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Income Taxes
 12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2019, December 31, 2018, and December 31, 2017, were as follows:
(dollars in thousands)
2019

 
2018

 
2017

Current:
 
 
 
 
 
Federal
$
60,902

 
$
45,464

 
$
73,176

State
14,426

 
11,434

 
6,039

Total Current
75,328

 
56,898

 
79,215

Deferred:
 
 
 
 
 
Federal
(9,630
)
 
(2,172
)
 
5,042

State
(5,785
)
 
(4,102
)
 
(865
)
Total Deferred
(15,415
)
 
(6,274
)
 
4,177

Provision for Income Taxes
$
59,913

 
$
50,624

 
$
83,392



The tax effects of fair value adjustments on AFS investment securities, the amortization of unrealized gains and losses related to investment securities transferred to HTM, and the minimum pension liability adjustment are recorded directly to consolidated shareholders’ equity. The Company elected to adopt ASU No. 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the first quarter of 2017, which requires the Company to record excess tax benefits related to stock options as a reduction of the provision for income taxes, whereas they were previously recognized in equity. The net tax charge recorded directly to consolidated shareholders’ equity was $7.1 million for the year ended December 31, 2019. The net tax benefit recorded directly to consolidated shareholders’ equity was $3.2 million and $0.5 million for the years ended December 31, 2018, and December 31, 2017, respectively.

Deferred Tax Liabilities and Assets

As of December 31, 2019, and December 31, 2018, significant components of the Company’s deferred tax liabilities and assets were as follows:
 
December 31,
(dollars in thousands)
2019

 
2018

Deferred Tax Liabilities:
 
 
 
Accelerated Depreciation
$
(4,064
)
 
$
(2,864
)
Accrued Pension Cost
(11,270
)
 
(11,270
)
Federal Home Loan Bank Stock
(3,416
)
 
(3,416
)
Lease Transactions
(48,487
)
 
(53,230
)
Operating Lease Liabilities
(26,731
)
 
—

Energy Tax Credits
(2,370
)
 
(5,274
)
Net Unrealized Gains on Investments Securities
(2,751
)
 
—

Investment in Variable Interest Entities
(3,783
)
 
(4,574
)
Deferred Loan Fees
(6,498
)
 
(6,688
)
Originated Mortgage Servicing Rights
(6,840
)
 
(6,548
)
Other
(1,597
)
 
(1,420
)
Gross Deferred Tax Liabilities
(117,807
)
 
(95,284
)
Deferred Tax Assets:
 
 
 
Allowance for Loan Losses
30,951

 
30,045

Minimum Pension Liability
13,980

 
12,989

Accrued Expenses
18,159

 
14,805

Postretirement Benefit Obligations
8,130

 
8,396

Capital Lease Expenses
2,171

 
2,172

Operating Lease Right-of-Use Assets
28,685

 
—

Restricted Stock
4,369

 
5,178

Net Unrealized Losses on Investments Securities
—

 
5,421

Deductible State and Local Taxes
3,558

 
3,242

Low Income Housing Investments
2,157

 
805

Other
6,236

 
4,244

Gross Deferred Tax Assets Before Valuation Allowance
118,396

 
87,297

Valuation Allowance
(2,460
)
 
(1,102
)
Gross Deferred Tax Assets After Valuation Allowance
115,936

 
86,195

Net Deferred Tax Liabilities
$
(1,871
)
 
$
(9,089
)


Both positive and negative evidence was considered by management in determining the need for a valuation allowance. Negative evidence included the uncertainty regarding the generation of capital gains in future years and restrictions on the ability to sell low-income housing investments during periods when carrybacks of capital losses are allowed. Positive evidence included capital gains in the carryback years. After considering all available evidence, management determined that a valuation allowance to offset deferred tax assets related to low-income housing investments that can only be used to offset capital gains was appropriate. Management determined that a valuation allowance was not required for the remaining deferred tax assets because it is more likely than not these assets will be realized through future reversals of existing taxable temporary difference and future taxable income exclusive of reversing temporary differences. The Tax Act prohibits the carryback of net operating losses (NOLs) generated in tax year ending after December 31, 2017. This eliminated consideration of taxable income in prior carryback years as an income source for prospective NOLs.

Certain events covered by Internal Revenue Code Section 593(e) will trigger a recapture of base year reserves of acquired thrift institutions. The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, shareholders. As of December 31, 2019, retained earnings included $18.2 million of base year reserves for which the deferred federal income tax liability of $4.8 million has not been recognized.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2019, December 31, 2018, and December 31, 2017:
 
2019

 
2018

 
2017

Statutory Federal Income Tax Rate
21.00
 %
 
21.00
 %
 
35.00
 %
Increase (Decrease) in Income Tax Rate Resulting From:
 
 
 
 
 
State Taxes, Net of Federal Income Tax
2.53

 
2.29

 
1.50

Tax Reserve Adjustments1
(0.03
)
 
—

 
0.04

Low-Income Housing Investments
0.60

 
0.22

 
(1.18
)
Investment Tax Credits
(0.84
)
 
(1.04
)
 
(1.03
)
Bank-Owned Life Insurance
(0.51
)
 
(0.55
)
 
(0.85
)
Tax-Exempt Income
(0.53
)
 
(1.29
)
 
(2.57
)
Excess Tax Benefits - Stock Compensation
(0.22
)
 
(0.34
)
 
(0.83
)
Leveraged Lease
(1.54
)
 
(0.83
)
 
(0.03
)
Tax Reform Effects
—

 
(0.75
)
 
1.25

Other1
0.50

 
0.02

 
(0.19
)
Effective Tax Rate
20.96
 %
 
18.73
 %
 
31.11
 %

1 Certain prior period information has been reclassified to conform to current presentation.

The Tax Cuts and Jobs Act changed the corporate tax rate from 35% to 21%, effective January 1, 2018.  The impact on deferred tax assets and liabilities was recognized as an additional income tax expense of $3.6 million in the fourth quarter of 2017, when the act was signed into law.  

Unrecognized Tax Benefits

The Company is required to record a liability, referred to as an unrecognized tax benefit (“UTB”), for the entire amount of benefit taken in a prior or future income tax return when the Company determines that a tax position has a less than 50% likelihood of being accepted by the taxing authority. The following presents a reconciliation of the Company’s liability for UTBs for the years ended December 31, 2019, December 31, 2018, and December 31, 2017:
(dollars in thousands)
2019

 
2018

 
2017

Unrecognized Tax Benefits at Beginning of Year
$
5,541

 
$
5,292

 
$
6,574

Gross Increases, Related to Tax Positions Taken in a Prior Period
673

 
157

 
273

Gross Increases, Related to Current Period Tax Positions
715

 
885

 
1,124

Lapse of Statute of Limitations
(809
)
 
(793
)
 
(2,679
)
Unrecognized Tax Benefits at End of Year
$
6,120

 
$
5,541

 
$
5,292



As of December 31, 2019, and December 31, 2018, $6.1 million and $5.5 million, respectively, in liabilities for UTBs was related to UTBs that if reversed would have an impact on the Company’s effective tax rate.

Management believes that it is reasonably possible that the Company’s liability for UTBs could further decrease as a result of the expiration of statutes of limitations within the next 12 months. However, management is currently not able to estimate a range of possible change in the amount of the liability for UTBs recorded as of December 31, 2019.

The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes. For the years ended December 31, 2019, the Company recorded a net tax provision of $0.5 million for interest and penalties. For the year ended December 31, 2018, and December 31, 2017, the Company recorded a net tax benefit of less than $0.1 million, respectively, for interest and penalties. As of December 31, 2019, and December 31, 2018, the Company had accrued $1.4 million and $0.9 million, respectively, for the payment of possible interest and penalties.

The federal tax returns for 2017 through 2018 remain subject to examination. The IRS audit for tax year 2016 concluded with no change needed to the tax return. The Company's State of Hawaii income tax returns for 2016 through 2018 remain subject to examination by the taxing authorities.