INCOME TAXES

The following table presents the components of the provision for income tax (benefit) expense included in the Consolidated Statement of Operations for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Years Ended December 31
	2012			2011			2010
Current	$	10,759		$	—		$	3,025
Deferred	841			(3,322		)	(21,183		)
Increase (decrease) in valuation allowance	(36,385		)	3,322			36,171
Provision for (benefit from) income taxes	$	(24,785	)	$	—		$	18,013

The following tables present the reconciliation of the provision for income taxes computed at the federal statutory rate to the actual effective rate for the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):



	Years Ended December 31
	2012			2011			2010
Provision for (benefit from) income taxes computed at federal statutory rate	$	14,034		$	1,910		$	(15,359	)
Increase (decrease) in taxes due to:
Tax-exempt interest	(1,710		)	(1,616		)	(1,471		)
Investment in life insurance	(894		)	(663		)	(683		)
State income taxes (benefit), net of federal tax offset	539			(2,260		)	(495		)
Tax credits	(788		)	(840		)	(816		)
Valuation allowance	(36,385		)	3,322			36,171
Other	419			147			666
Provision for (benefit from) income taxes	$	(24,785	)	$	—		$	18,013



	Years Ended December 31
	2012		2011		2010
Federal income tax statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate due to:
Tax-exempt interest	(4.3	)	(29.6	)	3.4
Investment in life insurance	(2.2	)	(12.1	)	1.6
State income taxes (benefit), net of federal tax offset	1.3		(41.5	)	1.1
Tax credits	(2.0	)	(15.4	)	1.9
Valuation allowance	(90.7	)	60.9		(82.4	)
Other	1.1		2.7		(1.6	)
Effective income tax rate	(61.8	)%	—	%	(41.0	)%

The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31, 2012 and 2011 (in thousands):



	December 31
	2012			2011
Deferred tax assets:
REO and loan loss reserves	$	24,615		$	31,156
Deferred compensation	6,122			6,032
Net operating loss carryforward	26,959			27,992
Low income housing tax credits	4,767			7,202
State net operating losses	1,081			—
Other	689			309
Total deferred tax assets	64,233			72,691
Deferred tax liabilities:
FHLB stock dividends	(6,187		)	(6,137		)
Depreciation	(4,061		)	(3,570		)
Deferred loan fees, servicing rights and loan origination costs	(5,608		)	(4,863		)
Intangibles	(1,544		)	(2,243		)
Financial instruments accounted for under fair value accounting	(10,632		)	(16,499		)
Total deferred tax liabilities	(28,032		)	(33,312		)
Deferred income tax asset	36,201			39,379
Unrealized gain on securities available-for-sale	(1,194		)	(1,151		)
Valuation allowance	—			(38,228		)
Deferred tax asset, net	$	35,007		$	—

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 prior 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 the full amount has been reversed to a zero balance as of December 31, 2012. 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 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.

At December 31, 2012, the Company has federal and state net operating loss carryforwards of approximately $77.0 million and $22.8 million, respectively, which will expire, if unused, by the end of 2031. The Company has federal general business credits and state tax credit carryforwards of $3.3 million and $600,000, respectively, which will expire, if unused, by the end of 2031 and 2025, respectively. The Company also has alternative minimum tax credit carryforwards of approximately $1.5 million, which are available to reduce future federal regular income taxes, if any, over an indefinite period.

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 carryforwards, general business credit, and recognized built-in-losses incurred prior to the change in control against income earned after the change in control. As a result of the Section 382 limitation, the Company expects it will be able to utilize approximately $6.9 million of net operating loss carryforwards on an annual basis. Based on its analysis, the Company does not believe the change in control will impact its ability to utilize all of the available net operating loss carryforwards, general business credit, and recognized built-in-losses.

As of December 31, 2012, the Company has an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which would materially affect the effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in the income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2012 and 2011 is immaterial. The Company files consolidated income tax returns in Oregon and Idaho and for federal purposes. The tax years which remain subject to examination by the taxing authorities are the years ending December 31, 2006 through 2011.

Retained earnings (accumulated deficits) at December 31, 2012 and 2011 include approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been booked. 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, established as $1.9 million at December 31, 2012.

On October 25, 2011, the Company filed amended federal income tax returns for tax years 2005, 2006, 2008 and 2009. The amended tax returns, which are under review by the Internal Revenue Service (IRS), significantly affect the timing for recognition of credit losses within previously filed income tax returns and, if approved, would result in the refund of up to $13.6 million of previously paid taxes from the utilization of net operating loss carryback claims into prior tax years. The outcome of the anticipated IRS review is inherently uncertain and since there can be no assurance of approval of some or all of the tax carryback claims, no asset has been recognized to reflect the possible results of these amendments as of December 31, 2012. Accordingly, the Company does not anticipate recognizing any tax benefit until the results of the IRS review have been determined. We expect this review to be completed and the issue resolved during 2013.