Note 14. Federal and State Income Taxes

The following is a summary of consolidated income tax expense (benefit):



	Years ended
(Dollars in thousands)	December 31, 2013		December 31, 2012	December 31, 2011
Current
Federal	$	18,377	12,718	8,836
State	7,007		5,522	4,191
Total current income tax expense	25,384		18,240	13,027
Deferred
Federal	3,918		708	(11,256	)
State	715		129	(2,052	)
Total deferred income tax expense (benefit)	4,633		837	(13,308	)
Total income tax expense (benefit)	$	30,017	19,077	(281	)

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



	Years ended
	December 31, 2013		December 31, 2012		December 31, 2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	4.0	%	3.9	%	8.1	%
Tax-exempt interest income	(12.2	)%	(14.0	)%	(65.5	)%
Tax credits	(3.2	)%	(4.2	)%	(22.1	)%
Goodwill impairment charge	—	%	—	%	42.3	%
Other, net	0.3	%	(0.5	)%	0.6	%
Effective tax rate	23.9	%	20.2	%	(1.6	)%

Note 14. Federal and State Income Taxes (continued)

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, 2013			December 31, 2012
Deferred tax assets
Allowance for loan and lease losses	$	50,652		50,963
Other real estate owned	8,041			7,685
Deferred compensation	4,837			3,129
Employee benefits	3,132			2,715
Federal income tax credits	2,778			3,543
Interest rate swap agreements	—			6,549
Other	7,813			7,835
Total gross deferred tax assets	77,253			82,419
Deferred tax liabilities
FHLB stock dividends	(10,359		)	(10,143	)
Deferred loan costs	(6,058		)	(5,316	)
Available-for-sale securities	(5,402		)	(37,083	)
Depreciation of premises and equipment	(3,939		)	(5,437	)
Intangibles	(3,099		)	(1,117	)
Interest rate swap agreements	(736		)	—
Other	(4,111		)	(2,929	)
Total gross deferred tax liabilities	(33,704		)	(62,025	)
Net deferred tax asset	$	43,549		20,394

The Company’s federal income tax credit carryforwards will expire in 2033.

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, 2013:



	Years ended December 31,
Federal	2009, 2010, 2011 and 2012
Montana	2010, 2011 and 2012
Idaho	2009, 2010, 2011 and 2012
Colorado	2009, 2010, 2011 and 2012
Utah	2010, 2011 and 2012

The Company had no unrecognized income tax benefits as of December 31, 2013, and 2012. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. Interest expense and penalties recognized with respect to income tax liabilities for the years ended December 31, 2013, 2012, and 2011 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2013, and 2012.

Note 14. Federal and State Income Taxes (continued)

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2013, and 2012. 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 income tax credit carryforwards expiring unused, and no future net operating losses (for tax purposes) are expected.

Retained earnings at December 31, 2013 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 income tax purposes.