Income Taxes

Income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 is summarized as follows:



	Years Ended December 31,
(Dollars in thousands)	2018			2017		2016
Current income taxes:
Federal	$	44,266		$	54,977	$	98,272
State	18,349			12,852		20,041
Foreign	(872		)	1,243		(10		)
Total current income taxes	$	61,743		$	69,072	$	118,303
Deferred income taxes:
Federal	$	40,500		$	51,668	$	4,464
State	11,705			10,403		(14		)
Foreign	3,019			1,172		2,226
Total deferred income taxes	$	55,224		$	63,243	$	6,676
Total income tax expense	$	116,967		$	132,315	$	124,979

The Company's income before income taxes in 2018, 2017 and 2016 includes $5.3 million, $7.8 million and $7.0 million, respectively, of foreign income attributable to its Canadian subsidiary.

The tax effects of certain transactions are recorded directly to shareholders' equity rather than income tax expense. 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 of $230,000, related to stock-based compensation, reflecting the excess of realized tax benefits over expected tax benefits, was recorded directly to shareholders' equity in 2016. Beginning in 2017, excess tax benefits on stock-based compensation were recorded in tax expense. The tax effect of unrealized gains and losses on certain foreign currency transactions is also recorded in shareholders' equity as part of other comprehensive income (loss).

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



	Years Ended December 31,
(Dollars in thousands)	2018			2017			2016
Income tax expense using the statutory Federal income tax rate of 21% in 2018, and 35% in 2017 and 2016, on income before income taxes	$	96,628		$	136,499		$	116,149
Increase (decrease) in tax resulting from:
Tax-exempt interest, net of interest expense disallowance	(3,869		)	(4,658		)	(3,634		)
State taxes, net of federal tax benefit	23,584			15,115			13,017
Income earned on bank owned life insurance	(1,002		)	(1,167		)	(1,198		)
Excess tax benefits on share based compensation	(3,107		)	(5,470		)	—
Enactment of Tax Cuts and Jobs Act
Re-measurement of net deferred tax liabilities	(1,209		)	(10,402		)	—
Transition tax on deferred foreign earnings	—			2,850			—
Meals, entertainment and related expenses	1,840			1,710			1,439
FDIC insurance expense	1,832			—			—
Non-deductible compensation expense	1,366			55			77
Foreign subsidiary, net	1,591			(271		)	(264		)
Tax benefits related to tax credit investments, net	(656		)	(698		)	(572		)
Other, net	(31		)	(1,248		)	(35		)
Income tax expense	$	116,967		$	132,315		$	124,979

In 2017, the Company recognized a provisional tax benefit of $7.6 million to reflect the impact of enactment of the Tax Act. In the third quarter 2018, the Company finalized the provisional amount and recorded an additional net tax benefit of $1.2 million as provided in the SEC issued Staff Accounting Bulletin SAB 118.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2018 and 2017 are as follows:




(Dollars in thousands)	2018			2017
Deferred tax assets:
Allowance for credit losses	$	40,342		$	36,442
Deferred compensation	22,363			12,310
Net unrealized losses on securities included in other comprehensive income	15,430			7,465
Stock-based compensation	7,544			6,898
Federal net operating loss carryforward	5,348			3,063
Loans	4,540			4,943
Other real estate owned	2,429			4,019
AMT credit carryforward	1,395			1,199
Nonaccrued interest	1,357			983
Mortgage banking recourse obligation	632			722
Other	3,744			2,307
Total gross deferred tax assets	105,124			80,351
Deferred tax liabilities:
Equipment leasing	90,306			42,681
Premises and equipment	28,517			23,211
Capitalized servicing rights	16,663			8,916
Goodwill and intangible assets	12,921			7,619
Deferred loan fees and costs	3,446			3,531
Net unrealized gains on derivatives included in other comprehensive income	2,863			3,197
Fair value adjustments on loans	2,833			3,143
Other	5,295			3,433
Total gross deferred liabilities	162,844			95,731
Net deferred tax liabilities	$	(57,720	)	$	(15,380	)

Management has determined that a valuation allowance is not required for the deferred tax assets at December 31, 2018 because it is more likely than not that these assets could be realized through 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 $1.4 million which is subject to IRC Section 383 annual limitation. The AMT credit has no expiration date and pursuant to the Tax Act will be fully refundable by 2021. The Company has a Federal net operating loss (“NOL”) carryforward of $25.5 million that begins to expire in 2029 through 2037 and is subject to IRC Section 382 annual limitation. The AMT credit and the NOL carryforwards were a result of acquisitions.

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)	2018		2017			2016
Unrecognized tax benefits at beginning of year	$	10,821	$	11,626		$	—
Gross increases for tax positions taken in current period	—		—			—
Gross increases (decreases) for positions taken in prior periods	717		(805		)	11,626
Unrecognized tax benefits at end of the year	$	11,538	$	10,821		$	11,626

At December 31, 2018, the Company had $9.3 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, 2018 and 2017 on unrecognized tax benefits was $1.1 million and $921,000, respectively, 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 2015 tax return year forward, and in general, the Company's state income tax returns are open and subject to audit from the 2015 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 2015 tax return year forward.