INCOME TAXES

The following table summarizes significant components of income tax expense (benefit) for the periods presented:



	Successor Company					Predecessor Company
	Year Ended December 31, 2013		Period from February 1 to December 31, 2012			Period from January 1 to January 31, 2012
Current tax expense:
Federal	$	—	$	69		$	—
State	—		—			—
Total current tax expense	—		69			—
Deferred tax expense (benefit):
Federal	42		(209		)	208
State	1,972		(46		)	62
Total deferred tax expense (benefit)	2,014		(255		)	270
Income tax expense (benefit) before adjustment to deferred tax asset valuation allowance	2,014		(186		)	270
Deferred tax asset valuation allowance	—		(3,300		)	—
Income tax expense (benefit)	$	2,014	$	(3,486	)	$	270

Income tax expense (benefit) is reconciled to the amount computed by applying the statutory federal income tax rate of 34 percent to net income before income taxes as follows:



	Successor Company						Predecessor Company
	Year Ended December 31, 2013			Period from February 1 to December 31, 2012			Period from January 1 to January 31, 2012

Tax computed at statutory rate of 34%	$	3,124		$	91		$	272
Effect of state income taxes	1,302			(30		)	41
Gain on acquisition	(2,644		)	—			—
Non-taxable interest income	(78		)	(174		)	(15		)
Non-taxable bank-owned life insurance	(348		)	(226		)	(21		)
Non-deductible merger costs	309			488			—
Deferred tax asset valuation allowance	—			(3,300		)	—
Other	349			(335		)	(7		)
	$	2,014		$	(3,486	)	$	270

Significant components of deferred taxes are summarized below.



	December 31, 2013		December 31, 2012
Deferred tax assets:
Net operating loss carryforward	$	28,779	$	23,793
Recognized built-in loss carryforward	6,570		6,055
Acquisition accounting fair value adjustments	12,109		6,038
Allowance for loan losses	2,499		1,164
Unrealized losses on securities	4,109		—
Unrealized losses on cash flow hedges	—		167
Stock-based compensation	878		563
Organizational expenses	285		324
Foreclosed assets	248		—
Other	1,094		881
Total deferred tax assets	56,571		38,985
Deferred tax liabilities:
Unrealized gains on securities	—		1,309
Unrealized gains on cash flow hedges	1,490		—
Foreclosed assets	—		722
Premises and equipment	203		122
Prepaid expenses	256		173
Total deferred tax liabilities	1,949		2,326
Net deferred tax asset	$	54,622	$	36,659

The Company’s federal income tax returns are open and subject to examination from the 2010 tax return year and forward. The Company’s state income tax returns are open and subject to examination from the 2010 tax return year and forward.

The acquisitions of Legacy VantageSouth, Rowan, Crescent, and ECB were each considered a change in control under Internal Revenue Code Section 382 (“Section 382”) and the Regulations thereunder. Accordingly, the Company is required to evaluate potential limitation or deferral of its ability to carry forward pre-acquisition net operating losses ("NOLs") and to determine the amount of net unrealized built-in losses (“NUBIL”), which may be subject to similar limitation or deferral. Under the Internal Revenue Code and Regulations, NUBIL recognized within five years of the change in control are subject to potential limitation. Recognized built-in losses ("RBIL") are generally limited to a carryforward period of twenty years, subject to the annual limitation and expire if not used by the end of that period. The Company believes that all of these benefits from pre-acquisition NOLs and RBIL will ultimately be realized; however, that amount is subject to continuing analysis and will not be finalized until the five-year recognition period for each acquisition expires.

As of December 31, 2013, the Company had NOLs available for carryforward of $71,536 that will expire, if unused, from 2025 through 2033. The Company also had recognized built-in losses in excess of annual limitations of $19,323 that will expire, if unused, from 2031 through 2033.

The Company evaluates its deferred tax assets (“DTAs”) each reporting period to determine whether a valuation allowance is necessary. In conducting this evaluation, all available evidence is considered, both positive and negative, based on the more-likely-than-not criteria that such assets will be realized. Some of the positive and negative evidence management considered in its year-end 2013 evaluation is summarized below.

Positive evidence regarding the Company's DTAs in order of significance is as follows:


•	Earnings trends and forecasts

The Company continued to improve its earnings performance in 2013, especially following its acquisition of ECB. The three-year cumulative pre-tax income position was $11,450 as of December 31, 2013. Additionally, management monitors the Company’s performance against its business plan and forecast on a regular basis. Based on the business plan and forecast, which consider certain improvements to the Company’s business, management currently expects the Company's pre-tax income to fully absorb the existing DTAs.


•	Sufficient carryforward period

The Company's tax loss carryforward periods were evaluated to determine whether the Company has sufficient time to execute on its business plan, considering the applicable annual Section 382 limitations. The earliest NOL period and related expiration for each acquired bank is described below.


•	Legacy VantageSouth's earliest NOL year was 2006, and this 2006 NOL is available to be used through 2025.


•	Rowan's earliest NOL year was 2011, and this 2011 NOL is available to be used through 2030.


•	Crescent's earliest NOL year was 2010, and this 2010 NOL is available to be used through 2029.


•	ECB's earliest NOL year was 2013, and this 2013 NOL is available to be used through 2032.


•	Robust capital levels and access to capital

The Bank's tier 1 capital and total risk-based capital ratios were 10.16 percent and 12.70 percent, respectively, as of December 31, 2013, both of which were in excess of the regulatory definition of a "well capitalized" bank. Additionally, Piedmont, which owns a controlling interest in the Company, has demonstrated its ability to source new capital by raising approximately $153,500 in capital from its investors since its first bank acquisition in 2010. The Company has also recently demonstrated its ability to access new capital. In August 2013, the Company issued $38,050 in fixed rate subordinated notes, which qualify as Tier 2 regulatory capital, and in January 2014, it completed another private placement offering when it issued $46,900 of common stock for the primary purpose of redeeming outstanding cumulative perpetual preferred stock and common stock warrants issued to Treasury pursuant to the Troubled Asset Relief Program ("TARP").


•	Sufficient liquidity

The Company was in compliance with all liquidity policy requirements as of December 31, 2013 and maintained high levels of off balance sheet liquidity.


•	Declining problem asset levels

Nonperforming loans to total loans declined from 1.67 percent as of December 31, 2012 to 1.51 percent as of December 31, 2013, and nonperforming assets to total assets declined from 1.71 percent to 1.50 percent in that period. Further, the Bank's classified asset ratio to tier 1 capital plus allowance for loan losses improved to approximately 30 percent as of December 31, 2013 from 35 percent as of December 31, 2012. The Company has developed a strong underwriting culture and requires all loans to be approved by the credit administration function. Credit administrators with specific credit expertise have been designated for each line of business, i.e., commercial real estate, commercial and industrial, SBA, Builder Finance, mortgage, and consumer.


•	Tax planning strategies

Reasonable tax planning strategies were considered, including liquidation of bank-owned life insurance to realized built-in gains, sale-leaseback of office buildings in an unrealized gain position, and others. Management has no current plans to execute these tax planning strategies, and in particular, liquidation of bank-owned life insurance would carry a tax penalty. These tax planning strategies would only be considered for possible execution if the ultimate realization of DTAs were in question.

Negative evidence regarding the necessity of a DTA valuation allowance is as follows:


•	Annual Section 382 limitations on acquired NOLs and RBIL

The annual Section 382 limitations on the Company's acquisitions may extend the time period necessary to utilize the related NOLs and RBIL. Therefore, the Company needs to execute on its business plan over the next several years to avoid concerns regarding its ability to realize these tax benefits.


•	Limited track record of taxable income

The Company has a limited track record of generating taxable income. While its pre-tax income has substantially improved, the Company needs to begin generating significant amounts of taxable income to utilize its NOLs and RBIL.


•	Uncertain regulatory environment

The risks from an uncertain regulatory environment negatively affect nearly all financial institutions.


•	Merger risks

The Company's business plan calls for significant growth over the coming years through organic activity as well as merger and acquisition activity. Future mergers may significantly impact the Company's ability to realize its tax benefits, both positively and negatively.

Based on the Company's evaluation, which considered the weight of the positive evidence compared to the negative evidence, management concluded that a valuation allowance was not necessary as of December 31, 2013.