Income Taxes

Income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:



	Years Ended December 31,
(Dollars in thousands)	2016			2015			2014
Current income taxes:
Federal	$	98,272		$	62,584		$	75,945
State	20,041			9,417			10,397
Foreign	(10		)	(39		)	4,566
Total current income taxes	$	118,303		$	71,962		$	90,908
Deferred income taxes:
Federal	$	4,464		$	15,550		$	466
State	(14		)	5,962			6,113
Foreign	2,226			1,542			(2,454		)
Total deferred income taxes	$	6,676		$	23,054		$	4,125
Total income tax expense	$	124,979		$	95,016		$	95,033

The Company's income before income taxes in 2016, 2015 and 2014 includes $7.0 million, $3.9 million and $3.8 million, respectively, of foreign income attributable to its Canadian subsidiary.

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) and are reflected on the Consolidated Statements of Comprehensive Income. In addition, a tax benefit (expense) of $230,000, $(1.9) million, and $(594,000) in 2016, 2015 and 2014, respectively, related to the exercise and expiration of certain stock options and vesting and issuance of restricted shares and performance stock awards pursuant to the Stock Incentive Plans and the issuance of shares pursuant to the Directors Deferred Fee and Stock Plan, was 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)	2016			2015			2014
Income tax expense based upon the Federal statutory rate on income before income taxes	$	116,149		$	88,118		$	86,251
Increase (decrease) in tax resulting from:
Tax-exempt interest, net of interest expense disallowance	(3,634		)	(2,878		)	(1,936		)
State taxes, net of federal tax benefit	13,017			9,996			10,731
Income earned on bank owned life insurance	(1,198		)	(1,562		)	(896		)
Meals, entertainment and related expenses	1,439			1,283			1,026
Foreign subsidiary, net	(264		)	148			775
Tax benefits related to tax credit investments	(572		)	(778		)	(1,498		)
Other, net	42			689			580
Income tax expense	$	124,979		$	95,016		$	95,033

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:




(Dollars in thousands)	2016		2015
Deferred tax assets:
Allowance for credit losses	$	46,519	$	39,561
Deferred compensation	28,125		25,492
Net unrealized losses on securities included in other comprehensive income	19,036		11,476
Covered assets	18,484		17,754
Stock-based compensation	9,704		9,760
Federal net operating loss carryforward	7,624		4,705
Other real estate owned	7,151		7,610
Loans - purchase accounting adjustments	5,055		749
Foreign net operating loss carryforward	3,476		6,616
Mortgage banking recourse obligation	2,025		1,565
Nonaccrued interest	1,884		1,603
AMT credit carryforward	1,872		1,498
Net unrealized losses on derivatives included in other comprehensive income	—		1,386
Other	2,408		3,361
Total gross deferred tax assets	153,363		133,136
Deferred tax liabilities:
Premises and equipment	31,053		33,423
Equipment leasing	28,440		15,089
Goodwill and intangible assets	10,085		8,198
Capitalized servicing rights	7,326		3,330
Deferred loan fees and costs	5,131		6,045
Fair value adjustments on loans	3,163		6,086
Net unrealized gains on derivatives included in other comprehensive income	2,732		—
FHLB stock dividends	346		904
Other	6,334		5,874
Total gross deferred liabilities	94,610		78,949
Net deferred tax assets	$	58,753	$	54,187

Management has determined that a valuation allowance is not required for the deferred tax assets at December 31, 2016 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, tax planning strategies 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 a Federal alternative minimum tax (“AMT”) credit carryforward of $1.9 million which is subject to IRC Section 383 annual limitation and has no expiration date. It has a Federal net operating loss (“NOL”) carryforward of $21.8 million that begins to expire in 2028 through 2035 and is subject to IRC Section 382 annual limitation. These credit and loss carryforwards were a result of acquisitions made in 2012, 2013, 2015 and 2016. The Company has a foreign NOL carryforward of $13.3 million that expires in 2035. Management believes it is more likely than not that it will be able to fully utilize the Federal and foreign NOLs and tax credits in future tax years.

The Company accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. The following table provides a reconciliation of the beginning and ending amounts of gross unrecognized tax benefits:



	Years Ended December 31,
(Dollars in thousands)	2016		2015		2014
Unrecognized tax benefits at beginning of year	$	—	$	—	$	—
Gross increases for tax positions taken in current period	—		—		—
Gross increases and decreases for positions taken in prior periods	11,626		—		—
Unrecognized tax benefits at end of the year	$	11,626	$	—	$	—

At December 31, 2016, the Company had $7.6 million of unrecognized tax benefits related to uncertain tax positions that, if recognized, would impact the effective tax rate. Interest and penalties on unrecognized tax positions are recorded in income tax expense. Total interest income accrued at December 31, 2016 on unrecognized tax benefits was $521,000 net of tax effect. Interest and penalties are included in the liability for uncertain tax positions, but are not included in the unrecognized tax benefits rollforward presented above. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve 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 U.S. federal income tax returns are open and subject to audit for the 2013 tax return year forward, and in general, the Company's state income tax returns are open and subject to audit from the 2013 tax return year forward, subject to individual state statutes of limitation. The Company's Canadian subsidiary's Canadian income tax returns are also subject to audit for the 2013 tax return year forward.