Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following table presents the components of income tax expense/benefit for the years ended December 31, 2020, 2019 and 2018:

($ in thousands)	Year Ended December 31,
	2020		2019		2018
Current income tax expense (benefit):
Federal	$	84,560	$	107,393	$	63,035
State	74,252		86,578		64,917
Foreign	671		(2,485)		3,513
Total current income tax expense	159,483		191,486		131,465
Deferred income tax (benefit) expense:
Federal	(28,093)		(8,801)		(11,870)
State	(11,671)		(16,390)		(4,600)
Foreign	(1,751)		3,587		—
Total deferred income tax benefit	(41,515)		(21,604)		(16,470)
Income tax expense	$	117,968	$	169,882	$	114,995

The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2020, 2019 and 2018:

	Year Ended December 31,
	2020		2019		2018
Statutory U.S. federal tax rate	21.0	%	21.0	%	21.0	%
U.S. state income taxes, net of U.S. federal income tax effect	7.2		7.1		5.8
Tax credits and benefits, net of related expenses	(12.4)		(6.8)		(12.7)
Other, net	1.4		(1.2)		(0.1)
Effective tax rate	17.2	%	20.1	%	14.0	%

Income tax expense was $118.0 million, and the effective tax rate was 17.2% for the year ended December 31, 2020, compared with income tax expense of $169.9 million, and an effective tax rate of 20.1% for the year ended December 31, 2019. Income tax expense was $115.0 million and the effective tax rate was 14.0% for the year ended December 31, 2018. For the year ended December 31, 2020, income tax expense included $5.1 million in uncertain tax position related to the Company’s investment in DC Solar. The higher effective tax rate for the year ended December 31, 2019 was primarily due to $30.1 million of additional income tax expense recorded to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar.

The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities as of December 31, 2020 and 2019 are presented below:

($ in thousands)	December 31,
	2020		2019
Deferred tax assets:
Allowance for loan losses	$	192,534	$	109,903
Investments in qualified affordable housing partnerships, tax credit and other investments, net	11,174		11,190
Deferred compensation	23,604		23,816
Interest income on nonaccrual loans	5,909		9,527
State taxes	273		5,848
Premises and equipment	2,096		1,578
Lease liability	30,554		35,948
Other	1,441		965
Total gross deferred tax assets	267,585		198,775
Valuation allowance	—		(21)
Total deferred tax assets, net of valuation allowance	$	267,585	$	198,754
Deferred tax liabilities:
Equipment lease financing	$	29,990	$	30,669
Investments in qualified affordable housing partnerships, tax credit and other investments, net	14,912		12,301
Core deposit intangibles	1,934		3,032
FHLB stock dividends	1,855		1,854
Mortgage servicing assets	1,675		1,839
Acquired debt	1,597		1,679
Prepaid expenses	1,194		1,100
Premises and equipment	99		1,890
Unrealized gains/losses on securities	21,593		890
Operating lease right-of-use assets	28,468		34,313
Other	453		2,700
Total gross deferred tax liabilities	$	103,770	$	92,267
Net deferred tax assets	$	163,815	$	106,487

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 considers 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. 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 net operating losses (“NOL”) carryforwards. As of December 31, 2020, management released $21 thousand of valuation allowance provided as of December 31, 2019, which related to the state NOL carryforwards. No additional valuation allowance was recorded as of December 31, 2020.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018:

($ in thousands)	Year Ended December 31,
	2020		2019		2018
Beginning balance	$	—	$	4,378	$	10,419
Additions for tax positions related to prior years	5,045		30,103		—
Deductions for tax positions related to prior years	—		(34,481)		(3,969)
Settlements with taxing authorities	—		—		(2,072)
Ending balance	$	5,045	$	—	$	4,378

The Company believes that adequate provisions have been recorded for all income tax uncertainties consistent with the standards of ASC 740-10. The increase in unrecognized tax benefits for the year ended December 31, 2020 was mainly attributable to the additional income expenses recorded related to DC Solar investments, as well as a minor state adjustment. The Company recognizes interest and penalties, as 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 charge of $564 thousand of interest for the year ended December 31, 2020. In comparison, a reversal of $6.3 million and $2.0 million of interest and penalties was recorded for the years ended December 31, 2019 and 2018, respectively. Total accrued interest included in Accrued expenses and other liabilities on the Consolidated Balance Sheet was $564 thousand as of December 31, 2020. There was no liability for accrued interest and penalties as of December 31, 2019.

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 for the 2019 tax year. For federal tax purposes, the IRS had completed the 2017 and earlier tax years’ corporate income tax return examination. For the 2020 tax year, the Company was accepted by IRS as a CAP Bridge Year. The Company is also currently being audited by the state of Missouri and California and the City of New York. 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, 2020.

Impact of Investment in DC Solar Tax Credit Funds

Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. Between fiscal year 2014 and 2018, the Company had invested in four DC Solar energy tax credit funds and claimed tax credits of approximately $53.9 million, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact of $48.2 million to the Consolidated Financial Statements.

ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. A subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the latest quarterly reporting date. A change in judgment that results in a subsequent derecognition or change in measurement of a tax position is recognized as a discrete item in the period in which the change occurs.

In February 2019, an affidavit from a FBI special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to have been received by DC Solar might not have existed. The Company, in coordination with other fund investors, engaged an unaffiliated third-party inventory firm to investigate the actual number of mobile solar generators in existence. Based on the inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information, as well as management’s best judgments regarding the future settlement of the related tax positions with the IRS, the Company concluded that a portion of the previously claimed tax credits would be recaptured. During the year ended December 31, 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense. In December 2020, the Company recorded an additional $5.1 million income tax expense regarding DC Solar investments.

The Company continues to conduct an ongoing investigation related to this matter. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 7 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 2 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.