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

Show all filings for CAPITAL BANK FINANCIAL CORP.

Form 10-Q for CAPITAL BANK FINANCIAL CORP.


8-Nov-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, 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 September 30, 2013 and statements of income for the three and nine months ended September 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 163 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 and 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 presence in the North Carolina markets.

The initial estimated fair values of assets acquired and liabilities assumed in the acquisition of SCMF were based on the information that was available at the time. During the third quarter of 2013, CBF concluded that certain measurement period adjustments were appropriate, particularly as the underlying asset quality in the SCMF loan portfolio is expected to produce better credit performance than originally anticipated based on facts and circumstances that existed at the acquisition date. As required by the acquisition method of accounting, the Company retrospectively adjusted the acquisition date balance sheet and the results of operations of the fourth quarter of 2012 and first two quarters of 2013 to reflect the impact of the measurement period adjustments. Further discussion and the impact on the financial statements is included in Note 3 Business Combinations and Acquisitions.

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 nine months ended September 30, 2013 includes our consolidated results, including SCMF. Accordingly, operating results for the three and nine months ended September 30, 2013 and 2012 are not generally comparable. 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. Additionally, certain adjustments were made in the third quarter of 2013 in regard to the fair values assigned in the acquisition of SCMF as further described above.

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 third quarter of 2013, we had net income of $11.4 million, or $0.22 per basic and diluted share. Results for the quarter included $1.1 million of stock-based compensation associated with original founder awards, $0.8 million of income from the reduction of contingent value right ("CVR") expected payouts, a $0.4 million gain on extinguishment of debt related to $8.0 million in prepayments of trust preferred securities, $0.1 million loss on investment securities, and a tax adjustment of $1.6 million associated with changes in certain statutory rates that were enacted into law during the quarter, which are effective in future years.

Operating and financial highlights include the following:

Loan originations of $291.3 million;

Total cost of deposits declined by five basis points to 0.38%;

Net interest margin increased by 13 basis points to 4.45% driven by additional accretion on purchased credit impaired loans, decline in average balances and rates in time deposits, and the reduction in high coupon trust preferred debt pre-paid in the third quarter;

Problem loan resolutions of $79.0 million;

Tier 1 leverage ratio of 14.5% as of September 30, 2013;

ROA and ROE increased to 0.69% and 4.12%, respectively.

Repurchased 600,000 shares of common stock at an average price of $21.50;

Recorded Southern Community Financial Corporation measurement period adjustments, which increased acquisition date estimated fair values of loans, CVR and other liabilities by $43.2 million and $11.7 million, respectively, and reduced deferred income tax assets, goodwill and OREO by $15.5 million, $15.9 million and $0.1 million, 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
                                                  September 30, 2013                             June  30, 2013
                                          Average        Income/       Yields/         Average        Income/       Yields/
(Dollars in thousands)                   Balances        Expense        Rates         Balances        Expense        Rates
Interest-earning assets:
Loans (1)                               $ 4,514,747      $ 67,524          5.93 %    $ 4,604,224      $ 68,363          5.96 %
Investment securities (1)                 1,230,771         4,639          1.50 %      1,292,249         4,525          1.40 %
Interest-bearing deposits in other
banks                                        61,995            37          0.24 %        164,784           102          0.25 %
FHLB and FRB stock                           40,195           533          5.26 %         36,278           462          5.11 %


Total interest-earning assets             5,847,708        72,733          4.93 %      6,097,535        73,452          4.83 %
Non-interest-earning assets:
Cash and due from banks                     105,360                                      105,347
Other assets                                727,599                                      759,771


Total non-interest-earning assets           832,959                                      865,118


Total assets                            $ 6,680,667                                  $ 6,962,653


Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                           $ 1,660,373      $  3,792          0.91 %    $ 1,853,592      $  4,598          0.99 %
Money market                                977,698           544          0.22 %      1,055,635           575          0.22 %
Negotiable order of withdrawal
accounts                                  1,260,477           521          0.16 %      1,263,133           499          0.16 %
Savings deposits                            524,728           276          0.21 %        506,997           255          0.20 %


Total interest-bearing deposits           4,423,276         5,133          0.46 %      4,679,357         5,927          0.51 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB
advances                                     34,820             7          0.08 %         38,794            15          0.16 %
Long-term borrowings                        140,938         1,953          5.50 %        142,541         1,894          5.33 %


Total interest-bearing liabilities      $ 4,599,034      $  7,093          0.61 %    $ 4,860,692      $  7,837          0.65 %
Non-interest-bearing liabilities and
shareholders' equity:
Demand deposits                             914,260                                      903,637
Other liabilities                            55,823                                       56,324
Shareholders' equity                      1,111,550                                    1,142,000


Total non-interest-bearing
liabilities and shareholders' equity      2,081,633                                    2,101,961


Total liabilities and shareholders'
equity                                  $ 6,680,667                                  $ 6,962,653


Interest rate spread (tax equivalent
basis)                                                                     4.32 %                                       4.19 %


Net interest income (tax equivalent
basis)                                                   $ 65,640                                     $ 65,616


Net interest margin (tax equivalent
basis)                                                                     4.45 %                                       4.32 %
Average interest-earning assets to
average interest-bearing liabilities         127.15 %                                     125.45 %

(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 September 30, 2013
                                                Compared to the Three Months Ended June 30, 2013
                                                              Due to Changes(1) in
                                                                                            Net  Increase
(Dollars in thousands)                 Average Volume             Average Rate               (Decrease)
Interest income
Loans (2)                              $        (1,360 )          $         521            $          (839 )
Investment securities (2)                         (222 )                    336                        114
Interest-bearing deposits in
other banks                                        (61 )                     (4 )                      (65 )
FHLB and FRB stock                                  51                       20                         71


Total interest income                  $        (1,592 )          $         873            $          (719 )


Interest expense
Time deposits                          $          (458 )          $        (348 )          $          (806 )
Money market                                       (43 )                     12                        (31 )
Negotiable order of withdrawal
accounts                                            (1 )                     23                         22
Savings deposits                                     9                       12                         21
Short-term borrowings and FHLB
advances                                            (1 )                     (7 )                       (8 )
Long-term borrowings                               (21 )                     80                         59


Total interest expense                 $          (515 )          $        (228 )          $          (743 )


Change in net interest income          $        (1,077 )          $       1,101            $            24

(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 September 30, 2013 compared to three months ended June 30, 2013

Our net interest income of $65.4 million for the three months ended September 30, 2013 remained flat compared to the three months ended June 30, 2013. The decrease in loan portfolio yields and average balances were partially offset by additional accretion from PCI loans, higher yields on investment securities, the third quarter prepayment of trust preferred securities and the decline in high cost time deposits. Accordingly, the net interest margin increased 13 basis points to 4.45% and our net interest income spread increased to 4.32% for the three months ended September 30, 2013 as compared to 4.19% for the three months ended June 30, 2013. Loan yields decreased to 5.93% for the three months ended September 30, 2013 from 5.96% for the three months ended June 30, 2013 largely driven by new loan originations, which were booked at an average yield of 3.98%, which was flat compared to the prior quarter. This lower yield on originated loans was partially offset by PCI portfolio yields which decreased to a weighted average of 7.22%. The average loan balance decreased due to the resolution of problem loans and principal repayments. Securities yields increased 10 basis points to 1.50% for the three months ended September 30, 2013 as compared to 1.40% for the three months ended June 30, 2013. Our cost of funds declined to 0.51% for the three months ended September 30, 2013 from 0.55% for the three months ended June 30, 2013, due to the decline in time deposits as a result of continued planned shrinkage in high-cost legacy time deposits and the $8.0 million third quarter prepayment of trust preferred securities, which reduced our long-term borrowings by approximately 6.0%. Core deposits represent 70.0% of total deposit funding as of September 30, 2013 and deposits represented 97.0% of total bank funding.

As of September 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 September 30, 2013 totaled $291.3 million.


Table of Contents
                                                         Three Months Ended                           Three Months Ended
                                                         September 30, 2013                           September 30, 2012
                                                 Average        Income/       Yields/         Average        Income/       Yields/
(Dollars in thousands)                          Balances        Expense        Rates         Balances        Expense        Rates
Interest-earning assets:
Loans (1)                                      $ 4,514,747      $ 67,524          5.93 %    $ 4,120,374      $ 65,031          6.28 %
Investment securities (1)                        1,230,771         4,639          1.50 %        982,750         4,025          1.63 %
Interest-bearing deposits in other banks            61,995            37          0.24 %        280,164           181          0.26 %
FHLB and FRB stock                                  40,195           533          5.26 %         39,224           460          4.67 %


Total interest-earning assets                    5,847,708        72,733          4.93 %      5,422,512        69,697          5.11 %
Non-interest-earning assets:
Cash and due from banks                            105,360                                      103,019
Other assets                                       727,599                                      673,321


Total non-interest-earning assets                  832,959                                      776,340


Total assets                                   $ 6,680,667                                  $ 6,198,852


Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                                  $ 1,660,373      $  3,792          0.91 %    $ 1,857,122      $  5,341          1.14 %
Money market                                       977,698           544          0.22 %        876,891           758          0.34 %
Negotiable order of withdrawal accounts          1,260,477           521          0.16 %      1,044,506           636          0.24 %
Savings deposits                                   524,728           276          0.21 %        399,300           288          0.29 %


Total interest-bearing deposits                  4,423,276         5,133          0.46 %      4,177,819         7,023          0.67 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB advances             34,820             7          0.08 %         80,336           130          0.64 %
Long-term borrowings                               140,938         1,953          5.50 %        135,893         1,951          5.71 %


Total interest-bearing liabilities             $ 4,599,034      $  7,093          0.61 %    $ 4,394,048      $  9,104          0.82 %
Non-interest-bearing liabilities and
shareholders' equity:
Demand deposits                                    914,260                                      722,987
Other liabilities                                   55,823                                       50,587
Shareholders' equity                             1,111,550                                    1,031,230


Total non-interest-bearing liabilities and
shareholders' equity                             2,081,633                                    1,804,804


Total liabilities and shareholders' equity     $ 6,680,667                                  $ 6,198,852


Interest rate spread (tax equivalent basis)                                       4.32 %                                       4.29 %


Net interest income (tax equivalent basis)                      $ 65,640                                     $ 60,593


Net interest margin (tax equivalent basis)                                        4.45 %                                       4.45 %
Average interest-earning assets to average
interest-bearing liabilities                        127.15 %                                     123.41 %

(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 September 30, 2013
                                                Compared to Three Months Ended September 30, 2012
                                                               Due to Changes(1) in
                                                                                              Net  Increase
(Dollars in thousands)                 Average Volume              Average Rate                (Decrease)
Interest income
Loans (2)                             $          6,014            $        (3,521 )          $         2,493
Investment securities (2)                          954                       (340 )                      614
Interest-bearing deposits in
other banks                                       (131 )                      (13 )                     (144 )
FHLB and FRB stock                                  12                         61                         73


Total interest income                 $          6,849            $        (3,813 )          $         3,036


Interest expense
Time deposits                         $           (526 )          $        (1,023 )          $        (1,549 )
Money market                                        80                       (294 )                     (214 )
Negotiable order of withdrawal
. . .
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