INCOME TAXES

The (benefit) provision for income taxes from continuing operations for the years ended December 31, 2013, 2012 and 2011 consists of the following:



	2013			2012		2011
	(dollars expressed in thousands)
Current (benefit) provision for income taxes:
Federal	$	3		—		902
State	(244		)	(32	)	(721	)
	(241		)	(32	)	181
Deferred benefit for income taxes:
Federal	44,068			6,766		(15,104	)
State	(1,275		)	1,253		(7,187	)
	42,793			8,019		(22,291	)
(Decrease) increase in deferred tax asset valuation allowance	(331,053		)	(8,126	)	11,456
Total	$	(288,501	)	(139	)	(10,654	)

The effective rates of federal income taxes for the years ended December 31, 2013, 2012 and 2011 differ from the federal statutory rates of taxation as follows:



	Years Ended December 31,
	2013					2012					2011
	Amount			Percent		Amount			Percent		Amount			Percent
	(dollars expressed in thousands)
Income (loss) from continuing operations before benefit for income taxes and net income (loss) attributable to noncontrolling interest in subsidiary	$	(67,801	)			$	34,663				$	(45,360	)
Provision (benefit) for income taxes calculated at federal statutory income tax rates	$	(23,730	)	35.0	%	$	12,132		35.0	%	$	(15,876	)	35.0	%
Effects of differences in tax reporting:
Tax-exempt interest income, net of tax preference adjustment	(117		)	0.2		(135		)	(0.4	)	(203		)	0.4
State income taxes	(1,098		)	1.6		795			2.3		(4,667		)	10.3
Bank owned life insurance, net of premium	516			(0.8	)	11			—		10			—
Noncontrolling investment in flow-through entity	(63		)	0.1		104			0.3		1,033			(2.3	)
Goodwill impairment and amortization of intangibles	37,544			(55.4	)	—			—		175			(0.3	)
(Decrease) increase in deferred tax asset valuation allowance, net of federal benefit	(311,537		)	459.5		(13,112		)	(37.9	)	19,456			(42.9	)
Reclassification of deferred tax asset valuation allowance from accumulated other comprehensive income to provision for income taxes	10,547			(15.6	)	—			—		(10,466		)	23.1
Expiration of net operating loss carryforwards	3			—		643			1.9		34			—
Other, net	(566		)	0.9		(577		)	(1.6	)	(150		)	0.2
Benefit for income taxes	$	(288,501	)	425.5	%	$	(139	)	(0.4	)%	$	(10,654	)	23.5	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 were as follows:



	December 31,
	2013			2012
	(dollars expressed in thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	200,139		209,190
State net operating loss carryforwards	66,578			65,882
Allowance for loan losses	35,354			37,825
Loans held for sale	2,341			2,032
Alternative minimum and general business tax credits	20,830			19,146
Interest on nonaccrual loans	9,078			12,551
Deferred compensation	4,070			3,573
Core deposit intangibles	2,493			2,706
Partnership and corporate investments	5,945			7,908
Deferred loan charge-offs and other fraud losses	1,426			4,341
Other real estate and repossessed assets	15,893			22,666
Accrued contingent liabilities	1,908			2,870
Depreciation on bank premises and equipment	—			1,202
State taxes	(19,325		)	682
Other	12,531			12,692
Gross deferred tax assets	359,261			405,266
Valuation allowance	(43,380		)	(376,224	)
Deferred tax assets, net of valuation allowance	315,881			29,042
Deferred tax liabilities:
Servicing rights	4,655			2,632
Net fair value adjustment for available-for-sale investment securities	1,055			21,214
Deferred gain on reclassification of investment securities from available for sale to held to maturity	4,988			4,265
Equity investments	5,683			5,364
Thrift base year tax bad debt reserve	10,605			—
Net deferred loan fees	1,870			1,903
Depreciation on bank premises and equipment	(1,561		)	—
Other	1,102			804
Deferred tax liabilities	28,397			36,182
Net deferred tax assets (liabilities)	$	287,484		(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 had a full valuation allowance against its net deferred tax assets at December 31, 2012. 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.

In evaluating the ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporates assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts and future taxable income and are consistent with the plans and estimates management uses to manage the underlying business.

After analysis of all available positive and negative evidence, the Company reversed substantially all of its valuation allowance against its net deferred tax assets, which was reflected as a benefit for income taxes in the consolidated statements of operations and as an adjustment to accumulated other comprehensive income of $319.1 million and $6.1 million, respectively, for the year ended December 31, 2013. The Company concluded that, as of December 31, 2013, it was more likely than not that substantially all of its net deferred tax assets would be realized in future years. This conclusion was primarily based on projected future taxable income, in addition to cumulative earnings resulting from eight consecutive quarters of profitability (excluding the goodwill impairment charge recognized during the fourth quarter of 2013), significant improvement in asset quality metrics and certain other relevant factors. If the Company’s estimate of realizability of its net deferred tax assets changes in the future, an adjustment to the valuation allowance would be recorded, which would either increase or decrease income tax expense in such period.

The valuation allowance reserves for certain state net operating loss carryovers, federal and state tax credits and capital loss carryovers which are projected to expire prior to their utilization, based upon projected taxable income at December 31, 2013. The Company has reserved for this benefit in its valuation allowance but will continue to evaluate the potential future utilization of these items and will record an adjustment to the valuation allowance in the period a change is warranted.

Changes in the deferred tax asset valuation allowance for the years ended December 31, 2013, 2012 and 2011 were as follows:



	2013			2012		2011
	(dollars expressed in thousands)
Balance, beginning of year	$	376,224		391,629		370,125
Reversal of deferred tax asset valuation allowance to provision for income taxes	(319,142		)	(643	)	(115	)
(Decrease) increase in deferred tax asset valuation allowance to provision for income taxes	(27,319		)	(468	)	31,621
Increase (decrease) in deferred tax asset valuation allowance to accumulated other comprehensive income	13,617			(14,294	)	(10,002	)
Balance, end of year	$	43,380		376,224		391,629

At December 31, 2013 and 2012, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $881,000 and $1.1 million, respectively. A reconciliation of the beginning and ending balance of these unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows:



	2013			2012
	(dollars expressed in thousands)
Balance, beginning of year	$	1,126		1,194
Additions:
Tax positions taken during the current year	90			217
Tax positions taken during the prior year	—			—
Reductions:
Tax positions taken during the prior year	(335		)	(14	)
Lapse of statute of limitations	—			(271	)
Balance, end of year	$	881		1,126

At December 31, 2013 and 2012, 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 $580,000 and $740,000, 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, 2013 and 2012, interest accrued for uncertain tax positions was $144,000 and $116,000, respectively. The Company recorded interest expense of $28,000 for the year ended December 31, 2013, compared to a reduction to interest expense of $20,000 and $44,000 related to unrecognized tax benefits for the years ended December 31, 2012 and 2011, respectively. There were no penalties for uncertain tax positions accrued at December 31, 2013 and 2012, nor did the Company recognize any expense for such penalties in 2013, 2012 and 2011.

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, 2013 could decrease by approximately $376,000 by December 31, 2014 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 $252,000.

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. A Texas tax examination for the 2007 and 2008 tax years was completed during 2013, which resulted in minor changes to the returns as originally filed. While the statute of limitations for the 2008 and 2009 tax years 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 and 2009 which, if realized, are subject to examination in order to validate the net operating loss carryforward. Thus, while closed, the 2008 and 2009 tax years for these states are still subject to examination. The statute of limitations will expire for 2008 and 2009 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.

At December 31, 2013 and 2012, 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. Effective December 31, 2013, the Company recorded a deferred tax liability in the amount of $10.6 million as it is projected that First Bank will make a nondividend distribution to the Company in the near future. Nondividend distributions include distributions in excess of First Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. The non-dividend distribution will be considered to have been made from First Bank’s unrecaptured tax bad debt reserve. To the extent the distribution is made from these reserves, the nondividend distribution will be included in First Bank’s taxable income in the year of the distribution.

At December 31, 2013 and 2012, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $571.8 million and $597.7 million, respectively. At December 31, 2013, the Company’s federal net operating loss carryforwards expire as follows:



	(dollars expressed in thousands)
Year ending December 31:
2021	$	2,919
2022	2,386
2023 – 2026	17,814
2027 – 2032	548,707
Total	$	571,826

At December 31, 2013 and 2012, for state income tax purposes, the Company had net operating loss carryforwards of approximately $785.4 million and $786.4 million, respectively, and a related deferred tax asset of $66.6 million and $65.9 million, respectively. The state net operating loss carryforwards are primarily from the states of California, Florida, Illinois and Missouri ("Footprint States"). At December 31, 2013, the Company’s state net operating loss carryforwards expire as follows:



	State Net Operating Losses (Footprint States)		State Net Operating Losses (Other States)	State Net Operating Losses
	(dollars expressed in thousands)
Year ending December 31:
2014	$	—	154	154
2015	16,822		291	17,113
2016	13,028		252	13,280
2017	1,372		272	1,644
2018	549		261	810
2019 – 2026	175,144		3,320	178,464
2027 – 2032	570,594		3,301	573,895
Total	$	777,509	7,851	785,360