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CBF > SEC Filings for CBF > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CAPITAL BANK FINANCIAL CORP.

Form 10-Q for CAPITAL BANK FINANCIAL CORP.


7-Aug-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 U.S. 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 June 30, 2014, and statements of income for the three and six months then ended. Except as noted in tables or otherwise, in 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 of the South, 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" and we refer to loans originated or purchased by Capital Bank, N.A. as "new loans" or "originated loans".

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 162 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.


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Our Chief Credit 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, 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.

On September 24, 2012, our majority owned subsidiaries, CBKN, GRNB and TIBB, merged with and into Capital Bank Financial Corp. ("CBF" or the "Company"), 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 U.S. 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 June 30, 2014, we had net income of $12.4 million, or $0.25 per diluted share, an increase of 9% and 32% over the first quarter and prior year second quarter, respectively. Results include the following non-core items: $0.3 million of contingent value right ("CVR") expense, and $0.3 million of stock-based compensation expense associated with original founders awards.

Operating and financial highlights for the quarter include the following:

Loan portfolio grew sequentially at an annualized rate of 16%;

New loans of $441.7 million during the quarter; an increase of 75% and 46% sequentially and year over year, respectively;

Legacy credit expenses declined 32% and 67% sequentially and year over year, respectively;

Efficiency and core efficiency ratio declined to 70.5% and 69.3%, respectively;

ROA and core ROA increased to 0.76% and 0.80%, respectively; and

Tangible book value per share increased to $18.85.


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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 June 30, 2014 compared to three months ended March 31, 2014

Net interest income for the three months ended June 30, 2014 declined by $1.6 million, or 2.6%, to $60.8 million from $62.5 million for the three months ended March 31, 2014. The decline reflects the lower yield on new loans as compared to the yield on our legacy portfolio and a decline in average investment securities balances, partially offset by a decline in high-cost legacy time deposits. The net interest margin declined 15 basis points to 4.26% from 4.41% and the net interest income spread declined to 4.12% from 4.28%. Loan yields declined to 5.40% from 5.66%, driven by new loans of $441.7 million with an average yield of 3.5% down from 4.0% in the first quarter of 2014. The decline in yield on new loans was driven by a shift in customer preference for variable rate financing as the percentage of new loans with variable rates increased to 65% as compared to 56% in the prior quarter. Variable rate loans comprised 52% of the loan portfolio at June 30, 2014, increasing from 50% at December 31, 2013. The decline in average investment securities balances and increase in yields was mainly due to the sale of approximately $125.0 million in lower yield asset backed securities in order to re-balance our investment securities portfolio as part of our strategy to manage the bank's overall interest rate risk position. The decline in time deposits average balances is a result of continued planned shrinkage of high-cost legacy time deposits. The cost of core deposits remained flat at 0.14%. The cost of funds remained flat at 0.45%.

(Dollars in thousands)                            Three Months Ended                                Three Months Ended
                                                    June 30, 2014                                     March 31, 2014
                                       Average                                           Average
                                      Balances       Interest       Yield / Rate        Balances       Interest       Yield / Rate
Interest earning assets
Loans (1)                            $ 4,593,337     $  61,826               5.40 %    $ 4,542,255     $  63,404               5.66 %
Investment securities (1)              1,060,611         4,648               1.76 %      1,141,231         4,801               1.71 %
Interest bearing deposits                 62,172            37               0.24 %         47,526            25               0.21 %
Other (2)                                 40,346           578               5.75 %         43,123           581               5.46 %

Total interest earning assets          5,756,466     $  67,089               4.67 %      5,774,135     $  68,811               4.83 %

Non-interest earning assets              763,185                                           779,933

Total assets                         $ 6,519,651                                       $ 6,554,068

Interest bearing liabilities
Time deposits                        $ 1,358,478     $   2,878               0.85 %    $ 1,413,731     $   2,970               0.85 %
Money market                             931,867           523               0.23 %        948,738           526               0.22 %
Negotiable order of withdrawal
accounts                               1,330,856           556               0.17 %      1,313,700           538               0.17 %
Savings                                  531,414           286               0.22 %        532,823           282               0.21 %

Total interest bearing deposits        4,152,615         4,243               0.41 %      4,208,992         4,316               0.42 %
Short-term borrowings and FHLB
advances                                  98,002            50               0.20 %        103,851            70               0.27 %
Long-term borrowings                     135,831         1,719               5.08 %        135,317         1,704               5.11 %

Total interest bearing liabilities     4,386,448     $   6,012               0.55 %      4,448,160     $   6,090               0.56 %

Non-interest bearing deposits          1,002,757                                           942,006
Other liabilities                         45,281                                            48,964
Shareholders' equity                   1,085,165                                         1,114,938

Total liabilities and
shareholders' equity                 $ 6,519,651                                       $ 6,554,068

Net interest income and spread                       $  61,077               4.12 %                    $  62,721               4.28 %

Net interest margin                                                          4.26 %                                            4.41 %


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Rate/Volume Analysis



(Dollars in thousands)                                       Three Months Ended June 30, 2014
                                                       Compared to Three Months Ended March 31, 2014
                                                                  Due to changes (3) in:
                                                Average                   Average                Net Increase
                                                Volume                 Yield / Rate               (Decrease)
Interest income
Loans (1)                                    $         707            $        (2,285 )         $       (1,578 )
Investment securities                                 (348 )                      195                     (153 )
Interest-bearing deposits                                8                          4                       12
Other (2)                                              (39 )                       36                       (3 )

Total interest income                                  328                     (2,050 )                 (1,722 )
Interest expense
Time deposits                                         (117 )                       25                      (92 )
Money market                                            (9 )                        6                       (3 )
Negotiable order of withdrawal accounts                  7                         11                       18
Savings                                                 (1 )                        5                        4
Short-term borrowings and FHLB advances                 (4 )                      (16 )                    (20 )
Long-term borrowings                                     6                          9                       15

Total interest expense                                (118 )                       40                      (78 )

Change in net interest income                $         446            $        (2,090 )         $       (1,644 )

(1) 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.

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

(3) 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.

Three months ended June 30, 2014 compared to three months ended June 30, 2013

Net interest income for the three months ended June 30, 2014 declined by $4.5 million, or 7.0%, to $60.8 million, from $65.4 million for the three months ended June 30, 2013. The decline was mainly due to lower yields on new loans, partially offset by a decline in high-cost legacy time deposits. The net interest margin declined 6 basis points to 4.26% from 4.32% and the net interest income spread declined to 4.12% from 4.19%. Loan yields declined to 5.40% from 5.96% mainly due to our new loan portfolio replacing higher yield legacy loans and a shift in customer preference for variable rate financing; for the trailing twelve months, new loans were $1.7 billion with an average yield of 3.74%. For the second quarter of 2014, new loans were $441.7 million with an average yield of 3.50% as compared to new loans of $301.6 million with an average yield of 3.98% in the second quarter of 2013. The cost of core deposits remained flat at 0.14%. The cost of funds declined to 0.45% from 0.55% for the prior year second quarter due to the continued planned shrinkage of high-cost legacy time deposits. Average balances in time deposits declined $495.1 million, or 27%, and average rates declined fourteen basis points.


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(Dollars in thousands)                            Three Months Ended                                Three Months Ended
                                                    June 30, 2014                                     June 30, 2013
                                       Average                                           Average
                                      Balances       Interest       Yield / Rate        Balances       Interest       Yield / Rate
Interest earning assets
Loans (1)                            $ 4,593,337     $  61,826               5.40 %    $ 4,604,224     $  68,363               5.96 %
Investment securities (1)              1,060,611         4,648               1.76 %      1,292,249         4,525               1.40 %
Interest bearing deposits                 62,172            37               0.24 %        164,784           102               0.25 %
Other (2)                                 40,346           578               5.75 %         36,278           462               5.11 %

Total interest earning assets          5,756,466     $  67,089               4.67 %      6,097,535     $  73,452               4.83 %

Non-interest earning assets              763,185                                           865,118

Total assets                         $ 6,519,651                                       $ 6,962,653

Interest bearing liabilities
Time deposits                        $ 1,358,478     $   2,878               0.85 %    $ 1,853,592     $   4,598               0.99 %
Money market                             931,867           523               0.23 %      1,055,635           575               0.22 %
Negotiable order of withdrawal
accounts                               1,330,856           556               0.17 %      1,263,133           499               0.16 %
Savings                                  531,414           286               0.22 %        506,997           255               0.20 %

Total interest bearing deposits        4,152,615         4,243               0.41 %      4,679,357         5,927               0.51 %
Short-term borrowings and FHLB
advances                                  98,002            50               0.20 %         38,794            15               0.16 %
Long-term borrowings                     135,831         1,719               5.08 %        142,541         1,894               5.33 %

Total interest bearing liabilities     4,386,448     $   6,012               0.55 %      4,860,692     $   7,836               0.65 %

Non-interest bearing deposits          1,002,757                                           903,637
Other liabilities                         45,281                                            56,324
Shareholders' equity                   1,085,165                                         1,142,000

Total liabilities and
shareholders' equity                 $ 6,519,651                                       $ 6,962,653

Net interest income and spread                       $  61,077               4.12 %                    $  65,616               4.19 %

Net interest margin                                                          4.26 %                                            4.32 %

Rate/Volume Analysis



(Dollars in thousands)                                        Three Months Ended June 30, 2014
                                                        Compared to Three Months Ended June 30, 2013
                                                                   Due to changes (3) in:
                                                 Average                   Average                Net Increase
                                                 Volume                  Yield / Rate              (Decrease)
Interest income
Loans (1)                                    $          (161 )          $       (6,376 )         $        (6,537 )
Investment securities                                   (896 )                   1,019                       123
Interest-bearing deposits                                (61 )                      (4 )                     (65 )
Other (2)                                                 55                        61                       116

Total interest income                                 (1,063 )                  (5,300 )                  (6,363 )
Interest expense
Time deposits                                         (1,112 )                    (608 )                  (1,720 )
Money market                                             (69 )                      17                       (52 )
Negotiable order of withdrawal accounts                   27                        30                        57
Savings                                                   13                        18                        31
Short-term borrowings and FHLB advances                   29                         6                        35
Long-term borrowings                                     (87 )                     (88 )                    (175 )

Total interest expense                                (1,199 )                    (625 )                  (1,824 )

Change in net interest income                $           136            $       (4,675 )         $        (4,539 )

(1) 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.

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

(3) 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.


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Six months ended June 30, 2014 compared to six months ended June 30, 2013

Net interest income for the six months ended June 30, 2014 declined by $9.2 million, or 6.9%, to $123.3 million from $132.5 million for the six months ended June 30, 2013. The decline was mainly due to lower yields on new loans and average loans balances, partially offset by a decline in high-cost legacy time deposits, higher investment securities yields, and the prepayment of high coupon trust preferred securities during 2013. The net interest margin remained flat at 4.33% and the net interest income spread increased to 4.20% from 4.19%. Loan yields declined to 5.53% from 6.10%, mainly due to our new loan portfolio replacing higher yield legacy loans and a shift in customer preference for variable rate loans, as the percentage of new loans with variable rates increased to 61% as compared to 52% in the six months of the prior year. For the six months ended June 30, 2014, new loans were $694.2 million with an average yield of 3.68% as compared to new loans of $553.0 million with an average yield of 4.16% for the six months ended June 30, 2013. Investment securities yields increased due to the deployment of excess liquidity in higher yield investment securities. The cost of core deposits remained flat at 0.11%. The cost of funds declined to 0.45% from 0.58% at June 30, 2013, due to the decline in time deposits as a result of continued planned shrinkage of high-cost legacy time deposits and the $42.5 million prepayment of trust preferred securities in 2013. Average balances in time deposits declined $533.6 million, or 28%, and average rates declined sixteen basis points.

(Dollars in thousands)                               Six Months Ended                                  Six Months Ended
. . .
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