Note 22 – Income Taxes

The components of consolidated income tax expense are as follows:


	2013		2012			2011
	(in thousands)
Current tax expense
Federal	$	11,618	$	9,895		$	9,645
State		4,261		3,425			3,238

		15,879		13,320			12,883

Deferred tax expense (benefit)
Federal		1,976		(235	)		(1,298	)
State		550		(148	)		(393	)

		2,526		(383	)		(1,691	)

Total tax expense	$	18,405	$	12,937		$	11,192

A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense for financial and tax reporting purposes. The net change during the year in the deferred tax asset or liability results in a deferred tax expense or benefit.

Taxes recorded directly to shareholders’ equity are not included in the preceding table. These taxes (benefits) relating to changes in unfunded status of the supplemental retirement plans amounting to $1,269,000 in 2013, ($2,000) in 2012, and $828,000 in 2011, taxes (benefits) related to unrealized gains and losses on available-for-sale investment securities amounting to ($1,780,000) in 2013, ($880,000) in 2012, and $1,090,000 in 2011, taxes (benefits) related to employee stock options of $138,000 in 2013, $13,000 in 2012, and $114,000 in 2011, and taxes (benefits) related to changes in joint beneficiary agreement liability of $0 in 2013, $64,000 in 2012, and ($105,000) in 2011, were recorded directly to shareholders’ equity.

The temporary differences, tax effected, which give rise to the Company’s net deferred tax asset recorded in other assets are as follows as of December 31 for the years indicated:


	2013			2012
	(in thousands)
Deferred tax assets:
Allowance for losses	$	17,096		$	19,073
Deferred compensation		3,093			3,254
Accrued pension liability		5,817			5,272
Accrued bonus		1,037			980
Other accrued expenses		—			879
Unfunded status of the supplemental retirement plans		331			1,600
State taxes		1,390			1,297
Stock option expense		2,225			1,879
Nonaccrual interest		1,840			1,889
Acquisition cost basis		699			482
OREO write downs		331			1,103

Total deferred tax assets		33,859			37,708

Deferred tax liabilities:
Securities income		(986	)		(1,038	)
Unrealized gain on securities		(1,767	)		(3,547	)
Depreciation		(392	)		(344	)
Merger related fixed asset valuations		(379	)		(379	)
Securities accretion		(256	)		(150	)
Mortgage servicing rights valuation		(2,416	)		(1,641	)
Indemnification asset		(87	)		(840	)
Prepaid expenses and other		(795	)		(834	)

Total deferred tax liability		(7,078	)		(8,773	)

Net deferred tax asset	$	26,781		$	28,935

The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

The Company had no unrecognized tax benefits at December 31, 2013, 2012 or 2011. During the year ended December 31, 2013, the Company recognized no interest and penalties related to taxes. During the year ended December 31, 2012, the Company recognized interest and penalties related to taxes of $22,000 and $5,000, respectively. During the year ended December 31, 2011 the Company recognized no interest and penalties related to taxes. The Company files income tax returns in the U.S. federal jurisdiction, and California. With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years before 2010 and 2009, respectively.

The provisions for income taxes applicable to income before taxes for the years ended December 31, 2013, 2012 and 2011 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as follows:


	Years Ended December 31,
	2013			2012			2011
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		6.8			6.7			6.2
Tax-exempt interest on municipal obligations		(0.4	)		(0.5	)		(0.6	)
Tax-exempt life insurance related income		(1.3	)		(2.0	)		(3.1	)
Non-deductible joint beneficiary agreement expense		0.2			0.3			—
Other		(0.1	)		1.0			0.1

Effective Tax Rate		40.2	%		40.5	%		37.6	%