Income Taxes

The following table presents the provision for income taxes for the quarters ended March 31, 2012 and 2011:



	2012			2011
	(in thousands)
Current:
Federal	$	—		$	250
State	—			—
	—			250
Deferred:
Federal	954			(698		)
State	251			(61		)
	1,205			(759		)
Decrease in valuation allowance for deferred tax assets	(1,205		)	—
Total income taxes	$	—		$	(509	)

The following table presents the tax effects of significant components of the Company's net deferred tax assets as of March 31, 2012 and December 31, 2011:



	March 31,			December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	11,785		$	12,880
Other than temporary impairment	807			807
Accrued liabilities	244			276
OREO property	1,337			1,268
Net operating loss	6,980			7,281
Sidus goodwill	1,018			1,050
Other	1,790			1,798
	23,961			25,360
Less: Valuation Allowance	(9,795		)	(11,000		)
	$	14,166		$	14,360

Deferred tax liabilities:
Unrealized gain on available-for-sale securities	$	(2,396	)	$	(2,387	)
FMV adjustment related to mergers	(170		)	(255		)
Depreciation	(1,980		)	(1,980		)
Prepaid expenses	(327		)	(327		)
Core deposit intangible	(1,358		)	(1,468		)
Noncompete intangible	(149		)	(149		)
Other	(196		)	(195		)
	$	(6,576	)	$	(6,761	)
Net deferred tax asset	$	7,590		$	7,599

Our net deferred tax asset was $7.6 million at March 31, 2012 and December 31, 2011, respectively. 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 tax loss position for the 3-year period ending December 31, 2011 as well as a cumulative tax loss position for the 3-year period ending March 31, 2012 of $(26.5) million and $(21.8) million respectively.



	March 31, 2012 Cumulative Loss Test
	2009*			2010			2011			2012**		Total
Income (loss) before income taxes	$	(82,638	)	$	(1,401	)	$	(7,701	)	$	3,471	$	(88,269	)
Goodwill impairment	61,566			—			4,944			—		66,510
	$	(21,072	)	$	(1,401	)	$	(2,757	)	$	3,471	$	(21,759	)

*2nd, 3rd, and 4th quarter of 2009

**First three months of 2012


•	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		Expiration
	(in thousands)
Cardinal State Bank acquisition	$	2,424	2029
American Community Bank acquisition	345		2030
Yadkin Valley Federal Tax	16,228		2031
Yadkin Valley State Tax	17,074		2031
Total Loss Carryforwards	$	36,071

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 next 12 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 $9.8 million was deemed prudent as of March 31, 2012. The amount of net DTA expected to be realized based on our tax planning strategies was $7.6 million at March 31, 2012 and December 31, 2012.

The following table presents a reconciliation of applicable income taxes for the quarters ended March 31, 2012 and 2011 to the amount of tax expense computed at the statutory federal income tax rate of 35%:



	2012			2011
	(in thousands)
Tax expense (benefit) at statutory rate on income before income taxes	$	1,215		$	(453	)
Increases (decreases) resulting from:
Tax-exempt interest on investments	(156		)	(224		)
State income tax, net of federal benefits	163			(39		)
Income from bank-owned life insurance	(55		)	(57		)
Valuation allowance on deferred tax assets	(1,205		)	—
Other	38			264
Total income taxes	$	—		$	(509	)