INCOME TAXES

The following table presents the provision for income taxes for the years ended December 31, 2011, 2010, and 2009:



	2011			2010			2009
Current:
Federal	$	711,818		$	(6,681,247	)	$	(3,524,067	)
State	—			—			(5,207		)
	711,818			(6,681,247		)	(3,529,274		)
Deferred:
Federal	(4,600,126		)	4,755,963			(3,735,175		)
State	(417,330		)	536,665			(1,611,252		)
	(5,017,456		)	5,292,628			(5,346,427		)

Increase in valuation allowance	11,000,000			—			—
Total income taxes	$	6,694,362		$	(1,388,619	)	$	(8,875,701	)

The following table presents the tax effects of significant components of the Company's net deferred tax assets as of December 31, 2011 and 2010:



	2011			2010
Deferred tax assets:	(Dollars in thousands)
Allowance for loan losses	$	12,880,326		$	14,808,620
Other than temporary impairment	807,074			466,661
Accrued liabilities	275,725			529,593
OREO property	1,267,922			680,115
Net operating loss	7,280,731			4,651,982
Sidus goodwill	1,050,403			—
Other	1,797,990			514,563
	25,360,171			21,651,534
Less: valuation allowance	(11,000,000		)	—
	$	14,360,171		$	21,651,534
Deferred tax liabilities:
Unrealized gain on available-for-sale securities	(2,386,706		)	$	(333,147	)
FMV adjustments related to mergers	(255,209		)	(49,631		)
Depreciation	(1,979,716		)	(2,214,513		)
Prepaid expenses	(327,475		)	(356,850		)
Core deposit intangible	(1,467,844		)	(1,929,458		)
Noncompete intangible	(149,058		)	(231,744		)
Goodwill	—			(763,934		)
Other	(195,408		)	(137,399		)
	(6,761,416		)	$	(6,016,676	)
Net deferred tax asset	7,598,755			$	15,634,858

Our net deferred tax asset was $7.6 million and $15.6 million at December 31, 2011 and December 31, 2010, respectively. This decrease is related to a $11.0 million valuation allowance recorded in 2011. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is used in the consideration to determine whether, based on the weight of that evidence, a valuation allowance is required. The Company considered the following negative and positive evidence in its evaluation of deferred tax assets:


•	The company was in a cumulative loss position for the 3-year period ending December 31, 2010 as well as a cumulative tax loss position for the 3-year period ending December 31, 2011 of $(18.7) million and $(25.2) million respectively.



	December 31, 2011 Cumulative Loss Test
	2009			2010			2011			Total
	(Amount in thousands)
Income (loss) before income taxes	$	(83,933	)	$	(1,401	)	$	(7,701	)	$	(93,035	)
Goodwill impairment	61,566			—			4,944			66,510
	$	(22,367	)	$	(1,401	)	$	(2,757	)	$	(26,525	)


•	The Company's strong history of earnings since the inception of the bank, and particularly over the 10 year period prior to the current economic cycle, shows the Company has historically been profitable and has no history of expiration of loss carryforwards.


•	The Company is projecting income on a pretax basis, as well as taxable income, for the future periods 2012-2014.


•	Management is not aware of any unsettled circumstances that, if resolved, would adversely affect future operations or earnings.

•

Federal net operating losses can be deducted over the twenty year carryforward period. Currently, management is projecting full utilization of these tax benefits within 3 years from December 31, 2011. The Company’s loss carryforwards for the tax period ending December 31, 2011 include net operating loss carryforwards generated in the acquisition of Cardinal State Bank in 2008 and American Community Bank in 2009, as well as net operating loss carryforwards for the Company. The expiration of the loss carryforwards for the tax period ending December 31, 2011 are as follows:



	Net Operating Loss Carryforward at December 31, 2011		Tax Benefit Recorded at December 31, 2011		Expiration
	(Amounts in thousands)
Cardinal State Bank acquisition	$	2,424	$	849	2029
American Community Bank acquisition	345		15		2030
Yadkin Valley Federal	16,228		5,680		2031
Yadkin Valley State	17,074		738		2031
Total Loss Carryforwards	$	36,071	$	7,282

After review of all available evidence and based on the weight of such evidence, the Company believes the realization of the deferred tax asset was, and still is, more likely than not. However, consideration should be given to the fact that the Company has been in a cumulative loss position for 12 months. This position could cast doubts on the realization of the asset and should be considered. The Company considered the amount of the deferred tax asset that could be recovered within the next12 months in determining the amount of valuation allowance including projected taxable income, and feasible and prudent tax planning strategies . These tax planning strategies include repositioning the Company's municipal securities portfolio to taxable securities and sale of various assets and are considered to be prudent and feasible and would be expected to be done if needed. Based on this method, a valuation allowance of $11.0 million was deemed prudent as of December 31, 2011.

The following table presents a reconciliation of applicable income taxes for the years ended December 31, 2011, 2010 and 2009 to the amount of tax expense computed at the statutory federal income tax rate of 35%:



	2011			2010			2009
Tax expense at statutory rate on income before income taxes	$	(2,695,334	)	$	(490,284	)	$	(29,376,488	)
Increases (decreases) resulting from:
Tax-exempt interest on investments	(847,204		)	(819,141		)	(765,108		)
State income tax, net of federal benefits	(271,265		)	348,832			(1,050,698		)
Income from bank-owned life insurance	(229,793		)	(288,399		)	(296,099		)
Goodwill write-down	—			—			21,548,018
Merger expenses	—			—			543,130
Valuation allowance on deferred tax assets	11,000,000			—			—
Other	(262,042		)	(139,627		)	521,544
Total income taxes	$	6,694,362		$	(1,388,619	)	$	(8,875,701	)

The Company recognizes interest and penalties associated with uncertain tax positions as components of income taxes. The Company’s federal tax returns are subject to examination for years 2008, 2009 and 2010. The Company’s state income tax returns are subject to examination for years 2008, 2009 and 2010.