Federal and State Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Expense (Benefit) [Abstract]

Federal and State Income Taxes

Note 14. Federal and State Income Taxes

The following is a summary of consolidated income tax expense:

	Years ended
(Dollars in thousands)	December 31, 2012		December 31, 2011		December 31, 2010
Current
Federal	$	12,718	8,836		3,724
State	5,522		4,191		3,481
Total current tax expense	18,240		13,027		7,205
Deferred
Federal	708		(11,256	)	115
State	129		(2,052	)	23
Total deferred tax expense (benefit)	837		(13,308	)	138
Total income tax expense (benefit)	$	19,077	(281	)	7,343

Note 14. Federal and State Income Taxes (continued)

Combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:

	Years ended
	December 31, 2012		December 31, 2011		December 31, 2010
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	3.9	%	8.1	%	4.6	%
Tax-exempt interest income	(14.0	)%	(65.5	)%	(17.3	)%
Tax credits	(4.2	)%	(22.1	)%	(7.3	)%
Goodwill impairment charge	—	%	42.3	%	—	%
Other, net	(0.5	)%	0.6	%	(0.2	)%
Effective tax rate	20.2	%	(1.6	)%	14.8	%

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows:

(Dollars in thousands)	December 31, 2012			December 31, 2011
Deferred tax assets
Allowance for loan and lease losses	$	50,963		53,555
Other real estate owned	7,685			7,852
Interest rate swap agreements	6,549			3,465
Federal income tax credits	3,543			2,400
Deferred compensation	3,129			2,964
Impairment of equity securities (FHLMC & FNMA)	2,954			2,954
Employee benefits	2,715			2,610
Non-accrued interest	2,008			2,894
Other	2,446			2,713
Total gross deferred tax assets	81,992			81,407
Deferred tax liabilities
Available-for-sale securities	(37,083		)	(24,783	)
FHLB stock dividends	(10,143		)	(10,165	)
Depreciation of premises and equipment	(5,437		)	(6,169	)
Deferred loan costs	(5,316		)	(4,954	)
Intangibles	(1,832		)	(1,566	)
Other	(1,787		)	(2,689	)
Total gross deferred tax liabilities	(61,598		)	(50,326	)
Net deferred tax asset	$	20,394		31,081

The Company’s federal income tax credit carryforwards will expire in 2031 and 2032.

Note 14. Federal and State Income Taxes (continued)

The Company and the Bank join together in the filing of consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho, Colorado and Utah. Although the Bank has operations in Wyoming and Washington, neither Wyoming nor Washington imposes a corporate-level income tax. All required income tax returns have been timely filed. The following schedule summarizes the years that remain subject to examination as of December 31, 2012:

	Years ended December 31,
Federal	2009, 2010 and 2011
Montana	2009, 2010 and 2011
Idaho	2009, 2010 and 2011
Colorado	2008, 2009, 2010 and 2011
Utah	2009, 2010 and 2011

The Company had no unrecognized tax benefit as of December 31, 2012, and 2011. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense.

During the years ended December 31, 2012, and 2011, the Company did not recognize any interest expense or penalties with respect to income tax liabilities. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2012, and 2011.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance is not necessary at December 31, 2012, and 2011. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing temporary differences). In its assessment, the Company considered its strong earnings history, no history of tax credit carryforwards expiring unused, and no future net operating losses (for tax purposes) are expected.

Retained earnings at December 31, 2012 includes $3,600,000 for which no provision for federal income tax has been made. This amount represents the base year reserve for bad debts, which is essentially an allocation of earnings to pre-1988 bad debt deductions for federal income tax purposes only. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that this bad debt reserve will be reduced and thereby result in taxable income in the foreseeable future. The Company is not currently contemplating any changes in its business or operations which would result in a recapture of this reserve for bad debts for federal tax income purposes.