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 Operations for the years ended December 31:


(in thousands)
	Current			Deferred			Total
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

YEAR ENDED DECEMBER 31, 2009:
Federal	$	(24,339	)	$	(7,471	)	$	(31,810	)
State		1,762			(10,889	)		(9,127	)

	$	(22,577	)	$	(18,360	)	$	(40,937	)

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:


	2011			2010			2009
Statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Goodwill impairment		—			—			-20.0	%
State tax, net of Federal income tax		3.8	%		2.5	%		2.9	%
Tax-exempt income		-3.7	%		-13.6	%		2.2	%
Tax credits		-1.5	%		-5.5	%		1.0	%
Other		-0.6	%		-1.4	%		-0.1	%

Effective income tax rate		33.0	%		17.0	%		21.0	%

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


(in thousands)
	2011			2010
DEFERRED TAX ASSETS:
Covered loans	$	38,812		$	49,334
Allowance for loan and lease losses		36,221			41,084
Accrued severance and deferred compensation		10,976			10,690
Tax credits		6,815			13,289
Non-covered other real estate owned		6,566			3,741
Covered other real estate owned		6,284			8,132
Non-covered loans		2,607			3,401
Discount on trust preferred securities		2,535			2,753
Basis differences of stock and securities		2,335			2,998
Net operating loss carryforwards		1,291			8,897
Other		9,826			7,719

Total gross deferred tax assets		124,268			152,038
DEFERRED TAX LIABILITIES:
FDIC indemnification asset		45,817			73,719
Unrealized gain on investment securities		22,713			16,966
Fair market value adjustment on junior subordinated debentures		20,099			20,801
Premises and equipment depreciation		8,789			5,581
Mortgage servicing rights		7,058			5,782
Deferred loan fees		4,983			4,297
Intangibles		4,928			5,228
Leased assets		4,251			4,879
Other		6,063			5,136

Total gross deferred tax liabilities		124,701			142,389

Net deferred tax (liabilities) assets	$	(433	)	$	9,649

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 $124.3 million and $152.0 million at December 31, 2011 and 2010, respectively, will be realized principally through carry-back to taxable income in prior years and 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 of state tax credits of $6.8 and $8.9 million at December 31, 2011 and 2010, respectively, and none and $4.3 million of federal low income housing credits at December 31, 2011 and 2010, respectively. 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. Federal low income housing credits have a twenty-year carry forward. 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 has California state net operating loss carry forwards of $1.3 million at both December 31, 2011 and 2010. The California state net operating losses may be carried forward twenty years. Management believes, based upon the Company's historical performance, that the deferred tax assets relating to federal and state net operating losses 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. Except for the California amended returns of an acquired institution for the tax years 2001, 2002, and 2003, and only as it relates to the net interest deduction taken on these amended returns, the Company is no longer subject to U.S. federal or Oregon state tax authority examinations for years before 2008 and California state tax authority examinations for years before 2004. The Internal Revenue Service concluded an examination of the Company's U.S. income tax returns for 2006 through 2008 in 2010. The results of these examinations had no significant impact on the Company's financial statements.

In accordance with the provisions of FASB ASC 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 a reduction in its liability for unrecognized tax benefits relating to California tax incentives and temporary differences in the amount of $39,000 and $1.7 million during 2011 and 2010, respectively. The Company had gross unrecognized tax benefits recorded as of December 31, 2011 and 2010 in the amounts of $550,000 and $589,000, respectively. If recognized the unrecognized tax benefit would impact the 2011 annual effective tax rate by 0.3%. During 2011, the Company recognized a benefit of $4,000 in interest related to its liability for unrecognized tax benefits during the same period. During 2010, the Company accrued $194,000 of interest related to unrecognized tax benefits, which is reported by the Company as a component of tax expense. As of December 31, 2011 and 2010, the accrued interest related to unrecognized tax benefits is $167,000 and $171,000, 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, 2011 and 2010, respectively:


(in thousands)
	2011			2010
Balance, beginning of period	$	589		$	2,263
Changes based on tax positions related to prior years		—			(1,674	)
Reductions for tax positions of prior years		(39	)		—

Balance, end of period	$	550		$	589