Note 12 – Income Taxes

The Corporation accounts for income taxes on the asset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, computed using enacted tax rates. We have maintained significant net deferred tax assets for deductible temporary differences, the largest of which relates to our allowance for loan losses. For income tax return purposes, only net charge-offs on uncollectible loan balances are deductible, not the provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods while negative evidence includes significant losses in the current year or cumulative losses in the current and prior two years as well as general business and economic trends. At June 30, 2011 and March 31, 2011, we determined that a valuation allowance relating to our deferred tax asset was necessary. This determination was based largely on the negative evidence represented by the losses in the current and prior fiscal years caused by the significant loan loss provisions associated with our loan portfolio. In addition, general uncertainty surrounding future economic and business conditions have increased the potential volatility and uncertainty of our projected earnings. Therefore, a valuation allowance of $140.3 million at June 30, 2011 and $143.5 million at March 31, 2011 was recorded to offset net deferred tax assets that exceed the Corporation’s carryback potential.

The significant components of the Corporation’s deferred tax assets (liabilities) are as follows (in thousands):


	At June 30,			At March 31,
	2011			2011
Deferred tax assets:
Allowances for loan losses	$	64,098		$	68,286
Other loss reserves		2,860			2,723
Federal NOL carryforwards		66,209			61,433
State NOL carryforwards		15,605			14,906
Unrealized gains/(losses)		2,829			7,984
Other		4,327			4,310

Total deferred tax assets		155,928			159,642
Valuation allowance		(140,267	)		(143,505	)

Adjusted deferred tax assets		15,661			16,137

Deferred tax liabilities:
FHLB stock dividends		(3,962	)		(3,962	)
Mortgage servicing rights		(9,547	)		(9,884	)
Purchase accounting		—			—
Other		(2,152	)		(2,291	)

Total deferred tax liabilities		(15,661	)		(16,137	)


Net deferred tax assets	$	—		$	—

The Corporation is subject to U.S. federal income tax as well as income tax of state jurisdictions. The tax years 2008-2010 remain open to examination by the Internal Revenue Service and certain state jurisdictions while the years 2007-2010 remain open to examination by certain other state jurisdictions.

Income tax expense includes $10,000 of franchise taxes for the three month period ended June 30, 2011. The effective tax rate was 0.21% for the three- month period ended June 30, 2011, respectively, due to a $3.2 million deferred tax asset valuation allowance reduction. This rate compared to 0% for the same respective periods last year.

The Corporation recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011 and March 31, 2011, the Corporation has not recognized any accrued interest and penalties related to uncertain tax positions.