Income Taxes

12 Months Ended

Dec. 31, 2022

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, 2022, December 31, 2021, and December 31, 2020, were as follows:

(dollars in thousands)	2022			2021		2020
Current:
Federal	$	59,855		$	58,652	$	65,840
State		7,688			10,510		12,066
Total Current		67,543			69,162		77,906
Deferred:
Federal		(3,247	)		2,254		(31,783	)
State		534			766		(10,803	)
Total Deferred		(2,713	)		3,020		(42,586	)
Provision for Income Taxes	$	64,830		$	72,182	$	35,320

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.  Excess tax benefits related to stock options are recorded as a reduction of the provision for income taxes.  The net tax charge recorded directly to consolidated shareholders’ equity was $132.7 million for the year ended December 31, 2022.  The net tax benefit and net tax charge recorded directly to consolidated shareholders’ equity was $26.8 million and $16.2 million for the years ended December 31, 2021, and December 31, 2020, respectively.

Deferred Tax Liabilities and Assets

As of December 31, 2022, and December 31, 2021, significant components of the Company’s deferred tax liabilities and assets were as follows:

	December 31,
(dollars in thousands)	2022			2021
Deferred Tax Liabilities:
Accelerated Depreciation	$	(7,958	)	$	(8,131	)
Accrued Pension Cost		(11,270	)		(11,270	)
Federal Home Loan Bank of Des Moines Stock		(6,597	)		(2,885	)
Lease Transactions		(25,741	)		(37,585	)
Operating Lease Liabilities		(24,469	)		(25,348	)
Investment in Variable Interest Entities		(700	)		(1,657	)
Deferred Loan Fees		(4,798	)		(3,845	)
Originated Mortgage Servicing Rights		(6,008	)		(6,068	)
Other		(909	)		(915	)
Gross Deferred Tax Liabilities		(88,450	)		(97,704	)
Deferred Tax Assets:
Allowance for Credit Losses		40,056			43,348
Minimum Pension Liability		9,046			12,082
Accrued Expenses		20,066			22,416
Postretirement Benefit Obligations		7,005			7,170
Capital Lease Expenses		2,156			2,163
Operating Lease Right-of-Use Assets		26,648			27,360
Restricted Stock		5,988			4,442
Net Unrealized Losses on Investments Securities		147,716			11,868
Deductible State and Local Taxes		2,360			3,239
Low Income Housing Investments		5,349			3,007
Other		5,995			6,089
Gross Deferred Tax Assets Before Valuation Allowance		272,385			143,184
Valuation Allowance		(6,222	)		(3,203	)
Gross Deferred Tax Assets After Valuation Allowance		266,163			139,981
Net Deferred Tax Assets	$	177,713		$	42,277

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 that these assets will be realized through future reversals of existing taxable temporary differences, and there will be sufficient future taxable income exclusive of reversing temporary differences. As of December 31, 2022, and December 31, 2021, the Company carried a valuation allowance of $6.2 million and $3.2 million, respectively, related to the deferred tax assets established in connection with the 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, 2022, 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, 2022, December 31, 2021, and December 31, 2020:

	2022			2021			2020
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		2.08			2.85			0.81
Low-Income Housing Investments		1.60			0.77			0.82
Investment Tax Credits		(0.28	)		(0.35	)		(1.24	)
Bank-Owned Life Insurance		(0.72	)		(0.48	)		(0.82	)
Tax-Exempt Income		(0.20	)		(0.24	)		(0.50	)
Leveraged Lease		(0.84	)		(0.10	)		(0.56	)
Other		(0.33	)		(1.28	)		(0.83	)
Effective Tax Rate		22.31	%		22.17	%		18.68	%

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, 2022, December 31, 2021, and December 31, 2020:

(dollars in thousands)	2022			2021			2020
Unrecognized Tax Benefits at Beginning of Year	$	4,015		$	5,403		$	6,120
Gross Increases, Related to Tax Positions Taken in a Prior Period		1			261			374
Gross Decreases, Related to Tax Positions Taken in a Prior Period		(26	)		(1,285	)		—
Gross Increases, Related to Current Period Tax Positions		226			234			222
Lapse of Statute of Limitations		(520	)		(598	)		(1,313	)
Unrecognized Tax Benefits at End of Year	$	3,696		$	4,015		$	5,403

As of December 31, 2022, and December 31, 2021, $3.7 million and $4.0 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, 2022.

The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes.  The recorded net tax benefit for interest and penalties was $0.1 million for the year ended December 31, 2022.  For the years ended December 31, 2021, and December 31, 2020, the Company recorded a net tax provision of less than $0.1 million for interest and penalties.  As of December 31, 2022, and December 31, 2021, the balance of the accrual for possible interest and penalties was $1.3 million and $1.5 million, respectively.

The federal tax returns for 2019 through 2021 remain subject to examination.  The Company's State of Hawaii income tax returns for 2015 through 2021 remain subject to examination by the taxing authorities.