Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return and combined state income tax returns.

The Bank’s retained earnings at December 31, 2015 and 2014 includes base-year bad debt reserves, created for tax purposes prior to 1988, totaling $50.9 million. Base-year reserves are subject to recapture in the unlikely event that Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. The Bank has no intention of making such a non-dividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $20.4 million has not been recognized.

The provision for income taxes consists of the following:



	Year Ended December 31, 2015			Year Ended December 31, 2014		Nine Months Ended December 31, 2013
				(In thousands)
Current:
Federal	$	558		$	—	$	—
State	46			10		9
	604			10		9
Deferred:
Federal	(67,724		)	—		—
State	(22,327		)	—		—
	(90,051		)	—		—
Total income tax expense	$	(89,447	)	$	10	$	9

At December 31, 2015 and 2014, the affiliated group had federal net operating loss carryovers of $175.4 million and $195.0 million, respectively, and at December 31, 2015 and 2014, certain subsidiaries had state net operating loss carryovers of $294.2 million and $314.0 million, respectively. These carryovers expire in varying amounts from 2016 through 2034.

The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:



	Year Ended December 31, 2015					Year Ended December 31, 2014					Nine Months Ended December 31, 2013
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
	(Dollars in thousands)
Net income before income taxes	$	48,311		100.0	%	$	14,632		100.0	%	$	111,632		100.0	%
Income tax expense at federal statutory rate	$	16,909		35.0		$	5,121		35.0		$	39,071		35.0
State income taxes, net of federal income tax benefits	2,507			5.2		746			5.1		(1,008		)	(0.9	)
Cancellation of indebtedness income exclusion	—			—		—			—		(47,080		)	(42.2	)
Increase (decrease) in valuation allowance	(108,899		)	(225.6	)	(5,806		)	(39.7	)	7,906			7.1
Other	36			0.2		(51		)	(0.3	)	1,120			1.0
Income tax expense (benefit)	$	(89,447	)	(185.2	)%	$	10		0.1	%	$	9		—	%

As of December 31, 2015 and December 31, 2014, the net deferred tax asset, prior to any valuation allowance, was $94.8 million and $113.1 million, respectively. Management recorded a full valuation allowance against the deferred tax asset in September 2009 based largely on negative evidence represented by the losses in prior years caused by significant provisions associated with its loan portfolio coupled with excessive debt costs. As of December 31, 2014, the Company determined that a full valuation allowance was still necessary. The realization of the deferred tax asset is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the DTA will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon management’s evaluation and judgement 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. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance against the net deferred tax asset is required.

Based on the Company’s periodic assessment of all of the positive and negative evidence regarding the deferred tax asset position in 2015, it was determined that it is more likely than not that the Company would be able to realize all of the federal deferred tax asset, including all net operating loss carryforwards. The Company also determined that it is more likely than not that it would be able to realize substantially all of the state deferred tax asset, with the exception of $4.2 million pertaining to certain multi state loss carryforwards, including states in which the Company no longer does business. Consequently, the Company has substantially reversed this valuation allowance on the deferred tax asset during 2015.

The positive evidence considered by management in arriving at the conclusion to reverse substantially all of the valuation allowance during the year ended December 31, 2015 included: (1) ten consecutive quarters of pre-tax earnings; (2) a twelve quarter cumulative pre-tax book income position; (3) significant reductions in the level of non-performing assets since their peak, which was the primary source of the losses generated in prior periods; (4) the successful execution of operational efficiency initiatives in 2015; (5) adequacy of capital to fund balance sheet and future asset growth; and (6) forecasted positive core earnings trends which allow for the utilization of substantially all net operating losses before the statutory expiration periods. The negative evidence considered by management included: (1) operating losses and the lack of taxes paid in prior years; (2) the charges in 2015 pertaining to the operational efficiency initiatives; and (3) classified asset levels relative to peers. All these factors were given the appropriate weighting based on the extent to which the positive and negative evidence can be objectively verified. Based on management’s analysis, it was concluded that the positive evidence was sufficient to overcome the weight of negative evidence.

Based on the Company's assessment of all of the positive and negative evidence as of December 31, 2015, it was determined that a net valuation allowance reduction of $108.9 million during the year ended December 31, 2015, was necessary.

The Company’s ultimate realization of the deferred tax asset will be dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The significant components of deferred tax assets (liabilities) are as follows:



	December 31, 2015			December 31, 2014
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	10,086		$	18,870
OREO valuation allowance and other loss reserves	7,506			10,307
Federal NOL carryforwards	61,392			68,237
State NOL carryforwards	15,319			16,343
Unrealized securities losses, net	1,532			963
Alternative minimum tax credit carryforward	2,522			2,129
Deferred gain on sales leaseback	1,986			2,541
Other	3,381			2,994
Total deferred tax assets	103,724			122,384
Valuation allowance	(4,200		)	(113,099		)
Adjusted deferred tax assets	99,524			9,285
Deferred tax liabilities:
FHLB stock dividends	(833		)	(833		)
Mortgage servicing rights	(7,597		)	(7,784		)
Other	(474		)	(668		)
Total deferred tax liabilities	(8,904		)	(9,285		)
Net deferred tax assets	$	90,620		$	—

The Company is subject to U.S. federal income tax as well as income tax of various state jurisdictions. The tax years 2012-2015 remain open to examination by the Internal Revenue Service and certain state jurisdictions while the years 2011-2015 remain open to examination by certain other state jurisdictions.