Income taxes

The benefit (provision) for income taxes for the years ended December 31, 2013, 2012, and 2011 was approximately as follows (dollars in thousands):



	2013			2012			2011
Current:
Federal	$	30		$	58		$	(88	)
State	(27		)	(137		)	(257		)
	3			(79		)	(345		)
Deferred	50,143			—			(10,027		)
Benefit (provision) for income taxes	$	50,146		$	(79	)	$	(10,372	)

The benefit (provision) for income taxes results in effective tax rates which are different than the federal income tax statutory rate. A reconciliation of the differences for the years ended December 31, 2013, 2012, and 2011 is as follows (dollars in thousands):



	2013			2012			2011
Expected federal income tax credit at statutory rates	$	(238	)	$	(2,050	)	$	12,547
State income taxes, net of federal effect	(33		)	(263		)	2,184
Effect of nontaxable income, net	547			583			670
Valuation allowance for deferred tax assets	—			10,762			(25,036		)
Reversal of valuation allowance	41,632			—			—
Section 382 impairment re-evaluation	8,163			(8,163		)	—
Rate change for deferred taxes	52			(814		)	—
Other, net	23			(134		)	(737		)
Benefit (provision) for income taxes	$	50,146		$	(79	)	$	(10,372	)

The significant components of the net deferred tax assets and liabilities at December 31, 2013 and 2012 were as follows (dollars in thousands):



	2013			2012
Deferred tax assets:
Reserve for loan losses and unfunded loan commitments	$	8,530		$	10,982
Deferred benefit plan expenses, net	8,700			7,448
Federal and state net operating loss and other carryforwards	33,823			20,325
Tax credit carryforwards	1,112			547
Allowance for losses on OREO	2,167			5,364
Accrued interest on non-accrual loans	231			494
Purchased intangibles related to CBGP	86			86
Net unrealized loss on investment securities available-for-sale	21			—
Other	284			35
Deferred tax assets	54,954			45,281
Valuation allowance for deferred tax assets	(74		)	(41,698		)
Deferred tax assets, net of valuation allowance	54,880			3,583
Deferred tax liabilities:
Accumulated depreciation and amortization	2,821			1,730
Deferred loan fees	711			809
FHLB stock dividends	556			556
Net unrealized gains on investment securities available-for-sale	—			2,258
Other	724			488
Deferred tax liabilities	4,812			5,841
Net deferred tax assets (liabilities)	$	50,068		$	(2,258	)

The Company recorded an income tax benefit of $50.1 million in 2013. The significant income tax benefit resulted primarily from reversing substantially all of the Company's DTA valuation allowance at June 30, 2013 of $41.6 million and the reversal of certain previously written-off deferred tax benefits of $8.5 million resulting from the reassessment of the Company's Internal Revenue Code ("IRC") Section 382 limitations and other related analyses. During 2012 and 2011, the Company recorded an income tax provision of approximately $0.1 million and $10.4 million, respectively. Included in the 2011 amount was an income tax provision of approximately $22.1 million related to the extraordinary gain on the extinguishment of the Debentures (see Note 2), which was calculated based on the Company’s estimated statutory income tax rates. The 2011 income tax provision of $10.4 million also includes a credit for income taxes of approximately $11.8 million related to the Company’s loss from operations excluding the extraordinary gain.

At December 31, 2013, the Company had deferred tax assets of $27.4 million for federal net operating loss carry-forwards which will expire in 2030, 2031 and 2032, $0.7 million for charitable contribution carry-forwards which will expire between 2014 and 2018; and $1.0 million for federal tax credits which will expire at various dates from 2028 to 2032. Also, at December 31, 2013, the Company had deferred tax assets of $5.7 million for state and local net operating loss carry-forwards which will expire at various dates from 2013 to 2032 and $0.1 million for state tax credits which will expire at various dates from 2016 to 2020. At December 31, 2012, the Company had deferred tax assets of $15.6 million for federal net operating loss carry-forwards which will expire in 2030, 2031 and 2032, $0.9 million for charitable contribution carry-forwards which will expire between 2013 and 2017; and $0.4 million for federal tax credits which will expire at various dates from 2028 to 2032. Also, at December 31, 2012, the Company had deferred tax assets of $3.9 million for state and local net operating loss carry-forwards which will expire at various dates from 2013 to 2032 and $0.2 million for state tax credits which will expire at various dates from 2016 to 2020.

In assessing the realizability of deferred tax assets (“DTA”), management considers whether it is more likely than not that some portion or all of the DTA will or will not be realized. The Company's ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The valuation allowance for deferred tax assets as of December 31, 2013 and 2012 was $0.1 million and $41.7 million, respectively. The DTA valuation allowance was established during 2009 due to uncertainty at the time regarding the Company's ability to generate sufficient future taxable income to fully realize the benefit of the net DTA. Due to cumulative losses incurred by the Company in years prior to 2012 and other relevant considerations, the Company was unable to conclude that it was more likely than not that it will realize its net deferred tax asset and, accordingly, maintained a valuation allowance to fully offset its deferred tax asset at December 31, 2012 and 2011.

During 2013 the Company reversed substantially all of its December 31, 2012 valuation allowance due to management's determination that it was more likely than not that a significant amount of the Company's deferred tax asset would be realized. The determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. Considering the guidance in paragraphs 21-23 of ASC 740-10-30, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Such a condition, which existed at June 30, 2013, is considered a significant piece of negative evidence that is difficult to overcome.

The Company had a pre-tax loss in 2011 of $91.8 million as a result of its steps to mitigate credit losses associated with its loan portfolio and losses associated with its OREO. Total charge offs included in the reserve for loan losses in 2011 was $81.4 million. Of that, $54.0 million resulted from a bulk sale of approximately $110.0 million (carrying value) of certain non-performing, substandard, and related performing loans. This substantial reduction of classified loans began a process to reduce classified assets to a level consistent with regulatory expectations for a Bank performing in a safe and sound manner. Further, OREO was greatly reduced during 2012 in part due to a 2011 $5.0 million general valuation allowance allocated among homogeneous groupings of OREO properties as part of a plan to strategically expedite the liquidation of a material portion of OREO properties.

The Company has revised and enhanced loan underwriting and credit risk management standards which have been important in creating credit quality improvements and current profitability. Improvement in underwriting and credit risk management practices can be attributed to a number of key initiatives, including replacement of leadership responsible for credit risk management, the implementation of a centralized credit structure, a comprehensive revision to credit policies including specific concentration limits and standardized loan origination and monitoring practices. These initiatives have been reviewed and approved by the Board of Directors and examined by bank regulators.

The credit risk management infrastructure has been reconstituted with people with a strong depth and breadth of industry experience who have developed sound credit processes and lending initiatives. A formal loan concentration policy was adopted to limit and manage exposure to certain loan concentrations, including acquisition, development and construction (ADC) loans and commercial real estate (CRE) loans. This enhanced policy provides a more detailed program for portfolio risk management and reporting, including setting limits and sub-limits on ADC and CRE loans as a percentage of risk-based capital (in the aggregate and by loan type), having large borrower concentration limits, and monitoring by geography, industry and portfolio mix.

Since implementation of strengthened policies, historically high loan loss categories such as land acquisition and residential construction and development loans (within the CRE portfolio) have decreased dramatically. Since its peak at 720% of regulatory capital (defined as total risk based capital) in 2010, non-owner occupied CRE (including ADC) has decreased to 255% of regulatory capital. Since its peak at 293% of regulatory capital in 2008, ADC has decreased to 34% of regulatory capital (primarily comprised of non-speculative commercial construction).

Credit risk management has developed various strategies for the remediation of criticized and classified assets, including exit and rehabilitation strategies. Classified assets have decreased 81% from their peak levels in 2011. Also a robust and centralized credit structure supporting consistent underwriting standards has been developed; centralized credit authority has been established to improve quality and consistency; and the Company has invested in systems and experienced credit resources to strengthen origination, underwriting, approval and collateral valuation processes.

Management evaluated the unique and non-recurring loss evidence as an important consideration in the evaluation of the Company’s cumulative loss. While this loss occurred the components of it can be assessed to determine whether the subsequent actions taken by management to strengthen credit risk management mitigate the risk that such losses would recur in the forecast period used to evaluate the utilization of the DTA. Management determined that the steps taken to strengthen its credit risk management process have addressed the conditions that existed when the loans were created and the losses were incurred. The outcome of this evaluation is an important factor in management’s determination that positive evidence overcomes the existence of the cumulative loss in the recent past.

Positive considerations also evaluated by management include reduction of the risk inherent in the loan portfolio as indicated by the reduction of classified loans, strengthening of the credit risk management process, elimination of substantially all of the OREO properties, termination of all existing regulatory agreements and orders, profitable performance during the past two years, development of new products and services that strengthen non-interest income (including customer swap arrangements, mortgage lending, and enhanced credit card products), opportunities that exist to bring operating costs in line with peer groups, the Company’s strong capital and liquidity positions, substantial improvements resulting from new members of the Board of Directors and management, new leadership in the production units, strong loan production focused on commercial lending, implementation of a productive sales management culture, strengthening of the Company’s governance and oversight and the sustained improvement in the economic conditions at a national and local level.

As management determined that positive evidence outweighed the negative, long term financial forecasts were developed to assess the Company’s capacity to realize the DTA. This process included a variety of scenarios necessary to understand a range of outcomes whether considered probable or not. Generally these various scenarios contemplated very unfavorable through moderately favorable outcomes thought to be possible. As a result of this analysis management concluded it was more likely than not that forecasted earnings performance would allow for the realization of the DTA in a timely manner.

During the second quarter of 2013, management completed its reassessment of the Internal Revenue Code Section 382 limitations, resulting from the Capital Raise in January 2011. As broadly defined in Section 382, the issuance of common stock in connection with the Capital Raise resulted in an “ownership change” of the Company. As a result of this reassessment and other analyses, $8.5 million of tax benefits previously impaired were restored to the deferred tax account for federal net operating losses ("NOL's"), federal tax credits and state NOL's. The net operating loss carry-forwards at December 31, 2013 are expected to be utilized over the statutory carry-forward period.

The Company files a U.S. federal income tax return, state income tax returns in Idaho and Oregon, and local income tax returns in various jurisdictions. The Internal Revenue Service (“IRS”) has audited the Company’s 2009 federal income tax return. The IRS issued a final audit report related to the 2009 audit in 2011. As a result of this audit, the Company made a payment to the IRS of $0.8 million during 2011. The state and local returns remain open to examination for 2008 and all subsequent years. During 2013 the Company received tax refunds totaling $0.1 million related to prior year tax returns. In 2012, the Company did not receive any income tax refunds.

The Company has evaluated its income tax positions as of December 31, 2013 and 2012. Based on this evaluation, the Company has determined that it does not have any uncertain income tax positions for which an unrecognized tax liability should be recorded. The Company recognizes interest and penalties related to income tax matters as additional income taxes in the consolidated statements of operations. The Company had no significant interest or penalties related to income tax matters during the years ended December 31, 2013, 2012 or 2011.