INCOME TAXES AND DEFERRED TAXES

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Abstract]

INCOME TAXES AND DEFERRED TAXES

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

	September 30 2012			December 31 2011
Deferred tax assets:
REO and loan loss reserves	$	33,697		$	31,156
Deferred compensation	5,567			6,032
Net operating loss carryforward	25,538			27,992
Low income housing tax credits	6,481			7,202
Other	309			309
Total deferred tax assets	71,592			72,691
Deferred tax liabilities:
FHLB stock dividends	(6,137		)	(6,137		)
Depreciation	(2,854		)	(3,570		)
Deferred loan fees, servicing rights and loan origination costs	(5,042		)	(4,863		)
Intangibles	(1,455		)	(2,243		)
Financial instruments accounted for under fair value accounting	(10,294		)	(16,499		)
Total deferred tax liabilities	(25,782		)	(33,312		)
Deferred income tax asset	45,810			39,379
Unrealized gain on securities available-for-sale	(1,336		)	(1,151		)
Valuation allowance	(3,000		)	(38,228		)
Deferred tax asset, net	$	41,474		$	—

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 re-analyzed that position.  During the quarter ended June 30, 2012, management analyzed the Company’s performance and trends over the past five quarters, focusing strongly on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income.  Based on this analysis, management determined that a full valuation allowance was no longer appropriate and reversed nearly all of the amount that had been recorded.  In the quarter ended September 30, 2012, the Company utilized $4.0 million of the remaining valuation allowance and anticipates utilizing the remaining $3.0 million in valuation allowance towards offsetting its tax expense in the fourth quarter 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 $3.0 million at September 30, 2012 from $38.2 million at December 31, 2011.

At September 30, 2012, the Company had federal and state net operating loss carryforwards of approximately $66.5 million and $17.1 million, respectively, which will expire, if unused, by the end of 2031.  The Company also has federal and state tax credit carryforwards of $5.8 million and $711,000, respectively, which will expire, if unused, by the end of 2032.

As a consequence of our capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Section 382 limits the ability of a corporate taxpayer to use net operating loss carry forwards, general business credits, and recognized built-in losses incurred prior to the change in control against income earned after a change in control.  As a result of the Section 382 limitation, the Company expects it will be able to utilize approximately $6.9 million on an annual basis. Based on our analysis, we do not believe the change in control will impact our ability to utilize all of the available net operating loss carryforwards.

Retained earnings at September 30, 2012 and December 31, 2011 included $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 $1.9 million at September 30, 2012.