Income Taxes

ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there are no unrecognized tax benefits to be reported in the Corporation’s financial statements.

The Corporation utilizes the asset and liability method of accounting for income taxes whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. The provision for income taxes for the periods indicated consisted of the following:



(In Thousands)		Year Ended June 30,
(In Thousands)		2013		2012		2011

Current:
	Federal	$	9,585	$	4,984	$	4,484
	State	3,056		1,662		1,643
		12,641		6,646		6,127
Deferred:
	Federal	2,454		947		2,911
	State	1,821		335		1,011
		4,275		1,282		3,922
Provision for income taxes		$	16,916	$	7,928	$	10,049

The Corporation's tax effect from non-qualified equity compensation in fiscal 2013 was $(92,000), while there were no deferred tax benefits from non-qualified equity compensation in fiscal 2012 or 2011.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to net income (loss) before income taxes as a result of the following differences for the periods indicated:



		Year Ended June 30,
		2013					2012						2011
(In Thousands)		Amount			Tax Rate		Amount			Tax Rate			Amount			Tax Rate

Federal income tax at statutory rate		$	14,950		35.0	%	$	6,558			35.0	%	$	8,144			35.0	%
State income tax		3,002			7.0	%	1,300				6.9	%	1,638				7.0	%
Changes in taxes resulting from:
	Bank-owned life insurance	(64		)	(0.1	)%	(66		)		(0.4	)%	(70		)		(0.3	)%
	Non-deductible expenses	63			0.1	%	33				0.2	%	31				0.1	%
	Non-deductible stock-based compensation	82			0.2	%	110				0.6	%	172				0.8	%
	Release of FIN 48 tax liabilities	(825		)	(1.9	)%	—				—	%	—				—	%
	Other	(292		)	(0.7	)%	(7		)		—	%	134				0.6	%
Effective income tax		$	16,916		39.6	%	$	7,928			42.3	%	$	10,049			43.2	%

Deferred tax assets at June 30, 2013 and 2012 by jurisdiction were as follows:



(In Thousands)	June 30,
(In Thousands)	2013		2012

Deferred taxes - federal	$	3,465	$	5,873
Deferred taxes - state	960		2,775
Total net deferred tax assets	$	4,425	$	8,648

Net deferred tax assets at June 30, 2013 and 2012 were comprised of the following:



(In Thousands)		June 30,
		2013			2012

Loss reserves		$	9,341		$	13,858
Non-accrued interest		420			237
Deferred compensation		3,106			3,425
Accrued vacation		323			281
Depreciation		—			28
State taxes		924			181
Other		202			159
	Total deferred tax assets	14,316			18,169

FHLB - San Francisco stock dividends		(2,069		)	(3,015		)
Unrealized gain on derivative financial instruments, at fair value		(2,916		)	(1,238		)
Unrealized gain on loans held for sale, at fair value		(1,422		)	(2,133		)
Unrealized gain on investment securities		(360		)	(399		)
Unrealized gain on interest-only strips		(41		)	(53		)
Deferred loan costs		(2,577		)	(2,683		)
Depreciation		(506		)	—
	Total deferred tax liabilities	(9,891		)	(9,521		)
	Net deferred tax assets	$	4,425		$	8,648

The net deferred tax assets were included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition. The Corporation analyzes the deferred tax assets to determine whether a valuation allowance is required based on the more likely than not criteria that such assets will be realized principally through future taxable income. This criteria takes into account the actual earnings and the estimates of profitability. The Corporation may carryback net federal tax losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At June 30, 2013, the Corporation had no federal and $4.1 million in state net tax loss carryforwards. Based on management's consideration of historical and anticipated future income before income taxes, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance was not considered necessary at June 30, 2013 and 2012 and management believes it is more likely than not the Corporation will realize its deferred tax asset.

In fiscal year ended June 30, 2012, the Corporation recorded an $825,000 tax liability against the deferred tax asset as a result of a prior period adjustment for fiscal 2009 and an $825,000 charge against retained earnings in stockholders' equity, pursuant to ASC 740-10. The liability was established as a result of certain income items for tax reporting purposes from 2006 through 2007 resulting in an overpayment of taxes and an understatement of the deferred tax liability. The understatement was the result of the early recognition of taxable income in closed tax years that should have been recognized in open tax years. The liability has been established against the deferred tax asset created (or understated deferred tax liability) by the early recognition of taxable income, since the early recognition could be argued by the Internal Revenue Service to not relieve the Corporation of once again recognizing that same taxable income in the appropriate subsequent open tax years. The prior period adjustment was presented as a reduction in other assets and retained earnings. The Corporation was pursuing several remedies including filing a request for accounting method change with federal tax authorities to effectively recover the overpayment of taxes or eliminate any potential duplicate recognition. In August 2012, the Corporation received a notification from the tax authorities indicating the acceptance of the accounting method change attributable to the Corporation’s overstatement of certain income items. As a result, the Corporation reversed the $825,000 tax liability which was recorded in fiscal year ended June 30, 2012, decreasing the provision for income taxes for fiscal year ended June 30, 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended June 30, 2013, 2012, and 2011 is as follows:



(In Thousands)	2013		2012		2011
Balance of prior fiscal year end	$	1,961	$	1,961	$	1,961
Additions based on tax positions related to the current year	—		—		—
Addition for tax positions of prior years	—		—		—
Reduction for tax positions of prior years	—		—		—
Settlements	—		—		—
Balance at June 30	$	1,961	$	1,961	$	1,961

Retained earnings at June 30, 2013 included approximately $9.0 million (pre-1988 bad debt reserve for tax purposes) for which federal income tax of $3.1 million had not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank.

The Corporation files income tax returns for the United States and state of California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2007 and 2008. The Corporation is under examination by the California Franchise Tax Board for the fiscal years 2009 and 2010. Tax years subsequent to fiscal 2010 remain subject to federal examination, while the California state tax returns for years subsequent to fiscal 2009 are subject to examination by state taxing authorities. The Corporation believes that it has adequately provided or paid income tax obligations not yet resolved with federal and state tax authorities.

It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the fiscal year ended June 30, 2013 , there were no tax penalties or interest charges. For fiscal 2012 and 2011, the Corporation paid $14,000 and $34,000 in interest charges, respectively, and paid no penalties and $8,000 of penalties, respectively.