Federal and State Income Taxes

The following table is a summary of consolidated income tax expense:



	Years ended
(Dollars in thousands)	December 31, 2015			December 31, 2014	December 31, 2013
Current
Federal	$	28,705		21,860	18,377
State	9,374			8,118	7,007
Total current income tax expense	38,079			29,978	25,384
Deferred ¹
Federal	(3,451		)	5,016	3,918
State	(629		)	915	715
Total deferred income tax (benefit) expense	(4,080		)	5,931	4,633
Total income tax expense	$	33,999		35,909	30,017

__________


¹	Includes tax benefit of operating loss carryforwards of $391,000, $0 and $0 for the years ended December 31, 2015, 2014, and 2013, respectively.

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, 2015		December 31, 2014		December 31, 2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	3.7	%	4.0	%	4.0	%
Tax-exempt interest income	(12.6	)%	(11.5	)%	(12.2	)%
Tax credits	(3.0	)%	(2.8	)%	(3.2	)%
Other, net	(0.5	)%	(0.5	)%	0.3	%
Effective tax rate	22.6	%	24.2	%	23.9	%

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, 2015			December 31, 2014
Deferred tax assets
Allowance for loan and lease losses	$	50,123		50,013
Other real estate owned	8,380			8,200
Deferred compensation	8,166			5,024
Interest rate swap agreements	7,554			6,467
Acquisition fair market value adjustments	5,842			5,302
Income tax credits and net operating loss carryforwards	3,590			4,652
Employee benefits	3,165			2,839
Other	5,433			4,290
Total gross deferred tax assets	92,253			86,787
Deferred tax liabilities
Available-for-sale securities	(8,812		)	(17,716	)
Deferred loan costs	(7,427		)	(6,419	)
Intangibles	(6,272		)	(4,290	)
FHLB stock dividends	(4,601		)	(10,342	)
Depreciation of premises and equipment	(2,376		)	(2,358	)
Other	(4,290		)	(3,925	)
Total gross deferred tax liabilities	(33,778		)	(45,050	)
Net deferred tax asset	$	58,475		41,737

The Company has federal net operating loss carryforwards of $8,882,000 expiring between 2029 and 2031. The Company has Colorado net operating loss carryforwards of $15,985,000 expiring between 2029 and 2031. The net operating loss carryforwards originated from bank acquisitions.

Note 15. Federal and State Income Taxes (continued)

The Company and the Bank file 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, 2015:



	Years ended December 31,
Federal	2008, 2009, 2010, 2012, 2013 and 2014
Montana	2012, 2013 and 2014
Idaho	2009, 2010, 2011, 2012, 2013 and 2014
Colorado	2008, 2009, 2010, 2011, 2012, 2013 and 2014
Utah	2012, 2013 and 2014

The Company had no unrecognized income tax benefits as of December 31, 2015 and 2014. 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, 2015, 2014, and 2013 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2015 and 2014.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2015 and 2014. 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, 2015 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.