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CBF > SEC Filings for CBF > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for CAPITAL BANK FINANCIAL CORP.

Form 10-Q for CAPITAL BANK FINANCIAL CORP.


9-May-2014

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, 2013. 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, 2013.

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, 2014, and statement of income for the three months ended March 31, 2014. 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 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 $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 from the Failed Banks. We operate 163 branches in Florida, North and 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 Strategic Planning and Investor Relations, 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.


Table of Contents

On September 24, 2012, our majority owned subsidiaries, CBKN, GRNB and TIBB, 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, the Company completed its acquisition of Southern Community Financial Corporation ("SCMF" or "Southern Community"), a publicly held bank holding company headquartered in Winston Salem, North Carolina.

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 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, 2013.

Quarterly Summary

For the three months ended March 31, 2014, we had net income of $11.4 million, or $0.22 per diluted share. Results include the following non-core items: a $0.2 million gain on investment securities; $0.8 million of contingent value right ("CVR") expense, and $0.5 million of stock-based compensation associated with original founders awards.

Operating and financial highlights for the quarter include the following:

Yield on $252.5 million of new loans up 50 basis points sequentially to 4.00%;

Legacy credit expenses down 14% and 30% over the prior year fourth and first quarters, respectively;

Net income up 98% from prior year's first quarter;

Net interest margin was 4.41%;

ROA and core ROA increased 38 and 21 basis points to 0.70% and 0.76%, respectively, over the prior year first quarter;

Repurchased 968,865 shares of common stock at an average price of $23.39 and ended the quarter with a Tier I leverage ratio of 14.9%; and

Tangible book value per share increased to $18.69.

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 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.

Three Months ended March 31, 2014 compared to Three Months ended December 31, 2013

Net interest income for the three months ended March 31, 2014 decreased by $3.3 million, or 5.0%, to $62.5 million from $65.7 million for the three months ended December 31, 2013. The decrease was mainly due to decreased loan yields partially offset by higher average loan balances and a decline in high-cost legacy time deposits. The net interest margin decreased 11 basis points to 4.41% from 4.52% and our net interest income spread decreased to 4.28% from 4.39%. Loan yields decreased to 5.66% from 5.88%, driven by new loan originations of $252.5 million with an average yield of 4.00%, replacing higher legacy loans and the $1.0 million decrease in accretion from acquired charged off loans. The decline in time deposits average balance is a result of continued plan shrinkage in high-cost legacy time deposits. Our cost of funds remained flat at 0.46%. Cost of core deposits increased to 0.15% from 0.14% from prior quarter.


Table of Contents
(Dollars in thousands)                                Three Months Ended                        Three Months Ended
                                                        March 31, 2014                          December 31, 2013
                                               Average                                   Average
                                              Balances       Interest      Yield        Balances       Interest      Yield
Interest earning assets
Loans (2)                                    $ 4,542,255     $  63,404       5.66 %    $ 4,505,159     $  66,735       5.88 %
Investments (2)                                1,141,231         4,801       1.71 %      1,186,466         4,943       1.65 %
Interest bearing deposits                         47,526            25       0.21 %         57,953            33       0.23 %
Other (3)                                         43,123           581       5.46 %         40,866           543       5.27 %

Total interest earning assets                  5,774,135     $  68,811       4.83 %      5,790,444     $  72,254       4.95 %

Non-interest earning assets                      779,933                                   807,278

Total Assets                                 $ 6,554,068                               $ 6,597,722

Interest bearing liabilities
Time                                         $ 1,413,731     $   2,970       0.85 %    $ 1,513,038     $   3,155       0.83 %
Money market                                     948,738           526       0.22 %        947,429           519       0.22 %
NOW                                            1,313,700           538       0.17 %      1,288,723           550       0.17 %
Savings                                          532,823           282       0.21 %        531,930           286       0.21 %

Total interest bearing deposits                4,208,992         4,316       0.42 %      4,281,120         4,510       0.42 %
Short-term borrowings and FHLB Advances          103,851            70       0.27 %         48,466            21       0.17 %
Long-term borrowings                             135,317         1,704       5.11 %        134,813         1,726       5.08 %

Total interest bearing liabilities             4,448,160     $   6,090       0.56 %      4,464,399     $   6,257       0.56 %

Non-interest bearing deposits                    942,006                                   964,823
Other Liabilities                                 48,964                                    56,624
Shareholders' equity                           1,114,938                                 1,111,876

Total Liabilities and shareholders' equity   $ 6,554,068                               $ 6,597,722

Net interest income and spread                               $  62,721       4.28 %                    $  65,997       4.39 %

Net interest margin                                                          4.41 %                                    4.52 %

Rate/Volume Analysis



(Dollars in thousands)                                    Three Months Ended March 31, 2014
                                                   Compared to Three Months Ended December 31, 2013
                                                                Due to changes (1) in:
                                           Average                    Average                   Net Increase
                                           Volume                       Rate                     (Decrease)
Interest income
Loans (2)                               $         546             $         (3,877 )          $         (3,331 )
Investment securities                            (190 )                         48                        (142 )
Interest-bearing deposits in
other banks                                        (6 )                         (2 )                        (8 )
Other (3)                                          30                            8                          38

Total interest income                             380                       (3,823 )                    (3,443 )
Interest expense
Time deposits                                    (208 )                         23                        (185 )
Money market                                        1                            6                           7
Negotiable order of withdrawal
accounts                                           11                          (23 )                       (12 )
Savings deposits                                   -                            (4 )                        (4 )
Short-term borrowings and FHLB
advances                                           33                           16                          49
Long-term borrowings                                6                          (28 )                       (22 )

Total interest expense                           (157 )                        (10 )                      (167 )

Change in net interest income           $         537             $         (3,813 )          $         (3,276 )

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

(3) Includes Federal Reserve Bank, Federal Home Loan Bank and Bankers Bank stock.


Table of Contents

Three Months ended March 31, 2014 compared to Three Months ended March 31, 2013

Net interest income for the three months ended March 31, 2014 decreased by $4.7 million or 6.9% to $62.5 million, from $67.1 million for the three months ended March 31, 2013. The decrease was mainly due to decreased average loan balances and yields partially offset by increased securities average balances and yields, a decline in high-cost legacy time deposits and the prepayment of high coupon trust preferred securities during 2013. The net interest margin increased 8 basis points to 4.41% from 4.33% and our net interest income spread increased to 4.28% from 4.20%. Loan yields decreased to 5.66% from 6.25% mainly due to our originated portfolio replacing higher rate legacy loans; for the full year of 2013, we originated $1.3 billion with an average yield of 3.9%. For the three months ended March 31, 2014, new loan originations were $252.5 million with an average yield of 4.00%. The decrease in average loan balances is mainly due to the resolution of problem loans and principal repayments. Securities average balances and yields increased due to the deployment of excess liquidity in higher yield investments. Our cost of funds declined to 0.46% from 0.61% for the three months ended March 31, 2013 due to the decline in time deposits as a result of continued planned shrinkage in high-cost legacy time deposits and the reduction in our long term borrowings as a result of the $42.5 million prepayment of trust preferred securities in 2013.

(Dollars in thousands)                                Three Months Ended                        Three Months Ended
                                                        March 31, 2014                            March 31, 2013
                                               Average                                   Average
                                              Balances       Interest      Yield        Balances       Interest      Yield
Interest earning assets
Loans (2)                                    $ 4,542,255     $  63,404       5.66 %    $ 4,672,302     $  71,956       6.25 %
Investments (2)                                1,141,231         4,801       1.71 %      1,006,647         3,549       1.43 %
Interest bearing deposits                         47,526            25       0.21 %        586,345           371       0.26 %
Other (3)                                         43,123           581       5.46 %         38,866           490       5.11 %

Total interest earning assets                  5,774,135     $  68,811       4.83 %      6,304,160     $  76,366       4.91 %

Non-interest earning assets                      779,933                                   895,925

Total Assets                                 $ 6,554,068                               $ 7,200,085

Interest bearing liabilities
Time                                         $ 1,413,731     $   2,970       0.85 %    $ 1,986,343     $   5,035       1.03 %
Money market                                     948,738           526       0.22 %      1,113,841           629       0.23 %
NOW                                            1,313,700           538       0.17 %      1,275,914           555       0.18 %
Savings                                          532,823           282       0.21 %        503,714           258       0.21 %

Total interest bearing deposits                4,208,992         4,316       0.42 %      4,879,812         6,477       0.54 %
Short-term borrowings and FHLB Advances          103,851            70       0.27 %         43,250            14       0.13 %
Long-term borrowings                             135,317         1,704       5.11 %        170,912         2,499       5.93 %

Total interest bearing liabilities             4,448,160     $   6,090       0.56 %      5,093,974     $   8,990       0.72 %

Non-interest bearing deposits                    942,006                                   888,834
Other Liabilities                                 48,964                                    52,316
Shareholders' equity                           1,114,938                                 1,164,961

Total Liabilities and shareholders' equity   $ 6,554,068                               $ 7,200,085

Net interest income and spread                               $  62,721       4.28 %                    $  67,376       4.20 %

Net interest margin                                                          4.41 %                                    4.33 %


Table of Contents

Rate/Volume Analysis



(Dollars in thousands)                                        Three Months Ended March 31, 2014
                                                        Compared to Three Months Ended March 31, 2013
                                                                    Due to changes (1) in:
                                                  Average                   Average                Net Increase
                                                  Volume                      Rate                  (Decrease)
Interest income
Loans (2)                                     $        (1,960 )          $       (6,592 )         $       (8,552 )
Investment securities                                     512                       740                    1,252
Interest-bearing deposits in other banks                 (292 )                     (54 )                   (346 )
Other (3)                                                  56                        35                       91

Total interest income                                  (1,684 )                  (5,871 )                 (7,555 )
Interest expense
Time deposits                                          (1,296 )                    (769 )                 (2,065 )
Money market                                              (92 )                     (11 )                   (103 )
Negotiable order of withdrawal accounts                    16                       (33 )                    (17 )
Savings deposits                                           15                         9                       24
Short-term borrowings and FHLB advances                    32                        24                       56
Long-term borrowings                                     (477 )                    (318 )                   (795 )

Total interest expense                                 (1,802 )                  (1,098 )                 (2,900 )

Change in net interest income                 $           118            $       (4,773 )         $       (4,655 )

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

(3) Includes Federal Reserve Bank, Federal Home Loan Bank and Bankers Bank stock.

Provision for Loan Losses

The following table presents the provision (reversal) for loan losses for PCI
and non-PCI loans for the three months ended March 31, 2014 and 2013:



(Dollars in thousands)                                         Three Months Ended
                                                    March 31, 2014             March 31, 2013
Provision (reversal) for loan losses on PCI
loans                                              $          (2,488 )         $        (3,148 )
Provision for loan losses on non-PCI loans                     2,464                     8,550

Provision (reversal) for Loan Losses               $             (24 )         $         5,402

Three Months ended March 31, 2014 compared to Three Months ended March 31, 2013

The provision reversal for loan losses for the three months ended March 31, 2014 was a reversal of $24 thousand compared to a provision of $5.4 million for the three months ended March 31, 2013. The improvement was mainly due to a lower level of net charge offs, which declined from $5.5 million to $1.2 million. For our originated loan portfolio, a $7.8 million charge off was recorded during the prior year related to a single commercial credit relationship associated with suspected fraud. The net reversal of impairment associated with PCI loans was mainly due to improvements in our expectations of future cash flows resulting from higher than anticipated payoffs. Improvement in cash flows on non-covered loans resulted in a $2.9 million reversal of impairment, partially offset by $0.4 million in increased impairment from covered loans. In contrast, in the prior year, improvement in cash flows on covered loans resulted in $3.4 million reversal, partially offset by $0.3 million in increased impairment from non-covered loans.


Table of Contents

The table below illustrates the impact of our first quarter 2014 estimates of expected cash flows on PCI loans on impairment and prospective yield:

(Dollars in thousands)                                                                  Weighted Average Prospective Yields
                                                                                                                    Based on Most                                   Weighted        Weighted
                                                                                Based on Original                Recent Estimates of                                Average         Average
. . .
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