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, 2014:
Federal	$	125	$	70,673		$	70,798
State	1,045		9,453			10,498
	$	1,170	$	80,126		$	81,296
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

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:



	2014		2013		2012
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
State tax, net of Federal income tax	3.5	%	4.4	%	4.4	%
Tax-exempt income	(2.5	)%	(3.2	)%	(3.0	)%
Tax credits	(0.8	)%	(1.8	)%	(1.1	)%
Nondeductible merger expenses	1.2	%	1.0	%	0.1	%
BOLI	(1.6	)%	(0.8	)%	(0.9	)%
Other	0.7	%	0.3	%	(0.1	)%
Effective income tax rate	35.5	%	34.9	%	34.4	%

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)	2014			2013
DEFERRED TAX ASSETS:
Net operating loss carryforwards	$	197,227		$	37
Loan discount	78,508			1,802
Allowance for loan and lease losses	41,133			33,665
Accrued severance and deferred compensation	28,216			13,442
Tax credits	21,966			5,716
Non-accrual loans	13,225			5,760
Covered loans	10,949			16,788
Unrealized loss on investment securities	—			3,304
Accrued bonuses	7,222			4,337
Other	24,876			13,547
Total gross deferred tax assets	423,322			98,398

DEFERRED TAX LIABILITIES:
Fair market value adjustment on preferred securities	50,549			18,649
Residential mortgage servicing rights	48,496			18,855
FHLB Dividends	16,452			1,233
Intangibles	15,074			5,633
Prepaid expenses	14,911			2,683
Unrealized gain on investment securities	13,546			—
Deferred loan fees	12,091			7,525
Premises and equipment depreciation	8,180			7,447
Other	11,137			19,695
Total gross deferred tax liabilities	190,436			81,720

Valuation allowance	(3,366		)	(51		)

Net deferred tax assets	$	229,520		$	16,627

The Company acquired a $276.8 million net deferred tax asset before purchase accounting adjustments in the Merger, including $238.4 million of federal and state NOL and tax credit carry-forwards. The Merger triggered an "ownership change" as defined in Section 382 of the Internal Revenue Service Code ("Section 382"). As a result of being subject to Section 382, the Company will be limited in the amount of NOL carry-forwards that can be used annually to offset future taxable income. The Company believes it is more likely than not that it will be able to fully realize the benefit of its federal NOL carry-forwards. The Company also believes that it is more likely than not that the benefit from certain state NOL and tax credit carry-forwards will not be realized and therefore has provided a valuation allowance of $3.4 million as of December 31, 2014 on the deferred tax assets relating to these state NOL and tax credit carry-forwards. The Company also determined that it is required to establish a valuation allowance on deferred tax assets of $42,000 and $51,000 at December 31, 2014 and 2013, respectively, primarily relating to Canadian net operating losses that 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 gross deferred tax assets of $420.0 million and $98.3 million at December 31, 2014 and 2013, 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 of $8.9 million and $5.7 million at December 31, 2014 and 2013, respectively, and federal low income housing and alternative minimum tax credits of $13.0 million and none at December 31, 2014 and 2013, respectively. The state tax credits 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. Federal low income housing credits have a twenty-year carry forward and the alternative minimum tax credits may be carried forward indefinitely.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the majority of states and Canada. The Company is no longer subject to U.S. federal and other state tax authorities examinations for years before 2010, except in California for years before 2005 and for Canadian tax authority examinations for years before 2012.

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 had gross unrecognized tax benefits in the amounts of $2.7 million and $602,000 recorded as of December 31, 2014 and 2013, respectively. The 2014 amounts includes $2.0 million assumed in the merger. If recognized the unrecognized tax benefit would reduce the 2014 annual effective tax rate by 1%. The Company accrued $206,000 and $24,000 of interest related to unrecognized tax benefits primarily due to the reductions of its liability for unrecognized tax benefits during 2014 and 2013, respectively. The 2014 amount includes $128,000 assumed in the Sterling merger. Interest on unrecognized tax benefits is reported by the Company as a component as of tax expense. As of December 31, 2014 and 2013, the accrued interest related to unrecognized tax benefits is $399,000 and $193,000, 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, 2014 and 2013, respectively:



(in thousands)	2014			2013
Balance, beginning of period	$	602		$	598
Effectively settled positions	(86		)	4
Changes for tax positions of current year	146			—
Changes for tax positions of prior years/assumed in merger	2,009			—
Balance, end of period	$	2,671		$	602