Income Taxes

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

(in thousands)



	Current		Deferred			Total
YEAR ENDED DECEMBER 31, 2013:
Federal	$	36,733	$	7,459		$	44,192
State	8,187		289			8,476
	$	44,920	$	7,748		$	52,668
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

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:



	2013		2012		2011
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
State tax, net of Federal income tax	4.4	%	4.4	%	3.8	%
Tax-exempt income	(3.2	)%	(3.0	)%	(3.7	)%
Tax credits	(1.8	)%	(1.1	)%	(1.5	)%
Nondeductible merger expenses	1.0	%	0.1	%	—	%
Other	(0.5	)%	(1.0	)%	(0.6	)%
Effective income tax rate	34.9	%	34.4	%	33.0	%

The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax assets recorded on the consolidated balance sheets as of December 31:

(in thousands)



	2013			2012
DEFERRED TAX ASSETS:
Allowance for loan and lease losses	$	33,652		$	33,782
Covered loans	16,788			28,610
Accrued severance and deferred compensation	13,080			13,376
Non-accrual loans	5,760			4,759
Tax credits	5,716			3,655
Unrealized loss on investment securities	3,318			—
Non-covered other real estate owned	3,023			1,974
Covered other real estate owned	831			5,120
Other	16,230			14,702
Total gross deferred tax assets	98,398			105,978

DEFERRED TAX LIABILITIES:
Mortgage servicing rights	18,855			10,847
Fair market value adjustment on preferred securities	18,649			19,567
FDIC indemnification asset	10,471			25,913
Leased assets	9,719			3,930
Deferred loan fees	7,525			5,706
Premises and equipment depreciation	7,356			8,834
Intangibles	5,633			5,161
Unrealized gain on investment securities	—			16,306
Other	3,512			6,186
Total gross deferred tax liabilities	81,720			102,450

Valuation allowance	(51		)	—

Net deferred tax assets	$	16,627		$	3,528

The Company has determined that it is required to establish a valuation allowance for a portion of the deferred tax assets as management believes it is more likely than not that a deferred tax asset of $51,000 as December 31, 2013, relating to Canadian net operating losses, may not be able to be utilized in the future. The Company has determined that no other valuation allowance for the remaining deferred tax assets is required as management believes it is more likely than not that the remaining deferred tax assets of $98.3 million and $106.0 million at December 31, 2013 and 2012, 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, 2013 and 2012. 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 and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the Oregon and California state jurisdictions. Additionally, as a result of the FinPac acquisition, the Company will now be subject to filings in the majority of states and in Canada. The Company is no longer subject to U.S. federal and other state tax authorities examinations for years before 2009, except in California for years before 2005 and for Canadian tax authority examinations for years before 2012.

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 $4,000 during 2013 and an increase of $47,000 during 2012. The Company had gross unrecognized tax benefits recorded as of December 31, 2013 and 2012 in the amounts of $602,000 and $598,000, respectively. If recognized the unrecognized tax benefit would reduce the 2013 annual effective tax rate by 0.3%. The Company accrued $24,000 of interest related to unrecognized tax benefits and recognized a benefit of $6,000 in interest reversed primarily due to the reductions of its liability for unrecognized tax benefits during 2013 and 2012 , respectively. Interest on unrecognized tax benefits is reported by the Company as a component as of tax expense. As of December 31, 2013 and 2012, the accrued interest related to unrecognized tax benefits is $193,000 and $168,000, 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, 2013 and 2012, respectively:

(in thousands)



	2013		2012
Balance, beginning of period	$	598	$	550
Effectively settled positions	4		(39		)
Changes for tax positions of prior years	—		87
Balance, end of period	$	602	$	598