INCOME TAXES

The provision (benefit) for income taxes from continuing operations for the years ended December 31, 2014, 2013 and 2012 consists of the following:



(dollars in thousands)	2014			2013		2012
Current provision (benefit) for income taxes:
Federal	$	102		3		—
State	(6		)	(244	)	(32	)
	96			(241	)	(32	)
Deferred provision (benefit) for income taxes:
Federal	9,663			44,068		6,766
State	10,239			(1,275	)	1,253
	19,902			42,793		8,019
Decrease in deferred tax asset valuation allowance	(7,839		)	(331,053	)	(8,126	)
Total	$	12,159		(288,501	)	(139	)

The effective rates of federal income taxes for the years ended December 31, 2014, 2013 and 2012 differ from the federal statutory rates of taxation as follows:



	Years Ended December 31,
	2014					2013					2012
(dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent
Income (loss) from continuing operations before provision (benefit) for income taxes and net (loss) income attributable to noncontrolling interest in subsidiary	$	33,738				$	(67,801	)			$	34,663
Provision (benefit) for income taxes calculated at federal statutory income tax rates	$	11,808		35.0	%	$	(23,730	)	35.0	%	$	12,132		35.0	%
Effects of differences in tax reporting:
Tax-exempt interest income, net of tax preference adjustment	(78		)	(0.2	)	(117		)	0.2		(135		)	(0.4	)
State income taxes	6,656			19.6		(1,098		)	1.6		795			2.3
Bank owned life insurance, net of premium	11			—		516			(0.8	)	11			—
Noncontrolling investment in flow-through entity	27			0.1		(63		)	0.1		104			0.3
Goodwill impairment and amortization of intangibles	—			—		37,544			(55.4	)	—			—
(Decrease) increase in deferred tax asset valuation allowance, net of federal benefit	(5,071		)	(15.0	)	(311,537		)	459.5		(13,112		)	(37.9	)
Reclassification of deferred tax asset valuation allowance from accumulated other comprehensive income to provision for income taxes	—			—		10,547			(15.6	)	—			—
Expiration of net operating loss carryforwards	—			—		3			—		643			1.9
Other, net	(1,194		)	(3.5	)	(566		)	0.9		(577		)	(1.6	)
Provision (benefit) for income taxes	$	12,159		36.0	%	$	(288,501	)	425.5	%	$	(139	)	(0.4	)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 were as follows:



	December 31,
(dollars in thousands)	2014			2013
Deferred tax assets:
Federal net operating loss carryforwards	$	185,247		200,139
State net operating loss carryforwards	57,843			66,578
Allowance for loan losses	29,102			35,354
Loans held for sale	1,088			2,341
Alternative minimum and general business tax credits	21,186			20,830
Interest on nonaccrual loans	8,620			9,078
Deferred compensation	4,591			4,070
Core deposit intangibles	2,135			2,493
Partnership and corporate investments	4,520			5,945
Deferred loan charge-offs and other fraud losses	3,847			1,426
Other real estate	13,734			15,893
Accrued contingent liabilities	2,414			1,908
Depreciation on bank premises and equipment	1,796			—
State taxes	—			(19,325	)
Other	11,993			12,531
Gross deferred tax assets	348,116			359,261
Valuation allowance	(35,541		)	(43,380	)
Deferred tax assets, net of valuation allowance	312,575			315,881
Deferred tax liabilities:
State taxes	17,799			—
Servicing rights	4,653			4,655
Net fair value adjustment for available-for-sale investment securities	5,270			1,055
Deferred gain on reclassification of investment securities from available for sale to held to maturity	4,211			4,988
Equity investments	5,681			5,683
Thrift base year tax bad debt reserve	—			10,605
Net deferred loan fees	1,860			1,870
Depreciation on bank premises and equipment	—			(1,561	)
Other	1,254			1,102
Deferred tax liabilities	40,728			28,397
Net deferred tax assets	$	271,847		287,484

The realization of the Company’s net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. The Company had a full valuation allowance against its net deferred tax assets at December 31, 2012. The deferred tax asset valuation allowance was recorded in accordance with ASC Topic 740, “Income Taxes.” Under ASC Topic 740, the Company is required to assess whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. Pursuant to ASC Topic 740, concluding that a deferred tax asset valuation allowance is not required is difficult when there is significant evidence which is objective and verifiable, such as the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable differences and cumulative losses in recent years.

In evaluating the ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporates assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts and future taxable income and are consistent with the plans and estimates management uses to manage the underlying business.

After analysis of all available positive and negative evidence, the Company reversed substantially all of its valuation allowance against its net deferred tax assets, which was reflected as a benefit for income taxes in the consolidated statements of income and as an adjustment to accumulated other comprehensive income of $319.1 million and $6.1 million, respectively, for the year ended December 31, 2013. The Company concluded that, as of December 31, 2013, it was more likely than not that substantially all of its net deferred tax assets would be realized in future years. This conclusion was primarily based on projected future taxable income, in addition to cumulative earnings resulting from eight consecutive quarters of profitability (excluding the goodwill impairment charge recognized during the fourth quarter of 2013), significant improvement in asset quality metrics and certain other relevant factors. The Company reversed an additional $8.0 million of its valuation allowance against its net deferred tax assets during the year ended December 31, 2014, which was reflected as a benefit for income taxes in the consolidated statements of income and was primarily attributable to a reduction of the Illinois state tax rate. If the Company’s estimate of realizability of its net deferred tax assets changes in the future, an adjustment to the valuation allowance would be recorded, which would either increase or decrease income tax expense in such period.

The valuation allowance reserves for certain state net operating loss carryovers, federal and state tax credits and capital loss carryovers which are projected to expire prior to their utilization, based upon projected taxable income at December 31, 2014. The Company has reserved for this benefit in its valuation allowance but will continue to evaluate the potential future utilization of these items and will record an adjustment to the valuation allowance in the period a change is warranted.

Changes in the deferred tax asset valuation allowance for the years ended December 31, 2014, 2013 and 2012 were as follows:



(dollars in thousands)	2014			2013		2012
Balance, beginning of year	$	43,380		376,224		391,629
Reversal of deferred tax asset valuation allowance to provision for income taxes	(7,957		)	(319,142	)	(643	)
Increase (decrease) in deferred tax asset valuation allowance to provision for income taxes	118			(27,319	)	(468	)
Increase (decrease) in deferred tax asset valuation allowance to accumulated other comprehensive income	—			13,617		(14,294	)
Balance, end of year	$	35,541		43,380		376,224

At December 31, 2014 and 2013, the Company’s unrecognized tax benefits for uncertain tax positions, excluding interest and penalties, were $873,000 and $881,000, respectively. A reconciliation of the beginning and ending balance of these unrecognized tax benefits for the years ended December 31, 2014 and 2013 is as follows:



(dollars in thousands)	2014			2013
Balance, beginning of year	$	881		1,126
Additions:
Tax positions taken during the current year	—			90
Tax positions taken during the prior year	—			—
Reductions:
Tax positions taken during the prior year	(8		)	(335	)
Lapse of statute of limitations	—			—
Balance, end of year	$	873		881

At December 31, 2014 and 2013, the total amount of unrecognized tax benefits that would affect the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, was $575,000 and $580,000, respectively. It is the Company’s policy to separately disclose any interest or penalties arising from the application of federal or state income taxes. Interest related to unrecognized tax benefits is included in interest expense and penalties related to unrecognized tax benefits are included in noninterest expense. At December 31, 2014 and 2013, interest accrued for uncertain tax positions was $195,000 and $144,000, respectively. The Company recorded interest expense of $51,000 and $28,000 for the years ended December 31, 2014 and 2013, respectively, compared to a reduction to interest expense of $20,000 related to unrecognized tax benefits for the year ended December 31, 2012. There were no penalties for uncertain tax positions accrued at December 31, 2014 and 2013, nor did the Company recognize any expense for such penalties in 2014, 2013 and 2012.

The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the total unrecognized tax benefits as of December 31, 2014 could decrease by approximately $553,000 by December 31, 2015 as a result of the lapse of statutes of limitations or potential settlements with the federal and state taxing authorities, of which the impact to the provision for income taxes, prior to the consideration of the deferred tax asset valuation allowance, is estimated to be approximately $368,000.

The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Management of the Company believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. The Company’s federal income tax returns through 2008 have been examined by the IRS. Years subsequent to 2008 could contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses. The Company has recorded a tax benefit only for those positions that meet the “more likely than not” standard. The Company’s current estimate of the resolution of various state examinations, none of which are in process, is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Company’s estimate may result in future income tax expense or benefit.

The Company is no longer subject to U.S. federal and Illinois income tax examination for the years prior to 2009 and is no longer subject to California, Florida, Missouri and various other state income tax examination by the tax authorities for the years prior to 2008. The Company had a federal tax examination for tax years through 2008, which was closed during 2010, and a California tax examination for the 2004 and 2005 tax years, which was closed during 2008. An Illinois tax examination of the 2007 and 2008 tax years was completed during 2011 with no changes to the returns as originally filed. A California tax examination for the 2005 and 2006 tax years was completed during 2012 with no changes to the amended returns as filed. A Texas tax examination for the 2007 and 2008 tax years was completed during 2013, which resulted in minor changes to the returns as originally filed. While the statute of limitations for the 2008 and 2009 tax years has expired for the majority of the states in which the Company is subject to income tax, the Company generated net operating loss carryforwards in 2008 and 2009 which, if realized, are subject to examination in order to validate the net operating loss carryforward. Thus, while closed, the 2008 and 2009 tax years for these states are still subject to examination. The statute of limitations will expire for 2008 and 2009 when the statute of limitations expires for the year the net operating loss carryforward is realized.

At December 31, 2014 and 2013, the accumulation of prior years’ earnings representing tax bad debt deductions was zero and $29.8 million, respectively. If these tax bad debt reserves were charged for losses other than bad debt losses, the Company would be required to recognize taxable income in the amount of the charge. Effective December 31, 2013, the Company recorded a deferred tax liability in the amount of $10.6 million as it was projected that First Bank would make a nondividend distribution to the Company in 2014. Nondividend distributions include distributions in excess of First Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. The nondividend distribution will be considered to have been made from First Bank’s unrecaptured tax bad debt reserve. To the extent the distribution is made from these reserves, the nondividend distribution will be included in First Bank’s taxable income in the year of the distribution. It has been determined that a nondividend distribution, in excess of $29.8 million, occurred during the year ended December 31, 2014 and will be included in First Bank's taxable income for the year then ended.

At December 31, 2014 and 2013, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $529.3 million and $571.8 million, respectively. At December 31, 2014, the Company’s federal net operating loss carryforwards expire as follows:



(dollars in thousands)
Year ending December 31:
2021	$	2,177
2022	2,386
2023 – 2026	14,937
2027 – 2032	509,778
Total	$	529,278

At December 31, 2014 and 2013, for state income tax purposes, the Company had net operating loss carryforwards of approximately $719.5 million and $785.4 million, respectively, and a related deferred tax asset of $58.7 million and $66.6 million, respectively. The state net operating loss carryforwards are primarily from the states of California, Florida, Illinois and Missouri ("Footprint States"). At December 31, 2014, the Company’s state net operating loss carryforwards expire as follows:



(dollars in thousands)	State Net Operating Losses (Footprint States)		State Net Operating Losses (Other States)	State Net Operating Losses
Year ending December 31:
2015	$	—	249	249
2016	—		42	42
2017	16,822		7	16,829
2018	13,028		26	13,054
2019 – 2026	177,167		3,003	180,170
2027 – 2032	506,168		2,973	509,141
Total	$	713,185	6,300	719,485