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CBF > SEC Filings for CBF > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for CAPITAL BANK FINANCIAL CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CAPITAL BANK FINANCIAL CORP.


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain of the matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and as such may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results described in such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believes," "can," "could," "may," "predicts," "potential," "should," "will," "estimate," "plans," "projects," "continuing," "ongoing," "expects," "intends" and similar words or phrases. Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation: market and economic conditions, the management of our growth, the risks associated with Capital Bank, NA's loan portfolio and real estate holdings, local economic conditions affecting retail and commercial real estate, our ability to integrate our new management and directors without encountering potential difficulties, the Company's geographic concentration in the southeastern region of the United States, restrictions imposed by Capital Bank, NA's loss sharing agreements with the FDIC, the assumptions and judgments required by loss share accounting and the acquisition method of accounting, competition within the industry, dependence on key personnel, government legislation and regulation, the risks associated with identification, completion and integration of any future acquisitions, and risks related to Capital Bank, NA's technology and information systems. Additional factors that could cause actual results to differ materially are discussed in the Company's 10-K. All forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of March 31, 2013 and statements of income for the quarter ended March 31, 2013 and comparative periods when appropriate . Except as otherwise noted, dollar and share amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are not in thousands.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part II, Item 1A and elsewhere in this report. See "Cautionary Notice Regarding Forward Looking Statements" in the beginning of this report.

The following discussion pertains to our historical results, which includes the operations of First National Bank, Metro Bank, Turnberry Bank, TIB Financial, Capital Bank Corp. Green Bankshares and Southern Community Financial subsequent to our acquisition of each such entity. In this discussion, unless the context suggests otherwise, references to "Old Capital Bank" refer to Capital Bank Corp.'s banking subsidiary prior to June 30, 2011, the date on which the Bank (then Known as NAFH National Bank) merged with Old Capital Bank and changed its name to Capital Bank, National Association.

Throughout this discussion we collectively refer to the above acquisitions as the "acquisitions".

Overview

We are a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. We have raised approximately $1.0 billion to make acquisitions through a series of private placements and an initial public offering of our common stock. Since inception, we have acquired seven depository institutions, including the assets and certain deposits of the three Failed Banks from the FDIC. We completed the acquisition of Southern Community Financial on October 1, 2012. We operate 164 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.

We were founded by a group of experienced bankers with a multi-decade record of leading, operating, acquiring and integrating financial institutions. Our executive management team is led by our Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America Corp., where his career spanned 38 years, including tenure as President of the Consumer and Commercial Bank. He also has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.'s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc. Our Chief Financial Officer, Christopher G. Marshall, has over 30 years of financial and managerial experience, including service as the Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America's Global Consumer and Small Business Bank. Our Chief Risk Officer, R. Bruce Singletary, has over 32 years of experience, including 19 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region and as Senior Risk Manager for commercial banking for Bank of America's Florida Bank. Kenneth A. Posner serves as our Chief of Investment Analytics and Research. Mr. Posner spent 13 years as an equity research analyst at Morgan Stanley focusing on a wide range of financial services firms.


Acquisitions

In September 2012, our majority owned subsidiaries, TIB Financial Corp. ("TIBB"), Green Bankshares Inc. ("GRNB") and Capital Bank Corporation ("CBKN"), merged with and into Capital Bank Financial Corp. with CBF continuing as the surviving corporation (the "Reorganization"). Upon completion of the Reorganization, the outstanding common shares held by the minority shareholders were converted into an aggregate of 3.7 million shares of CBF's Class A common stock.

On October 1, 2012, we acquired all of the common equity interest in Southern Community Financial Corporation ("SCMF"), a publicly held bank holding company headquartered in Winston Salem, North Carolina. The merger consideration for all of the common equity interest consisted of approximately $52.4 million in cash paid to Southern Community's shareholders and approximately $46.9 million in cash paid to the Treasury for preferred stock issued to the Treasury as part of TARP. This acquisition expanded our market area in the North Carolina markets.

Comparability to Past Periods

The consolidated financial information presented throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the quarter ended March 31, 2013 includes our consolidated results, including Southern Community Financial Corporation. Accordingly, operating results for the quarters ended March 31, 2013 and 2012 are not generally comparable. In addition, results of operations for these periods reflect, among other things, the acquisition method of accounting. Under the acquisition method of accounting, all of the assets acquired and liabilities assumed were initially recorded on our consolidated balance sheet at estimated fair values as of the dates of acquisition. These estimated fair values differed substantially from the carrying amounts of the assets acquired and liabilities assumed immediately prior to acquisition. Therefore, certain comparisons to prior periods have been intentionally omitted unless observations we deem meaningful could be disclosed herein.

Material Trends and Developments

As part of the process of integrating the acquisitions into our line of business model, we have appointed experienced bankers to oversee loan and deposit production in each of our markets, centralized and consolidated back office operations and eliminated certain duplicative positions, improved productivity in our sales forces and established line of business reporting. These steps have helped us accelerate new loan production and core deposit growth. New loan production for the quarters ended March 31, 2013 and 2012 were $251.4 million and $196.8 million, respectively. Approximately 55.1% consisted of commercial loans for the quarter ended March 31, 2013 and 64.2% consisted of commercial loans for the quarter ended March 31, 2012. Core deposits were $3.8 billion at March 31, 2013, a decrease of $22.6 million from $3.8 billion on December 31, 2012.

Florida, South Carolina, North Carolina, and Tennessee accounted for 28.6%, 11.8%, 45.2%, and 14.5%, respectively, of our new loan originations for the quarter ended March 31, 2013.

Florida, South Carolina, North Carolina, Tennessee and Virginia accounted for 24.0%, 20.9%, 31.1%, 23.3% and 0.7%, respectively, of our new loan originations for the quarter ended March 31, 2012.

A significant portion of our core deposit decrease during the first quarter of 2013 resulted from a $10 million run-off in the legacy Southern Community footprint. The remainder was due to a loss of money market balances where we lowered rates and lost certain rate sensitive customers, partially offset by growth in checking accounts.

Primary Factors Used to Evaluate Our Business

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and income statement, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our budgeted performance and the financial condition and performance of comparable financial institutions in our region and nationally. Our financial information is prepared in accordance with GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our consolidated financial statements and accompanying notes. For more information on our accounting policies and estimates, refer to Company's consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2012.


Income Statement Metrics

Net Interest Income

Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. The net interest margin represents net interest income divided by average interest-earning assets. We earn interest income from interest, dividends and fees earned on interest-earning assets, the recognition of accretable yield associated with purchased credit impaired loans, and the amortization and accretion of discounts and premiums on investment securities. We incur interest expense on interest-bearing liabilities, including interest-bearing deposits, borrowings and other forms of indebtedness as well as from amortization and accretion of discounts and premiums on purchased time deposits and debt. We seek to maintain our net interest margin by originating commercial and consumer loans we believe to be high-quality and funding these assets primarily with low-cost customer deposits. References throughout this discussion to "commercial loans" include commercial & industrial and owner occupied commercial real estate loans, and references to "commercial real estate loans" include non-owner occupied commercial real estate loans, C&D loans and multifamily commercial real estate loans.

Provision for Loan Losses

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management's judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.

Non-interest Income

Non-interest income includes service charges on deposit accounts, debit card income, fees on mortgage loans, investment advisory and trust fees, income on the FDIC indemnification asset, other operating income and investment securities gains and losses.

Non-interest Expense

Non-interest expense includes salary and employee benefits, net occupancy expense, conversion related expenses, accounting, legal and other professional expenses, FDIC and state assessments, foreclosed asset related expenses and other operating expenses. We monitor the ratio of non-interest expense to net revenues (net interest income plus non-interest income), which is commonly known as the efficiency ratio.

Net Income

We evaluate our net income using the common industry ratio, return on assets (which we refer to as "ROA"), which is equal to net income for the period annualized, divided by the average of total assets for the period. As part of our budgeting process, we plan to improve the returns on assets of banks we acquire from the lower levels characteristic of institutions operating under financial distress.

Balance Sheet Drivers

Loan Growth

We monitor new loan production on a weekly basis by loan type, borrower type, market and profitability. Our operating strategy focuses on growing assets by originating commercial and consumer loans that we believe to be high quality. For the quarter ended March 31, 2013, we originated a total of $251.4 million in loans comprised of $139.4 million of commercial loans, $68.6 million of consumer loans, $39.1 million of commercial real estate loans and $4.3 million of other loans. For the quarter ended March 31, 2012, we originated a total of $196.8 million in loans comprised of $126.4 million of commercial loans, $44.9 million of consumer loans, $24.1 million of commercial real estate loans and $1.4 million of other loans. In addition, our acquisition strategy, which focuses on acquiring assets and businesses in southeastern U.S. markets, has resulted in an increase of the number of commercial and consumer loans as the acquisition of SCMF led to the increase in the average balance of loans for the first quarter of 2013.

Asset Quality

In order to operate with a sound risk profile, we have focused on originating loans we believe to be of high quality and prudently disposing of non-performing assets as rapidly as possible.

We are working to improve the diversification of our portfolio by reducing the concentration of commercial real estate loans in the legacy acquired portfolios and increasing the contribution of newly originated commercial and consumer loans. We monitor the levels of each loan type in our portfolio on a quarterly basis.


In marking the legacy loan portfolios to market at acquisition, we segregated similar loans into pools and value those pools by projecting lifetime cash flows for each loan based on assumptions about yield, average life and credit losses and then discounting those cash flows to present value. Because of the accounting treatment, for acquired impaired loans, we no longer report these loans as non-accrual loans or report charge-offs with respect to these loans. Rather, we monitor the performance of our legacy portfolio against our projections. Each quarter we update our assessment of cash flows for the acquired impaired loans in each pool. To the extent that we make unfavorable changes to estimates of lifetime credit losses for loans in a given pool (other than due to decreases in interest rate indices) which result in the present value of cash flows from the pool being less than our recorded investment of the pool, we record a provision for loan losses, resulting in an increase in the allowance for loan losses for that pool. For any pool where the present value of our most recent estimate of future cumulative lifetime cash flows has increased above its recorded investment, we will first reverse any previously established allowance for loan losses for the pool. If such estimate exceeds the amount of any previously established allowance, we will increase future interest income as a prospective yield adjustment over the remaining life of the pool to a rate which, when used to discount the expected cash flows, results in the present value of such cash flows equaling the recorded investment of the pool at the time of the estimate.

Deposit Growth

We monitor deposit growth by account type, market and rate on a daily and weekly basis. We seek to fund loan growth primarily with low-cost customer deposits either originated or acquired by us.

Liquidity

We manage liquidity based upon policy limits and cash flow modeling. To maintain adequate liquidity, we also monitor indicators of potential liquidity risk, utilize cash flow projection models to forecast liquidity needs, model liquidity stress scenarios and develop contingency plans, and identify alternative back-up sources of liquidity.

Capital

We manage capital to comply with our internal planning targets and regulatory capital standards, including the requirements of the OCC Operating Agreement. We review capital levels on a quarterly basis, and we project capital levels in connection with our organic growth plans and acquisitions to ensure continued compliance. We evaluate a number of capital ratios, including Tier 1 capital to total adjusted assets (the leverage ratio) and Tier 1 capital to risk-weighted assets.

Results of Operations

Overview

For the quarter ended March 31, 2013, we had net income of $5.6 million, or $0.10 per diluted share. Results for the quarter ended March 31, 2013 included $2.6 million of contingent value right ("CVR") expense, $1.6 million of stock-based compensation associated with original founder awards, $0.3 million of loss on extinguishment of debt related to $34.5 million in prepayments of trust preferred securities and $0.1 million of merger related costs.

Operating and financial highlights for the quarter ended March 31, 2013 include the following:

Originated $251.4 million of new loans for the quarter, demonstrating continued execution of the Company's organic growth strategies;

Cost of deposits declined 3 basis points during the quarter to 0.46%;

Provision expense of $6.9 million included a $7.8 million charge related to deterioration in a $9.2 million commercial credit;

Ended the first quarter with a tier 1 leverage ratio of 13.5%; and

Tangible book value increased $0.15 to $17.89.


Net Interest Income

Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, federal funds sold and securities purchased under agreements to resell. Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures underlying the trust preferred securities we acquired in connection with our acquisitions, repurchase agreements and other short-term borrowings.

                                                     Quarter Ended                                Quarter Ended
                                                    March 31, 2013                              December 31, 2012
                                          Average        Income/       Yields/         Average        Income/       Yields/
(Dollars in thousands)                   Balances        Expense        Rates         Balances        Expense        Rates
Interest-earning assets:
Loans(1)(2)                             $ 4,628,838      $ 72,664          6.37 %    $ 4,742,452      $ 72,004          6.04 %
Investment securities(2)                  1,006,647         3,549          1.43 %      1,074,700         3,470          1.28 %
Interest-bearing deposits in other
banks                                       586,345           371          0.26 %        562,937           371          0.26 %
FHLB stock                                   38,866           490          5.11 %         41,204           537          5.18 %

Total interest-earning assets             6,260,696        77,074          4.99 %      6,421,293        76,382          4.73 %
Non-interest-earning assets:
Cash and due from banks                     110,930                                      115,310
Other assets                                810,418                                      815,086

Total non-interest-earning assets           921,348                                      930,396

Total assets                            $ 7,182,044                                  $ 7,351,689

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                           $ 1,986,343      $  5,035          1.03 %    $ 2,199,407      $  5,281          0.96 %
Money market                              1,113,841           629          0.23 %      1,104,390           913          0.33 %
Negotiable order of withdrawal
accounts                                  1,275,914           555          0.18 %      1,246,897           791          0.25 %
Savings deposits                            503,714           258          0.21 %        467,009           343          0.29 %

Total interest-bearing deposits           4,879,812         6,477          0.54 %      5,017,703         7,328          0.58 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB
advances                                     43,250            14          0.13 %         45,971            16          0.14 %
Long-term borrowings                        170,912         2,499          5.93 %        179,282         2,771          6.15 %

Total interest-bearing liabilities      $ 5,093,974      $  8,990          0.72 %    $ 5,242,956      $ 10,115          0.77 %
Non-interest-bearing liabilities and
shareholders' equity:
Demand deposits                             888,834                                      892,615
Other liabilities                            33,536                                       63,010
Shareholders' equity                      1,165,700                                    1,153,108

Total non-interest-bearing
liabilities and shareholders' equity      2,088,070                                    2,108,733

Total liabilities and shareholders'
equity                                  $ 7,182,044                                  $ 7,351,689

Interest rate spread (tax equivalent
basis)                                                                     4.28 %                                       3.97 %

Net interest income (tax equivalent
basis)                                                   $ 68,084                                     $ 66,267

Net interest margin (tax equivalent
basis)                                                                     4.41 %                                       4.11 %
Average interest-earning assets to

average interest-bearing liabilities 122.90 % 122.47 %

(1) Average loans include non-performing loans.

(2) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis.


Rate/Volume Analysis

The table below details the components of the changes in net interest income for the quarter ended March 31, 2013 compared to the quarter ended December 31, 2012. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

                                                                 Quarter Ended March 31, 2013
                                                          Compared to Quarter Ended December 31, 2012
                                                                       Due to Changes in
                                                                                                   Net Increase
(Dollars in thousands)                         Average Volume             Average Rate              (Decrease)
Interest income
Loans(1)(2)                                   $         (1,749 )         $        2,409           $           660
Investment securities(1)                                  (228 )                    307                        79
Interest-bearing deposits in other banks                    15                      (15 )                      -
FHLB stock                                                 (30 )                    (17 )                     (47 )

Total interest income                         $         (1,992 )         $        2,684           $           692

Interest expense
Time deposits                                 $           (530 )         $          284           $          (246 )
Money market                                                 8                     (292 )                    (284 )
Negotiable order of withdrawal accounts                     18                     (254 )                    (236 )
Savings deposits                                            25                     (110 )                     (85 )
Short-term borrowings and FHLB advances                     (1 )                     (1 )                      (2 )
Long-term borrowings                                      (126 )                   (146 )                    (272 )

Total interest expense                        $           (606 )         $         (519 )         $        (1,125 )

Change in net interest income                 $         (1,386 )         $        3,203           $         1,817

(1) Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.

(2) Average loan volumes include non-performing loans which results in the impact of the non-accrual of interest being reflected in the change in average rate on loans.

Our net interest income for the quarter ended March 31, 2013 increased by $1.8 million, or 2.7%, to $67.8 million, from $66.0 million for the quarter ended December 31, 2012. The increase was due to a decline in rates paid across all core deposit types and additional accretion from legacy loan portfolios, partially offset by lower average loan balances. Accordingly, the net interest margin increased 30 basis points to 4.41% and our net interest income spread . . .

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