INCOME TAXES

The table below summarizes significant components of income tax expense for the periods presented.



	Year ended December 31,
	2016			2015			2014
Current tax expense:
Federal	$	7,596		$	5,415		$	305
State	135			—			—
Total current tax expense	7,731			5,415			305
Deferred tax expense:
Federal	21,128			16,653			7,924
State	3,507			4,053			1,981
Total deferred tax expense	24,635			20,706			9,905
Income tax expense before change in deferred tax asset valuation allowance	32,366			26,121			10,210
Change in deferred tax asset valuation allowance	(296		)	(126		)	(4,797		)
Income tax expense	$	32,070		$	25,995		$	5,413

Income tax expense is reconciled to the amount computed by applying the statutory federal income tax rate of 35 percent to net income before income taxes as follows.



	Year ended December 31,
	2016			2015			2014

Tax computed at statutory rate of 35%	$	30,533		$	24,718		$	9,491
Effect of state income taxes, net of federal benefit	2,367			2,635			1,287
Change in state income tax rates	(327		)	(361		)	(1,899		)
Non-taxable interest income	(1,329		)	(828		)	(437		)
Non-taxable bank-owned life insurance	(1,423		)	(655		)	(549		)
Non-deductible merger costs	1,819			94			1,006
Write-off of acquired net operating losses subject to Section 382 limitation	—			—			652
Change in deferred tax asset valuation allowance	(296		)	(126		)	(4,797		)
Other	726			518			659
Income tax expense	$	32,070		$	25,995		$	5,413

Significant components of deferred taxes are summarized below.



	December 31, 2016			December 31, 2015
Deferred tax assets:
Net operating loss carryforward	$	35,955		$	32,638
Recognized built-in loss carryforward	5,899			5,899
Acquisition accounting fair value adjustments	—			4,998
Allowance for loan losses	5,169			3,673
Federal tax credits carryforward	7,960			4,112
Unrealized losses on securities	6,120			2,055
Unrealized losses on cash flow hedges	2,272			2,596
Stock-based compensation	2,778			1,997
Capitalized leases	1,057			1,110
Deferred compensation	4,606			1,831
Other	1,524			—
Total deferred tax assets	73,340			60,909
Valuation allowance	(763		)	(1,059		)
Net deferred tax assets	72,577			59,850
Deferred tax liabilities:
Premises and equipment	6,643			3,262
Prepaid expenses	469			680
Deferred loan origination costs	4,429			—
Acquisition accounting fair value adjustments	2,807			—
Other	—			301
Total deferred tax liabilities	14,348			4,243
Net deferred tax asset	$	58,229		$	55,607

As of December 31, 2016, the Company had net operating losses ("NOLs") available for carryforward of $96,702 that will expire, if unused, from 2023 through 2032. The Company also had recognized built-in losses in excess of annual limitations of $16,855 that will expire, if unused, from 2031 through 2035. The Company’s federal income tax returns are open and subject to examination from the 2013 tax return year and forward. The Company’s state income tax returns are open and subject to examination from the 2013 tax return year and forward.

The Company (along with its predecessors) has completed several change in control transactions under Internal Revenue Code Section 382 (“Section 382”) and the Regulations thereunder. Those transactions are summarized below in chronological order.


•	Piedmont's acquisition of a controlling interest in Legacy VantageSouth Bank on February 19, 2010


•	An ownership shift in the Piedmont capital structure on February 22, 2011


•	Piedmont's acquisition of Community Bank of Rowan on April 19, 2011


•	Piedmont's acquisition of a controlling interest in Crescent Financial Bancshares, Inc. ("Crescent") on November 18, 2011


•	Piedmont's purchase of the non-controlling interests in Legacy VantageSouth Bank on February 1, 2012 along with an ownership shift in the Piedmont capital structure (described above)


•	Crescent's acquisition of a controlling interest in ECB on April 1, 2013


•	Yadkin's merger with Piedmont and VantageSouth on July 4, 2014 (double ownership change)


•	Yadkin’s acquisition of NewBridge Bancorp on March 1, 2016


•	NewBridge’s acquisition of Patriot State Bank on January 31, 2013


•	NewBridge’s acquisition of Premier Commercial Bank on February 27, 2015

Accordingly, the Company is required to evaluate potential limitation or deferral of its ability to carryforward pre-acquisition 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.

Based on the Company’s analysis of Section 382 limitations and applicable carryforward periods for limited NOLs and RBILs, there are NOLs totaling $1,917 that will expire unused due to Section 382 limitations. The deferred taxes related to these NOLs were written off in 2014. Other than these unusable NOLs, the Company believes that all of the remaining benefits from pre-acquisition NOLs and RBILs 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 transaction expires.

The Company evaluates its deferred tax assets (“DTAs”) at least quarterly 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 2016 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 2016, especially following the NewBridge acquisition. The Company had a three-year cumulative pre-tax income position as of December 31, 2016. 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. The Company has also begun to generate significant taxable income, which is important when considering the need to utilize NOLs and other tax loss carryforwards prior to expiration. In 2016, the Company generated taxable income of $35.5 million before NOLs and was able to utilize $28.4 million.


•	Robust capital levels and access to capital

The Company's tier 1 capital and total risk-based capital ratios were 9.83 percent and 12.49 percent, respectively, as of December 31, 2016. The Bank's tier 1 capital and total risk-based capital ratios were 10.57 percent and 12.41 percent, respectively, as of December 31, 2016, both of which were in excess of the regulatory definition of a "well capitalized" bank.

The Company has also recently demonstrated its ability to raise various forms of capital as needed to fund both strategic acquisitions and organic growth, including common stock, preferred stock, and subordinated debt. The Company also recently redeemed preferred stock previously issued to the U.S. Treasury as part of its TARP Capital Purchase Program and has current plans to redeem the remaining Yadkin preferred stock owned by private investors.


•	Sufficient liquidity

The Company was in compliance with all liquidity policy requirements as of December 31, 2016 and maintained high levels of off balance sheet liquidity.


•	Strong asset quality

The Company's nonperforming loan and nonperforming asset ratios changed slightly in 2016. Nonperforming loans to total loans were 0.95 percent as of December 31, 2016, compared to 1.06 percent as of December 31, 2015. Nonperforming assets to total assets were 1.16 percent as of December 31, 2016, compared to 1.07 percent as of December 31, 2015. Further, the Bank's classified asset ratio to tier 1 capital plus allowance for loan losses decreased slightly to approximately 21.0 percent as of December 31, 2016 from 22.6 percent as of December 31, 2015. The Company has developed a strong underwriting culture, and 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).


•	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 applicable annual Section 382 limitations. Based on the Company’s analysis of each change in control, annual Section 382 limitation, dollar amounts of NOLs and RBILs, and forecasted taxable income to offset these loss carryforwards, management believes the Company has sufficient time to execute on its business plan and to utilize all of its NOLs and RBILs (with the exception of certain NOLs referred to above that will expire unused and have been written off).


•	Tax planning strategies

Reasonable tax planning strategies were considered, including conversion of non-taxable investment to taxable investment, holding investment securities in a current loss position until maturity, sale-leaseback of office buildings in an unrealized gain position, and others. Management has no current plans to execute these tax planning strategies. 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.


•	Uncertain regulatory environment

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


•	Uncertain economic and rate environment

The risks from an uncertain economic and rate environment negatively affect nearly all financial institutions. Management believes that the Company’s balance sheet is conservatively positioned from an interest rate risk perspective, and based on its interest rate risk model, management generally expects net interest income to rise and the economic value of equity to increase in a rising interest rate environment.

Prior to the 2014 Mergers, Piedmont maintained a full valuation allowance on all of its NOLs and other DTAs due to substantial doubt about its ability to realize these tax benefits since its federal tax returns could not be consolidated with VantageSouth at the time. Due to nature of Piedmont’s merger into Yadkin on July 4, 2014, however, Piedmont was consolidated into Yadkin from a federal tax perspective, and the Company is now able to use taxable income generated by Yadkin and its Bank to realize federal NOLs and other DTAs generated by Piedmont prior to the 2014 Mergers. Based on this transaction and the Company’s analysis of its ability to realize Piedmont’s DTAs, subject to applicable Section 382 limitations, management determined that it was appropriate to reverse the $4,706 valuation allowance on Piedmont’s DTAs subsequent to the 2014 Mergers. This valuation allowance reversal was recorded as a reduction to income tax expense.

As of December 31, 2016, the Company's valuation allowance totaled $763, which represented reserves due to uncertainty regarding its ability to generate taxable income of a character required to realize the benefits related to long-term capital losses carryovers and certain state NOLs. Based on the Company's DTA evaluation, which considered the weight of the positive evidence compared to the negative evidence, management concluded that sufficient taxable income will be generated in the future to realize the Company’s remaining net DTA as of December 31, 2016.