Capital Bank Financial
Capital Bank Financial Corp. (Form: 10-Q, Received: 11/08/2013 17:18:51)
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from                      to                     

Commission File Number 001-35655

 

 

CAPITAL BANK FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-1454759

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

121 Alhambra Plaza Suite 1601 Coral Gables, Florida 33134

(Address of principal executive offices) (Zip Code)

(305) 670-0200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class A Common Stock, $0.01 Par Value   32,432,736
Class B Non-Voting Common, $0.01 Par Value   19,681,637
Class   Outstanding as of October 31, 2013

 

 

 


Table of Contents

CAPITAL BANK FINANCIAL CORP.

FORM 10-Q

For the Quarter Ended September 30, 2013

INDEX

 

PART I. FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS

     1  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     85  

ITEM 4. CONTROLS AND PROCEDURES

     86  

PART II. OTHER INFORMATION

     86   

ITEM 1. LEGAL PROCEEDINGS

  

ITEM 1A. RISK FACTORS

     86   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     86   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     87   

ITEM 4. MINE SAFETY DISCLOSURES

     87   

ITEM 5. OTHER INFORMATION

     87   

ITEM 6. EXHIBITS

     87   

 

2


Table of Contents

Capital Bank Financial Corp.

Consolidated Balance Sheets

(Unaudited)

 

(Dollars and shares in thousands, except per share data)    September 30,
2013
    December 31,
2012
 

Assets

    

Cash and due from banks

   $ 115,671      $ 142,361   

Interest-bearing deposits with banks

     48,033        592,375   

Federal funds sold

     —         138   
  

 

 

   

 

 

 

Total cash and cash equivalents

     163,704        734,874   
  

 

 

   

 

 

 

Trading securities

     6,091        —    

Investment securities available-for-sale at fair value (amortized cost $718,400 and $991,566 at September 30, 2013 and December 31, 2012, respectively)

     717,602        1,006,744   

Investment securities held-to-maturity at amortized cost (fair value $483,413 and $0 at September 30, 2013 and December 31, 2012, respectively)

     482,986        —    

Loans held for sale

     8,918        11,276   

Loans, net of deferred loan costs and fees

     4,468,362        4,724,214   

Less: allowance for loan losses

     56,393        57,262   
  

 

 

   

 

 

 

Loans, net

     4,411,969        4,666,952   
  

 

 

   

 

 

 

Other real estate owned

     129,654        154,093   

Receivable from FDIC

     8,439        8,486   

Indemnification asset

     36,837        49,417   

Premises and equipment, net

     183,498        198,457   

Goodwill

     131,987        131,987   

Intangible assets, net

     24,681        28,636   

Deferred income tax asset, net

     177,928        183,157   

Accrued interest receivable and other assets

     117,017        132,874   
  

 

 

   

 

 

 

Total assets

   $ 6,601,311      $ 7,306,953   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Deposits

    

Noninterest-bearing demand

   $ 937,152      $ 895,274   

Time deposits

     1,579,772        2,070,698   

Money market

     938,854        1,125,967   

Savings

     531,655        492,187   

Negotiable order of withdrawal accounts

     1,281,036        1,288,742   
  

 

 

   

 

 

 

Total deposits

     5,268,469        5,872,868   
  

 

 

   

 

 

 

Federal Home Loan Bank advances

     1,324        1,460   

Short-term borrowings

     23,224        41,508   

Long-term borrowings

     138,290        180,430   

Accrued interest payable and other liabilities

     62,179        55,344   
  

 

 

   

 

 

 

Total liabilities

     5,493,486        6,151,610   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock $0.01 par value: 50,000 shares authorized, 0 shares issued

     —         —    

Common stock-Class A $0.01 par value: 200,000 shares authorized; 36,177 issued and 32,738 outstanding as of September 30, 2013 and 33,025 issued and outstanding as of December 31, 2012.

     361        330   

Common stock-Class B $0.01 par value: 200,000 shares authorized, 19,681 and 22,821 issued and outstanding, respectively

     197        228   

Additional paid in capital

     1,081,108        1,076,797   

Retained earnings

     95,279        68,641   

Accumulated other comprehensive (loss) income

     (6,236     9,347   

Treasury stock, at cost, 3,439 shares

     (62,884     —    
  

 

 

   

 

 

 

Total shareholders’ equity

     1,107,825        1,155,343   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,601,311      $ 7,306,953   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Capital Bank Financial Corp.

Consolidated Statements of Income

(Unaudited)

 

(Dollars in thousands, except per share amounts)    Three Months  Ended
September 30, 2013
    Three Months  Ended
September 30, 2012
    Nine Months  Ended
September 30, 2013
    Nine Months  Ended
September 30, 2012
 

Interest and dividend income

        

Loans, including fees

   $ 67,355      $ 64,866      $ 207,327      $ 199,476   

Investment securities:

        

Taxable interest income

     4,383        3,738        11,925        14,516   

Tax-exempt interest income

     158        175        484        663   

Dividends

     14        18        44        49   

Interest-bearing deposits in other banks

     37        181        510        468   

Federal Home Loan Bank stock

     533        460        1,485        1,293   

Federal funds sold

     —         —         —         7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     72,480        69,438        221,775        216,472   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     5,135        7,023        17,541        22,181   

Long-term borrowings

     1,952        1,951        6,346        5,823   

Federal Home Loan Bank advances

     1        115        3        884   

Other borrowings

     6        15        33        53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     7,094        9,104        23,923        28,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     65,386        60,334        197,852        187,531   

Provision for loan losses

     984        5,771        10,853        17,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     64,402        54,563        186,999        169,776   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     6,034        5,058        18,711        17,381   

Fees on mortgage loans originated and sold

     1,477        1,612        4,319        3,920   

Investment advisory and trust fees

     740        253        1,380        991   

FDIC indemnification asset (amortization) accretion

     (502     850        (3,779     1,008   

Debit card income

     2,854        2,442        8,669        7,792   

Other income

     4,078        1,675        9,591        4,152   

Legal Settlements and insurance recoveries

     900        3,460        900        3,460   

Investment securities (losses) gains, net

     (247     4,918        (42     8,610   

Other-than-temporary impairment losses on investments:

        

Gross impairment loss

     (54     —         (54     (44

Less: Impairments recognized in other comprehensive income

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (54     —         (54     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     15,280        20,268        39,695        47,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     22,606        21,295        66,085        66,951   

Stock-based compensation expense

     1,371        4,242        4,312        14,927   

Net occupancy and equipment expense

     10,740        9,355        31,973        28,229   

OREO valuation expenses

     6,045        8,633        18,844        15,529   

Loss (gain) on sales of OREO

     188        (1,514     (3,204     (3,937

Foreclosed asset related expense

     1,265        2,530        4,909        7,414   

Loan workout expense

     2,063        2,310        6,363        5,755   

Conversion and merger related expense

     (19     3,894        234        6,939   

Professional fees

     2,426        2,759        7,418        9,511   

(Gain) loss on extinguishment of debt

     (430     2,946        (122     3,267   

Legal settlement expenses

     535        1,755        535        2,752   

Computer services

     3,231        2,368        9,872        6,913   

CVR (income) expense

     (776     (179     2,535        (179

FDIC assessments

     1,710        1,655        5,276        4,955   

Telecommunication expenses

     1,534        1,630        4,919        4,208   

Other expenses

     6,774        5,692        20,009        18,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     59,263        69,371        179,958        191,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,419        5,460        46,736        25,808   

Income tax expense (benefit)

     8,975        (32,385     20,098        (24,573
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before attribution of noncontrolling interests

     11,444        37,845        26,638        50,381   

Net income attributable to noncontrolling interests

     —          2,762        —         4,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Capital Bank Financial Corp .

   $ 11,444      $ 35,083      $ 26,638      $ 45,847   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic income per share

   $ 0.22      $ 0.76      $ 0.50      $ 1.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per share

   $ 0.22      $ 0.75      $ 0.49      $ 1.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

CAPITAL BANK FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

(Dollars in thousands)    Three Months
Ended
September 30, 2013
    Three Months
Ended
September 30, 2012
    Nine Months
Ended
September 30, 2013
    Nine Months
Ended
September 30, 2012
 

Net income

   $ 11,444      $ 37,845      $ 26,638      $ 50,381   

Other comprehensive income (loss) before tax:

        

Unrealized holding gains (losses) on available for sale securities

     17,692        6,374        (15,826     15,680   

Unrealized holding loss on investment securities transferred from available-for-sale to held-to-maturity

     (9,354     —          (9,354     —     

Less: Reclassification adjustments for losses (gains) recognized in income

     54        (4,913     (151     (8,439
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     8,392        1,461        (25,331     7,241   

Tax effect

     (3,234     (564     9,748        (2,792
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     5,158        897        (15,583     4,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 16,602      $ 38,742      $ 11,055      $ 54,830   

Less: Comprehensive income attributable to noncontrolling interests

     —         2,803        —         4,895   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Capital Bank Financial Corp.

   $ 16,602      $ 35,939      $ 11,055      $ 49,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

Capital Bank Financial Corp.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

(Dollars and shares in thousands)   Shares
Common
Stock
Class A
Outstanding
    Class A
Stock
    Shares
Common
Stock
Class B
Outstanding
    Class B
Stock
    Additional
Paid in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Treasury
Stock
    Non-controlling
Interests
    Total
Shareholders’
Equity
 

Balance, December 31, 2012

    33,025      $ 330        22,821      $ 228      $ 1,076,797      $ 68,641      $ 9,347      $ —       $ —       $ 1,155,343   

Net income

    —         —         —         —         —         26,638        —         —         —         26,638   

Other comprehensive loss, net of tax benefit of $9,748

    —         —         —         —         —         —         (15,583     —         —         (15,583

Fractional shares

    —         —         8        —         (1     —         —         —         —         (1

Stock based compensation and related tax effect

    —         —         —         —         4,312        —         —         —         —         4,312   

Restricted stock grants

    4        —         —         —         —         —         —         —         —         —    

Purchase of treasury stock

    (3,439     —         —         —         —         —         —         (62,884     —         (62,884

Conversion of shares

    3,148        31        (3,148     (31     —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

    32,738      $ 361        19,681      $ 197      $ 1,081,108      $ 95,279      $ (6,236   $ (62,884   $ —       $ 1,107,825   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    20,028      $ 200        26,122      $ 261      $ 890,627      $ 18,150      $ 7,167      $ —       $ 74,505      $ 990,910   

Net income

    —         —         —         —         —         45,847        —         —         4,534        50,381   

Other comprehensive income , net of tax benefit of $2,792

    —         —         —         —         —         —         4,088        —         361        4,449   

Restricted stock grants

    306        3        —         —         (3     —         —         —         —         —    

Stock based compensation and related tax effect

    —         —         —         —         14,914        —         —         —         13        14,927   

Issuance of shares for noncontrolling interest

    3,706        37        —         —         78,128        —         1,248          (79,413     —    

Initial public offering

    5,682        57        —         —         89,407        —         —         —         —         89,464   

Conversion of shares

    2,924        29        (2,924     (29     —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

    32,646      $ 326        23,198      $ 232      $ 1,073,073      $ 63,997      $ 12,503      $ —       $ —         1,150,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6


Table of Contents

Capital Bank Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited)

 

(Dollars in thousands)

   Nine Months  Ended
September 30, 2013
    Nine Months
Ended
September 30, 2012
 

Cash flows from operating activities

    

Net income

   $ 26,638      $ 50,381   

Adjustments to reconcile net income to net cash used in operating activities:

    

Accretion of acquired loans

     (126,634     (142,024

Depreciation and amortization

     15,795        12,111   

Provision for loan losses

     10,853        17,755   

Deferred income tax

     14,977        (33,037

Net amortization of investment securities premium/discount

     9,339        9,209   

Other than temporary impairment of investment securities

     54        44   

Net realized losses (gains) on investment securities

     42        (8,610

Stock-based compensation expense

     4,312        14,927   

Gain on sales of OREO

     (3,204     (3,937

OREO valuation expenses

     18,844        15,529   

Other

     (2,454     (1,184

(Gains) losses on extinguishment of debt

     (122     3,267   

Mortgage loans originated for sale

     (138,686     (137,633

Proceeds from sales of mortgage loans originated for sale

     145,363        149,370   

Fees on mortgage loans originated and sold

     (4,319     (3,920

FDIC indemnification asset amortization (accretion)

     3,779        (1,008

(Gain) loss on sale/disposal of premises and equipment

     (419     85   

Gain on exchange of partnership interest

     (1,536     —     

Proceeds from FDIC loss share agreements

     12,211        19,264   

Change in accrued interest receivable and other assets

     10,507        (1,593

Change in accrued interest payable and other liabilities

     6,658        2,684   
  

 

 

   

 

 

 

Net cash provided by (used) in operating activities

     1,998        (38,320
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investment securities available-for-sale

     (436,365     (666,605

Sales of investment securities available-for-sale

     225        340,026   

Repayments of principal and maturities of investment securities available for sale

     178,592        177,781   

Repayments of principal and maturities of investment securities held-to-maturity

     27,347        —     

Net purchases of FHLB and Federal Reserve stock

     (978     1,147   

Purchase of trademark

     —         (100

Net decrease in loans

     319,814        297,418   

Purchases of premises and equipment

     (2,473     (11,716

Proceeds from sales of premises and equipment

     6,707        —    

Proceeds from sales of OREO

     62,165        77,073   
  

 

 

   

 

 

 

Net cash provided by investing activities

     155,034        215,024   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net (decrease) increase in demand, money market and savings accounts

     (113,473     123,237   

Net decrease in time deposits

     (490,925     (401,166

Net decrease in federal funds purchased and securities sold under agreements to repurchase

     (18,284     (12,839

Net decrease of long term FHLB advances

     (136     (223,162

Prepayment of long-term borrowings

     (42,500     —    

Purchase of treasury stock

     (62,884     —    

Proceeds from initial public offering

     —         89,465   
  

 

 

   

 

 

 

Net cash used in financing activities

     (728,202     (424,465
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (571,170     (247,761

Cash and cash equivalents at beginning of period

     734,874        709,963   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 163,704      $ 462,202   
  

 

 

   

 

 

 

Supplemental disclosures of cash:

    

Interest paid

   $ 28,725      $ 34,074   

Cash collections of contractual interest on purchased credit impaired loans

     91,983        84,441   

Income taxes paid

     1,641        16,781   

Supplemental disclosures of noncash transactions :

    

OREO acquired through loan transfers

   $ 53,366      $ 65,530   

Transfer of available-for-sale securities to held-to-maturity securities

     510,976        —    

Transfer of OREO to premises and equipment

     —         1,026   

Transfer of financed portion of premises and equipment sold

     —         930   

Non-cash portion of acquired premises and equipment

     —         (2,717

The accompanying notes are an integral part of these financial statements.

 

7


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Principles of Consolidation and Nature of Operations

Capital Bank Financial Corp (“CBF” or the “Company”; formerly known as North American Financial Holdings, Inc.) is a bank holding company incorporated in Delaware and headquartered in Florida whose business is conducted primarily through Capital Bank, National Association (“Capital Bank, NA” or the “Bank”). CBF has a total of 163 full service banking offices located in Florida, North Carolina, South Carolina, Tennessee and Virginia.

In September 2012, Capital Bank Corporation (“CBKN”), Green Bankshares Inc. (“GRNB”) and TIB Financial Corp. (“TIBB”), then majority owned subsidiaries of the Company, 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.

The Reorganization was accounted for as a merger with CBF as the accounting acquirer (which is the surviving entity for legal purposes). As this was a common control transaction under Accounting Standard Codification (“ASC”) 805, Business Combinations, the Reorganization was accounted for as an equity transaction in accordance with ASC 810, Consolidation, as the acquisition of a noncontrolling interest. As a result, there was no adjustment to CBF’s historical carrying amounts of assets and liabilities reflected in the accompanying balance sheet.

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. See Note 3 – Business Combinations, for further information regarding this acquisition.

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and Regulation S-X. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete financial statement presentation. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All significant inter-company accounts and transactions have been eliminated in consolidation. For further information refer to the 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.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Direct Financing Leases

Direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income on direct financing leases is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment. Initial direct costs are deferred and amortized over the lease term as a reduction to interest income using the effective interest method.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently any such matters that will have a material effect on the financial statements.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This update requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. For public entities, this ASU is effective for fiscal years and interim periods beginning after December 15, 2013, with early adoption permitted. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASUNo. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income .” This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For public entities, this ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012. This update adopted on January 1, 2013, as required, impacted presentation only and it did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

8


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

In October 2012, the FASB issued ASU No. 2012-06, “ Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution .” This ASU addresses the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation or National Credit Union Administration) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). For public and nonpublic entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The adoption on January 1, 2013, as required, did not have a material impact on the Company’s consolidated financial condition or results of operations. Subsequent changes in the measurement of the indemnification asset will be accounted for on the same basis as the changes in the assets subject to indemnification resulting from future changes in the expected cash flows.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities .” This update requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The application of this ASU was clarified by ASU 2013-01. The scope of this ASU includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements. The Company is required to adopt this update for periods beginning after January 1, 2013, with restrocpective presentation for all comparative periods. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

9


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

2. Earnings Per Common Share

Basic earnings per share is net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options and unvested restricted shares computed using the treasury stock method. Earnings per share have been computed based on the following:

 

(Shares in thousands)

   Three Months
Ended September 30,

2013
     Three Months
Ended September  30,
2012
     Nine Months
Ended September  30,
2013
     Nine Months
Ended September  30,
2012
 

Weighted average number of common shares outstanding:

           

Basic

     51,804         46,116         53,170         45,496   

Dilutive effect of options outstanding

     31         —          —          —    

Dilutive effect of restricted shares

     920         622         862         456   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     52,755         46,738         54,032         45,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

The dilutive effect of stock options and unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.

Weighted average anti-dilutive stock options and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:

 

(Shares in thousands)

   Three Months Ended
September  30,
2013
     Three Months Ended
September  30,
2012
     Nine Months Ended
September  30,
2013
     Nine Months Ended
September  30,
2012
 

Anti-dilutive stock options

     269        2,867         3,133         2,837   

Anti-dilutive restricted shares

     —          —          —          —    

 

10


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

3. Business Combinations and Acquisitions

CBF Acquisition of Southern Community Financial Corporation

On October 1, 2012, the acquisition of all of the preferred and common share interests of Southern Community was consummated for a total purchase price of $99.3 million in cash. In addition, SCMF shareholders received a contingent value right (“CVR”) which could pay up to $1.30 per share (maximum potential payment of $21.9 million) in cash at the end of a five-year period based on 75% of the savings to the extent that legacy loan and foreclosed asset losses are less than a prescribed amount. As part of the acquisition, the Company purchased from the United States Department of the Treasury (the “Treasury”) all of the outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and related warrants originally issued by SCMF to the Treasury in connection with SCMF’s participation in the Treasury’s Troubled Asset Relief Program (“TARP”). The cash purchase price included approximately $46.9 million paid in cash to the Treasury, which is equal to the outstanding liquidation amount of the preferred stock and is included in the $99.3 million above. Subsequently, SCMF cancelled the Series A Preferred stock. SCMF was the parent of Southern Community Bank and Trust, a bank with 22 branches in Winston-Salem, the Piedmont Triad, and other North Carolina markets. The 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 the underlying asset quality in the SCMF loan portfolio should lead to better credit performance than originally anticipated in our preliminary estimates of fair value. Completion of portfolio due diligence of credit attributes of the acquired loans not initially known but existing at the acquisition date, including assessment of the predecessor institution’s underwriting approach and practices, quality of risk ratings, and borrower credit scores, ultimately resulted in the necessity to revise the original estimate of fair value during the third quarter. 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 following: (1) an increase in the estimated fair value of the loan portfolio; (2) an increase in the associated CVR; (3) a decrease in the deferred tax asset related to the increased value of loans; (4) a decrease in Goodwill caused by the net effect of these adjustments. All amounts presented herein reflect such adjustments. A reconciliation of their impact on the acquired assets, assumed liabilities and prior period operating results is shown below:

 

(Dollars in thousands)

   Reported on Dec. 31,
2012 as of October 1,
2012
     Measurement
Period
Adjustments
    Revised as of
October 1,  2012
 

Fair value of assets acquired:

       

Cash and cash equivalents

   $ 256,267         $ 256,267   

Investment securities

     189,771           189,771   

Loans

     774,781         43,238        818,019   

Premises and equipment

     35,061           35,061   

Other intangible assets

     6,860           6,860   

Deferred tax asset

     43,481         (15,532     27,949   

Other assets

     60,159         (174     59,985   
  

 

 

    

 

 

   

 

 

 

Total assets acquired

     1,366,380         27,532        1,393,912   

Fair value of liabilities assumed:

       

Deposits

     1,093,914           1,093,914   

Long term debt and other borrowings

     187,341           187,341   

Other liabilities

     17,703         11,656        29,359   
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

     1,298,958         11,656        1,310,614   
  

 

 

    

 

 

   

 

 

 

Fair value of net assets acquired

     67,422         15,876        83,298   

Purchase price

     99,325           99,325   
  

 

 

    

 

 

   

 

 

 

Goodwill

   $ 31,903       $ (15,876   $ 16,027   
  

 

 

    

 

 

   

 

 

 

 

11


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

     For the Quarter Ended  
     June 30,
2013

Revised
     June 30,
2013

As Filed
     March 31,
2013

Revised
     March 31,
2013

As Filed
     December 31,
2012

Revised
     December 31,
2012

As filed
 

Interest and dividend income

   $ 73,189       $ 74,989       $ 76,106       $ 76,814       $ 77,808       $ 76,122   

Interest expense

     7,837         7,837       $ 8,992         8,992         10,115         10,115   

Net Interest Income

     65,352         67,152         67,114         67,822         67,693         66,007   

Provision for loan losses

     4,467         3,868         5,402         6,904         6,736         4,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     13,506         13,506         10,909         10,909         15,438         15,438   

Total non-interest expense

     59,382         59,141         61,313         61,040         68,720         68,448   

Income before income taxes

     15,009         17,649         11,308         10,787         7,675         8,627   

Income tax expense

     5,580         6,514         5,543         5,234         3,031         3,295   

Net income attributable to Capital Bank Financial Corp.

   $ 9,429       $ 11,135       $ 5,765       $ 5,553         4,644       $ 5,332   

Basic Earnings Per Common Share

   $ 0.18       $ 0.21       $ 0.11       $ 0.10       $ 0.09       $ 0.10   

Diluted Earnings Per Common Share

   $ 0.17       $ 0.21       $ 0.11       $ 0.10       $ 0.08       $ 0.10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pro Forma

The following table reflects the pro forma total net interest income, non-interest income and net income for the three and nine months ended September 30, 2012 as though the acquisition of SCMF had taken place as of the beginning of fiscal 2012. The pro forma results are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on the first day of the respective period, nor of future results of operations.

 

(Dollars in thousands)

   Three Months
Ended

September 30,  2012
     Nine Months
Ended

September 30,  2012
 

Net interest income

   $ 69,422       $ 218,207   

Non-interest income

     34,467         68,800   

Net income attributable to Capital Bank Financial Corp.

     46,604         59,274   

4. Investment Securities

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2013, and December 31, 2012 are presented below:

 

(Dollars in thousands)

   September 30, 2013  

Available-for-sale

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated
Fair Value
 

Asset-backed securities

   $ 139,148       $ —        $ 1,187       $ 137,961   

Marketable equity securities

     946         —          —          946   

Mortgage-backed securities—residential issued by government sponsored entities

     574,051         4,229         3,879         574,401   

Industrial revenue bond

     3,750         215         —          3,965   

Collateralized debt obligations

     505         —          176         329   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 718,400       $ 4,444       $ 5,242       $ 717,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity

                           

U.S. Government agencies

     15,192         —          307         14,885   

States and political subdivisions—tax exempt

     14,172         44         27         14,189   

States and political subdivisions—taxable

     547         —          6         541   

Mortgage-backed securities—residential issued by government sponsored entities

     453,075         1,520         797         453,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 482,986       $ 1,564       $ 1,137       $ 483,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

(Dollars in thousands)

   December 31, 2012  

Available-for-sale

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated
Fair Value
 

Asset-backed securities

   $ —        $ —        $ —        $ —    

U.S. Government agencies

     7,913         102         —          8,015   

States and political subdivisions—tax exempt

     16,019         1,196         —          17,215   

States and political subdivisions—taxable

     509         64         —          573   

Marketable equity securities

     2,731         —          12         2,719   

Mortgage-backed securities—residential issued by government sponsored entities

     959,863         15,048         1,058         973,853   

Industrial revenue bond

     3,750         50         —          3,800   

Corporate bonds

     26         —          —          26   

Trust preferred securities

     250         —          4         246   

Collateralized debt obligations

     505         —          208         297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 991,566       $ 16,460       $ 1,282       $ 1,006,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the third quarter of 2013, the Company transferred $511.0 million of available-for-sale securities to held-to-maturity securities, reflecting the Company’s intent and ability to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are accounted for at fair value at the date of transfer. The related $9.7 million of unrealized holding loss, net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is being amortized as an adjustment to interest income over the remaining life of the securities. There were no gains or losses recognized as a result of this transfer. There was no investment securities held-to-maturity at December 31, 2012.

 

13


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

Proceeds from sales and calls of securities were $0.5 million and $2.1 million for the three and nine months ended September 30, 2013, respectively. Gross gains of approximately $0 and $0.2 million were realized on these sales and calls during the three and nine months ended September 30, 2013, respectively. Proceeds from sales and calls of securities available for sale were $247.3 million and $340.0 million for the three and nine months ended September 30, 2012, respectively. Gross gains of approximately $4.9 million and $8.4 million were realized on these sales and calls during the three and nine months ended September 30, 2012, respectively. Trading securities totaled $6.1 million and $0 at September 30, 2013 and December 31, 2012, respectively. Gross realized losses on trading securities were $0.2 million for the three and nine months ended September 30, 2013. Gross realized gains on trading securities were $0 for the three and nine months ended September 30, 2012.

The estimated fair value of investment securities at September 30, 2013, by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Debt securities not due at a single maturity date are shown separately.

 

(Dollars in thousands)

                    

Available-for-sale

   Amortized
Cost
     Estimated
Fair Value
     Yield  

Due in one year or less

   $ —        $ —          —  

Due after one year through five years

     —          —          —  

Due after five years through ten years

     58,422         58,064         0.62

Due after ten years

     84,981         84,191         0.69

Mortgage-backed securities—residential issued by government sponsored entities

     574,051         574,401         1.54
  

 

 

    

 

 

    
   $ 717,454       $ 716,656         1.36

Marketable equity securities

     946         946      
  

 

 

    

 

 

    
   $ 718,400       $ 717,602      
  

 

 

    

 

 

    

 

Held-to-maturity

   Amortized
Cost
     Estimated
Fair Value
     Yield  

Due in one year or less

   $ 679       $ 678         0.83 %

Due after one year through five years

     1,130         1,134         2.06 %

Due after five years through ten years

     7,198         7,197         3.03 %

Due after ten years

     20,904         20,606         3.05

Mortgage-backed securities—residential issued by government sponsored entities

     453,075         453,798         2.23 %
  

 

 

    

 

 

    
   $ 482,986       $ 483,413         2.27 %
  

 

 

    

 

 

    

 

14


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:

 

(Dollars in thousands)

   Less than 12 Months      12 Months or Longer      Total  

September 30, 2013

   Estimated Fair
Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
 

Available-for-sale:

                 

Asset-backed securities

   $ 137,961       $ 1,187       $ —        $ —        $ 137,961       $ 1,187   

Mortgage-backed securities—residential issued by government sponsored entities

     338,084         3,879         —          —          338,084         3,879   

Collateralized debt obligation

     —          —          329         176         329         176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 476,045       $ 5,066       $ 329       $ 176       $ 476,374       $ 5,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                 

U.S. Government agencies

   $ 14,885       $ 307       $ —        $ —        $ 14,885       $ 307   

State and political subdivisions—tax exempt

     7,656         27         —          —          7,656         27   

State and political subdivisions—taxable

     541         6         —          —          541         6   

Mortgage-backed securities—residential issued by government sponsored entities

     81,712         797         —          —          81,712         797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 104,794       $ 1,137       $ —        $ —        $ 104,794       $ 1,137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)

   Less than 12 Months      12 Months or Longer      Total  

December 31, 2012

   Estimated Fair
Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
     Estimated Fair
Value
     Unrealized
Losses
 

Available-for-sale:

                 

Marketable equity securities

   $ 988       $ 12       $ —        $ —        $ 988       $ 12   

Mortgage-backed securities—residential issued by government sponsored entities

     247,515         846         21,221         212         268,736         1,058   

Trust preferred securities

     246         4         —          —          246         4   

Collateralized debt obligation

     —          —          297         208         297         208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 248,749       $ 862       $ 21,518       $ 420       $ 270,267       $ 1,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was no investment securities held-to-maturity at December 31, 2012.

The table below presents a rollforward for the three and nine months ended September 30, 2013 and 2012 of the other than temporary impairment credit losses recognized in earnings.

 

(Dollars in thousands)

   Three Months
Ended
September 30, 2013
     Three Months
Ended
September 30, 2012
     Nine Months
Ended
September 30, 2013
     Nine Months
Ended
September 30, 2012
 

Beginning balance

   $ 660       $ 660       $ 660       $ 616   

Additions/subtractions:

           

Credit losses recognized during the period

     54         —          54         44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 714       $ 660       $ 714       $ 660   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

The Company owns shares of an investment fund with the principal investment strategy to invest in debt securities and other debt instruments that will cause shares of the fund to be deemed qualified under the Community Reinvestment Act (the “CRA”), so that financial institutions that are subject to the CRA may receive investment test or similar credit under the CRA with respect to shares of the Fund held by them. Valuation and measurement of OTTI of this investment falls under ASC 320-10-S991, Other Than Temporary Impairment of Certain Investments in Equity Securities. The Company evaluates the intent and ability to hold for any anticipated recovery in fair value and the length of time and extent to which the fair value has been less than cost.

Based on the extended period the security fair value has been less than cost, and market information that indicates the prospects for recovery in the near-term are unlikely, the Company determined there to be OTTI as of September 30, 2013. The Company recognized $54 thousand of impairment loss in earnings, equal to the entire difference between the security’s cost basis and its fair value.

The Company owns a collateralized debt obligation (“CDO”) collateralized by trust preferred securities issued primarily by banks and several insurance companies. Valuation and measurement of other-than-temporary impairment (“OTTI”) of this investment falls under ASC 325-40, Beneficial Interests in Securitized Financial Assets. The Company compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in the expected cash flows which would require the recognition of impairment. The Company utilizes a discounted cash flow valuation model which considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults by issuers of the underlying trust preferred securities. Assumptions used in the model include expected future default rates. Interest payment deferrals are generally treated as defaults even though they may not actually result in defaults.

Based on this analysis, the estimated fair value of the CDO increased by $32 thousand during the nine months ended September 30, 2013. In addition, the credit loss potential of the CDO declined. Since previous credit impairment was recognized, no recovery is allowed under U.S. GAAP. The CDO was recorded at fair value and the remaining unrealized loss was recognized as a component of accumulated other comprehensive income.

As of September 30, 2013, the Company’s security portfolio consisted of 139 securities, 60 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed securities.

The majority of the mortgage-backed securities at September 30, 2013 and December 31, 2012 were issued by U.S. government-sponsored entities and agencies, institutions which the government has affirmed its commitment to support. Unrealized losses associated with these securities are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013, or December 31, 2012.

Investment securities having carrying values of approximately $303.0 million at September 30, 2013 were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.

5. Loans

Major classifications of loans, including loans held for sale, are as follows:

 

(Dollars in thousands)

   September 30, 2013      December 31, 2012  

Non-owner occupied commercial real estate

   $ 803,954       $ 904,215   

Other commercial construction and land

     326,040         415,969   

Multifamily commercial real estate

     72,627         84,838   

1-4 family residential construction and land

     76,013         91,680   
  

 

 

    

 

 

 

Total commercial real estate

     1,278,634         1,496,702   
  

 

 

    

 

 

 

Owner occupied commercial real estate

     1,052,994         1,065,900   

Commercial and industrial loans

     681,882         665,507   

Lease financing

     2,554         —    
  

 

 

    

 

 

 

Total commercial

     1,737,430         1,731,407   
  

 

 

    

 

 

 

1-4 family residential

     816,915         838,557   

Home equity loans

     386,071         430,887   

Other consumer loans

     158,452         136,806   
  

 

 

    

 

 

 

Total consumer

     1,361,438         1,406,250   
  

 

 

    

 

 

 

Other (1)

     99,778         101,131   
  

 

 

    

 

 

 

Total loans

   $ 4,477,280       $ 4,735,490   
  

 

 

    

 

 

 

 

(1) Other loans include $45.7 million and $27.0 million and $45.3 million and $26.0 million of farm land and agricultural and state and political subdivision obligations as of September 30, 2013 and December 31, 2012, respectively.

 

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Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

Total loans as of September 30, 2013 and December 31, 2012, include $8.9 million and $11.3 million of 1-4 family residential loans held for sale and $3.1 million and $0.7 million of deferred loan origination costs, respectively.

Covered loans represent loans acquired from the FDIC subject to loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment (“Purchased Credit Impaired or PCI Loans”) and (ii) non-PCI loans. Loans originated by the Company and loans acquired through the purchase of CBKN, GRNB, SCMF and TIBB are not subject to the loss sharing agreements and are classified as “none covered.” Additionally, certain consumer loans acquired through the acquisitions of First National Bank in Spartanburg, South Carolina, Metro Bank in Miami, Florida and Turnberry Bank in Aventura, Florida (collectively, the “Failed Banks”) from the FDIC are specifically excluded from the loss sharing agreements.

The Company designates loans as PCI loans by evaluating both qualitative and quantitative factors. The loans are analyzed by taking into account the individual loan risk rating assigned by the Company along with an understanding of the credit underwriting and monitoring practices of the originating institution as well as loan level data available regarding credit risk, such as delinquency status, origination vintage, accrual and charge off history.

Loans acquired are recorded at fair value in accordance with acquisition accounting, exclusive of any loss share agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows adjusted for expected credit losses and interest rate fluctuations. At the time of acquisition, the Company accounted for the PCI loans by segregating each portfolio into loan pools with similar risk characteristics, which included:

 

   

The loan type based on regulatory reporting guidelines, namely whether the loan was a mortgage, consumer, or commercial loan;

 

   

The nature of collateral; and

 

   

The relative credit risk of the loan on performance.

From these pools, the Company uses certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average term to re-price (if a variable rate loan), weighted average margin, and weighted average interest rate to estimate the expected cash flow for each loan pool. Over the lives of the acquired loans, the Company continues to estimate cash flows expected to be collected on each loan pool. The Company evaluates, at each balance sheet date, whether its estimates of the present value of the cash flows from the loan pools, determined using the effective interest rates, has decreased, such that the present value of such cash flows is less than the recorded investment of the pool, and if so, recognizes a provision for loan loss in its consolidated statement of income, unless interest rate driven. Additionally, if we have favorable changes in our estimates of cash flows expected to be collected for a loan pool such that the then-present value exceeds the recorded investment of that pool, 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 accrete future interest income over the remaining life of the pool at a rate which, when used to discount the expected cash flows, results in the then-present value of such cash flows equaling the recorded investment of the pool at the time of the revised estimate.

The table below presents a rollforward of accretable yield and income expected to be earned related to purchased credit-impaired loans:

 

(Dollars in thousands)

   Three Months Ended
September 30, 2013
    Three Months Ended
September 30, 2012
    Nine Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2012
 

Balance, beginning of period

   $ 444,481      $ 609,993      $ 553,348      $ 715,479   

New loans purchased

     —         —         —         —    

Accretion of income

     (39,625     (43,927     (126,634     (142,024

Reclassifications from nonaccretable difference

     15,018        19,134        46,117        76,697   

Disposals

     (21,459     (35,160     (74,416     (100,112
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 398,415      $ 550,040      $ 398,415      $ 550,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the measurement period adjustment discussed in Note 3. Business Combinations and Acquisitions, the beginning of period balance and accretion of income was impacted by $1.0 million and $0.9 million, respectively, for the three months ended June 30, 2013 and $0.3 million and $1.1 million, respectively, for the six months ended June 30, 2013. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans. Disposals represent reductions of accretable yield due to non-credit events such as interest rate reductions on variable rate loans and prepayment activity on loans.

 

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Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:

 

   

The estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;

 

   

The estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

 

   

Indices for PCI loans with variable rates of interest.

For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

Because of the loss protection provided by the FDIC, the risks of CBF covered loans and foreclosed real estate are significantly different from those assets not covered under the loss share agreement. Refer to Note 8 – Other Real Estate Owned, for the covered and non-covered balances of other real estate owned.

As a result of overall improvement of credit loss expectations in our most recent estimates of cash flows, substantially related to the Company’s legacy Green Bankshares and Southern Community portfolios, the Company recognized $(0.8) million in CVR income and a $2.5 million expense for the three and nine months ended September 30, 2013, respectively.

Non-covered Loans

The following is a summary of the major categories of non-covered loans outstanding as of September 30, 2013 and December 31, 2012:

 

(Dollars in thousands)

                    

September 30, 2013

   PCI Loans      Non-PCI
Loans
     Total
Non-covered
Loans
 

Non-owner occupied commercial real estate

   $ 476,248       $ 260,773       $ 737,021   

Other commercial C&D

     240,931         64,490         305,421   

Multifamily commercial real estate

     36,040         26,150         62,190   

1-4 family residential C&D

     18,079         57,934         76,013   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     771,298         409,347         1,180,645   

Owner occupied commercial real estate

     321,684         657,677         979,361   

Commercial and industrial

     140,800         530,111         670,911   
  

 

 

    

 

 

    

 

 

 

Lease financing

     —           2,554         2,554   
  

 

 

    

 

 

    

 

 

 

Total commercial

     462,484         1,190,342         1,652,826   

1-4 family residential

     374,519         364,549         739,068   

Home equity

     104,927         227,959         332,886   

Consumer

     14,754         143,629         158,383   
  

 

 

    

 

 

    

 

 

 

Total consumer

     494,200         736,137         1,230,337   

Other

     48,217         50,530         98,747   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,776,199       $ 2,386,356       $ 4,162,555   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

(Dollars in thousands)

                    

December 31, 2012

   PCI Loans      Non-PCI
Loans
     Total
Non-covered
Loans
 

Non-owner occupied commercial real estate

   $ 628,234       $ 181,009       $ 809,243   

Other commercial C&D

     328,280         55,967         384,247   

Multifamily commercial real estate

     46,146         27,078         73,224   

1-4 family residential C&D

     45,305         42,208         87,513   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     1,047,965         306,262         1,354,227   

Owner occupied commercial real estate

     425,869         556,025         981,894   

Commercial and industrial

     194,481         453,969         648,450   

Leasing

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total commercial

     620,350         1,009,994         1,630,344   

1-4 family residential

     486,122         260,622         746,744   

Home equity

     129,967         240,810         370,777   

Consumer

     28,109         108,512         136,621   
  

 

 

    

 

 

    

 

 

 

Total consumer

     644,198         609,944         1,254,142   

Other

     56,287         40,480         96,767   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,368,800       $ 1,966,680       $ 4,335,480   
  

 

 

    

 

 

    

 

 

 

Covered Loans

The following is a summary of the major categories of covered loans outstanding as of September 30, 2013 and December 31, 2012:

 

(Dollars in thousands)

                    

September 30, 2013

   PCI Loans      Non-PCI
Loans
     Total Covered
Loans
 

Non-owner occupied commercial real estate

   $ 66,933       $ —         $ 66,933   

Other commercial C&D

     20,619         —           20,619   

Multifamily commercial real estate

     10,437         —           10,437   

1-4 family residential C&D

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     97,989         —           97,989   

Owner occupied commercial real estate

     73,633         —           73,633   

Commercial and industrial

     10,612         359         10,971   

Leasing

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total commercial

     84,245         359         84,604   

1-4 family residential

     77,055         792         77,847   

Home equity

     16,038         37,147         53,185   

Consumer

     69         —           69   
  

 

 

    

 

 

    

 

 

 

Total consumer

     93,162         37,939         131,101   

Other

     1,031         —           1,031   
  

 

 

    

 

 

    

 

 

 

Total

   $ 276,427       $ 38,298       $ 314,725   
  

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

(Dollars in thousands)

                    

December 31, 2012

   PCI Loans      Non-PCI
Loans
     Total Covered
Loans
 

Non-owner occupied commercial real estate

   $ 94,916       $ 56       $ 94,972   

Other commercial C&D

     31,722         —           31,722   

Multifamily commercial real estate

     11,614         —           11,614   

1-4 family residential C&D

     4,167         —           4,167   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     142,419         56         142,475   

Owner occupied commercial real estate

     84,006         —           84,006   

Commercial and industrial

     16,451         606         17,057   

Leasing

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total commercial

     100,457         606         101,063   

1-4 family residential

     91,586         227         91,813   

Home equity

     16,823         43,287         60,110   

Consumer

     185         —           185   
  

 

 

    

 

 

    

 

 

 

Total consumer

     108,594         43,514         152,108   

Other

     4,364         —           4,364   
  

 

 

    

 

 

    

 

 

 

Total

   $ 355,834       $ 44,176       $ 400,010   
  

 

 

    

 

 

    

 

 

 

The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of September 30, 2013 by class of loans:

 

(Dollars in thousands)

                    

Non-purchased credit impaired loans

   30-89 Days Past Due      Greater than 90 Days
Past Due and Still
Accruing/Accreting
     Nonaccrual      Total  
     Covered      Non-Covered      Covered      Non-Covered      Covered      Non-Covered         

Non-owner occupied commercial real estate

   $ —         $ 201       $ —         $ —         $ —         $ 94       $ 295   

Other commercial C&D

     —           150         —           —           —           441         591   

Multifamily commercial real estate

     —           —           —           —           —           —           —     

1-4 family residential C&D

     —           —           —           —           —           2,581         2,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     —           351         —           —           —           3,116         3,467   

Owner occupied commercial real estate

     —           173         —           —           —           2,252         2,425   

Commercial and industrial

     —           12         —           —           66         2,512         2,590   

Lease financing

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           185         —           —           66         4,764         5,015   

1-4 family residential

     —           814         —           —           —           952         1,766   

Home equity

     402         731         —           —           1,190         2,919         5,242   

Consumer

     —           1,452         —           —           —           805         2,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     402         2,997         —           —           1,190         4,676         9,265   

Other

     —           —           —           —           —           11         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 402       $ 3,533       $ —         $ —         $ 1,256       $ 12,567       $ 17,758   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

(Dollars in thousands)

                    

Purchased credit impaired loans

   30-89 Days Past Due      Greater than 90 Day
Past Due and Still

Accruing/Accreting
     Nonaccrual      Total  
     Covered      Non-Covered      Covered      Non-Covered      Covered      Non-Covered         

Non-owner occupied commercial real estate

   $ 243       $ 4,847       $ 12,199       $ 42,040       $ —         $ —         $ 59,329   

Other commercial C&D

     —           5,631         10,313         60,915         —           —           76,859   

Multifamily commercial real estate

     —           119         957         3,378         —           —           4,454   

1-4 family residential C&D

     —           10         —           3,041         —           —           3,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     243         10,607         23,469         109,374         —           —           143,693   

Owner occupied commercial real estate

     247         3,353         4,870         37,136         —           —           45,606   

Commercial and industrial

     —           4,068         167         22,784         —           —           27,019   

Lease financing

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     247         7,421         5,037         59,920         —           —           72,625   

1-4 family residential

     374         8,010         10,643         41,008         —           —           60,035   

Home equity

     39         1,602         1,821         6,711         —           —           10,173   

Consumer

     —           512         33         380         —           —           925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     413         10,124         12,497         48,099         —           —           71,133   

Other

     —           438         5         3,069         —           —           3,512   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 903       $ 28,590       $ 41,008       $ 220,462       $ —         $ —         $ 290,963   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2012 by class of loans:

 

(Dollars in thousands)

                    

Non-purchased credit impaired loans

   30-89 Days Past Due      Greater than 90 Days
Past Due and Still
Accruing/Accreting
     Nonaccrual      Total  
     Covered      Non-Covered      Covered      Non-Covered      Covered      Non-Covered         

Non-owner occupied commercial real estate

   $ —         $ —         $ —         $ —        $ 56       $ 24       $ 80   

Other commercial C&D

     —           —           —           —           —           97         97   

Multifamily commercial real estate

     —           —           —           —           —           —           —     

1-4 family residential C&D

     —           474         —           —           —           363         837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     —           474         —           —           56         484         1,014   

Owner occupied commercial real estate

     —           405         —           —           —           1,966         2,371   

Commercial and industrial

     —           608         —           —           276         2,057         2,941   

Leasing

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           1,013         —           —           276         4,023         5,312   

1-4 family residential

     —           1,648         —           —           —           3,731         5,379   

Home equity

     1,614         1,416         —           —           2,460         2,613         8,103   

Consumer

     —           1,873         —           —           —           368         2,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1,614         4,937         —           —           2,460         6,712         15,723   

Other

     —           49         —           —           —           —           49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,614       $ 6,473       $  —         $ —         $ 2,792       $ 11,219       $ 22,098   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

 

(Dollars in thousands)

                                         

Purchased credit impaired loans

   30-89 Days Past Due      Greater than 90 Days
Past Due and Still
Accruing/Accreting
     Nonaccrual      Total  
     Covered      Non-Covered      Covered      Non-Covered      Covered      Non-Covered         

Non-owner occupied commercial real estate

   $ 2,799       $ 4,662       $ 17,286       $ 44,917       $ —        $ —        $ 69,664   

Other commercial C&D

     135         7,183         21,659         84,189         —          —          113,166   

Multifamily commercial real estate

     —          194         3,612         2,755         —          —          6,561   

1-4 family residential C&D

     —          2,405         3,482         5,145         —          —          11,032   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     2,934         14,444         46,039         137,006         —          —          200,423   

Owner occupied commercial real estate

     873         4,210         7,646         54,971         —          —          67,700   

Commercial and industrial

     99         3,921         2,045         32,007         —          —          38,072   

Leasing

     —           —           —           —           —          —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     972         8,131         9,691         86,978         —          —          105,772   

1-4 family residential

     1,214         15,550         13,685         41,905         —          —          72,354   

Home equity

     345         4,224         3,024         10,247         —          —