NOTE 13. INCOME TAXES

The following table presents the components of income tax expense (benefit) attributable to continuing operations included in the Consolidated Statements of Income for the years ended December 31:


		Current		Deferred		Total
YEAR ENDED DECEMBER 31, 2012:
Federal	$	44,268	$	(426)	$	43,842
State		2,632		6,847		9,479
	$	46,900	$	6,421	$	53,321
YEAR ENDED DECEMBER 31, 2011:
Federal	$	29,932	$	(40)	$	29,892
State		4,810		2,040		6,850
	$	34,742	$	2,000	$	36,742
YEAR ENDED DECEMBER 31, 2010:
Federal	$	(1,714)	$	6,364	$	4,650
State		3,126		(1,971)		1,155
	$	1,412	$	4,393	$	5,805

The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate for the years ended December 31:


	2012	2011	2010
Statutory Federal income tax rate	35.0%	35.0%	35.0%
State tax, net of Federal income tax	4.4%	3.8%	2.5%
Tax-exempt income	-3.0%	-3.7%	-13.6%
Tax credits	-1.1%	-1.5%	-5.5%
Other	-0.9%	-0.6%	-1.4%
Effective income tax rate	34.4%	33.0%	17.0%

The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax assets (liabilities) (recorded in other liabilities or/and other assets on the consolidated balance sheets) as of December 31:

(in thousands)


		2012		2011
DEFERRED TAX ASSETS:
Allowance for loan and lease losses	$	33,782	$	36,221
Covered loans		28,610		38,812
Accrued severance and deferred compensation		13,376		10,976
Covered other real estate owned		5,120		6,284
Non-covered loans		4,759		2,607
Tax credits		3,655		6,815
Discount on trust preferred securities		2,450		2,535
Non-covered other real estate owned		1,974		6,566
Basis differences of stock and securities		1,527		2,335
Net operating loss carryforwards		-		1,291
Other		10,725		9,826
Total gross deferred tax assets		105,978		124,268

DEFERRED TAX LIABILITIES:
FDIC indemnification asset		25,912		45,817
Fair market value adjustment on junior subordinated debentures		19,567		20,099
Unrealized gain on investment securities		16,306		22,713
Mortgage servicing rights		10,847		7,058
Premises and equipment depreciation		8,834		8,789
Deferred loan fees		5,706		4,983
Intangibles		5,161		4,928
Leased assets		3,930		4,251
Other		6,186		6,063
Total gross deferred tax liabilities		102,449		124,701

Net deferred tax assets (liabilities)	$	3,529	$	(433)

The Company has determined that it is not required to establish a valuation allowance for the deferred tax assets as management believes it is more likely than not that the deferred tax assets of $106.0 million and $124.3 million at December 31, 2012 and 2011, respectively, will be realized principally through future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carry-back to prior years or through the reversal of future temporary taxable differences.

The tax credits consist entirely of state tax credits at December 31, 2012 and 2011. The state tax credits, comprised primarily of State of Oregon Business Energy Tax Credits (“BETC”), will be utilized to offset future state income taxes. Most of the state tax credits benefit a five-year period, with an eight-year carry-forward allowed. Management believes, based upon the Company’s historical performance that the deferred tax assets relating to these tax credits will be realized in the normal course of operations, and, accordingly, management has not reduced these deferred tax assets by a valuation allowance.

The Company’s California state net operating loss carry forward of $1.3 million at December 31, 2011 is expected to be realized in the normal course of operations.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the Oregon and California state jurisdictions. The Company is no longer subject to U.S. federal and Oregon state tax authorities examinations for years before 2009 and California state tax authority examinations for years before 2005.

In accordance with the provisions of FASB 740, Income Taxes, (“ASC 740”), relating to the accounting for uncertainty in income taxes, the Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

The Company recorded an increase in its liability for unrecognized tax benefits relating to California tax incentives and temporary differences in the amount of $47,000 during 2012 and a reduction of $39,000 during 2011. The Company had gross unrecognized tax benefits recorded as of December 31, 2012 and 2011 in the amounts of $598,000 and $550,000, respectively. If recognized the unrecognized tax benefit would reduce the 2012 annual effective tax rate by 0.3%. The Company recognized a benefit of $6,000 and $4,000 during 2012 and 2011 in interest reversed primarily due to the reductions of its liability for unrecognized tax benefits. Interest benefit is reported by the Company as a component of tax expense. As of December 31, 2012 and 2011, the accrued interest related to unrecognized tax benefits is $168,000 and $167,000, respectively.

Detailed below is a reconciliation of the Company’s unrecognized tax benefits, gross of any related tax benefits, for the years ended December 31, 2012 and 2011, respectively:

(in thousands)


		2012		2011
Balance, beginning of period	$	550	$	589
Effectively settled positions		(39)		-
Changes for tax positions of prior years		87		(39)
Balance, end of period	$	598	$	550