Note 17. Income Taxes

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

(in thousands)	Current			Deferred			Total

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

2010
Federal	$	12,381		$	20,125		$	32,506
State		(16,425	)		9,974			(6,451	)

Total	$	(4,044	)	$	30,099		$	26,055

The Company recognized income tax expense of $98.8 million, $77.6 million and $26.1 million in 2012, 2011 and 2010, respectively. The effective tax rate for 2012 was equal to 32.1 percent of pretax income, compared to an effective tax rate of 30.6 percent for 2011 and 16.2 percent for 2010.

The Company had income taxes receivable of $59.6 million and $40.3 million at December 31, 2012 and 2011, respectively.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented below:

	December 31,

(in thousands)	2012		2011
Deferred tax assets:
Allowance for credit losses	$	137,680	$	129,931
Federal and state carryforwards		665		—
Accrued expenses		79,416		68,981
Nonaccrual interest income		20,912		16,766
Basis difference in OREO and loans		—		15,118
Unrealized losses on cash flow hedges		—		607
Share-based compensation		28,993		26,471
Basis difference in investments		12,952		12,179
Other		3,306		3,910

Total gross deferred tax assets		283,924		273,963
Deferred tax liabilities:
Core deposit and other intangibles		11,353		5,268
State income taxes		7,763		6,625
Depreciation		6,371		2,814
Basis difference in OREO and loans		890		—
Deferred loan origination costs		8,483		6,728
Prepaid expenses		3,784		2,760
Unrealized gains on securities available-for-sale		62,225		53,308
Leasing activities		43,176		20,950
Basis difference in FHLB stock		13,331		19,755
Other		2,087		226

Total gross deferred tax liabilities		159,463		118,434

Net deferred tax assets	$	124,461	$	155,529

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, 2012, 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)

	2012			2011			2010
Statutory rate		35.0	%		35.0	%		35.0	%
Net state income tax		6.1			6.2			5.9
Tax exempt income		(4.2	)		(4.0	)		(6.3	)
Affordable housing investments		(4.7	)		(5.0	)		(7.2	)
FTB settlement and other adjustments		—			—			(9.5	)
All other, net		(0.1	)		(1.6	)		(1.7	)

Effective tax provision		32.1	%		30.6	%		16.2	%

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 2012. The Company is also under audit with the California Franchise Tax Board for the tax years 2005 to 2007. The potential financial statement impact, if any, resulting from the completion of these audits is expected to be minimal.

From time to time, there may be differences in opinions with respect to the tax treatment accorded 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. As of December 31, 2012, the Company does not have any tax positions which dropped below a more likely than not threshold.

A reconciliation of unrecognized tax benefits for 2012 and 2011 is as follows:

	For the year ended December 31,

(in thousands)	2012		2011
Balance, beginning of the year	$	4,279	$	4,164
Additions for tax positions of current year		194		443
Reductions for tax positions of prior years		—		(273	)
Settlements		—		(55	)

Balance, end of the year	$	4,473	$	4,279

As of December 31, 2012 and 2011, the total tax liabilities associated with unrecognized tax benefits that, if recognized would impact the effective tax rate, is $2.9 million and $2.8 million, respectively.

The Company recognizes accrued interest and penalties relating to uncertain tax positions as an income tax provision expense. The Company recognized interest and penalties expense of $0.2 million and $0.4 million for 2012 and 2011, respectively, and $0.4 million of benefit on interest and penalties in 2010. The Company had approximately $3.4 million and $3.2 million of accrued interest and penalties as of December 31, 2012 and 2011, respectively. The Company does not expect a material change in the total amount of unrecognized tax benefits within the next twelve months.