Note 16. Income Taxes

Provision for Income Taxes

The components of the Company's provision for income taxes for the years ended December 31, 2012, 2011, and 2010 were as follows:



(dollars in thousands)	2012			2011			2010
Current:
Federal	$	80,224		$	60,371		$	78,888
State	10,106			3,995			12,809
Foreign	2,668			2,373			3,231
Total Current	92,998			66,739			94,928
Deferred:
Federal	(13,104		)	1,254			(19,102		)
State	(3,680		)	(1,056		)	447
Total Deferred	(16,784		)	198			(18,655		)
Provision for Income Taxes	$	76,214		$	66,937		$	76,273

The tax effects of fair value adjustments on available-for-sale investment securities, the amortization of gains related to held-to-maturity investment securities, the minimum pension liability adjustment, and tax benefits related to stock options are recorded directly to consolidated shareholders' equity. The net tax benefit recorded directly to consolidated shareholders' equity was $4.7 million for the year ended December 31, 2012. The net tax charge recorded directly to consolidated shareholders' equity was $4.6 million and $10.8 million for the years ended December 31, 2011 and 2010, respectively.

Deferred Tax Liabilities and Assets

As of December 31, 2012 and 2011, significant components of the Company's deferred tax liabilities and assets were as follows:



(dollars in thousands)	2012			2011
Deferred Tax Liabilities:
Accrued Pension Cost	$	(14,616	)	$	(14,648	)
Federal Home Loan Bank Stock	(9,582		)	(9,898		)
Lease Transactions	(115,699		)	(125,472		)
Net Unrealized Gains on Investments Securities Available-for-Sale	(38,868		)	(40,847		)
Deferred Loan Fees	(4,478		)	(2,682		)
Originated Mortgage Servicing Rights	(10,872		)	(6,693		)
Other	(502		)	(518		)
Gross Deferred Tax Liabilities	(194,617		)	(200,758		)
Deferred Tax Assets:
Accelerated Depreciation	10,097			8,772
Allowance for Loan Losses	47,808			47,843
Minimum Pension Liability	19,906			17,981
Accrued Expenses	14,499			16,103
Postretirement Benefit Obligations	12,580			12,124
Capital Lease Expenses	3,146			3,087
Restricted Stock	4,591			2,706
Investment in Unincorporated Entities	7,304			6,546
Deductible State and Local Taxes	10,284			10,225
Other	6,338			5,218
Gross Deferred Tax Assets Before Valuation Allowance	136,553			130,605
Valuation Allowance	(5,133		)	(4,433		)
Gross Deferred Tax Assets After Valuation Allowance	131,420			126,172
Net Deferred Tax Liabilities	$	(63,197	)	$	(74,586	)

Both positive and negative evidence was considered by management in determining the need for a valuation allowance. Negative evidence included the uncertainty regarding the generation of capital gains in future years and restrictions on the ability to sell low-income housing investments during periods when carrybacks of capital losses are allowed. Positive evidence included capital gains in the current year and carryback years. After considering all available evidence, management determined that a valuation allowance to offset deferred tax assets related to low-income housing investments that can only be used to offset capital gains was appropriate. Management determined that a valuation allowance was not required for the remaining deferred tax assets because it is more likely than not these assets will be realized through future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback years.

Certain events covered by Internal Revenue Code Section 593(e) will trigger a recapture of base year reserves of acquired thrift institutions. The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders. As of December 31, 2012, retained earnings included approximately $18.2 million of base year reserves for which the deferred federal income tax liability of $7.2 million has not been recognized.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate for the years ended December 31, 2012, 2011, and 2010:



	2012		2011		2010
Statutory Federal Income Tax Rate	35.00	%	35.00	%	35.00	%
Increase (Decrease) in Income Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax	1.90		0.71		4.42
Tax Reserve Adjustments	0.44		(2.21	)	(6.58	)
Leveraged Leases	(1.44	)	0.05		(1.31	)
Low-Income Housing Investments	0.16		(1.55	)	(1.18	)
Bank-Owned Life Insurance	(0.98	)	(0.97	)	(0.86	)
Tax-Exempt Income	(2.31	)	(0.57	)	(0.23	)
Other	(1.31	)	(0.97	)	0.05
Effective Tax Rate	31.46	%	29.49	%	29.31	%

Unrecognized Tax Benefits

The Company is required to record a liability, referred to as an unrecognized tax benefit ("UTB"), for the entire amount of benefit taken in a prior or future income tax return when the Company determines that a tax position has a less than 50% likelihood of being accepted by the taxing authority. The following presents a reconciliation of the Company's liability for UTBs for the years ended December 31, 2012, 2011, and 2010:



(dollars in thousands)	2012			2011			2010
Unrecognized Tax Benefits at Beginning of Year	$	13,633		$	22,980		$	16,400
Gross Increases, Related to Tax Positions Taken in a Prior Period	280			725			8,520
Gross Increases, Related to Current Period Tax Positions	1,888			—			300
Settlement with Taxing Authority	(40		)	(1,889		)	—
Lapse of Statute of Limitations	(328		)	(8,183		)	(2,240		)
Unrecognized Tax Benefits at End of Year	$	15,433		$	13,633		$	22,980

As of December 31, 2012 and 2011, $14.2 million and $13.6 million, respectively, in liabilities for UTBs was related to UTBs that if reversed would have an impact on the Company's effective tax rate.

Management believes that it is reasonably possible that the Company's liability for UTBs could significantly decrease as a result of the expiration of statutes of limitations and potential settlements with taxing authorities within the next 12 months. However, management is currently not able to estimate a range of possible change in the amount of the liability for UTBs recorded as of December 31, 2012.

The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes. For the years ended December 31, 2012, 2011, and 2010, the Company recorded a net tax provision of $0.5 million, a net tax benefit of $2.6 million, and a net tax provision of $2.2 million, respectively, for interest and penalties. As of December 31, 2012 and 2011, the Company had accrued $3.1 million and $2.6 million, respectively, for the payment of possible interest and penalties.

The Company's federal income tax return for 2011 is currently under examination by the IRS. The State of Hawaii is currently in the process of examining state income tax returns filed for 2003 through 2010. The Company's State of Hawaii income tax returns for 2003 through 2011 remain subject to examination by the taxing authorities.