Income Taxes

Income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:



	Years Ended December 31,
(Dollars in thousands)	2012			2011			2010
Current income taxes:
Federal	$	74,109		$	40,312		$	46,169
State	16,224			10,785			7,281
Foreign	1,918			—			—
Total current income taxes	$	92,251		$	51,097		$	53,450
Deferred income taxes:
Federal	(19,550		)	(555		)	(14,233		)
State	(4,206		)	(84		)	(1,739		)
Foreign	441			—			—
Total deferred income taxes	(23,315		)	(639		)	(15,972		)
Total income tax expense	$	68,936		$	50,458		$	37,478

In June 2012, the Company acquired FIFC Canada, which contributed $6.0 million of foreign income to the Company's net income before taxes in 2012.

Tax expense in 2011 includes approximately $408,000 related to increases in deferred tax liabilities for enacted changes in tax laws or increases in tax rates.

The tax effect of fair value adjustments on securities available-for-sale and derivative instruments in cash flow hedges are recorded directly to shareholders' equity as part of other comprehensive income (loss). In addition, tax benefits of $1.7 million, $129,000 and $895,000 in 2012, 2011 and 2010, respectively, related to the exercise of certain stock options and vesting and issuance of shares pursuant to the Stock Incentive Plans and the issuance of shares pursuant to the Directors Deferred Fee and Stock Plan, were recorded directly to shareholders’ equity.

A reconciliation of the differences between taxes computed using the statutory Federal income tax rate of 35% and actual income tax expense is as follows:



	Years Ended December 31,
(Dollars in thousands)	2012			2011			2010
Income tax expense based upon the Federal statutory rate on income before income taxes	$	63,046		$	44,812		$	35,282
Increase (decrease) in tax resulting from:
Tax-exempt interest, net of interest expense disallowance	(1,294		)	(1,139		)	(963		)
State taxes, net of federal tax benefit	7,811			6,955			3,602
Income earned on bank owned life insurance	(974		)	(854		)	(795		)
Non-deductible compensation costs	1,156			644			707
Meals, entertainment and related expenses	931			802			669
Foreign subsidiary, net	1,991			—			—
Foreign tax credits	(2,177		)	—			—
Tax credits, excluding foreign tax credits	(1,906		)	(562		)	(704		)
Other, net	352			(200		)	(320		)
Income tax expense	$	68,936		$	50,458		$	37,478

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2012 and 2011 are as follows:



	Years Ended December 31,
(Dollars in thousands)	2012		2011
Deferred tax assets:
Allowance for credit losses	$	42,480	$	44,538
Net unrealized losses on derivatives included in other comprehensive income	3,442		4,623
Deferred compensation	7,453		10,855
Stock-based compensation	11,333		10,757
Nonaccrued interest	3,053		2,414
Other real estate owned	9,193		9,724
Mortgage banking recourse obligation	1,706		992
Goodwill and intangible assets	—		264
Covered assets	7,527		—
Pension plan liabilities	916		—
AMT credit carryforward	345		—
State tax losses carryforward	130		—
Foreign tax credit carryforward	1,042		—
Other	2,072		1,845
Total gross deferred tax assets	90,692		86,012
Deferred tax liabilities:
Discount on purchased loans	27,458		33,664
Premises and equipment	29,725		20,591
Goodwill and intangible assets	338		—
Deferred loan fees and costs	4,487		5,809
FHLB stock dividends	1,610		3,322
Capitalized servicing rights	2,670		2,650
Net unrealized gains on securities included in other comprehensive income	4,336		2,807
Covered assets	—		30,058
Fair value adjustments on loans	6,634		2,142
Other	2,680		2,347
Total gross deferred liabilities	79,938		103,390
Valuation allowance	1,042		—
Net deferred tax assets (liabilities)	$	9,712	$	(17,378	)

Management has established a valuation allowance against the deferred tax asset related to foreign tax credit carryforward because management believes that it is more likely than not that the Company will not be able to utilize this credit in the future due to the foreign source income limitation. The deferred tax asset and related valuation allowance were recognized in other comprehensive income since the income that gave rise to the foreign tax credit was recognized in other comprehensive income. Management has determined that a valuation allowance is not required for the remaining deferred tax assets because it is more likely than not that these assets could be realized through carry back to taxable income in prior years, future reversals of existing taxable temporary differences and future taxable income. This conclusion is based on the Company's historical earnings, its current level of earnings and prospects for continued growth and profitability.

The Company has an AMT credit carryforward of $345,000 which has no expiration date and an Illinois net loss deduction carryforward of $2.6 million that begins to expire in 2018.

The Company is required to record a liability (or a reduction of an asset) for the uncertainty associated with certain tax positions. This liability, if any, reflects the fact that the Company has not recognized the benefit associated with the tax position. The Company had no unrecognized tax benefits at December 31, 2011 and it did not have increases or decreases in unrecognized tax benefits during 2012 and does not have any tax positions for which unrecognized tax benefits must be recorded at December 31, 2012. In addition, for the year ended December 31, 2012, the Company has no interest or penalties relating to income tax positions recognized in the income statement or in the balance sheet. If the Company were to record interest and penalties associated with uncertain tax positions or as a result of an audit by a tax jurisdiction, the interest and penalties would be included in income tax expense. The Company does not believe it is reasonably possible that unrecognized tax benefits will significantly change in the next 12 months.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in numerous state jurisdictions and in Canada. In the ordinary course of business we are routinely subject to audit by the taxing authorities of these jurisdictions. Currently, the Company's federal income tax returns are open and subject to audit for the 2006 tax return year forward, and in general, the Company's state income tax returns from the 2009 tax return year forward are open and subject to audit, subject to individual state statutes of limitation.