11. INCOME TAXES

Income tax expense consists of the following:


	For the Year Ended December 31,
	2012			2011		2010
	(Dollars in thousands)
Current provision:
Federal	$	35,089		$	9,111	$	30,053
State		15,910			3,948		15,626

		50,999			13,059		45,679
Deferred provision/(benefit):
Federal		(10,102	)		17,732		(15,412	)
State		(3,484	)		8,280		(6,463	)

		(13,586	)		26,012		(21,875	)

Total	$	37,413		$	39,071	$	23,804

Income tax asset (liability) consists of the following:


	As of December 31,
	2012			2011
	(Dollars in thousands)
Current:
Federal	$	(1,074	)	$	25,999
State		4,795			21,234

		3,721			47,233
Deferred:
Federal		10,968			1,661
State		2,289			(861	)

		13,257			800

Total	$	16,978		$	48,033

The components of the net deferred tax asset (liability) are as follows:


	As of December 31,
	2012		2011
	(Dollars in thousands)
Federal
Deferred tax assets:
Bad debt and credit loss deduction	$	37,970	$	39,131
Net operating loss carryforward		890		999
Deferred compensation		2,780		2,757
Other intangibles		8		12
Covered loans		22,348		8,537
California franchise tax		1,420		943
Other, net		4,459		6,819

Gross deferred tax asset		69,875		59,198
Deferred tax liabilities:
Depreciation		6,647		1,845
Intangibles—acquisitions		1,230		2,485
FDIC indemnification asset		18,079		20,387
FHLB stock		6,967		7,777
Deferred income		2,748		2,764
Unrealized gain on investment securities, net		23,236		22,279

Gross deferred tax liability		58,907		57,537

Net deferred tax asset – federal	$	10,968	$	1,661

State
Deferred tax assets:
Depreciation	$	—	$	191
Bad debt and credit loss deduction		11,710		12,119
Net operating loss carryforward		398		652
Deferred compensation		872		871
Other intangibles		3		4
FDIC indemnification asset		2,766		900
Capital loss carryforward		133		320
Other, net		1,381		1,648

Gross deferred tax asset		17,263		16,705
Deferred tax liabilities:
Depreciation		1,393		—
Intangibles—acquisitions		559		608
Covered loans		2,729		6,918
FHLB stock		1,744		1,994
Deferred income		466		296
Unrealized gain on investment securities, net		8,083		7,750

Gross deferred tax liability		14,974		17,566

Net deferred tax (liability)/asset — state	$	2,289	$	(861	)

A reconciliation of the statutory income tax rate to the consolidated effective income tax rate follows:


	For the Year Ended December 31,
	2012						2010						2009
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Federal income tax at statutory rate	$	40,143			35.0	%	$	42,281			35.0	%	$	30,359			35.0	%
State franchise taxes, net of federal benefit		8,081			7.0	%		8,512			7.0	%		6,112			7.0	%
Tax-exempt income		(10,654	)		(9.3	%)		(11,234	)		(9.3	%)		(11,874	)		(13.7	%)
Tax credits		(1,279	)		(1.1	%)		(1,487	)		(1.2	%)		(1,427	)		(1.6	%)
Other, net		1,122			1.0	%		999			0.8	%		634			0.7	%

Provision for income taxes	$	37,413			32.6	%	$	39,071			32.3	%	$	23,804			27.4	%

The change in unrecognized tax benefits in 2012 and 2011 follows:


	For the Year Ended December 31,
	2012			2011
	(Dollars in thousands)
Balance, beginning of period	$	1,279		$	1,279
Additions for tax positions related to prior years		—			—
Reductions due to lapse of statue of limitations		—			—
Settlement with tax authorities		(390	)		—

Balance, end of period	$	889		$	1,279

The total amount of unrecognized tax benefits at December 31, 2012, of $889,000 would, if recognized, affect the effective tax rate. The amount accrued for payment of interest as of December 31, 2012 and 2011 was $241,000 and $298,000, respectively. We record interest and penalties related to uncertain tax positions as part of other operating expense. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

The Company is subject to federal income tax and franchise tax of the state of California. Our federal income tax returns for the years ended December 31, 2007, through 2012 are open to audit by the federal authorities and our California state tax returns for the years ended December 31, 2006, through 2012 are open to audit by state authorities.