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

Show all filings for CAPITAL BANK FINANCIAL CORP.

Form 10-Q for CAPITAL BANK FINANCIAL CORP.


8-Aug-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 may cause actual results to differ materially from these forward-looking statements include, but are not limited to, the risk factors described in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2012. 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.

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.

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 June 30, 2013 and statements of income for the three and six months ended June 30, 2013 and comparative periods when appropriate . Except as otherwise noted, dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are not in thousands.

The following discussion pertains to our historical results, which includes the operations of First National Bank, Metro Bank, Turnberry Bank (collectively, the "Failed Banks"), TIB Financial, Capital Bank Corp. Green Bankshares and Southern Community Financial subsequent to our acquisition of each such entity. 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 operate 162 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 Investor Relations Executive spent 13 years as an equity research analyst at Morgan Stanley focusing on a wide range of financial services firms.


Table of Contents

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 three and six months ended June 30, 2013 includes our consolidated results, including Southern Community Financial Corporation. Accordingly, operating results for the three and six months ended June 30, 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.

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. For a full description of income statement metrics and balance sheet drivers used to evaluate our business such as, Net Interest Income, Provision for Loan Losses, Non-Interest Income, Non-Interest Expense, Net Income, Loan Growth, Asset Quality, Deposit Growth, Liquidity and Capital, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the fiscal year ended December 31, 2012.

Quarterly Summary

For the second quarter of 2013, we had net income of $11.1 million, or $0.21 per basic and diluted share. Results for the quarter included $1.3 million of stock-based compensation associated with original founder awards, $0.6 million and $0.2 million in gain on sales of facilities and investment securities, respectively, $0.2 million of contingent value right ("CVR") expense, and $0.1 million of merger related costs as a result of our Southern Community acquisition.

Operating and financial highlights include the following:

Record loan originations of $301.6 million;

Cost of deposits declined to 0.43% and core deposit costs declined to 0.14%, representing 67.5% of total deposits;

Net interest margin increased by 6 basis points to 4.47% driven by additional accretion on purchased credit impaired loans, decline in costs across all deposit types, redeployment of excess cash into securities, and the impact of the prepayment of high coupon trust preferred debt in the first quarter;

Problem loan resolutions of $103.8 million;

Tier 1 leverage ratio of 13.3% as of June 30, 2013;

Completed a $50.0 million stock repurchase program with an average repurchase price of $17.60; and

ROA and ROE increased to 0.64% and 3.90%, respectively.


Table of Contents

Results of Operations

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.

                                                Three Months Ended                         Three Months Ended
                                                  June 30, 2013                              March 31, 2013
                                        Average       Income/       Yields/        Average       Income/       Yields/
(Dollars in thousands)                 Balances       Expense        Rates        Balances       Expense        Rates
Interest-earning assets:
Loans (1)                             $ 4,562,295     $ 70,163          6.17 %   $ 4,628,838     $ 72,664          6.37 %
Investment securities (1)               1,292,249        4,525          1.40 %     1,006,647        3,549          1.43 %
Interest-bearing deposits in other
banks                                     164,784          102          0.25 %       586,345          371          0.26 %
FHLB and FRB stock                         36,278          462          5.11 %        38,866          490          5.11 %


Total interest-earning assets           6,055,606       75,252          4.98 %     6,260,696       77,074          4.99 %
Non-interest-earning assets:
Cash and due from banks                   105,347                                    110,930
Other assets                              784,146                                    810,418


Total non-interest-earning assets         889,493                                    921,348


Total assets                          $ 6,945,099                                $ 7,182,044


Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                         $ 1,853,592     $  4,598          0.99 %   $ 1,986,343     $  5,035          1.03 %
Money market                            1,055,635          575          0.22 %     1,113,841          629          0.23 %
Negotiable order of withdrawal
accounts                                1,263,133          499          0.16 %     1,275,914          555          0.18 %
Savings deposits                          506,997          255          0.20 %       503,714          258          0.21 %


Total interest-bearing deposits         4,679,357        5,928          0.51 %     4,879,812        6,477          0.54 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB
advances                                   38,794           15          0.16 %        43,250           14          0.13 %
Long-term borrowings                      142,541        1,894          5.33 %       170,912        2,499          5.93 %


Total interest-bearing liabilities    $ 4,860,692     $  7,837          0.65 %   $ 5,093,974     $  8,990          0.72 %
Non-interest-bearing liabilities
and shareholders' equity:
Demand deposits                           903,637                                    888,834
Other liabilities                          38,235                                     33,536
Shareholders' equity                    1,142,535                                  1,165,700


Total non-interest-bearing
liabilities and shareholders'
equity                                  2,084,407                                  2,088,070


Total liabilities and shareholders'
equity                                $ 6,945,099                                $ 7,182,044


Interest rate spread (tax
equivalent basis)                                                       4.34 %                                     4.28 %


Net interest income (tax equivalent
basis)                                                $ 67,416                                   $ 68,084


Net interest margin (tax equivalent
basis)                                                                  4.47 %                                     4.41 %
Average interest-earning assets to
average interest-bearing
liabilities                                124.58 %                                   122.90 %

(1) Average loans and securities include non-performing assets. 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.


Table of Contents

Rate/Volume Analysis



                                                       Three Months Ended June 30, 2013
                                               Compared to the Three Months Ended March 31, 2013
                                                             Due to Changes(1) in
                                                                                          Net  Increase
(Dollars in thousands)                 Average Volume            Average Rate              (Decrease)
Interest income
Loans (2)                              $        (1,036 )        $        (1,465 )        $        (2,501 )
Investment securities (2)                        1,000                      (24 )                    976
Interest-bearing deposits in
other banks                                       (261 )                     (8 )                   (269 )
FHLB and FRB stock                                 (33 )                      5                      (28 )


Total interest income                  $          (330 )        $        (1,492 )        $        (1,822 )


Interest expense
Time deposits                          $          (331 )        $          (106 )        $          (437 )
Money market                                       (32 )                    (22 )                    (54 )
Negotiable order of withdrawal
accounts                                            (6 )                    (50 )                    (56 )
Savings deposits                                     2                       (5 )                     (3 )
Short-term borrowings and FHLB
advances                                            (2 )                      3                        1
Long-term borrowings                              (390 )                   (215 )                   (605 )


Total interest expense                 $          (759 )        $          (395 )        $        (1,154 )


Change in net interest income          $           429          $        (1,097 )        $          (668 )

(1) 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.

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

Three months ended June 30, 2013 compared to three months ended March 31, 2013

Our net interest income for the three months ended June 30, 2013 decreased by $0.7 million, or 1.0%, to $67.2 million, from $67.8 million for the three months ended March 31, 2013. The main driver of the decrease was the decrease in loan portfolio yields and average balances, partially offset by additional accretion from purchased credit impaired loans, higher average securities portfolio balances as we reinvested excess liquidity, the late first quarter prepayment of trust preferred securities, the decline in high cost time deposits and a decline in rates paid across all deposit types. Accordingly, the net interest margin increased 6 basis points to 4.47% and our net interest income spread increased to 4.34% for the three months ended June 30, 2013 as compared to 4.28% for the three months ended March 31, 2013. Loan yields decreased to 6.17% for the three months ended June 30, 2013 from 6.37% for the three months ended March 31, 2013 largely driven by new loan originations, which were booked at an average yield of 3.98% (a decrease of 40 basis points over the prior quarter), partially offset by acquired impaired loan portfolio yields which increased to a weighted average of 7.56%. The average loan balance decreased due to the resolution of problem loans and principal repayments. Securities average balance increased as the company redeployed excess cash into securities, while the yields remained relatively flat. Our cost of funds declined to 0.55% for the three months ended June 30, 2013 from 0.61% for the three months ended March 31, 2013, due to the $34.5 million late first quarter prepayment of trust preferred securities, which reduced our long-term borrowings by approximately 17.0%, and the decline in time deposits as a result of continued plan shrinkage in high-cost legacy time deposits. Core deposits represent 67.5% of total deposit funding as of June 30, 2013 and deposits represented 96.9% of total bank funding.

As of June 30, 2013, we held cash and securities equal to 20.8% of total assets. We intend to use our current excess liquidity and capital for general corporate purposes, including loan originations as well as the acquisition of depository institutions that meet our investment standards. Our loan originations for the three months ended June 30, 2013 totaled $301.6 million.


Table of Contents
                                                Three Months Ended                         Three Months Ended
                                                  June 30, 2013                              June 30, 2012
                                        Average       Income/       Yields/        Average       Income/       Yields/
(Dollars in thousands)                 Balances       Expense        Rates        Balances       Expense        Rates
Interest-earning assets:
Loans (1)                             $ 4,562,295     $ 70,163          6.17 %   $ 4,210,746     $ 66,682          6.37 %
Investment securities (1)               1,292,249        4,525          1.40 %     1,215,494        5,931          1.96 %
Interest-bearing deposits in other
banks                                     164,784          102          0.25 %       101,657           65          0.26 %
FHLB and FRB stock                         36,278          462          5.11 %        37,966          488          5.17 %


Total interest-earning assets           6,055,606       75,252          4.98 %     5,565,863       73,166          5.29 %
Non-interest-earning assets:
Cash and due from banks                   105,347                                     97,379
Other assets                              784,146                                    691,840


Total non-interest-earning assets         888,493                                    789,219


Total assets                          $ 6,945,099                                $ 6,355,082


Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                         $ 1,853,592     $  4,598          0.99 %   $ 1,982,499     $  5,336          1.08 %
Money market                            1,055,635          575          0.22 %       902,334        1,000          0.45 %
Negotiable order of withdrawal
accounts                                1,263,133          499          0.16 %     1,069,756          691          0.26 %
Savings deposits                          506,997          255          0.20 %       360,347          276          0.31 %


Total interest-bearing deposits         4,679,357        5,927          0.51 %     4,314,936        7,303          0.68 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB
advances                                   38,794           15          0.16 %       132,517          317          0.96 %
Long-term borrowings                      142,541        1,894          5.33 %       135,477        1,928          5.72 %


Total interest-bearing liabilities    $ 4,860,692     $  7,836          0.65 %   $ 4,582,930     $  9,548          0.84 %
Non-interest-bearing liabilities
and shareholders' equity:
Demand deposits                           903,637                                    722,929
Other liabilities                          38,235                                     38,483
Shareholders' equity                    1,142,535                                  1,010,740


Total non-interest-bearing
liabilities and shareholders'
equity                                  2,084,407                                  1,772,152


Total liabilities and shareholders'
equity                                $ 6,945,099                                $ 6,355,082


Interest rate spread (tax
equivalent basis)                                                       4.34 %                                     4.45 %


Net interest income (tax equivalent
basis)                                                $ 67,416                                   $ 63,618


Net interest margin (tax equivalent
basis)                                                                  4.47 %                                     4.60 %
Average interest-earning assets to
average interest-bearing
liabilities                                124.58 %                                   121.45 %

(1) Average loans and securities include non-performing assets. 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.


Table of Contents

Rate/Volume Analysis



                                                        Three Months Ended June 30, 2013
                                                  Compared to Three Months Ended June 30, 2012
                                                              Due to Changes(1) in
                                                                                          Net  Increase
(Dollars in thousands)                   Average Volume             Average Rate            (Decrease)
Interest income
Loans (2)                               $          5,448           $       (1,967 )       $        3,481
Investment securities (2)                            355                   (1,761 )               (1,406 )
Interest-bearing deposits in other
banks                                                 39                       (2 )                   37
FHLB and FRB stock                                   (22 )                     (4 )                  (26 )


Total interest income                   $          5,820           $       (3,734 )       $        2,086


Interest expense
Time deposits                           $           (335 )         $         (403 )       $         (738 )
Money market                                         148                     (573 )                 (425 )
Negotiable order of withdrawal
accounts                                             110                     (302 )                 (192 )
Savings deposits                                      91                     (112 )                  (21 )
Short-term borrowings and FHLB
advances                                            (138 )                   (164 )                 (302 )
Long-term borrowings                                  98                     (132 )                  (34 )


Total interest expense                  $            (26 )         $       (1,686 )       $       (1,712 )


Change in net interest income           $          5,846           $       (2,048 )       $        3,798

(1) 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.

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

Three months ended June 30, 2013 compared to three months ended June 30, 2012

Our net interest income for the three months ended June 30, 2013 increased by $3.8 million or 6.0% to $67.2 million, from $63.3 million for the three months . . .

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