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| CBKN > SEC Filings for CBKN > Form 10-Q on 10-Aug-2012 | All Recent SEC Filings |
10-Aug-2012
Quarterly Report
The following discussion presents an overview of the unaudited financial statements for the three months ended June 30, 2012 (Successor) and June 30, 2011 (Successor) as well as the six months ended June 30, 2012 (Successor), the period of January 29 to June 30, 2011 (Successor) and the period of January 1 to January 28, 2011 (Predecessor) for Capital Bank Corporation ("Capital Bank Corp." or the "Company"). This discussion and analysis is intended to provide pertinent information concerning financial condition, results of operations, liquidity, and capital resources for the periods covered and should be read in conjunction with the unaudited financial statements and related footnotes contained in Part I, Item 1 of this report.
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, which statements represent the Company's judgment concerning the future and
are subject to risks and uncertainties that could cause the Company's actual
operating results to differ materially. Such forward-looking statements can be
identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," "believe," or "continue," or the negative
thereof or other variations thereof or comparable terminology. The Company
cautions that such forward-looking statements are further qualified by important
factors that could cause the Company's actual operating results to differ
materially from those in the forward-looking statements, including those factors
set forth in Part II, Item 1A of this report, and the Company's periodic reports
and other filings with the Securities and Exchange Commission, or SEC
Overview
Capital Bank Corporation is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. Prior to June 30, 2011, the Company's primary wholly-owned subsidiary was Old Capital Bank, which was a state-chartered banking corporation that was incorporated under the laws of the State of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. As of June 30, 2012 (Successor), the Company had a 26% equity method investment in Capital Bank, NA, a national banking association with approximately $6.3 billion in total assets and 143 full-service banking offices throughout Florida, North Carolina, South Carolina, Tennessee and Virginia. The Company also has interests in three trusts: Capital Bank Statutory Trust I, II, and III.
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank's then existing loan portfolio. Also in connection with the CBF Investment, the Company's Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company's common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Upon closing of the CBF Investment, R. Eugene Taylor, CBF's Chief Executive Officer, Christopher G. Marshall, CBF's Chief Financial Officer, and R. Bruce Singletary, CBF's Chief Risk Officer, were named as the Company's CEO, CFO and CRO, respectively, and as members of the Company's Board of Directors. In addition, the Company's Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).
Balances and activity in the Company's consolidated financial statements prior to the CBF Investment have been labeled with "Predecessor Company" while balances and activity subsequent to the CBF Investment have been labeled with "Successor Company." Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management's Discussion and Analysis of Financial Condition and Results of Operations.
Bank Mergers
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial and Green Bankshares. CBF is the owner of approximately 83% of the Company's common stock, approximately 94% of TIB Financial's common stock and approximately 90% of Green Bankshares' common stock.
Capital Bank, NA was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks - Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina) - from the FDIC and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity's relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of June 30, 2012, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.3 billion, total deposits of $5.1 billion and shareholders' equity of $966.5 million.
Potential Merger of the Company and CBF
On September 1, 2011, the Boards of Directors of CBF and the Company approved and adopted a merger agreement. The merger agreement provides for the merger, following the receipt of shareholder approval by the Company's shareholders (including CBF), of the Company with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of the Company's common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or the Company, will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of the Company's common stock will be entitled to receive cash in lieu thereof.
Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.
Critical Accounting Policies and Estimates
The following discussion and analysis of the Company's financial condition and results of operations are based on the Company's condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.
Prior to the Bank Merger, the Company had identified the following accounting
policies as being critical in terms of significant judgments and the extent to
which estimates were used: (1) allowance for loan losses,
(2) other-than-temporary impairment on investment securities, (3) valuation
allowance on deferred income tax assets, and (4) impairment of goodwill and
long-lived assets. Due to the CBF Investment, the Company added an accounting
policy related to purchased credit-impaired loans, and due to the Bank Merger,
the Company added an accounting policy related to its equity method investment
in Capital Bank, NA. These policies are important in understanding management's
discussion and analysis. For more information on the Company's critical
accounting policies, refer to Part II, Item 7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2011.
Executive Summary
The following is a summary of the Company's results of operations and changes in financial condition for the three and six months ended June 30, 2012:
• Net income totaled $2.6 million, or $0.03 per share, in the second quarter of 2012 and totaled $5.4 million, or $0.06 per share, in the six months ended June 30, 2012;
• The Company held a 26% ownership interest in Capital Bank, NA, which has $6.3 billion in assets and operates 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia; and
• The Company increased the equity investment balance in Capital Bank, NA by $2.9 million based on its equity in Capital Bank, NA's net income and increased the equity investment balance by $1.5 million based on its equity in Capital Bank, NA's other comprehensive income in the second quarter of 2012.
Results of Operations
Financial results for the first quarter of 2011 were significantly impacted by the controlling investment in the Company by CBF. The Company used push-down accounting, and as such, has applied the acquisition method of accounting to the CBF Investment. Accordingly, the Company's assets and liabilities were adjusted to estimated fair value at the acquisition date, and the allowance for loan losses was eliminated at that date. The Company's operating results in the periods subsequent to the acquisition date were impacted by these fair value adjustments as the underlying assets and liabilities were converted in the normal course of business. Further, in connection with the Bank Merger on June 30, 2011, the Company deconsolidated the assets and liabilities of Old Capital Bank and began reporting its ownership of Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment.
In the successor periods, net income totaled $2.6 million, or $0.03 per share, for the three months ended June 30, 2012, and totaled $2.3 million, or $0.03 per share, for the three months ended June, 30 2011. Further, net income totaled $5.4 million, or $0.06 per share, for the six months ended June 30, 2012, and totaled $1.7 million, or $0.02 per share, for the period of January 29 to June 30, 2011. In the predecessor period, net loss to common shareholders totaled $265 thousand, or ($0.02) per share, for the period of January 1 to January 28, 2011.
Net Interest Income
Net interest income in the second quarter of 2012 was significantly impacted by the Bank Merger, upon which Old Capital Bank's interest-earning assets and interest-bearing liabilities were deconsolidated from the Company. Following the Bank Merger on June 30, 2011, the Company's interest-bearing liabilities, which consisted of subordinated debentures, significantly exceeded interest-earning assets, thus creating net interest loss and a negative net interest margin. Net interest income (loss) for the three months ended June 30, 2012 (Successor) and the three months ended June 30, 2011 (Successor) totaled ($284) thousand and $15.4 million, respectively. Net interest margin decreased from 4.23% in the three months ended June 30, 2011 (Successor) to (33.57)% in the three months ended June 30, 2012 (Successor).
Further, net interest income (loss) for the six months ended June 30, 2012 (Successor), the period of January 29 to June 30, 2011 (Successor) and the period of January 1 to January 28, 2011 (Predecessor) totaled ($561) thousand, $25.5 million and $4.0 million, respectively. The Company's net interest margin increased from 3.09% in the period of January 1 to January 28, 2011 (Predecessor) to 4.23% for the period of January 29 to June 30, 2011 (Successor), and decreased to (33.16)% for the six months ended June 30, 2012 (Successor) primarily due to the CBF Investment and Bank Merger, respectively. Average interest-earning assets decreased from $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $1.49 billion in the period of January 29 to June 30, 2011 (Successor) to $3.4 million in the six months ended June 30, 2012 (Successor). The decline in average interest-earning assets in the successor period was primarily related to the Bank Merger, upon which Old Capital Bank's interest-earning assets and interest-bearing liabilities were deconsolidated from the Company. As of June 30, 2012 (Successor), the Company's only interest-earning asset was a $3.4 million advance to Capital Bank, NA.
The following tables (Average Balances, Interest Earned or Paid, and Interest Yields/Rates) reflect the Company's effective yield on interest-earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the period by the respective daily average asset or liability balance. Changes in net interest income cannot be explained in terms of fluctuations in volume and rate due to the different lengths of the periods presented in the following tables.
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Tax Equivalent Basis 1
Successor Company
Three Months Ended Three Months Ended Three Months Ended
(Dollars in thousands) Jun. 30, 2012 Mar. 31, 2012 Jun. 30, 2011
Average Amount Average Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate Balance Earned Rate
Assets
Loans 2 $ - $ - - % $ - $ - - % $ 1,098,266 $ 16,579 6.05 %
Investment securities 3 - - - - - - 334,230 2,639 3.16
Interest-bearing deposits - - - - - - 56,149 40 0.29
Advance to Capital Bank, NA 3,393 85 10.00 3,393 85 10.00 - - -
Total interest-earning assets 3,393 $ 85 10.00 % 3,393 $ 85 10.00 % 1,488,645 $ 19,258 5.19 %
Cash and due from banks 1,239 1,950 16,587
Other assets 250,003 245,961 195,839
Total assets $ 254,635 $ 251,304 $ 1,701,071
Liabilities and Equity
NOW and money market accounts $ - $ - - % $ - $ - - % $ 345,307 $ 666 0.77 %
Savings accounts - - - - - - 32,241 10 0.12
Time deposits - - - - - - 843,725 2,110 1.00
Total interest-bearing deposits - - - - - - 1,221,273 2,786 0.91
Borrowings - - - - - - 93,349 410 1.76
Subordinated debentures 19,253 369 7.58 19,191 362 7.46 19,323 355 7.27
Total interest-bearing liabilities 19,253 $ 369 7.58 % 19,191 $ 362 7.46 % 1,333,945 $ 3,551 1.07 %
Noninterest-bearing deposits - - 122,326
Other liabilities 5,515 5,754 13,058
Total liabilities 24,768 24,945 1,469,329
Shareholders' equity 229,867 226,359 231,742
Total liabilities and shareholders'
equity $ 254,635 $ 251,304 $ 1,701,071
Net interest spread 4 2.42 % 2.54 % 4.12 %
Tax equivalent adjustment $ - $ - $ 268
Net interest income and net interest
margin 5 $ (284 ) (33.57 )% $ (277 ) (32.75 )% $ 15,707 4.23 %
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1 The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities.
2 Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded.
3 The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any.
4 Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5 Net interest margin represents net interest income divided by average interest-earning assets.
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Tax Equivalent Basis 1
Successor Company Predecessor Company
Six Months Ended Period of Period of
(Dollars in thousands) Jun. 30, 2012 Jan. 29 to Jun. 30, 2011 Jan. 1 to Jan. 28, 2011
Average Amount Average Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate Balance Earned Rate
Assets
Loans 2 $ - $ - - % $ 1,102,487 $ 27,734 6.12 % $ 1,253,296 $ 5,530 5.20 %
Investment securities 3 - - - 298,283 3,893 3.13 225,971 504 2.68
Interest-bearing deposits - - - 88,465 87 0.24 63,350 11 0.20
Advance to Capital Bank, NA 3,393 170 10.00 - - - - - -
Total interest-earning assets 3,393 $ 170 10.00 % 1,489,235 $ 31,714 5.18 % 1,542,617 $ 6,045 4.61 %
Cash and due from banks 1,594 16,503 16,112
Other assets 247,983 191,902 34,021
Total assets $ 252,970 $ 1,697,640 $ 1,592,750
Liabilities and Equity
NOW and money market accounts $ - $ - - % $ 344,867 $ 1,084 0.76 % $ 334,668 $ 211 0.74 %
Savings accounts - - - 31,958 16 0.12 30,862 3 0.11
Time deposits - - - 846,753 3,460 0.99 870,146 1,337 1.81
Total interest-bearing deposits - - - 1,223,578 4,560 0.91 1,235,676 1,551 1.48
Borrowings - - - 95,414 664 1.69 120,032 343 3.36
Subordinated debentures 19,222 731 7.52 19,417 587 7.26 34,323 102 3.50
Total interest-bearing liabilities 19,222 $ 731 7.52 % 1,338,410 $ 5,811 1.06 % 1,390,031 $ 1,996 1.69 %
Noninterest-bearing deposits - 118,897 114,660
Other liabilities 5,635 10,683 9,635
Total liabilities 24,857 1,467,990 1,514,326
Shareholders' equity 228,113 229,650 78,424
Total liabilities and shareholders'
equity $ 252,970 $ 1,697,640 $ 1,592,750
Net interest spread 4 2.48 % 4.13 % 2.92 %
Tax equivalent adjustment $ - $ 443 $ 90
Net interest income and net interest
margin 5 $ (561 ) (33.16 )% $ 25,903 4.23 % $ 4,049 3.09 %
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1 The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities.
2 Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded.
3 The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any.
4 Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5 Net interest margin represents net interest income divided by average interest-earning assets.
Noninterest Income
The following table presents the detail of noninterest income for each period
presented:
Successor Successor Predecessor
Company Company Company
Three Months Three Months Six Months Jan. 29, 2011 Jan. 1, 2011
Ended Ended Ended to to
(Dollars in thousands except per share data) Jun. 30, 2012 Jun. 30, 2011 Jun. 30, 2012 Jun. 30, 2011 Jan. 28, 2011
Equity income from investment in Capital Bank, NA $ 2,937 $ - $ 6,025 $ - $ -
Service charges and other fees - 807 - 1,355 291
Bank card services - 547 - 847 174
. . .
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