax expense for the years ended December 31, 2018, 2017 and 2016:




($ in thousands)	Year Ended December 31,
($ in thousands)	2018			2017			2016
Current income tax expense:
Federal	$	63,035		$	120,968		$	63,642
State	64,917			72,837			48,558
Foreign	3,513			1,815			1,345
Total current income tax expense	131,465			195,620			113,545
Deferred income tax (benefit) expense:
Federal	(11,870		)	40,057			25,296
State	(4,600		)	(6,201		)	1,883
Foreign	—			—			(213		)
Total deferred income tax (benefit) expense	(16,470		)	33,856			26,966
Income tax expense	$	114,995		$	229,476		$	140,511

Upon exercise or vesting of a share-based award, if the tax deduction exceeds the compensation cost that was previously recorded for financial statement purposes, this will result in an excess tax benefit. Effective January 1, 2017, the Company adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result of the adoption of this new guidance, all excess tax benefits on share-based payment awards, which amounted to $5.1 million and $4.8 million, were recognized in Income tax expense on the Consolidated Statement of Income for the years ended December 31, 2018 and 2017, respectively. Prior to the adoption of ASU 2016-09, any excess tax benefits were recognized in Additional paid-in capital on the Consolidated Statement of Changes in Stockholders’ Equity to offset current-period and subsequent-period tax deficiencies. Hence, the preceding table does not include these excess tax benefits recorded directly to the Consolidated Statement of Changes in Stockholders’ Equity of $1.1 million for the year ended December 31, 2016.

The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2018, 2017 and 2016:




	Year Ended December 31,
	2018		2017		2016
Federal income tax provision at statutory rate	21.0	%	35.0	%	35.0	%
State franchise taxes, net of federal tax effect	5.8		5.9		6.1
Tax Cuts and Jobs Act of 2017 (the “Tax Act”)	0.1		4.5		—
Tax credits, net of amortization	(13.3	)	(15.1	)	(18.3	)
Other, net	0.4		0.9		1.8
Effective tax rate	14.0	%	31.2	%	24.6	%

On December 22, 2017, the Tax Act was signed into law, resulting in significant changes to the Internal Revenue Code. Changes include, but are not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018; allowing the expensing of 100% of the cost of acquired qualified property placed in service after September 27, 2017; transitioning from a worldwide tax system to a territorial system; imposing a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminating the carrybacks of tax credits and net operating losses (“NOLs”) incurred after December 31, 2017. In addition, NOLs incurred after December 31, 2017 cannot offset more than 80% of taxable income for any future year, but may be carried forward indefinitely. ASC 740, Income Taxes, requires companies to recognize the effect of the Tax Act in the period of enactment. Hence, such effects were recognized in the Company’s 2017 Consolidated Financial Statements, even though the effective date of the law for most provisions is January 1, 2018.

Based on reasonable estimates, the Company recorded $41.7 million of income tax expense in the fourth quarter of 2017 related to the impact of the Tax Act, the period in which the legislation was enacted. 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 during the same period 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.

The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities as of December 31, 2018 and 2017 are presented below:




($ in thousands)	December 31,
	2018												2017
	Federal			State			Foreign			Total			Federal			State			Foreign			Total
Deferred tax assets:
Allowance for loan losses and OREO reserves	$	66,510		$	30,366		$	1,366		$	98,242		$	62,942		$	28,857		$	1,365		$	93,164
Tax credit carryforwards	24,116			2,715			—			26,831			—			—			—			—
Unrealized losses on securities	13,127			7,106			—			20,233			10,730			5,354			—			16,084
Deferred compensation	13,081			5,919			—			19,000			11,483			5,220			—			16,703
Interest income on nonaccrual loans	5,922			2,680			—			8,602			5,396			2,451			—			7,847
State taxes	4,898			—			—			4,898			5,217			—			—			5,217
Mortgage servicing assets	1,406			605			—			2,011			2,727			1,206			—			3,933
Fixed assets	(1,047		)	1,932			—			885			—			—			—			—
Other, net	2,027			5,422			97			7,546			744			5,481			97			6,322
Total gross deferred tax assets	130,040			56,745			1,463			188,248			99,239			48,569			1,462			149,270
Valuation allowance	—			(128		)	—			(128		)	—			(256		)	—			(256		)
Total deferred tax assets, net of valuation allowance	$	130,040		$	56,617		$	1,463		$	188,120		$	99,239		$	48,313		$	1,462		$	149,014
Deferred tax liabilities:
Equipment financing	$	(26,040	)	$	(4,483	)	$	—		$	(30,523	)	$	(21,844	)	$	(3,760	)	$	—		$	(25,604	)
Investments in qualified affordable housing partnerships, tax credit and other investments, net	(31,098		)	3,806			—			(27,292		)	(10,838		)	7,025			—			(3,813		)
Core deposit intangibles	(3,048		)	(1,494		)	—			(4,542		)	(4,408		)	(2,117		)	—			(6,525		)
Acquired loans and OREO	(1,293		)	(318		)	(406		)	(2,017		)	(2,252		)	(754		)	(406		)	(3,412		)
FHLB stock dividends	(1,285		)	(581		)	—			(1,866		)	(1,285		)	(583		)	—			(1,868		)
Acquired debt	(1,219		)	(552		)	—			(1,771		)	(1,273		)	(578		)	—			(1,851		)
Prepaid expenses	(831		)	(376		)	—			(1,207		)	(4,142		)	(1,517		)	—			(5,659		)
Fixed assets	—			—			—			—			(2,671		)	914			—			(1,757		)
Other, net	(923		)	(338		)	—			(1,261		)	(510		)	(609		)	—			(1,119		)
Total gross deferred tax liabilities	$	(65,737	)	$	(4,336	)	$	(406	)	$	(70,479	)	$	(49,223	)	$	(1,979	)	$	(406	)	$	(51,608	)
Net deferred tax assets	$	64,303		$	52,281		$	1,057		$	117,641		$	50,016		$	46,334		$	1,056		$	97,406

Deferred tax benefits of $3.6 million, $1.5 million and $16.4 million related to net unrealized losses on available-for-sale investment securities are recorded as changes in AOCI for the years ended December 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2017, the AOCI was not adjusted to reflect the impact of the Tax Act on the remeasurement of deferred tax assets arising from these net unrealized losses, which was recognized in income tax expense. This resulted in stranded tax effects within the AOCI related to available-for-sale investment securities not reflecting the appropriate new tax rate (which is 21%). During the first quarter of 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.

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 considered 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. Apart from this factor, 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 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 $128 thousand and $256 thousand was recorded for such carryforwards as of December 31, 2018 and 2017, respectively. The Company believes that adequate provisions have been made for all income tax uncertainties consistent with the standards of ASC 740-10. As of December 31, 2018 and 2017, the Company recorded net deferred tax assets of $117.6 million and $97.4 million, respectively, in Other assets on the Consolidated Balance Sheet.

The following table presents the activities related to the Company’s unrecognized tax position for the years ended December 31, 2018, 2017 and 2016:




($ in thousands)	Year Ended December 31,
($ in thousands)	2018			2017		2016
Beginning Balance	$	10,419		$	10,419	$	7,125
Additions for tax positions related to prior years	—			—		5,819
Deductions for tax positions related to prior years	(3,969		)	—		—
Settlements with taxing authorities	(2,072		)	—		(2,525		)
Ending Balance	$	4,378		$	10,419	$	10,419

As of December 31, 2018 and 2017, the balance of the Company’s unrecognized tax position that, if recognized, would favorably affect the effective tax rate in the future was $3.5 million and $8.2 million, respectively. The Company recognizes interest and penalties, if 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 $(2.0) million, $450 thousand and $6.2 million of interest and penalties for the years ended December 31, 2018, 2017 and 2016, respectively. Total accrued interest and penalties included in Accrued expenses and other liabilities on the Consolidated Balance Sheet were $6.3 million and $8.4 million as of December 31, 2018 and 2017, respectively.

The foreign provision for income taxes is based on foreign pre-tax earnings of $14.1 million, $7.3 million and $4.5 million for the years ended 2018, 2017 and 2016, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. All of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by the Company’s subsidiary organized in China. As of December 31, 2018, U.S. income taxes have not been provided on a cumulative total of $52.3 million of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $6.2 million.

Beginning with its 2012 tax year, the Company has executed a Memorandum of Understanding (“MOU”) with the Internal Revenue Service (“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 through 2019 tax year. For federal tax purposes, the IRS had completed the 2017 and earlier tax years’ corporate income tax return examination. In addition, the state of California had initiated an audit of the Company’s corporate income tax return for the 2014 tax year as of December 31, 2018. 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, 2018. The Company is also evaluating the possibility of recording an uncertain tax position liability in 2019 with regards to its investments in mobile solar generators sold and managed by DC Solar and its affiliates (“DC Solar”). For further information, see Note 23 — Subsequent Events.