Income Taxes

12 Months Ended

Dec. 31, 2019

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions. The components of our provision for income taxes for 2019, 2018 and 2017 were as follows:



	Year ended December 31,
(Dollars in thousands)	2019			2018			2017
Current provision:
Federal	$	296,400		$	249,358		$	263,231
State	132,357			123,264			67,046
Deferred (benefit) expense:
Federal	(1,530		)	(11,777		)	24,654
State	(1,542		)	(9,284		)	532
Income tax expense	$	425,685		$	351,561		$	355,463

Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The reconciliation between the federal statutory income tax rate and our effective income tax rate for 2019, 2018 and 2017, is as follows:



	December 31,
(Dollars in thousands)	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of the federal tax effect	7.0		7.2		5.8
Net deferred tax assets revaluation (TCJ Act)	—		—		4.3
Meals and entertainment	0.4		0.3		0.3
Disallowed officers' compensation	0.2		0.2		0.1
FDIC premiums	0.2		0.5		—
Share-based compensation expense on incentive stock options and ESPP	(0.6	)	(1.4	)	(2.1	)
Qualified affordable housing project tax credits	(0.3	)	(0.3	)	(0.4	)
Tax-exempt interest income	(0.6	)	(0.6	)	(0.3	)
Other, net	(0.1	)	(0.4	)	(0.7	)
Effective income tax rate	27.2	%	26.5	%	42.0	%

Deferred tax assets and liabilities at December 31, 2019 and 2018, consisted of the following:



	December 31,
(Dollars in thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	103,267		$	93,580
Net unrealized losses on AFS debt securities	—			19,704
Share-based compensation expense	14,233			10,642
State income taxes	16,097			13,854
Accrued compensation	22,578			8,291
Deferred rent	—			7,940
Lease liability	60,635			—
Other accruals	12,383			7,061
Net operating loss	6,386			2,447
Goodwill and intangibles	3,141			—
Other	7,923			11,339
Deferred tax assets	246,643			174,858
Valuation allowance	(5,919		)	(2,107		)
Net deferred tax assets after valuation allowance	240,724			172,751

Deferred tax liabilities:
Derivative equity warrant assets	(45,533		)	(32,861		)
Change in accounting method (section 481(a))	(1,841		)	(8,034		)
Net unrealized gains on AFS debt securities	(33,480		)	—
Non-marketable and other equity securities	(54,239		)	(45,759		)
Premises and equipment and other intangibles	(16,459		)	(10,284		)
Right-of-use asset and deferred rent assets	(50,493		)	—
Other	(10,246		)	(10,380		)
Deferred tax liabilities	(212,291		)	(107,318		)
Net deferred tax assets	$	28,433		$	65,433

Net Deferred Tax Assets

U.S. federal net operating loss carryforwards totaled $2.2 million for both December 31, 2019 and 2018. Our foreign net operating loss carryforwards totaled $20.8 million and $7.6 million at December 31, 2019 and 2018, respectively. These net operating loss carryforwards expire at various dates beginning in 2022.

Currently, we believe that it is more likely than not that the benefit from the foreign net operating loss carryforwards, which are associated with our Germany and Canada operations, will not be realized in the near term due to uncertainties in the timing of future profitability in the course of business. In recognition of this, our valuation allowance is $5.9 million on the deferred tax assets related to our German and Canadian net operating loss carryforwards as of December 31, 2019. We believe it is more likely than not that the remaining deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal and California tax returns as major tax filings. Our U.S. federal tax returns for 2016 and subsequent years remain open to full examination. Our California tax returns for 2015 and subsequent tax years remain open to full examination.

At December 31, 2019, our unrecognized tax benefit was $12.6 million, the recognition of which would reduce our income tax expense by $9.9 million. We do not expect that our unrecognized tax benefit will materially change in the next 12 months.

We recognize interest and penalties related to income tax matters as part of income before income taxes. Interest and penalties were not material for the years ended December 31, 2019, 2018 and 2017.

A summary of changes in our unrecognized tax benefit (including interest and penalties) for December 31, 2019, 2018 and 2017 is as follows:



(Dollars in thousands)	Reconciliation of Unrecognized Tax Benefit			Interest and Penalties			Total
Balance at December 31, 2016	$	5,269		$	442		$	5,711
Additions for tax positions for current year	3,141			—			3,141
Additions for tax positions for prior years	3,378			754			4,132
Reduction for tax positions for prior years	(223		)	(1		)	(224		)
Lapse of the applicable statute of limitations	(60		)	(17		)	(77		)
Balance at December 31, 2017	$	11,505		$	1,178		$	12,683
Additions for tax positions for current year	4,171			—			4,171
Additions for tax positions for prior years	631			823			1,454
Reduction for tax positions for prior years	(1,865		)	(243		)	(2,108		)
Lapse of the applicable statute of limitations	(435		)	(86		)	(521		)
Reduction as a result of settlement	(1,318		)	(222		)	(1,540		)
Balance at December 31, 2018	$	12,689		$	1,450		$	14,139
Additions for tax positions for current year	3,712			—			3,712
Additions for tax positions for prior years	63			826			889
Reduction for tax positions for prior years	(884		)	(524		)	(1,408		)
Lapse of the applicable statute of limitations	(1,826		)	(569		)	(2,395		)
Reduction as a result of settlement	(1,142		)	$	(17	)	$	(1,159	)
Balance at December 31, 2019	$	12,612		$	1,166		$	13,778