Income Taxes

12 Months Ended

Dec. 31, 2019

Income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 is summarized as follows:



	Years Ended December 31,
(Dollars in thousands)	2019			2018			2017
Current income taxes:
Federal	$	55,664		$	44,266		$	54,977
State	18,270			18,349			12,852
Foreign	5,913			(872		)	1,243
Total current income taxes	$	79,847		$	61,743		$	69,072
Deferred income taxes:
Federal	$	33,345		$	40,500		$	51,668
State	13,099			11,705			10,403
Foreign	(1,887		)	3,019			1,172
Total deferred income taxes	$	44,557		$	55,224		$	63,243
Total income tax expense	$	124,404		$	116,967		$	132,315

The Company's income before income taxes in 2019, 2018 and 2017 includes $12.2 million, $5.3 million and $7.8 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. 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)	2019			2018			2017
Income tax expense using the statutory Federal income tax rate of 21% in 2019 and 2018, and 35% in 2017, on income before taxes	$	100,821		$	96,628		$	136,499
Increase (decrease) in tax resulting from:
Tax-exempt interest, net of interest expense disallowance	(3,958		)	(3,869		)	(4,658		)
State taxes, net of federal tax benefit	24,600			23,584			15,115
Income earned on bank owned life insurance	(959		)	(1,002		)	(1,167		)
Excess tax benefits on share based compensation	(1,447		)	(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	2,148			1,840			1,710
FDIC insurance expense	1,274			1,832			—
Non-deductible compensation expense	1,019			1,366			55
Foreign subsidiary, net	1,979			1,591			(271		)
Tax benefits related to tax credit investments, net	(513		)	(656		)	(698		)
Other, net	(560		)	(31		)	(1,248		)
Income tax expense	$	124,404		$	116,967		$	132,315

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 of 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, 2019 and 2018 are as follows:




(Dollars in thousands)	2019			2018
Deferred tax assets:
Right-of-use liability	$	52,472		$	—
Allowance for credit losses	41,809			40,342
Deferred compensation	23,555			22,363
Stock-based compensation	8,487			7,544
Loans	5,673			4,540
Net unrealized losses on derivatives included in other comprehensive income	4,781			—
Federal net operating loss carryforward	4,016			5,348
Other real estate owned	2,198			2,429
Nonaccrued interest	2,164			1,357
AMT credit carryforward	1,338			1,395
Net unrealized losses on securities included in other comprehensive income	—			15,430
Other	2,366			4,376
Total gross deferred tax assets	148,859			105,124
Deferred tax liabilities:
Equipment leasing	120,114			90,306
Premises and equipment	51,544			28,517
Right-of-use asset	43,912			—
Capitalized servicing rights	20,277			16,663
Goodwill and intangible assets	12,819			12,921
Net unrealized gains on securities included in other comprehensive income	5,443			—
Deferred loan fees and costs	4,604			3,446
Fair value adjustments on loans	3,603			2,833
Net unrealized gains on derivatives included in other comprehensive income	—			2,863
Other	5,397			5,295
Total gross deferred liabilities	267,713			162,844
Net deferred tax liabilities	$	(118,854	)	$	(57,720	)

Management has determined that a valuation allowance is not required for the deferred tax assets at December 31, 2019 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 $1.3 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 $19.1 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)	2019			2018		2017
Unrecognized tax benefits at beginning of year	$	11,538		$	10,821	$	11,626
Gross increases for tax positions taken in current period	—			—		—
Gross increases (decreases) for positions taken in prior periods	268			717		(805		)
Settlements with taxing authorities	(966		)	—		—
Unrecognized tax benefits at end of the year	$	10,840		$	11,538	$	10,821

At December 31, 2019, the Company had $8.6 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, 2019 and 2018 on unrecognized tax benefits was $1.7 million and $1.1 million, 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 2016 tax return year forward, and in general, the Company's state income tax returns are open and subject to audit from the 2016 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 2016 tax return year forward.