Capital Bank Financial Corp.

Income Taxes

Income tax expense for the years ended December 31, 2016, 2015 and 2014 was as follows:



(Dollars in thousands)	Years Ended
	December 31, 2016		December 31, 2015		December 31, 2014
Current income tax expense (benefit):
Federal	$	5,564	$	4,028	$	(2,629	)
State	2,584		1,901		2,024
Total	8,148		5,929		(605		)

Deferred income tax expense:
Federal	21,253		22,938		29,291
State	1,526		2,242		2,005
Total	22,779		25,180		31,296

Total income tax expense	$	30,927	$	31,109	$	30,691

A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income tax expense reported for the years ended December 31, 2016, 2015 and 2014 is as follows:



(Dollars in thousands)	Years Ended
	December 31, 2016			December 31, 2015			December 31, 2014
Income before income taxes	$	89,091		$	85,830		$	81,609
Income taxes computed at Federal statutory tax rate	31,182			30,041			28,563
Effect of:
State taxes (net of federal benefit)	2,611			2,923			2,720
State statutory rate change	749			33			421
Tax-exempt interest income, net	(1,213		)	(1,099		)	(1,247		)
Contingent value right expense	—			(118		)	597
Other, net	(2,402		)	(671		)	(363		)
Total income tax expense	$	30,927		$	31,109		$	30,691

The composition of the net deferred tax asset as of December 31, 2016 and 2015 is as follows:



(Dollars in thousands)	December 31, 2016			December 31, 2015
Deferred tax assets:
Loan basis differences	$	52,996		$	30,539
Net operating and realized built in losses	93,650			38,394
Alternative minimum tax credits	4,428			4,147
OREO basis differences	8,337			21,221
Allowance for loan and lease losses	16,155			17,113
Stock based compensation	7,016			6,560
Employee compensation and retirement benefits	5,645			2,523
Goodwill	6,818			8,515
CD premium	1,051			3,493
Net unrealized losses on AFS investments securities	7,449			4,038
Other	2,247			2,701
Total deferred tax assets	205,792			139,244
Deferred tax liabilities:
FDIC indemnification asset	—			(2,556		)
Other intangibles	(5,523		)	(886		)
Depreciation	(6,089		)	(3,923		)
Borrowings	(33,589		)	(15,074		)
Deferred loan costs	(9,969		)	(9,944		)
Other	(350		)	(1,545		)
Total deferred tax liabilities	(55,520		)	(33,928		)
Net deferred tax asset	150,272			105,316
Valuation allowance	—			—
Net deferred tax asset	$	150,272		$	105,316

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered the following positive factors:


1.	projections of future operating results which forecast that the Company will continue to recognize pre-tax income on a consolidated basis;


2.	reductions in operating expenses have been achieved as evidenced by continued progress in reducing operating costs and legacy credit expenses; and


3.	the Company expects interest rates to rise in the future, which should have a favorable impact on our net interest income trend and overall return on assets.

A negative factor that management considered was the severe losses incurred by the acquired institutions as a result of the severe recession and significant decline in real estate values in their local markets. In addition, Section 382 of the Internal Revenue Code limits the ability of the Company to utilize net operating losses and deduct built in losses for income tax purposes. The Company appropriately considers these limitations and has taken them into account in calculating the net deferred tax assets. These factors represent the most significant positive and negative evidence that management considered in concluding that no valuation allowance was necessary at December 31, 2016 and 2015. The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the states of Florida, New York, South and North Carolina and Tennessee.

At December 31, 2016 and 2015 the company had $478.6 million and $107.7 million of gross federal net operating losses, respectively. In addition, the company had $44.3 million of realized built-in-loss carry-forwards expected to be realized.

At December 31, 2016 and 2015 the company had $507.0 million and $100.1 million of gross state net operating loss carry-forwards expected to be utilized, respectively.

The table below shows federal and state net operating losses by acquisition, as well as realized built-in-losses and alternative minimum tax credits. Also, presented are annual limitation amounts, when applicable, and expiration periods as of December 31, 2016:



(Dollars in thousands)	TIB Financial Corp.			Capital Bank Corp.		Green Bankshares, Inc.		Southern Community Financial Corp.		CommunityOne Bancorp			Capital Bank Financial Corp.		Total			Tax Effected
Federal Tax
Federal net operating losses	$	70,983		$	9,423	$	25,948	$	—	$	372,224		$	—	$	478,578
Amounts not recorded due to Section 382 limitation	(62,312		)	—		—		—		(201,511		)	—		(263,823		)
Federal net operating losses available	8,671			9,423		25,948		—		170,713			—		214,755			75,164
Realized built-in-losses, net of 382 limitation	2,168			4,106		35,139		2,894		—			—		44,307			16,621
Total federal available	$	10,839		$	13,529	$	61,087	$	2,894	$	170,713		$	—	$	259,062		$	91,785

State Tax
State net operating losses	$	72,431		$	—	$	—	$	—	$	411,805		$	22,728	$	506,964
Amounts not recorded due to Sec 382 limitation	(62,312		)	—		—		—		(291,693		)	—		(354,005		)
Total state available	$	10,119		$	—	$	—	$	—	$	120,112		$	22,728	$	152,959		$	1,865

Total federal and state available																		$	93,650
Annual Section 382 limitation	$	723		$	3,487	$	3,687	$	2,991	$	19,956		$	—	$	30,844
Year federal expiration begins	2028			2029		2029		2032		2029			—
Year state expiration begins	2028			—		—		—		2024			2027
Alternative minimum tax credits - no expiration	$	—		$	2,000	$	106	$	979	$	1,343		$	—	$	4,428

At December 31, 2016 and 2015, the company had no material unrecognized tax benefits and no material amounts recorded for uncertain tax positions.