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CBF > SEC Filings for CBF > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for CAPITAL BANK FINANCIAL CORP.

Form 10-K for CAPITAL BANK FINANCIAL CORP.


28-Feb-2014

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the audited consolidated statements of condition as of December 31, 2013 and 2012, and statements of income for the years ended December 31, 2013, 2012 and 2011. 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 may differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to, those discussed in the section titled "Risk Factors" included under Part I, 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 (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, 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 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 $955.6 million 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 and included responsibilities as Vice Chairman and President of the Consumer and Commercial Bank. Mr. Taylor also served on Bank of America's Risk & Capital and Management Operating Committees. He 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 31 years of financial and managerial experience, including serving as Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America's Global Consumer and Small Business Bank. Mr. Marshall also served as Chief Financial Officer of Bank of America's Consumer Products Group. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services.

Our Chief Credit Officer, R. Bruce Singletary, has over 33 years of experience, including 20 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region, where he established a centralized underwriting function to serve middle market commercial clients in the southeastern region of the United States. Mr. Singletary also served as Senior Risk Manager for commercial banking for Bank of America's Florida Bank and as Senior Credit Policy Executive of C&S Sovran (renamed NationsBank Corp).

Our Chief of Investment Analytics and Investor Relations Executive, Kenneth A. Posner, spent 13 years as an equity research analyst including serving as a Managing Director at Morgan Stanley focusing on a wide range of financial services firms. Mr. Posner also served in the United States Army, rising to the rank of Captain and has received professional designations as a Certified Public Accountant, a Chartered Financial Analyst and for Financial Risk Management.


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Acquisitions

Our banking operations commenced on July 16, 2010, when we purchased approximately $1.2 billion of assets and assumed approximately $960.1 million of deposits of three Failed Banks from the FDIC: First National Bank, Metro Bank and Turnberry Bank. The acquired assets included loans with an estimated fair value of $768.6 million at the acquisition date. These transactions gave us an initial market presence in Miami, which we targeted because of its size and concentrated business activity, and South Carolina, which we targeted because of its attractive demographic growth trends. In connection with the acquisition, we entered into loss-sharing arrangements with the FDIC covering approximately $796.1 million of loans and real estate owned of the Failed Banks that we acquired.

On September 30, 2010, we invested approximately $175.0 million in TIB Financial ("TIBB"), a publicly held bank holding company headquartered in Naples, Florida with approximately $1.7 billion in assets at the acquisition date and, after giving effect to a subsequent rights offering to legacy TIB Financial shareholders, we acquired approximately 94% of TIB Financial's common stock. The acquired assets included loans with an estimated fair value of $1.0 billion at the acquisition date. This acquisition expanded our geographic reach in Florida to include markets that we believe have particularly attractive deposit customer characteristics and provided a platform to support our future growth.

On January 28, 2011, we invested approximately $181.1 million in Capital Bank Corp. ("CBKN"), a publicly held bank holding company headquartered in Raleigh, North Carolina with approximately $1.7 billion in assets at the acquisition date and, after giving effect to a subsequent rights offering to legacy Capital Bank Corp. shareholders, we acquired approximately 83% of Capital Bank Corp.'s common stock. The acquired assets included loans with an estimated fair value of $1.1 billion at the acquisition date. This transaction gave us a strong presence in fast-growing North Carolina markets, including the Raleigh MSA, which, according to SNL Financial, has the fifth highest projected population growth rate in the nation, with over 13% growth projected between 2011 and 2016.

On September 7, 2011, we invested approximately $217.0 million in Green Bankshares ("GRNB"), a publicly held bank holding company headquartered in Greeneville, Tennessee with approximately $2.4 billion in assets at the acquisition date, and we acquired approximately 90% of Green Bankshares's common stock. The acquired assets included loans with an estimated fair value of $1.3 billion at the acquisition date. This transaction extended our market area into the fast-growing Tennessee metropolitan areas of Nashville and Knoxville.

On September 24, 2012, our majority owned subsidiaries, TIBB, CBKN and GRNB, merged with and into Capital Bank Financial Corp. ("CBF"), 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. This acquisition expanded our presence in the North Carolina markets.

The following table sets forth the fair value of the assets we acquired in each of our acquisitions as of the applicable acquisition date and shows the acquisition price as a percentage of the most recently reported tangible book value of the assets prior to acquisition accounting and the tangible book value in accordance with the acquisition method of accounting:

(Dollars in millions)                                                                                                  Acquisition Price Per Share
                                                                                                                                            Percent of
                                                                                                                                          Tangible Book
                                                                                                                 Percent of              Value Per Share
                                                                                             Fair Value         Last Reported             in Accordance
                                                                                             of Assets            Tangible               with Acquisition
Target                                  Announcement Date          Acquisition Date           Acquired          Book Value(1)             Accounting(2)
First National Bank                          July 16, 2010              July 16, 2010       $        602                    NA                       109.3 %
Metro Bank                                   July 16, 2010              July 16, 2010       $        393                    NA                        30.0 %
Turnberry Bank                               July 16, 2010              July 16, 2010       $        228                    NA                          NM (3)
TIB Financial                                June 28, 2010         September 30, 2010       $      1,737                  25.4 %                     125.4 %
Capital Bank Corp                         November 3, 2010           January 28, 2011       $      1,728                  45.1 %                     125.1 %
Green Bankshares                               May 5, 2011          September 7, 2011       $      2,365                  41.0 %                     117.2 %
Southern Community Financial                March 27, 2012            October 1, 2012       $      1,410                  94.5 %                     125.6 %

(1) Last reported tangible book value is based on the tangible book value per share amount as disclosed by the institution in the quarter immediately preceding the announcement of the acquisition.


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(2) Tangible book value for the investment or purchase by us reflects all assets and liabilities recorded at fair value in accordance with acquisition accounting subsequent to repurchase and cancellation of TARP preferred stock as applicable. Tangible book value per share is calculated by subtracting goodwill and intangible assets, net of any associated deferred tax liabilities, from the total stockholders' equity of the acquired entity, subsequent to acquisition accounting adjustments, and dividing this difference by the total number of common shares of the acquired entity. For the Failed Banks, the number of common shares is assumed to be 1. For the acquisition of TIB Financial, the denominator includes the common share equivalents resulting from assuming the conversion of the preferred shares issued to us as of the acquisition date were converted as of that date.

(3) Not a meaningful ratio because consideration of $16.9 million was received on this transaction. Tangible book value acquired was a negative $13.0 million.

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 year ended December 31, 2013 includes our consolidated results including the Failed Banks, TIBB, CBKN, GRNB and SCMF. For the year ended December 31, 2012, our consolidated results, include the Failed Banks, TIBB, CBKN, GRNB and SCMF subsequent to October 1, 2012. For the year ended December 31, 2011, our consolidated results include the Failed Banks, TIBB, the results of CBKN subsequent to January 28, 2011 and GRNB subsequent to September 7, 2011.

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 sheets at their 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 in Note 2. Business Combinations and Acquisitions.

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, see Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements or Critical Accounting Policies section below.

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, construction and development loans and multifamily commercial real estate loans.


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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 originated and sold, investment advisory and trust fees, income, losses and amortization 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 and equipment expense, conversion and merger 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 of high quality. For the year ended December 31, 2013, we originated $667.8 million of commercial loans, $330.6 million of consumer loans, $224.4 million of commercial real estate loans and $30.1 million of other loans. For the year ended December 31, 2012, we originated $558.5 million of commercial loans, $206.6 million of consumer loans, $80.8 million of commercial real estate loans and $26.9 million of other loans.

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 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 portfolios of the acquisitions 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 fair value 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, loans with similar risk characteristics are pooled and 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.


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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 year ended December 31, 2013, we had net income of $38.8 million, or $0.73 per diluted share. Results for the year included a tax adjustment of $1.6 million associated with changes in certain statutory rates that were enacted into law, which are effective in future years, a $0.3 million gain on investment securities, $2.8 million of contingent value right ("CVR") expense, $0.1 million of merger and conversion related expense, $4.9 million of stock-based compensation associated with original founder awards and a $0.1 million net gain on extinguishment of debt related to $42.5 million in prepayments of trust preferred securities.

Operating and financial highlights for the year ended December 31, 2013 include the following:

Loan originations of $1.3 billion;

Cost of deposits declined 16 basis points to 0.40%;

Legacy credit expenses totaled $41.5 million, including related compensation costs, a 22% decline;

Net interest margin remained stable at 4.40%.;

Efficiency ratio and core efficiency ratio declined by 7% and six basis points to 74.6% and 72.2%, respectively;

ROA declined 26 basis points mainly as a result of a $34.0 million tax benefit in 2012; Core ROA increased 11 basis points to 0.68%;

Repurchased 3,761,317 shares of common stock at an average price of $18.60 and ended the year with a Tier I leverage ratio of 14.9%; and

Tangible book value per share increased $0.54 to $18.55.

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 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, repurchase agreements and other short-term borrowings.


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                                                        Year Ended                                    Year Ended
                                                    December 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)                                $ 4,574,397      $ 274,577          6.00 %    $ 4,344,326      $ 273,679          6.30 %
Investment securities (1)                  1,179,668         17,658          1.50 %      1,078,025         19,054          1.77 %
Interest-bearing deposits in other
banks                                        215,894            543          0.25 %        341,242            846          0.25 %
FHLB and FRB stock                            39,060          2,027          5.19 %         39,285          1,830          4.66 %

Total interest-earning assets              6,009,019        294,805          4.91 %      5,802,878        295,409          5.09 %
Non-interest-earning assets:
Cash and due from banks                      107,145                                       101,996
Other assets                                 738,837                                       714,379

Total non-interest-earning assets            845,982                                       816,375

Total assets                             $ 6,855,001                                   $ 6,619,253

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits                            $ 1,751,785      $  16,585          0.95 %    $ 2,039,301      $  21,423          1.05 %
Money market                               1,023,069          2,268          0.22 %        945,432          3,970          0.42 %
Negotiable order of withdrawal
accounts                                   1,272,065          2,125          0.17 %      1,110,878          2,943          0.26 %
Savings deposits                             516,941          1,075          0.21 %        384,104          1,174          0.31 %

Total interest-bearing deposits            4,563,860         22,053          0.48 %      4,479,715         29,510          0.66 %
Other interest-bearing liabilities:
Short-term borrowings and FHLB
advances                                      41,329             57          0.14 %        118,772            953          0.80 %
Long-term borrowings                         147,185          8,072          5.48 %        146,477          8,594          5.87 %

Total interest-bearing liabilities       $ 4,752,374      $  30,182          0.64 %    $ 4,744,964      $  39,057          0.82 %
Non-interest-bearing liabilities and
shareholders' equity:
Demand deposits                              918,087                                       772,404
Other liabilities                             52,147                                        53,330
Shareholders' equity                       1,132,393                                     1,048,555

Total non-interest-bearing liabilities
and shareholders' equity                   2,102,627                                     1,874,289

Total liabilities and shareholders'
equity                                   $ 6,855,001                                   $ 6,619,253

Interest rate spread (tax equivalent
basis)                                                                       4.27 %                                        4.27 %

Net interest income (tax equivalent
basis)                                                    $ 264,623                                     $ 256,352

. . .
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