Income Taxes

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as “major” tax filings. U.S. federal tax examinations through 2009 have been concluded. In December 2012, the IRS concluded their examination of our U.S. federal tax returns for the 2008 and 2009 tax years without any material adjustments. Our U.S. federal tax returns for 2010 and subsequent years remain open to examination. Our California and Massachusetts tax returns for 2008 and subsequent years remain open to examination.

Current taxes payable were $8.6 million at December 31, 2012, compared to current taxes receivable of $1.0 million at December 31, 2011.

The components of our provision for income taxes for 2012, 2011 and 2010 were as follows:



	Year ended December 31,
(Dollars in thousands)	2012			2011		2010
Current provision:
Federal	$	87,635		$	86,220	$	47,794
State	23,752			25,505		15,042
Deferred expense (benefit):
Federal	2,385			5,756		(1,157		)
State	(503		)	1,606		(277		)
Income tax expense	$	113,269		$	119,087	$	61,402

Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The reconciliation between the federal statutory income tax rate and our effective income tax rate for 2012, 2011 and 2010, is as follows:



	December 31,
(Dollars in thousands)	2012		2011		2010
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of the federal tax effect	5.8		6.0		6.2
Meals and entertainment	0.5		0.5		0.7
Share-based compensation expense on incentive stock options and ESPP	0.4		0.3		1.2
Disallowed officer's compensation	0.1		0.1		0.3
Tax-exempt interest income	(0.4	)	(0.4	)	(0.9	)
Low-income housing tax credit	(1.2	)	(1.1	)	(2.4	)
Other, net	(0.9	)	0.5		(0.8	)
Effective income tax rate	39.3	%	40.9	%	39.3	%

Deferred tax assets and liabilities at December 31, 2012 and 2011, consisted of the following:



	December 31,
(Dollars in thousands)	2012			2011
Deferred tax assets:
Allowance for loan losses	$	53,953		$	45,521
Share-based compensation expense	11,478			9,786
Loan fee income	10,356			8,969
State income taxes	7,042			6,576
Net operating loss	8,175			6,089
Other accruals not currently deductible	2,205			6,010
Research and development credit	364			364
Other	16			16
Deferred tax assets	93,589			83,331
Valuation allowance	(8,539		)	(6,453		)
Net deferred tax assets after valuation allowance	85,050			76,878

Deferred tax liabilities:
Net unrealized gains on available-for-sale securities	(74,983		)	(59,180		)
Nonmarketable securities	(23,363		)	(14,478		)
Derivative equity warrant assets	(5,566		)	(5,428		)
Premises and equipment and other intangibles	(5,466		)	(4,515		)
FHLB stock dividend	(1,252		)	(1,252		)
Deferred tax liabilities	(110,630		)	(84,853		)
Net deferred tax liabilities	$	(25,580	)	$	(7,975	)

At both December 31, 2012 and 2011, federal net operating loss carryforwards totaled $15.8 million, and state net operating loss carryforwards totaled $7.8 million. Our foreign net operating loss carryforwards totaled $10.9 million at December 31, 2012, and we did not have any foreign net operating loss carryforwards at December 31, 2011. These net operating loss carryforwards expire at various dates beginning in 2019. A portion of our net operating loss carryforwards will be subject to provisions of the tax law that limits the use of losses that existed at the time there is a change in control of an enterprise. At December 31, 2012, the amount of our federal and state net operating loss carryforwards that would be subject to these limitations was $7.2 million and $2.2 million, respectively.

Currently, we believe that it is more likely than not that the benefit from these net operating loss carryforwards associated with eProsper and our UK Branch will not be realized in the near term due to difficulties projecting the timing of future profitability in those businesses. In recognition of this, we have provided a valuation allowance of $8.5 million and $6.5 million on the deferred tax assets related to these net operating loss carryforward and research and development credits at December 31, 2012 and 2011, respectively. We believe it is more likely than not that the remaining deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.

At December 31, 2012, our unrecognized tax benefit was $0.4 million, the recognition of which would reduce our income tax expense by $0.3 million. We expect that our unrecognized tax benefit will change in the next 12 months; however we do not expect the change to have a significant impact on our financial position or our results of operations.

A summary of changes in our unrecognized tax benefit (including interest and penalties) in 2012 is as follows:



(Dollars in thousands)	Reconciliation of Unrecognized Tax Benefit			Interest & Penalties			Total
Balance at December 31, 2011	$	640		$	140		$	780
Additions for tax positions for prior years	284			63			347
Reduction for tax positions for prior years	—			(25		)	(25		)
Settlement with tax authorities	(640		)	(18		)	(658		)
Balance at December 31, 2012	$	284		$	160		$	444