Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 16.  Income Taxes

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, were as follows:

(dollars in thousands)	2020			2019			2018
Current:
Federal	$	65,840		$	60,902		$	45,464
State		12,066			14,426			11,434
Total Current		77,906			75,328			56,898
Deferred:
Federal		(31,783	)		(9,630	)		(2,172	)
State		(10,803	)		(5,785	)		(4,102	)
Total Deferred		(42,586	)		(15,415	)		(6,274	)
Provision for Income Taxes	$	35,320		$	59,913		$	50,624

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 $16.2 million and $7.1 million for the year ended December 31, 2020, and December 31, 2019, respectively.  The net tax benefit recorded directly to consolidated shareholders’ equity was $3.2 million for the year ended December 31, 2018.

Deferred Tax Liabilities and Assets

As of December 31, 2020, and December 31, 2019, significant components of the Company’s deferred tax liabilities and assets were as follows:

	December 31,
(dollars in thousands)	2020			2019
Deferred Tax Liabilities:
Accelerated Depreciation	$	(8,042	)	$	(4,064	)
Accrued Pension Cost		(11,270	)		(11,270	)
Federal Home Loan Bank Stock		(3,416	)		(3,416	)
Lease Transactions		(41,726	)		(48,487	)
Operating Lease Right-of-Use Assets		(26,387	)		(26,731	)
Energy Tax Credits		(674	)		(2,370	)
Net Unrealized Gains on Investments Securities		(18,407	)		(2,751	)
Investment in Variable Interest Entities		(2,725	)		(3,783	)
Deferred Loan Fees		(4,736	)		(6,498	)
Originated Mortgage Servicing Rights		(5,579	)		(6,840	)
Other		(1,124	)		(1,597	)
Gross Deferred Tax Liabilities		(124,086	)		(117,807	)
Deferred Tax Assets:
Allowance for Credit Losses		57,840			30,951
Minimum Pension Liability		13,430			13,980
Accrued Expenses		17,629			18,159
Postretirement Benefit Obligations		7,980			8,130
Capital Lease Expenses		2,168			2,171
Operating Lease Liabilities		28,473			28,685
Restricted Stock		3,669			4,369
Deductible State and Local Taxes		3,366			3,558
Low Income Housing Investments		3,648			2,157
Other		6,204			6,236
Gross Deferred Tax Assets Before Valuation Allowance		144,407			118,396
Valuation Allowance		(3,597	)		(2,460	)
Gross Deferred Tax Assets After Valuation Allowance		140,810			115,936
Net Deferred Tax Assets (Liabilities)	$	16,724		$	(1,871	)

Both positive and negative evidence were 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/ carryforwards 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. As of December 31, 2020, and December 31, 2019, we carried a valuation allowance of $3.6 million and $2.5 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.

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, 2020, 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, 2020, December 31, 2019, and December 31, 2018:

	2020			2019			2018
Statutory Federal Income Tax Rate		21.00	%		21.00	%		21.00	%
Increase (Decrease) in Income Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax		0.81			2.53			2.29
Tax Reserve Adjustments		0.07			(0.03	)		—
Low-Income Housing Investments- Federal		0.82			0.60			0.22
Investment Tax Credits- Federal		(1.24	)		(0.84	)		(1.04	)
Bank-Owned Life Insurance		(0.82	)		(0.51	)		(0.55	)
Tax-Exempt Income		(0.50	)		(0.53	)		(1.29	)
Excess Tax Benefits - Stock Compensation		(0.07	)		(0.22	)		(0.34	)
Leveraged Lease		(0.56	)		(1.54	)		(0.83	)
Tax Reform Effects		—			—			(0.75	)
Other		(0.83	)		0.50			0.02
Effective Tax Rate		18.68	%		20.96	%		18.73	%

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, 2020, December 31, 2019, and December 31, 2018:

(dollars in thousands)	2020			2019			2018
Unrecognized Tax Benefits at Beginning of Year	$	6,120		$	5,541		$	5,292
Gross Increases, Related to Tax Positions Taken in a Prior Period		374			673			157
Gross Increases, Related to Current Period Tax Positions		222			715			885
Lapse of Statute of Limitations		(1,313	)		(809	)		(793	)
Unrecognized Tax Benefits at End of Year	$	5,403		$	6,120		$	5,541

As of December 31, 2020, and December 31, 2019, $5.4 million and $6.1 million, respectively, in liabilities for UTBs were 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, 2020.

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 year ended December 31, 2020, the Company recorded a net tax provision of less than $0.1 million for interest and penalties.  For the years ended December 31, 2019, and December 31, 2018, the Company recorded a net tax benefit of less than $0.5 million and a net tax benefit of less than $0.1 million, respectively, for interest and penalties.  As of December 31, 2020, and December 31, 2019, the Company had accrued $1.5 million and $1.4 million, respectively, for the payment of possible interest and penalties.

The federal tax returns for 2017 through 2019 remain subject to examination.  The Company's State of Hawaii income tax returns for 2017 through 2019 remain subject to examination by the taxing authorities.