Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2016, 2015, and 2014 were as follows:



(dollars in thousands)	2016		2015			2014
Current:
Federal	$	69,061	$	73,278		$	76,789
State	1,885		3,737			3,018
Total Current	70,946		77,015			79,807
Deferred:
Federal	6,947		(6,801		)	(5,603		)
State	240		284			392
Total Deferred	7,187		(6,517		)	(5,211		)
Provision for Income Taxes	$	78,133	$	70,498		$	74,596

The tax effects of fair value adjustments on available-for-sale investment securities, the amortization of unrealized gains and losses related to investment securities transferred to held-to-maturity, 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 $7.9 million for the year ended December 31, 2016. The net tax charge recorded directly to consolidated shareholders’ equity was $1.0 million and $2.7 million for the years ended December 31, 2015 and 2014, respectively.

Deferred Tax Liabilities and Assets

As of December 31, 2016 and 2015, significant components of the Company’s deferred tax liabilities and assets were as follows:



	December 31,
(dollars in thousands)	2016			2015
Deferred Tax Liabilities:
Accrued Pension Cost	$	(13,292	)	$	(13,707	)
Federal Home Loan Bank Stock	(5,088		)	(5,088		)
Lease Transactions	(87,454		)	(85,874		)
Energy Tax Credits	(10,476		)	(8,054		)
Net Unrealized Gains on Investments Securities	—			(3,453		)
Investment in Variable Interest Entities	(1,883		)	—
Deferred Loan Fees	(9,088		)	(7,744		)
Originated Mortgage Servicing Rights	(9,588		)	(9,104		)
Other	(691		)	(657		)
Gross Deferred Tax Liabilities	(137,560		)	(133,681		)
Deferred Tax Assets:
Accelerated Depreciation	6,027			7,775
Allowance for Loan Losses	43,705			42,890
Minimum Pension Liability	18,852			18,831
Accrued Expenses	18,693			16,738
Postretirement Benefit Obligations	12,900			12,849
Capital Lease Expenses	3,235			3,231
Restricted Stock	7,955			6,262
Net Unrealized Losses on Investments Securities	3,271			—
Investment in Variable Interest Entities	—			1,951
Deductible State and Local Taxes	3,956			4,166
Other	7,596			7,225
Gross Deferred Tax Assets Before Valuation Allowance	126,190			121,918
Valuation Allowance	(3,655		)	(3,932		)
Gross Deferred Tax Assets After Valuation Allowance	122,535			117,986
Net Deferred Tax Liabilities	$	(15,025	)	$	(15,695	)

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, shareholders. As of December 31, 2016, retained earnings included $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, 2016, 2015, and 2014:



	2016		2015		2014
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	0.60		1.23		0.59
Tax Reserve Adjustments	(0.18	)	0.38		0.88
Leveraged Leases	(0.13	)	0.06		0.01
Low-Income Housing Investments	(0.69	)	(0.78	)	(0.10	)
Investment Tax Credits	(0.85	)	(0.89	)	(0.68	)
Bank-Owned Life Insurance	(0.88	)	(1.06	)	(0.97	)
Tax-Exempt Income	(2.71	)	(3.03	)	(2.83	)
Other	(0.06	)	(0.42	)	(0.51	)
Effective Tax Rate	30.10	%	30.49	%	31.39	%

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, 2016, 2015, and 2014:



(dollars in thousands)	2016			2015			2014
Unrecognized Tax Benefits at Beginning of Year	$	11,602		$	12,229		$	11,846
Gross Increases, Related to Tax Positions Taken in a Prior Period	145			398			1,074
Gross Decreases, Related to Tax Positions Taken in a Prior Period	(230		)	(98		)	(314		)
Gross Increases, Related to Current Period Tax Positions	395			573			498
Settlement with Taxing Authority	(1,002		)	—			—
Lapse of Statute of Limitations	(4,336		)	(1,500		)	(875		)
Unrecognized Tax Benefits at End of Year	$	6,574		$	11,602		$	12,229

As of December 31, 2016 and 2015, $5.8 million and $10.8 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 further decrease as a result of the expiration of statutes of limitations 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, 2016.

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, 2016, 2015, and 2014, the Company recorded a net tax benefit of $1.1 million, net tax provision of less than $0.1 million, and a net tax provision of $0.2 million, respectively, for interest and penalties. As of December 31, 2016 and 2015, the Company had accrued $1.0 million and $2.2 million, respectively, for the payment of possible interest and penalties.

During the year ended December 31, 2016, a settlement agreement was reached with the IRS related to prior tax years after the Company had filed a protest with IRS Appeals which resulted in a $0.5 million release of federal tax reserves. The federal tax returns for 2012 through 2015 remain subject to examination. The Company’s State of Hawaii income tax returns for 2012 through 2015 remain subject to examination by the taxing authorities.