NOTE 14. INCOME TAXES

The following table presents the components of income tax expense for the years indicated:



	December 31,
	2015			2014			2013
	(In thousands)
Current Income Tax Expense:
Federal	$	(11,950	)	$	(14,611	)	$	(32,113	)
State	(28,167		)	(10,823		)	(7,667		)
Total current income tax expense	(40,117		)	(25,434		)	(39,780		)
Deferred Income Tax (Expense) Benefit:
Federal	(128,436		)	(70,662		)	9,099
State	(11,964		)	(19,795		)	(1,586		)
Total deferred income tax (expense) benefit	(140,400		)	(90,457		)	7,513
Total income tax expense	$	(180,517	)	$	(115,891	)	$	(32,267	)

The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable federal statutory income tax rate of 35% to earnings or loss before income taxes for the years indicated:



	December 31,
	2015			2014			2013
	(In thousands)
Computed expected income tax expense at federal statutory rate	$	(168,047	)	$	(98,575	)	$	(26,201	)
State tax expense, net of federal tax benefit	(29,009		)	(15,689		)	(6,014		)
Tax‑exempt interest benefit	8,274			4,472			3,979
Increase in cash surrender value of life insurance	884			739			407
Tax credits	2,441			3,567			2,480
Nondeductible employee compensation	(1,005		)	(6,792		)	(4,730		)
Nondeductible acquisition‑related expense	(876		)	(2,994		)	(1,196		)
Acquisition‑related securities gain	—			—			1,828
Release/settlement of FIN 48 reserve	5,529			(157		)	—
Valuation allowance change	2,917			3,520			—
Other, net	(1,625		)	(3,982		)	(2,820		)
Recorded income tax expense	$	(180,517	)	$	(115,891	)	$	(32,267	)

The Company had net income taxes receivable of $6.2 million and $18.3 million at December 31, 2015 and 2014, included in other assets on its consolidated balance sheets.

As of December 31, 2015 and 2014, the Company had a valuation allowance of $121.1 million and $130.3 million against acquired deferred tax assets (“DTA”). Periodic reviews of the carrying amount of DTA are made to determine if a valuation allowance is necessary. A valuation allowance is required, based on available evidence, when it is more likely than not that all or a portion of a DTA will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the DTA. All available evidence, both positive and negative, that may affect the realizability of the DTA are identified and considered in determining the appropriate amount of the valuation allowance. It is more likely than not that these deferred tax assets subject to a valuation allowance will not be realized primarily due to their character and/or the expiration of the carryforward periods.

We have net operating loss and tax credit carryforwards for federal and state income tax purposes that can be utilized to offset future taxable income. Upon a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code (“the Code”), our ability to utilize our net operating loss forwards and other tax attributes after the ownership change generally would be limited. The annual limit would generally equal the product of the applicable long term tax exempt rate and the value of the relevant taxable entity’s capital stock immediately before the ownership change. These change of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more (the “5-Percent Shareholders”) of a company’s outstanding stock, including certain public groups of stockholders as set forth under Section 382, and those arising from new stock issuances and other equity transactions.

We acquired Square 1 on October 6, 2015. As merger consideration, we issued approximately 18.1 million shares of common stock to the Square 1 stockholders. The issuance of these shares caused us to experience an ownership change under Section 382 of the Code. Consequently, the utilization of our net operating loss carryforwards, tax credits, and other tax attributes are subject to an annual limitation. We estimate that such annual limitation will not impose additional restriction on the anticipated usage of our existing tax attributes.

At December 31, 2015, we had approximately $200.4 million of unused federal net operating loss carryforwards that may be applied against future taxable income. If not used, these carryforwards will fully expire in 2031. We had available at December 31, 2015, approximately $1.0 billion of unused state net operating loss carryforwards that may be applied against future taxable income. The state net operating loss carryforwards will expire in varying amounts beginning in 2016 through 2035.

As of December 31, 2015, for federal tax purposes, we had capital loss carryforwards of $82.3 million. If not used, these carryforwards will begin to expire in 2016 and will fully expire in 2018.

As of December 31, 2015, for federal tax purposes, we had foreign tax credit carryforwards of $28.6 million. The foreign tax credit carryforwards are available to offset future federal taxable income. If not used, these carryforwards will begin to expire in 2016 and fully expire in 2021. We also had Low Income Housing Tax Credit carryforwards of $7.1 million, which if not used, will begin to expire in 2034 and fully expire in 2035.

The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of the dates indicated:



	December 31,
	2015			2014
	(In thousands)
Deferred Tax Assets:
Book allowance for loan losses in excess of tax specific charge-offs	$	97,385		$	100,981
Interest on nonaccrual loans	5,100			7,394
Deferred compensation	4,027			4,585
Premises and equipment, principally due to differences in depreciation	5,867			5,359
Foreclosed assets valuation allowance	6,479			7,353
Assets acquired in FDIC‑assisted acquisitions	2,319			10,217
State tax benefit	6,101			5,009
Net operating losses	125,678			207,575
Capital loss carryforwards	35,597			57,494
Accrued liabilities	40,733			36,115
Other	—			6,254
Equity investments	16,712			8,666
Goodwill	37,423			44,372
Tax credits	35,874			32,183
Gross deferred tax assets	419,295			533,557
Valuation allowance	(121,138		)	(130,282		)
Deferred tax assets, net of valuation allowance	298,157			403,275
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles	19,122			3,978
Deferred loan fees and costs	16,283			17,594
Unrealized gain on securities available‑for‑sale	19,224			17,926
FHLB stock	1,067			2,820
Subordinated debentures	39,242			40,369
Operating leases	40,029			34,136
Unrealized income from FDIC‑assisted acquisitions	7,543			2,041
Tax mark-to-market	17,087			—
Other	12,171			—
Gross deferred tax liabilities	171,768			118,864
Total net deferred tax asset	$	126,389		$	284,411

Based upon our taxpaying history and estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.

The following table summarizes the activity related to the Company's unrecognized tax benefits for the years indicated:



	Year Ended December 31,
Unrecognized Tax Benefits:	2015			2014
	(In thousands)
Balance, beginning of year	$	20,501		$	—
Increase related to CapitalSource Inc. merger	—			18,724
Increase based on tax positions related to prior years	6,839			2,371
Reductions for tax positions related to prior years	(4,789		)	—
Reductions related to settlements	(6,640		)	(293		)
Reductions for tax positions as a result of a lapse of the applicable statute of limitations	(756		)	(301		)
Balance, end of year	$	15,155		$	20,501

As of December 31, 2015 and 2014, our unrecognized tax benefit that may affect the effective tax rate was $4.3 million and $2.4 million. Due to the potential for the resolution of federal and state examinations and the expiration of various statutes of limitations, it is reasonably possible that our gross unrecognized tax benefits may decrease within the next twelve months by as much as $4.0 million.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2015, we reduced our accrual for interest expense and penalties and recognized $2.4 million in income related to these items. For the year ended December 31, 2014, we accrued and recognized $0.2 million in interest expense and penalties. The amount of interest and penalties accrued and recognized for the year ended December 31, 2013 was minimal and immaterial to our financial results. We had $0.9 million and $3.3 million accrued for the payment of interest and penalties as of December 31, 2015 and 2014.

We file federal and state income tax returns with the Internal Revenue Service ("IRS") and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2006 through 2014. We are currently under examination by the IRS for tax years 2008 through 2012 and certain state jurisdictions for tax years 2006 through 2013.