Income Taxes and Deferred Taxes

3 Months Ended

Sep. 30, 2011

Income Taxes and Deferred Taxes

Income Taxes and Deferred Taxes

Note 12:  INCOME TAXES AND DEFERRED TAXES

The following table reflects the effect of temporary differences that give rise to the components of the net deferred tax asset as of September 30, 2011 and December 31, 2010 (in thousands):

		September 30			December 31
		2011			2010
Deferred tax assets:
REO and loan loss reserves	$	36,861		$	40,652
Deferred compensation		6,419			6,765
Net operating loss carryforward		26,485			21,161
Low income housing and other tax credits		4,533			3,319
Other		--			--
Total deferred tax assets		74,298			71,897
Deferred tax liabilities:
FHLB stock dividends		(6,230	)		(6,230	)
Depreciation		(3,932	)		(4,405	)
Deferred loan fees, servicing rights and loan origination costs		(4,465	)		(4,646	)
Intangibles		(2,447	)		(3,041	)
Financial instruments accounted for under fair value accounting		(18,497	)		(16,983	)
Other		(90	)		--
Total deferred tax liabilities		(35,661	)		(35,305	)
Deferred income tax asset		38,637			36,592
Unrealized gain on securities available-for-sale		(1,119	)		(421	)
Valuation allowance		(37,518	)		(36,171	)
Deferred tax asset, net	$	--		$	--

The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making this assessment.  While management believes a return to sustainable profitability is probable, based on available evidence and the guidance provided in GAAP, management is unable to conclude that it is more likely than not that the net deferred tax assets as of September 30, 2011 will be realized in the future.  The valuation allowance increased to $37.5 million at September 30, 2011 from $36.2 million at December 31, 2010.

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $68.7 million and $14.3 million, respectively, which will expire, if unused, by the end of 2030.  The Company also has federal and state tax credit carryforwards of $4.5 million and $410,000, respectively, which will expire, if unused, by the end of 2030.  See Note 2 of the Selected Notes to the Consolidated Financial Statements for more information related to our net operating loss carryforwards.

Retained earnings at September 30, 2011 and December 31, 2010 include approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been recognized.  In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate.  Based on current corporate tax rates, this amount would be approximately $1.9 million at September 30, 2011.