Income Taxes and Deferred Taxes

3 Months Ended

Jun. 30, 2012

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 June 30, 2012 and December 31, 2011 (in thousands):

	June 30 2012	December 31 2011
Deferred tax assets:
REO and loan loss reserves	$29,534	$31,156
Deferred compensation	6,067	6,032
Net operating loss carryforward	23,000	27,992
Low income housing tax credits	7,622	7,202
Other	331	309
Total deferred tax assets	66,554	72,691
Deferred tax liabilities:
FHLB stock dividends	(6,137)	(6,137)
Depreciation	(3,444)	(3,570)
Deferred loan fees, servicing rights and loan origination costs	(5,156)	(4,863)
Intangibles	(1,864)	(2,243)
Financial instruments accounted for under fair value accounting	(10,278)	(16,499)
Total deferred tax liabilities	(26,879)	(33,312)
Deferred income tax asset	39,675	39,379
Unrealized gain on securities available-for-sale	(1,103)	(1,151)
Valuation allowance	(7,000)	(38,228)
Deferred tax asset, net	$31,572	$--

During the quarter ended September 30, 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation allowance against the net asset.  At each subsequent quarter-end, the Company has reanalyzed that position.  During the quarter ended June 30, 2012, the Company determined that a full valuation allowance was no longer appropriate and reversed essentially all of the valuation allowance.  The Company anticipates utilizing the remaining $7.0 million in valuation allowance to offset its tax expense in the third and fourth quarters of 2012.  The ultimate utilization of the remaining valuation allowance and 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 considered the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making its assessment to reverse the deferred tax valuation allowance.  As a result, the valuation allowance decreased to $7.0 million at June 30, 2012 from $38.2 million at December 31, 2011.

At June 30, 2012, the Company had federal and state net operating loss carryforwards of approximately $60.6 million and $18.1 million, respectively, which will expire, if unused, by the end of 2031.  The Company also has federal and state tax credit carryforwards of $6.9 million and $700,000, respectively, which will expire, if unused, by the end of 2032.

Retained earnings at June 30, 2012 and December 31, 2011 include approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been recorded.  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 holding company 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 June 30, 2012.