Income Taxes (Tables)

12 Months Ended

Dec. 31, 2014

Income tax expense for the years ended December 31, 2014, 2013 and 2012 consisted of the following:



	Years Ended December 31,
	2014			2013			2012
	(In thousands)
Current tax expense	$	9,992		$	4,344		$	5,916
Deferred tax (benefit) expense	(3,087		)	326			185
(Decrease) increase in valuation allowance	—			(77		)	77
Income tax expense	$	6,905		$	4,593		$	6,178

Income tax expense (benefit) the Federal statutory income tax rate

A reconciliation of the Company's effective income tax rate with the Federal statutory income tax rate of 35% is as follows:



	Years Ended December 31,
	2014			2013			2012
	(In thousands)
Income tax expense at Federal statutory rate	$	9,772		$	4,959		$	6,804
Tax-exempt instruments	(1,598		)	(858		)	(649		)
Non-deductible acquisition costs	373			469			—
Federal tax credits (1)	(812		)	—			—
Effects of BOLI	(159		)	(25		)	(28		)
Tax position resolution (2)	(728		)	—			—
Valuation allowance	—			(77		)	77
Other, net	57			125			(26		)
Income tax expense	$	6,905		$	4,593		$	6,178

(1)

Federal tax credits are provided for under the New Market Tax Credit program. A subsidiary of Heritage Bank was awarded an allocation of New Market Tax Credit investments consisting of three tranches totaling $25.0 million. Gross tax credits related to these tranches totaling $9.8 million are available through 2020. The subsidiary is required to fund 85 percent of a tranche to claim the entire tax credit, and it has until May 15, 2015 to complete the funding. Tax benefits related to these credits were recognized for financial reporting purposes in the same period that the credits were recognized in the Company's income tax returns. The Company has analyzed the three tranches and believes that it is more likely than not that all tranches will be funded to 85 percent by May 15, 2015. The Company believes that these tax credits will be realized and therefore has reflected the impact of these credits in its estimated annual effective tax rate for 2014.


(2)	Washington Banking Company had recorded a liability for certain tax positions prior to the merger effective date, which the Company assumed as part of the Washington Banking Merger. These tax positions were resolved as of December 31, 2014, resulting in a decrease of the Company's income tax expense for the year ended December 31, 2014.

Deferred income tax asset (liability)

The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis:



	December 31, 2014			December 31, 2013
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	5,460		$	7,003
Accrued compensation	1,382			821
Stock compensation	818			524
Capital loss carryforward	30			95
Unrealized losses charged to earnings on other than temporarily impaired investment securities	338			622
Net unrealized losses charged to other comprehensive income on securities	—			626
Goodwill and other intangible assets	—			2,107
Market discount on purchased loans	17,949			6,767
Foregone interest on nonaccrual loans	2,337			1,026
Net operating loss carryforward acquired from NCB	553			588
Difference in amounts reflected in financial statements and income tax basis of certain liabilities assumed in business combinations	3,492			—
Other deferred tax assets	1,394			705
Total deferred tax assets	33,753			20,884
Deferred tax liabilities:
Deferred loan fees, net	(1,982		)	(867		)
Premises and equipment	(1,937		)	(1,520		)
FHLB stock	(2,768		)	(1,039		)
Net unrealized gains charged to other comprehensive income on securities	(1,832		)	—
Indemnification asset	(392		)	(1,539		)
Goodwill and other intangible assets	(1,560		)	—
Federal tax credits	(439		)	—
Junior subordinated debentures	(2,349		)	—
Other deferred tax liabilities	(730		)	(248		)
Total deferred tax liabilities	(13,989		)	(5,213		)
Deferred income tax asset, net	$	19,764		$	15,671