Federal and State Income Taxes

The following is a summary of consolidated income tax expense:



	Years ended
(Dollars in thousands)	December 31, 2014		December 31, 2013	December 31, 2012
Current
Federal	$	21,860	18,377	12,718
State	8,118		7,007	5,522
Total current income tax expense	29,978		25,384	18,240
Deferred
Federal	5,016		3,918	708
State	915		715	129
Total deferred income tax expense	5,931		4,633	837
Total income tax expense	$	35,909	30,017	19,077

Note 15. 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, 2014		December 31, 2013		December 31, 2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	4.0	%	4.0	%	3.9	%
Tax-exempt interest income	(11.5	)%	(12.2	)%	(14.0	)%
Tax credits	(2.8	)%	(3.2	)%	(4.2	)%
Other, net	(0.5	)%	0.3	%	(0.5	)%
Effective tax rate	24.2	%	23.9	%	20.2	%

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, 2014			December 31, 2013
Deferred tax assets
Allowance for loan and lease losses	$	50,013		50,652
Other real estate owned	8,200			8,041
Interest rate swap agreements	6,467			—
Acquisition fair market value adjustments	5,302			4,151
Deferred compensation	5,024			4,837
Income tax credits and net operating loss carryforwards	4,652			2,778
Employee benefits	2,839			3,132
Other	4,290			3,662
Total gross deferred tax assets	86,787			77,253
Deferred tax liabilities
Available-for-sale securities	(17,716		)	(5,402	)
FHLB stock dividends	(10,342		)	(10,359	)
Deferred loan costs	(6,419		)	(6,058	)
Intangibles	(4,290		)	(3,099	)
Depreciation of premises and equipment	(2,358		)	(3,939	)
Interest rate swap agreements	—			(736	)
Other	(3,925		)	(4,111	)
Total gross deferred tax liabilities	(45,050		)	(33,704	)
Net deferred tax asset	$	41,737		43,549

Note 15. Federal and State Income Taxes (continued)

The Company has federal income tax credit carryforwards of $845,000 expiring in 2034. The Company has federal net operating loss carryforwards of $9,388,000 expiring between 2029 and 2031. The Company has Colorado net operating loss carryforwards of $17,317,000 expiring between 2029 and 2031.

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, 2014:



	Years ended December 31,
Federal	2008, 2009, 2010, 2011, 2012 and 2013
Montana	2011, 2012 and 2013
Idaho	2009, 2010, 2011, 2012 and 2013
Colorado	2008, 2009, 2010, 2011, 2012 and 2013
Utah	2011, 2012 and 2013

The Company had no unrecognized income tax benefits as of December 31, 2014 and 2013. 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, 2014, 2013, and 2012 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2014 and 2013.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2014 and 2013. 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, 2014 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.