INCOME TAXES

The (benefit) provision for income taxes from continuing operations for the years ended December 31, 2012, 2011 and 2010 consists of the following:



	2012			2011		2010
	(dollars expressed in thousands)
Current (benefit) provision for income taxes:
Federal	$	—		902		(366	)
State	(32		)	(721	)	(71	)
	(32		)	181		(437	)
Deferred benefit for income taxes:
Federal	5,615			(16,129	)	(56,871	)
State	1,023			(7,392	)	(13,974	)
	6,638			(23,521	)	(70,845	)
(Decrease) increase in deferred tax asset valuation allowance	(6,745		)	12,686		75,396
Total	$	(139	)	(10,654	)	4,114

The effective rates of federal income taxes for the years ended December 31, 2012, 2011 and 2010 differ from the federal statutory rates of taxation as follows:



	Years Ended December 31,
	2012					2011					2010
	Amount			Percent		Amount			Percent		Amount			Percent
	(dollars expressed in thousands)
Income (loss) from continuing operations before benefit (provision) for income taxes and noncontrolling interest in loss of subsidiaries	$	31,365				$	(48,295	)			$	(197,699	)
Provision (benefit) for income taxes calculated at federal statutory income tax rates	$	10,978		35.0	%	$	(16,904	)	35.0	%	$	(69,195	)	35.0	%
Effects of differences in tax reporting:
Tax-exempt interest income, net of tax preference adjustment	(135		)	(0.4	)	(203		)	0.4		(308		)	0.2
State income taxes	645			2.1		(4,800		)	9.9		(9,125		)	4.6
Bank owned life insurance, net of premium	11			—		10			—		3,144			(1.6	)
Noncontrolling investment in flow-through entity	104			0.3		1,033			(2.1	)	2,280			(1.2	)
Amortization of intangibles	—			—		175			(0.3	)	350			(0.2	)
(Decrease) increase in deferred tax asset valuation allowance, net of federal benefit	(11,811		)	(37.7	)	20,614			(42.7	)	70,668			(35.8	)
Reclassification of deferred tax asset valuation allowance from accumulated other comprehensive income to provision for income taxes	—			—		(10,466		)	21.7		6,816			(3.4	)
Expiration of net operating loss carryforwards	643			2.1		34			—		5			—
Other, net	(574		)	(1.8	)	(147		)	0.2		(521		)	0.3
(Benefit) provision for income taxes	$	(139	)	(0.4	)%	$	(10,654	)	22.1	%	$	4,114		(2.1	)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 were as follows:



	December 31,
	2012			2011
	(dollars expressed in thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	209,190		188,726
State net operating loss carryforwards	65,882			58,326
Allowance for loan losses	37,825			56,649
Loans held for sale	2,032			1,745
Alternative minimum and general business tax credits	19,146			17,326
Interest on nonaccrual loans	12,551			15,359
Deferred compensation	3,573			3,593
Core deposit intangibles	2,706			3,111
Partnership and corporate investments	7,908			12,052
Deferred loan charge-offs and other fraud losses	4,341			13,875
Other real estate and repossessed assets	22,666			22,665
Accrued contingent liabilities	2,870			3,632
Depreciation on bank premises and equipment	1,202			486
State taxes	682			—
Other	12,692			13,205
Gross deferred tax assets	405,266			410,750
Valuation allowance	(376,224		)	(391,629	)
Deferred tax assets, net of valuation allowance	29,042			19,121
Deferred tax liabilities:
Servicing rights	2,632			2,418
Net fair value adjustment for available-for-sale investment securities	21,214			10,466
Deferred gain on reclassification of investment securities from available for sale to held to maturity	4,265			—
Equity investments	5,364			5,366
State taxes	—			4,577
Net deferred loan fees	1,903			2,779
Other	804			655
Deferred tax liabilities	36,182			26,261
Net deferred tax liabilities	$	(7,140	)	(7,140	)

The realization of the Company’s net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. The Company has a full valuation allowance against its net deferred tax assets at December 31, 2012 and 2011. The deferred tax asset valuation allowance was recorded in accordance with ASC Topic 740, “Income Taxes.” Under ASC Topic 740, the Company is required to assess whether it is “more likely than not” that some portion or all of its deferred tax assets will not be realized. Pursuant to ASC Topic 740, concluding that a deferred tax asset valuation allowance is not required is difficult when there is significant evidence which is objective and verifiable, such as the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable differences and cumulative losses in recent years. If, in the future, the Company generates taxable income on a sustained basis, management may conclude the deferred tax asset valuation allowance is no longer required, which would result in the reversal of a portion or all of the deferred tax asset valuation allowance, which would be reflected as a benefit for income taxes in the consolidated statements of operations.

Changes in the deferred tax asset valuation allowance for the years ended December 31, 2012, 2011 and 2010 were as follows:



	2012			2011		2010
	(dollars expressed in thousands)
Balance, beginning of year	$	391,629		370,125		295,067
Reversal of deferred tax asset valuation allowance to provision for income taxes	(643		)	(115	)	(1,189	)
(Decrease) increase in deferred tax asset valuation allowance to provision for income taxes	(468		)	31,621		73,928
(Decrease) increase in deferred tax asset valuation allowance to accumulated other comprehensive income (loss)	(14,294		)	(10,002	)	2,319
Balance, end of year	$	376,224		391,629		370,125

At December 31, 2012 and 2011, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $1.1 million and $1.2 million, respectively. A reconciliation of the beginning and ending balance of these unrecognized tax benefits for the years ended December 31, 2012 and 2011 is as follows:



	2012			2011
	(dollars expressed in thousands)
Balance, beginning of year	$	1,194		1,276
Additions:
Tax positions taken during the current year	217			232
Tax positions taken during the prior year	—			—
Reductions:
Tax positions taken during the prior year	(14		)	(8	)
Allocated to discontinued operations	—			—
Lapse of statute of limitations	(271		)	(306	)
Balance, end of year	$	1,126		1,194

At December 31, 2012 and 2011, the total amount of unrecognized tax benefits that would affect the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, was $740,000 and $784,000, respectively. It is the Company’s policy to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense. At December 31, 2012 and 2011, interest accrued for uncertain tax positions was $116,000 and $136,000, respectively. The Company recorded a reduction to interest expense of $20,000, $44,000 and $1.0 million related to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010, respectively. There were no penalties for uncertain tax positions accrued at December 31, 2012 and 2011, nor did the Company recognize any expense for such penalties in 2012, 2011 and 2010.

The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the total unrecognized tax benefits as of December 31, 2012 could decrease by approximately $234,000 by December 31, 2013 as a result of the lapse of statutes of limitations or potential settlements with the federal and state taxing authorities, of which the impact to the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, is estimated to be approximately $153,000. It is also reasonably possible that this decrease could be substantially offset by new matters arising during the same period.

The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. The Company’s federal income tax returns through 2008 have been examined by the IRS. Years subsequent to 2008 could contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses. The Company has recorded a tax benefit only for those positions that meet the “more likely than not” standard. The Company’s current estimate of the resolution of various state examinations, none of which are in process, is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Company’s estimate may result in future income tax expense or benefit.

The Company is no longer subject to U.S. federal and Illinois income tax examination for the years prior to 2009 and is no longer subject to California, Florida, Missouri and various other state income tax examination by the tax authorities for the years prior to 2008. The Company had a federal tax examination for tax years through 2008, which was closed during 2010, and a California tax examination for the 2004 and 2005 tax years, which was closed during 2008. An Illinois tax examination of the 2007 and 2008 tax years was completed during 2011 with no changes to the returns as originally filed. A California tax examination for the 2005 and 2006 tax years was completed during 2012 with no changes to the amended returns as filed. The Company is currently under examination of the 2007 and 2008 tax years for its Texas returns. While the statute of limitations for the 2008 tax year has expired for the majority of the states in which the Company is subject to income tax, the Company generated net operating loss carryforwards in 2008 which, if realized, are subject to examination in order to validate the net operating loss carryforward. Thus, while closed, the 2008 tax year for these states is still subject to examination. The statute of limitations will expire for 2008 when the statute of limitations expires for the year the net operating loss carryforward is realized.

The Company recorded a benefit for income taxes of $10.5 million during the year ended December 31, 2011 related to an intraperiod tax allocation between other comprehensive income and loss from continuing operations, primarily driven by market appreciation in the Company’s investment securities portfolio.

The Company had an accumulated other comprehensive loss of $6.8 million related to the establishment of a deferred tax asset valuation allowance regarding the unrealized gain on certain interest rate swap agreements that were designated as cash flow hedges on certain loans, as further described in Note 8 to the consolidated financial statements. In the third quarter of 2010, the Company recorded a provision for incomes taxes of $6.8 million related to the expiration of the amortization period of the unrealized gain on the interest rate swap agreements with a corresponding increase to accumulated other comprehensive income.

At December 31, 2012 and 2011, the accumulation of prior years’ earnings representing tax bad debt deductions was $29.8 million. If these tax bad debt reserves were charged for losses other than bad debt losses, the Company would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities.

At December 31, 2012 and 2011, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $597.7 million and $539.2 million, respectively. At December 31, 2012, the Company’s federal net operating loss carryforwards expire as follows:



	(dollars expressed in thousands)
Year ending December 31:
2013 – 2016	$	—
2017 – 2020	5,256
2021 – 2026	43,105
2028 – 2032	549,325
Total	$	597,686

At December 31, 2012 and 2011, for state income tax purposes, the Company had net operating loss carryforwards of approximately $786.4 million and $702.8 million, respectively, and a related deferred tax asset of $65.9 million and $58.3 million, respectively. The state net operating loss carryforwards are primarily from the states of California, Florida, Illinois and Missouri and expire from 2019 to 2032.