Income Taxes

12 Months Ended

Dec. 31, 2019



NOTE 12 – INCOME TAXES

The components of the provision for income taxes are as follows:



	2019			2018			2017
	(in thousands)
Current tax expense:
Federal	$	32,610		$	35,783		$	19,553
State	5,204			5,352			2,617
	37,814			41,135			22,170
Deferred tax (benefit) expense:
Federal	(1,271		)	(16,841		)	39,885
State	1,106			283			646
	(165		)	(16,558		)	40,531
Total income tax expense	$	37,649		$	24,577		$	62,701

The differences between the effective income tax rate and the federal statutory income tax rate are as follows:



	2019		2018		2017
Statutory tax rate	21.0	%	21.0	%	35.0	%
Tax credit investments	(4.6	)	(6.1	)	(7.8	)
Tax-exempt income	(3.9	)	(4.1	)	(6.6	)
Bank owned life insurance	(0.4	)	(0.4	)	(0.4	)
State income taxes, net of federal benefit	0.2		2.0		(0.5	)
Change in valuation allowance	1.8		(0.1	)	1.2
Re-measurement of net deferred tax asset due to the Tax Act	—		(0.3	)	6.7
Executive compensation	—		0.1		0.1
Other, net	0.2		(1.6	)	(1.0	)
Effective income tax rate	14.3	%	10.5	%	26.7	%

The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:



	2019			2018
	(in thousands)
Deferred tax assets:
Tax credit carryforwards	$	43,133		$	27,615
Allowance for credit losses	37,081			37,906
State loss carryforwards	16,324			11,605
Other accrued expenses	8,797			7,232
Deferred compensation	7,752			7,064
Tax credit investments	6,799			4,529
Stock-based compensation	2,930			2,743
Postretirement and defined benefit plans	599			5,079
OTTI	462			1,803
Unrealized holding losses on securities	—			12,489
Other	3,784			3,855
Total gross deferred tax assets	127,661			121,920
Deferred tax liabilities:
Equipment lease financing	42,273			31,466
MSRs	8,686			8,560
Premises and equipment	6,282			3,579
Acquisition premiums/discounts	5,266			5,294
Unrealized holding gains on securities available for sale	4,223			—
Intangible assets	1,136			1,292
Other	12,387			12,178
Total gross deferred tax liabilities	80,253			62,369
Net deferred tax asset, before valuation allowance	47,408			59,551
Valuation allowance	(16,324		)	(11,605		)
Net deferred tax asset	$	31,084		$	47,946

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment.

The valuation allowance relates to state deferred tax assets and net operating loss carryforwards for which realizability is uncertain. As of December 31, 2019 and 2018, the Corporation had state net operating loss carryforwards of approximately $392.0 million and $347.3 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2038.

Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, as of December 31, 2019.

As of December 31, 2019, the Corporation had tax credit carryforwards related to TCIs of approximately $43 million. The corporation recorded a deferred tax asset of $43.1 million, reflecting the benefit of these tax credit carryforwards. Such deferred tax asset will begin to expire in 2038 if not yet utilized.

Uncertain Tax Positions

The following table summarizes the changes in unrecognized tax benefits for the years ended December 31:



	2019			2018			2017
	(in thousands)
Balance at beginning of year	$	2,726		$	2,550		$	2,438
Current period tax positions	292			593			523
Lapse of statute of limitations	(501		)	(417		)	(411		)
Balance at end of year	$	2,517		$	2,726		$	2,550

Virtually all of the Corporation’s unrecognized tax benefits are for positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year.

Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position. These offsetting increases and decreases are likely to continue in the future, including over the next twelve months. While the net effect on total unrecognized tax benefits during this period cannot be reasonably estimated, approximately $460,000 is expected to reverse in 2020 due to lapsing of the statute of limitations. Decreases can also occur throughout the settlement of positions with taxing authorities.

As of December 31, 2019, if recognized, all of the Corporation’s unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $549,000 of federal income tax benefit on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized approximately $22,000 and $59,000 in 2019 and 2018, respectively, for interest and penalties in income tax expense related to unrecognized tax positions. As of December 31, 2019 and 2018, total accrued interest and penalties related to unrecognized tax positions were approximately $697,000 and $675,000, respectively.

The Corporation files income tax returns in the federal and various state jurisdictions. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2016.

Tax Credit Investments ("TCIs")

The TCIs are included in other assets, with any unfunded equity commitments recorded in other liabilities on the consolidated balance sheets. Certain TCIs qualify for the proportional amortization method and are amortized over the period the Corporation expects to receive the tax credits, with the expense included within income taxes on the consolidated statements of income. Other TCIs are accounted for under the equity method of accounting, with amortization included within non-interest expense on the consolidated statements of income. This amortization includes equity in partnership losses and the systematic write-down of investments over the period in which income tax credits are earned. All of the TCIs are evaluated for impairment at the end of each reporting period.

The following table presents the balances of the Corporation's TCIs and related unfunded commitments as of December 31:



		2019		2018
Included in other assets:		(in thousands)
Affordable housing tax credit investments, net		$	153,351	$	170,401
Other tax credit investments, net		64,354		72,584
	Total TCIs, net	$	217,705	$	242,985
Included in other liabilities:
Unfunded affordable housing tax credit commitments		$	16,684	$	23,196
Other tax credit liabilities		55,105		59,823
	Total unfunded tax credit commitments and liabilities	$	71,789	$	83,019

The following table presents other information relating to the Corporation's TCIs for the years ended December 31:



		2019			2018			2017
		(in thousands)
Components of income taxes:
Affordable housing tax credits and other tax benefits		$	(30,642	)	$	(30,721	)	$	(25,642	)
Other tax credit investment credits and tax benefits		(4,542		)	(6,385		)	(15,791		)
Amortization of affordable housing investments, net of tax benefit		22,184			21,569			16,958
Deferred tax expense		954			1,341			6,201
	Total reduction in income tax expense	$	(12,046	)	$	(14,196	)	$	(18,274	)
Amortization of TCIs:
Affordable housing tax credits investment		$	3,344		$	3,355		$	—
Other tax credit investment amortization		2,677			8,094			11,028
	Total amortization of TCIs	$	6,021		$	11,449		$	11,028