Income Taxes

The following table presents the provision for income taxes for the nine months ended March 31, 2014 and 2013:



	2014			2013
	(in thousands)
Current:
Federal	$	(1	)	$	(200	)
State	—			—
	(1		)	(200		)
Deferred:
Federal	2,210			2,307
State	450			501
	2,660			2,808
Decrease in valuation allowance for deferred tax assets	—			—
Total income taxes	$	2,659		$	2,608

The following table presents the tax effects of significant components of the Company's net deferred tax assets as of March 31, 2014 and December 31, 2013:



	March 31,			December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	6,360		$	6,956
Other than temporary impairment	829			829
Accrued liabilities	43			55
OREO property	112			178
Net operating loss	13,285			14,375
Mortgage goodwill	747			779
Unrealized loss on available-for-sale securities	—			—
Other	2,480			3,243
	23,856			26,415
Less: Valuation Allowance	—			—
	$	23,856		$	26,415

Deferred tax liabilities:
Unrealized gain on available-for-sale securities	$	(484	)	$	(3	)
FMV adjustment related to mergers	(116		)	(97		)
Depreciation	(1,887		)	(1,753		)
Prepaid expenses	(342		)	(342		)
Core deposit intangible	(704		)	(765		)
Noncompete intangible	(11		)	(24		)
Other	(7		)	(6		)
	$	(3,551	)	$	(2,990	)
Net deferred tax assets	$	20,305		$	23,425

Our net deferred tax asset was $20.3 million at March 31, 2014 and $23.4 million at December 31, 2013. In evaluating whether the Company will realize the full benefit of its net deferred tax asset, it considers both positive and negative evidence, including recent earnings trends and projected earnings, asset quality, and other significant events. 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.

As of March 31, 2014, the Company returned to a cumulative pretax income position excluding goodwill impairment for the 3-year period ending March 31, 2014 of $1.7 million and the Company is projecting income on a pretax basis, as well as taxable income, for the future periods 2014-2016. Credit quality has also improved dramatically over the past two years, including significant decreases in classified loans and nonperforming loans.

After review of all available evidence and based on the weight of such evidence, the Company believes the realization of the deferred tax asset is, more likely than not and no valuation allowance is deemed necessary at March 31, 2014 based primarily on a return to profitability, pretax income trends, projected pretax income for the years 2014-2016 and improving credit quality metrics.



	March 31, 2014
	Cumulative Loss Test
	2011*			2012			2013		2014**		Total
Income (loss) before income taxes	$	(6,406	)	$	(32,635	)	$	29,227	$	6,567	$	(3,247	)
Goodwill impairment	4,944			—			—		—		4,944
	$	(1,462	)	$	(32,635	)	$	29,227	$	6,567	$	1,697

*2nd - 4th quarter of 2011

**First quarter of 2014

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 March 31, 2014. The Company's loss carryforwards for the tax period ending December 31, 2013 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 March 31, 2014 are as follows:



	Net Operating Loss Carryforward March 31, 2014		Expiration
	(in thousands)
Cardinal State Bank acquisition	$	2,424	2029
American Community Bank acquisition	345		2030
Yadkin Federal Tax	32,868		2031
Yadkin State Tax	24,827		2031
Total Loss Carryforwards	$	60,464

The following table presents a reconciliation of applicable income taxes for the three months ended March 31, 2014 and 2013 to the amount of tax expense computed at the statutory federal income tax rate of 35%:



	2014			2013
	(in thousands)
Tax expense at statutory rate on income before income taxes	$	2,299		$	2,540
Increases (decreases) resulting from:
Tax-exempt interest on investments	(253		)	(219		)
State income tax, net of federal benefits	292			326
Income from bank-owned life insurance	(48		)	(53		)
Non-deductible merger expenses	360			—
Other	9			14
Total income taxes	$	2,659		$	2,608