Note 18. Income Taxes

Income taxes (benefits) in the consolidated statements of income include the following amounts:

(in thousands)	Current		Deferred			Total

2013
Federal	$	80,709	$	(10,615	)	$	70,094
State		34,097		(9,572	)		24,525


Total	$	114,806	$	(20,187	)	$	94,619




2012
Federal	$	60,253	$	9,525		$	69,778
State		26,260		2,784			29,044


Total	$	86,513	$	12,309		$	98,822




2011
Federal	$	80,707	$	(26,635	)	$	54,072
State		31,792		(8,303	)		23,489


Total	$	112,499	$	(34,938	)	$	77,561

The Company recognized income tax expense of $94.6 million, $98.8 million and $77.6 million in 2013, 2012 and 2011, respectively. The effective tax rate for 2013 was equal to 28.9 percent of pretax income, compared to an effective tax rate of 32.1 percent for 2012 and 30.6 percent for 2011.

The Company had income taxes payable of $8.6 million at December 31, 2013 and income taxes receivable of $59.6 million at December 31, 2012.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented below:

	December 31,

(in thousands)	2013		2012
Deferred tax assets:
Allowance for credit losses	$	153,037	$	137,680
Federal and state carryforwards		143		665
Accrued expenses		97,269		79,416
Nonaccrual interest income		23,201		20,912
Unrealized losses on securities available-for-sale		11,116		—
Share-based compensation		30,371		28,993
Basis difference in investments		420		12,952
Other		2,410		3,306


Total gross deferred tax assets		317,967		283,924
Deferred tax liabilities:
Core deposit and other intangibles		9,261		11,353
State income taxes		7,855		7,763
Depreciation		3,460		6,371
Basis difference in OREO and loans		5,016		890
Deferred loan origination costs		10,686		8,483
Prepaid expenses		3,863		3,784
Unrealized gains on securities available-for-sale		—		62,225
Leasing activities		48,709		43,176
Basis difference in FHLB stock		9,179		13,331
Other		1,948		2,087


Total gross deferred tax liabilities		99,977		159,463


Net deferred tax assets	$	217,990	$	124,461

The tax benefit of deductible temporary differences and tax carryforwards are recorded as an asset to the extent that management assesses the utilization of such temporary differences and carryforwards to be more likely than not. To the extent the deferred tax asset is subsequently determined to be less than more likely than not to be realized, a valuation allowance is recorded. Management expects to have sufficient taxable income in future years to fully realize the deferred tax assets recorded at December 31, 2013, and has determined that a valuation reserve is not required for any of its deferred tax assets.

Income taxes resulted in effective tax rates that differ from the statutory federal income tax rate for the following reasons:

	Percent of Pretax Income (Loss)

	2013			2012			2011
Statutory rate		35.0	%		35.0	%		35.0	%
Net state income tax		6.0			6.1			6.2
Tax exempt income		(4.6	)		(4.2	)		(4.0	)
Affordable housing investments		(4.9	)		(4.7	)		(5.0	)
All other, net		(2.6	)		(0.1	)		(1.6	)


Effective tax provision		28.9	%		32.1	%		30.6	%

The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including tax benefits from investments in affordable housing partnerships, tax-exempt income on municipal bonds and bank-owned life insurance, and other adjustments.

The Company and its subsidiaries file a consolidated federal income tax return and also file income tax returns in various state jurisdictions. The Company is currently being audited by the Internal Revenue Service for the tax year 2013. The Company is also under audit with the California Franchise Tax Board for the tax years 2005 to 2007. The financial statement impact resulting from the completion of these audits is not expected to be material.

From time to time, there may be differences in opinions with respect to the tax treatment of certain transactions. If a tax position which was previously recognized on the consolidated financial statements is no longer more likely than not to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. The Company did not have any material tax positions for which previously recognized benefits were derecognized during the year ended December 31, 2013.

A reconciliation of unrecognized tax benefits for 2013 and 2012 is as follows:

	For the year ended December 31,

(in thousands)	2013			2012
Balance, beginning of the year	$	4,473		$	4,279
Additions for tax positions of current year		2,048			194
Additions for tax positions of prior years		502			—
Settlements		(2,525	)		—


Balance, end of the year	$	4,498		$	4,473

As of December 31, 2013 and 2012, the total tax liabilities associated with unrecognized tax benefits that, if recognized would impact the effective tax rate, is $2.9 million.

The Company recognizes accrued interest and penalties relating to uncertain tax positions as an income tax provision expense. The Company recognized a benefit on interest and penalties of $0.4 million in 2013, and interest and penalties expense of $0.2 million and $0.4 million in 2012 and 2011, respectively. The Company had approximately $3.0 million and $3.4 million of accrued interest and penalties as of December 31, 2013 and 2012, respectively. The Company does not expect a material change in the total amount of unrecognized tax benefits within the next twelve months.