Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of our provision for income taxes for 2021, 2020 and 2019 were as follows:

	Year ended December 31,
(Dollars in millions)	2021		2020		2019
Current provision:
Federal	$	435	$	300	$	297
State	224		141		132
Deferred expense (benefit):
Federal	3		5		(2)
State	(11)		2		(2)
Income tax expense	$	651	$	448	$	425

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 2021, 2020 and 2019, is as follows:

	December 31,
(Dollars in millions)	2021		2020		2019
Federal statutory income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of the federal tax effect	7.5		6.8		7.0
Meals and entertainment	0.1		0.1		0.4
Disallowed officers' compensation	0.3		0.2		0.2
FDIC premiums	0.4		0.3		0.2
Share-based compensation expense on incentive stock options and ESPP	(1.6)		(0.3)		(0.6)
Qualified affordable housing project tax credits	(0.2)		(0.5)		(0.3)
Tax-exempt interest income	(1.0)		(0.8)		(0.6)
Other, net	(0.3)		0.2		(0.1)
Effective income tax rate	26.2	%	27.0	%	27.2	%

Deferred tax assets and liabilities at December 31, 2021 and December 31, 2020, consisted of the following:

	December 31,
(Dollars in millions)	2021		2020
Deferred tax assets:
Allowance for credit losses	$	170	$	158
Share-based compensation expense	26		16
State income taxes	24		17
Accrued compensation	77		44
Loans and debt securities	113		—
Lease liability	105		70
Other accruals	19		10
Net operating loss	7		7
Goodwill and intangibles	—		3
Foreign tax credit carryforward	—		9
SBA loan fees	3		6
Other	10		8
Deferred tax assets	554		348
Valuation allowance	(7)		(7)
Net deferred tax assets after valuation allowance	547		341
Deferred tax liabilities:
Derivative equity warrant assets	(82)		(71)
Net unrealized gains on cash flow hedge derivatives	(33)		(50)
Net unrealized gains on AFS debt securities	—		(186)
Non-marketable and other equity securities	(219)		(119)
Premises and equipment	(41)		(24)
Right-of-use asset and deferred rent assets	(81)		(52)
Goodwill and intangibles	(24)		—
Contingent payments	(9)		—
Merger-related fair value adjustments	(28)		—
Other	(6)		(11)
Deferred tax liabilities	(523)		(513)
Net deferred tax assets (liabilities)	$	24	$	(172)

Net Deferred Tax Assets

U.S. federal net operating loss carryforwards totaled $1 million and $2 million for December 31, 2021 and December 31, 2020. Our foreign net operating loss carryforwards totaled $25 million and $25 million at December 31, 2021 and December 31, 2020, 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, we have a valuation allowance of $7 million on the deferred tax assets related to our German and Canadian net operating loss carryforwards as of December 31, 2021. We believe it is more likely than not that the remaining deferred tax assets will be realized against future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.

We are subject to income tax and non-income based taxes by the U.S. federal tax authorities as well as various state and foreign tax authorities. The U.S. federal government and the state of California are major tax filing jurisdictions. We are subject to examination by the IRS and tax authorities in various state, local and foreign tax jurisdictions. The state of California

is currently examining the years 2013-2016. Our U.S. federal tax returns remain open to examination for 2018 and subsequent tax years. California tax returns remain open to examination for 2017 and subsequent tax years.

At December 31, 2021, our unrecognized tax benefit was $37 million, the recognition of which would reduce our income tax expense by $30 million. We are unable to estimate the unrecognized tax benefit that 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, 2021, 2020 and 2019.

A summary of changes in our unrecognized tax benefit (including interest and penalties) for December 31, 2021, 2020 and 2019 is as follows:

(Dollars in millions)	Reconciliation of Unrecognized Tax Benefit		Interest and Penalties		Total
Balance at December 31, 2018	$	13	$	1	$	14
Additions for tax positions for current year	4		—		4
Additions for tax positions for prior years	—		1		1
Reduction for tax positions for prior years	(1)		—		(1)
Lapse of the applicable statute of limitations	(2)		(1)		(3)
Reduction as a result of settlement	(1)		—		(1)
Balance at December 31, 2019	$	13	$	1	$	14
Additions for tax positions for current year	5		—		5
Additions for tax positions for prior years	1		1		2
Reduction for tax positions for prior years	(1)		—		(1)
Lapse of the applicable statute of limitations	(1)		—		(1)
Reduction as a result of settlement	(1)		—		(1)
Balance at December 31, 2020	$	16	$	2	$	18
Additions for tax positions for current year	21		—		21
Additions for tax positions for prior years	—		1		1
Reduction for tax positions for prior years	—		—		—
Lapse of the applicable statute of limitations	—		—		—
Reduction as a result of settlement	—		—		—
Balance at December 31, 2021	$	37	$	3	$	40