Income Taxes

The following table presents the components of income tax expense for the years indicated:




($ in thousands)	Year Ended December 31,
($ in thousands)	2017			2016			2015
Current income tax expense (benefit):
Federal	$	120,968		$	63,642		$	(62,829	)
State	72,837			48,558			(4,750		)
Foreign	1,815			1,345			409
Total current income tax expense (benefit)	195,620			113,545			(67,170		)
Deferred income tax expense (benefit):
Federal	40,057			25,296			199,858
State	(6,201		)	1,883			60,437
Foreign	—			(213		)	919
Total deferred income tax expense	33,856			26,966			261,214
Income tax expense	$	229,476		$	140,511		$	194,044

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 $4.8 million, were recognized within Income tax expense on the Consolidated Statement of Income for the year ended December 31, 2017. 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 and $3.3 million for the years ended December 31, 2016 and 2015, respectively.

The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2017, 2016 and 2015:




	Year Ended December 31,
	2017		2016		2015
Federal income tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State franchise taxes, net of federal tax effect	5.9		6.1		6.3
Tax Cuts and Jobs Act of 2017 (the “Tax Act”)	4.5		—		—
Tax credits, net of amortization	(15.1	)	(18.3	)	(8.7	)
Other, net	0.9		1.8		0.9
Effective tax rate	31.2	%	24.6	%	33.5	%

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, expensing 100% of the cost of acquired qualified property after September 27, 2017, transitioning from a worldwide tax system to a territorial system and imposing a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, as well as eliminating any carrybacks of tax credits and net operating losses (“NOLs”) incurred after December 31, 2017. In addition, NOLs incurred after December 31, 2017 are now limited to 80% of taxable income for any given year and 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 must be recognized in the Company’s 2017 Consolidated Financial Statements, even though the effective date of the law for most provisions is January 1, 2018.

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 tax credits and other tax benefits related to qualified affordable housing partnerships of $7.9 million.

The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are presented below:




($ in thousands)	December 31,
	2017												2016
	Federal			State			Foreign			Total			Federal			State			Foreign			Total
Deferred tax assets:
Allowance for loan losses and OREO reserves	$	62,942		$	28,857		$	1,365		$	93,164		$	97,921		$	27,792		$	1,365		$	127,078
Deferred compensation	11,483			5,220			—			16,703			20,093			5,731			—			25,824
Mortgage servicing assets	2,727			1,206			—			3,933			—			—			—			—
Unrealized losses on securities	10,730			5,354			—			16,084			16,253			5,315			—			21,568
State taxes	5,217			—			—			5,217			1,333			—			—			1,333
Interest income on nonaccrual loans	5,396			2,451			—			7,847			4,461			1,258			—			5,719
Other, net	744			5,481			97			6,322			2,053			5,269			97			7,419
Total gross deferred tax assets	99,239			48,569			1,462			149,270			142,114			45,365			1,462			188,941
Valuation allowance	—			(256		)	—			(256		)	—			(283		)	—			(283		)
Total deferred tax assets, net of valuation allowance	$	99,239		$	48,313		$	1,462		$	149,014		$	142,114		$	45,082		$	1,462		$	188,658
Deferred tax liabilities:
Core deposit intangibles	$	(4,408	)	$	(2,117	)	$	—		$	(6,525	)	$	(9,768	)	$	(2,874	)	$	—		$	(12,642	)
Investments in partnerships, tax credit and other investments, net	(10,838		)	7,025			—			(3,813		)	(7,012		)	5,318			—			(1,694		)
Fixed assets	(2,671		)	914			—			(1,757		)	(13,166		)	(3,360		)	—			(16,526		)
Equipment financing	(21,844		)	(3,760		)	—			(25,604		)	(13,240		)	(1,866		)	—			(15,106		)
FHLB stock dividends	(1,285		)	(583		)	—			(1,868		)	(1,189		)	(335		)	—			(1,524		)
Acquired debt	(1,273		)	(578		)	—			(1,851		)	(2,210		)	(623		)	—			(2,833		)
Acquired loans and OREO	(2,252		)	(754		)	(406		)	(3,412		)	(5,407		)	(1,242		)	(406		)	(7,055		)
Prepaid expenses	(4,142		)	(1,517		)	—			(5,659		)	(1,088		)	(251		)	—			(1,339		)
Other, net	(510		)	(609		)	—			(1,119		)	(121		)	(120		)	—			(241		)
Total gross deferred tax liabilities	$	(49,223	)	$	(1,979	)	$	(406	)	$	(51,608	)	$	(53,201	)	$	(5,353	)	$	(406	)	$	(58,960	)
Net deferred tax assets	$	50,016		$	46,334		$	1,056		$	97,406		$	88,913		$	39,729		$	1,056		$	129,698

Deferred taxes of $1.5 million, $16.4 million and $7.5 million related to net unrealized gains or losses on available-for-sale investment securities are recorded as Other comprehensive income on the Consolidated Statement of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015, respectively.

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, 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 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 was recorded for such carryforwards. 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, 2017 and 2016, the Company recorded net deferred tax assets of $97.4 million and $129.7 million, respectively, in Other assets on the Consolidated Balance Sheet.

The following table summarizes the activities related to the Company’s unrecognized tax benefits as of the periods indicated:




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

As of December 31, 2017 and 2016, the balance of the Company’s unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in the future was $8.2 million and $6.8 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 charge (reversal) of $450 thousand, $6.2 million and ($460) thousand of interest and penalties for the years ended December 31, 2017, 2016 and 2015, respectively. Total accrued interest and penalties included in Accrued expenses and other liabilities on the Consolidated Balance Sheet were $8.4 million and $7.9 million as of December 31, 2017 and 2016, respectively.

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, and identifies and resolves 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. Filed in September 2017, the 2016 tax return received a full acceptance of all tax matters from the IRS. The Company has executed a MOU with the IRS for the 2017 to 2018 tax years. For federal tax purposes, tax years from 2013 and beyond remain open. For California franchise tax purposes, tax years from 2009 and beyond remain open. The City of New York initiated an audit of the Company’s corporate income tax return for the 2012 to 2014 tax years in September 2016. 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 further believes that adequate provisions have been recorded for all income tax uncertainties. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly change in the next twelve months.