Capital Bank Financial
Capital Bank Financial Corp. (Form: 10-Q, Received: 11/06/2014 16:10:51)

 
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, 2014
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
  ________________________________________________
 
(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.     ý   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).     ý   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
 
X
 
 
 
 
 
 
Non-accelerated filer
 
 
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   ý     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
 
30,018,114
Class B Non-Voting Common, $0.01 Par Value
 
17,574,807
Class
 
Outstanding as of October 31, 2014
 

1


CAPITAL BANK FINANCIAL CORP.
INDEX
 
PART I. FINANCIAL INFORMATION
 
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



Capital Bank Financial Corp.
Consolidated Balance Sheets
(Unaudited)
(Dollars and shares in thousands)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
 
Cash and due from banks
 
$
92,704

 
$
118,937

Interest-bearing deposits in other banks
 
66,706

 
45,504

Total cash and cash equivalents
 
159,410

 
164,441

Trading securities
 
2,312

 
6,348

Investment securities available-for-sale at fair value (amortized cost $582,623 and $688,717, respectively)
 
580,732

 
685,441

Investment securities held-to-maturity at amortized cost (fair value $457,712 and $459,693, respectively)
 
454,809

 
465,098

Loans held for sale
 
6,439

 
8,012

Loans, net of deferred loan costs and fees
 
4,817,332

 
4,544,017

Less: Allowance for loan losses
 
52,334

 
56,851

Loans, net
 
4,764,998

 
4,487,166

Other real estate owned
 
90,277

 
129,396

FDIC indemnification asset
 
21,025

 
33,610

Receivable from FDIC
 
3,491

 
7,624

Premises and equipment, net
 
174,941

 
179,855

Goodwill
 
134,522

 
131,987

Intangible assets, net
 
19,865

 
23,365

Deferred income tax asset, net
 
139,388

 
166,762

Other assets
 
138,090

 
128,456

Total Assets
 
$
6,690,299

 
$
6,617,561

Liabilities and Shareholders’ Equity
 
 
 
 
Liabilities
 
 
 
 
Deposits:
 
 
 
 
Non-interest bearing demand
 
$
1,006,556

 
$
923,993

Negotiable order of withdrawal
 
1,309,839

 
1,321,903

Money market
 
914,226

 
961,526

Savings
 
514,729

 
530,144

Time deposits
 
1,430,106

 
1,447,497

Total deposits
 
5,175,456

 
5,185,063

Federal Home Loan Bank advances
 
226,138

 
96,278

Short-term borrowings
 
23,823

 
24,850

Long-term borrowings
 
139,396

 
138,561

Accrued expenses and other liabilities
 
60,547

 
60,021

Total liabilities
 
5,625,360

 
5,504,773

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, 36,662 issued and 30,114 outstanding and 36,212 issued and 33,051 outstanding, respectively.
 
367

 
362

Common stock-Class B 0.01 par value: 200,000 shares authorized, 19,017 issued and 18,217 outstanding and 19,647 issued and 19,047 outstanding, respectively.
 
190

 
196

Additional paid in capital
 
1,081,177

 
1,082,235

Retained earnings
 
144,567

 
107,485

Accumulated other comprehensive loss
 
(6,018
)
 
(7,528
)
Treasury stock, at cost, 7,348 and 3,761 shares, respectively
 
(155,344
)
 
(69,962
)
Total shareholders’ equity
 
1,064,939

 
1,112,788

Total Liabilities and Shareholders’ Equity
 
$
6,690,299

 
$
6,617,561

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

3


Capital Bank Financial Corp.
Consolidated Statements of Income
(Unaudited)
 
(Dollars and shares in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Interest and dividend income
 
 
 
 
 
 
 
 
Loans, including fees
 
$
61,942

 
$
67,355

 
$
186,828

 
$
207,327

Investment securities:
 
 
 
 
 
 
 
 
Taxable interest income
 
4,913

 
4,383

 
13,853

 
11,925

Tax-exempt interest income
 
152

 
158

 
463

 
484

Dividends
 
14

 
14

 
44

 
44

Interest-bearing deposits in other banks
 
18

 
37

 
81

 
510

Other earning assets
 
604

 
533

 
1,763

 
1,485

Total interest and dividend income
 
67,643

 
72,480

 
203,032

 
221,775

Interest expense
 
 
 
 
 
 
 
 
Deposits
 
4,362

 
5,135

 
12,923

 
17,541

Long-term borrowings
 
1,731

 
1,952

 
5,154

 
6,346

Federal Home Loan Bank advances
 
115

 
1

 
217

 
3

Other borrowings
 
10

 
6

 
29

 
33

Total interest expense
 
6,218

 
7,094

 
18,323

 
23,923

Net Interest Income
 
61,425

 
65,386

 
184,709

 
197,852

Provision (reversal) for loan losses
 
(1,332
)
 
984

 
48

 
10,853

Net interest income after provision (reversal) for loan losses
 
62,757

 
64,402

 
184,661

 
186,999

Non-Interest Income
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
5,565

 
6,034

 
16,673

 
18,711

Debit card income
 
3,017

 
2,854

 
8,964

 
8,669

Fees on mortgage loans originated and sold
 
1,195

 
1,477

 
3,077

 
4,319

Investment advisory and trust fees
 
1,183

 
740

 
3,354

 
1,380

FDIC indemnification asset expense
 
(3,881
)
 
(502
)
 
(8,110
)
 
(3,779
)
Legal settlements and insurance recoveries
 

 
900

 

 
900

Investment securities gains (losses), net
 
317

 
(247
)
 
463

 
(42
)
Other-than-temporary impairment loss on investments:
 
 
 
 
 
 
 
 
Gross impairment loss
 

 
(54
)
 

 
(54
)
Less: Impairment recognized in other comprehensive income
 

 

 

 

Net impairment loss recognized in earnings
 

 
(54
)
 

 
(54
)
Other income
 
2,561

 
4,078

 
8,792

 
9,591

Total non-interest income
 
9,957

 
15,280

 
33,213

 
39,695

Non-Interest Expense
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
22,590

 
22,668

 
69,537

 
66,090

Stock-based compensation expense
 
443

 
1,371

 
2,191

 
4,312

Net occupancy and equipment expense
 
8,475

 
8,866

 
25,797

 
26,459

Computer services
 
3,332

 
3,231

 
9,974

 
9,872

Software expense
 
1,932

 
1,874

 
5,740

 
5,514

Telecommunication expense
 
1,406

 
1,534

 
4,642

 
4,919

OREO valuation expense
 
2,752

 
6,045

 
9,347

 
18,844

(Gains) losses on sales of OREO
 
(223
)
 
188

 
(4,136
)
 
(3,204
)
Foreclosed asset related expense
 
845

 
1,265

 
3,295

 
4,909


4


Loan workout expense
 
911

 
2,063

 
3,205

 
6,363

Professional fees
 
1,532

 
2,426

 
5,574

 
7,418

Gains on extinguishment of debt
 

 
(430
)
 

 
(122
)
Contingent value right expense (income)
 
278

 
(776
)
 
1,372

 
2,535

Regulatory assessments
 
1,637

 
1,710

 
4,914

 
5,276

Other expense
 
5,508

 
7,228

 
16,463

 
20,773

Total non-interest expense
 
51,418

 
59,263

 
157,915

 
179,958

Income before income taxes
 
21,296

 
20,419

 
59,959

 
46,736

Income tax expense
 
8,053

 
8,975

 
22,877

 
20,098

Net income
 
$
13,243

 
$
11,444

 
$
37,082

 
$
26,638

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.28

 
$
0.22

 
$
0.75

 
$
0.50

Diluted
 
$
0.27

 
$
0.22

 
$
0.74

 
$
0.49

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
47,912

 
51,804

 
49,164

 
53,170

Diluted
 
49,069

 
52,755

 
50,406

 
54,032

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


5


Capital Bank Financial Corp.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Net Income
 
$
13,243

 
$
11,444

 
$
37,082

 
$
26,638

Other comprehensive income before tax:
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on investment securities available-for-sale
 
(4,634
)
 
17,692

 
2,040

 
(15,826
)
Unrealized holding losses on investment securities transferred from available-for-sale to held-to-maturity
 

 
(9,354
)
 

 
(9,354
)
Reclassification adjustment for (losses) gains realized in net income on securities available-for-sale
 
(333
)
 
54

 
(655
)
 
(151
)
Reclassification adjustment for losses amortized in net income on securities held-to-maturity
 
379

 

 
1,084

 

Other comprehensive (loss) income, before tax:
 
(4,588
)
 
8,392

 
2,469

 
(25,331
)
Tax effect
 
1,782

 
(3,234
)
 
(959
)
 
9,748

Other comprehensive (loss) income, net of tax:
 
(2,806
)
 
5,158

 
1,510

 
(15,583
)
Comprehensive income
 
$
10,437

 
$
16,602

 
$
38,592

 
$
11,055

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


6


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
Income (Loss)
 
Treasury
Stock
 
Total
Shareholder's
Equity
Balance, December 31, 2013
 
33,051

 
$
362

 
19,047

 
$
196

 
$
1,082,235

 
$
107,485

 
$
(7,528
)
 
$
(69,962
)
 
$
1,112,788

Net income
 

 

 

 

 

 
37,082

 

 

 
37,082

Other comprehensive income, net of tax expense of $959
 

 

 

 

 

 

 
1,510

 

 
1,510

Stock-based compensation
 

 

 

 

 
2,191

 

 

 

 
2,191

Full value stock awards
 
12

 

 

 

 

 

 

 

 

Excess tax benefit from share-based payment
 

 

 

 

 
1,603

 

 

 

 
1,603

Restricted stock cancelled
 
(192
)
 
(1
)
 

 

 
(4,852
)
 

 

 

 
(4,853
)
Purchase of treasury stock
 
(3,387
)
 

 
(200
)
 

 

 

 

 
(85,382
)
 
(85,382
)
Conversion of shares
 
630

 
6

 
(630
)
 
(6
)
 

 

 

 

 

Balance, September 30, 2014
 
30,114

 
$
367

 
18,217

 
$
190

 
$
1,081,177

 
$
144,567

 
$
(6,018
)
 
$
(155,344
)
 
$
1,064,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income, net of tax benefit of $9,748
 

 

 

 

 

 

 
(15,583
)
 

 
(15,583
)
Stock-based compensation
 

 

 

 

 
4,312

 

 

 

 
4,312

Fractional shares
 

 

 
8

 

 
(1
)
 

 

 

 
(1
)
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

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


7


Capital Bank Financial Corp.
Consolidated Statements of Cash Flows
(Unaudited)
 
(Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
Cash flows from operating activities
 
 
 
 
Net income
 
$
37,082

 
$
26,638

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
Accretion of purchased credit impaired loans
 
(92,743
)
 
(126,634
)
Depreciation and amortization
 
14,248

 
15,795

Provision for loan losses
 
48

 
10,853

Deferred income tax
 
23,879

 
14,977

Net amortization of investment securities premium/discount
 
6,375

 
9,339

Other than temporary impairment of investment securities
 

 
54

Net realized (gains) losses on sales of investment securities
 
(463
)
 
42

Stock-based compensation expense
 
2,191

 
4,312

Gains on sales of OREO
 
(4,136
)
 
(3,204
)
OREO valuation expenses
 
9,347

 
18,844

Other
 
39

 
(38
)
Net deferred loan origination fees
 
(5,417
)
 
(2,416
)
Gains on extinguishment of debt
 

 
(122
)
Mortgage loans originated for sale
 
(107,232
)
 
(138,686
)
Proceeds from sales of mortgage loans originated for sale
 
111,882

 
145,363

Fees on mortgage loans originated and sold
 
(3,077
)
 
(4,319
)
FDIC indemnification asset expense
 
8,110

 
3,779

Gains on sales/disposals of premises and equipment
 
(45
)
 
(419
)
Gains on exchange of partnership interests
 

 
(1,536
)
Proceeds from FDIC loss share agreements
 
9,616

 
12,211

Change in other assets
 
(7,220
)
 
10,507

Change in accrued expenses and other liabilities
 
(4,218
)
 
6,658

Net cash (used in) provided by operating activities
 
(1,734
)
 
1,998

Cash flows from investing activities
 
 
 
 
Purchases of investment securities available-for-sale
 
(140,653
)
 
(436,365
)
Purchases of investment securities held-to-maturity
 
(44,143
)
 

Sales of investment securities available-for-sale
 
172,594

 
225

Repayments of principal and maturities of investment securities available-for-sale
 
73,896

 
178,592

Repayments of principal and maturities of investment securities held-to-maturity
 
53,897

 
27,347

Net purchases of FHLB and FRB stock
 
(3,421
)
 
(978
)
Net (increase) decrease in loans
 
(212,736
)
 
319,814

Proceeds from sales of loans
 
2,564

 

Purchases of premises and equipment
 
(5,241
)
 
(2,473
)
Proceeds from sales of premises and equipment
 
139

 
6,707

Proceeds from sales of OREO
 
64,360

 
62,165

Net cash (used in) provided by investing activities
 
(38,744
)
 
155,034

 
 
 
 
 
 
 
 
 
 

8


Cash flows from financing activities
 
 
 
 
Net increase (decrease) in demand, money market and savings accounts
 
7,783

 
(113,473
)
Net decrease in time deposits
 
(17,390
)
 
(490,925
)
Net decrease in federal funds purchased and securities sold under agreement to repurchase
 
(1,027
)
 
(18,284
)
Net decrease in short term FHLB advances
 
129,720

 

Net increase (decrease) in long term FHLB advances
 
140

 
(136
)
Prepayments of long term borrowings
 

 
(42,500
)
Excess tax benefit from share-based payment
 
1,603

 

Purchases of treasury stock
 
(85,382
)
 
(62,884
)
Net cash provided by (used in) financing activities
 
35,447

 
(728,202
)
Net decrease in cash and cash equivalents
 
(5,031
)
 
(571,170
)
Cash and cash equivalents at beginning of period
 
164,441

 
734,874

Cash and cash equivalents at end of period
 
$
159,410

 
$
163,704

 
 
 
 
 
Supplemental disclosures of cash:
 
 
 
 
Interest paid
 
$
17,869

 
$
24,954

Cash collections of contractual interest on purchased credit impaired loans
 
63,528

 
91,983

Income taxes paid
 
1,315

 
1,641

Supplemental disclosures of non-cash transactions:
 
 
 
 
OREO acquired through loan transfers and acquisitions
 
$
30,452

 
$
53,366

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

 
510,976

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



9

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 162 full service banking offices located in Florida, North and South Carolina, Tennessee and Virginia.
The accompanying consolidated financial statements (unaudited) 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 U.S. 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 the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013 .
Out of Period Adjustments
During the three months ended March 31, 2014, the Company recorded a correction of an error resulting from the state net operating loss that the Company was not entitled to subsequent to the 2011 Green Bankshares acquisition. The impact of this correction decreased deferred tax assets and increased goodwill by $2.5 million . After evaluating the quantitative and qualitative aspects of this error, the Company concluded that its prior period financial statements were not materially misstated.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40)—Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". The amendments in this update provide guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update apply to all entities and will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-14, "Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40)—Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure". The amendment in this update requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration ("FHA") of the U.S. Department of Housing and Urban Development ("HUD"), and the U.S. Department of Veterans Affairs ("VA"). This ASU will be effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued ASU No. 2014-12, “Compensation- Stock Compensation (Topic 718)—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period”. This update provides specific guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. This ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.



10

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (topic 860)—Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures”. This update changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.  
In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers (Topic 606)”. This update clarifies the principles for recognizing revenue from contracts with customers. This ASU, which does not apply to financial instruments, is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In January 2014, the FASB issued ASU 2014-4, “Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This update clarifies that when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1)the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2)the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2014, the FASB issued ASU 2014-1, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” This ASU allows for use of the proportional amortization method for qualified affordable housing projects if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized in the income statement as a component of income tax expense. This ASU provides for a practical expedient, which allows for amortization of only expected tax credits over the period tax credits are expected to be received. This method is permitted if it produces a measurement that is substantially similar to the measurement that would result from using both tax credits and other tax benefits. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.


11

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


2. Earnings Per Common Share
Basic earnings per share is computed as 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
 
Nine Months Ended
 

September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Weighted average number of shares outstanding:

 
 
 
 
 
 
 
Basic

47,912

 
51,804

 
49,164

 
53,170

Dilutive effect of options outstanding

498

 
31

 
490

 

Dilutive effect of unvested restricted shares

659

 
920

 
752

 
862

Diluted

49,069

 
52,755

 
50,406

 
54,032

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
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Anti-dilutive stock options
 
12

 
269

 
12

 
3,133

Anti-dilutive unvested restricted shares
 

 

 

 


 
3. Investment Securities
Trading securities totaled $ 2.3 million and $6.3 million at September 30, 2014 and December 31, 2013 , respectively.
The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2014 and December 31, 2013 , are presented below:
(Dollars in thousands)

September 30, 2014
 

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Available-for-Sale








Marketable equity securities

$
946

 
$

 
$

 
$
946

Mortgage-backed securities—residential issued by government sponsored entities

578,097

 
1,136

 
3,171

 
576,062

Industrial revenue bonds

3,580

 
144

 

 
3,724

Total

$
582,623

 
$
1,280

 
$
3,171

 
$
580,732

Held-to-Maturity

 
 
 
 
 
 
 
U.S. Government agencies

$
14,288

 
$

 
$
32

 
$
14,256

Corporate bonds

25,000

 
163

 

 
25,163

State and political subdivisions—tax exempt

12,970

 
475

 

 
13,445

State and political subdivisions—taxable

539

 
21

 

 
560

Mortgage-backed securities—residential issued by government sponsored entities

402,012

 
2,638

 
362

 
404,288

Total

$
454,809

 
$
3,297

 
$
394

 
$
457,712


12

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


(Dollars in thousands)

December 31, 2013
 

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Available-for-Sale








Asset-backed securities

$
133,647


$
363


$
785


$
133,225

Marketable equity securities

946




15


931

Mortgage-backed securities—residential issued by government sponsored entities

549,869


2,337


5,580


546,626

Industrial revenue bonds

3,750


109




3,859

Collateralized debt obligations

505


295




800

Total

$
688,717


$
3,104


$
6,380


$
685,441

Held-to-Maturity








U.S. Government agencies

$
14,972


$


$
401


$
14,571

State and political subdivisions—tax exempt

14,201


27


129


14,099

State and political subdivisions—taxable

545




12


533

Mortgage-backed securities—residential issued by government sponsored entities

435,380


328


5,218


430,490

Total

$
465,098


$
355


$
5,760


$
459,693

Proceeds from sales of securities were $22.3 million and $172.6 million for the three and nine months ended September 30, 2014 , respectively. Gross gains of $0.3 million and $1.4 million were realized on sales of these investments for the three and nine months ended September 30, 2014 , respectively. Gross losses of $0.8 million were realized on sales of these investments for the nine months ended September 30, 2014 .
Proceeds from sales of securities were $0.2 million for the nine months ended September 30, 2013 . Gross gains of $0.2 million were realized on sales of these investments for the nine months ended September 30, 2013 .
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.
The estimated fair value of investment securities at September 30, 2014 , by contractual maturity, is shown in the table that 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.

13

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


(Dollars in thousands)

September 30, 2014
 

Amortized
Cost

Estimated
Fair Value

Yield
Available-for-sale


 

 

Due in one year or less

$

 
$

 
%
Due after one year through five years


 

 
%
Due after five years through ten years

3,580

 
3,724

 
2.23
%
Due after ten years


 

 
%
Mortgage-backed securities—residential issued by government sponsored entities

578,097

 
576,062

 
1.78
%
Subtotal

581,677

 
579,786

 
1.78
%
Marketable equity securities

946

 
946

 

Total

$
582,623

 
$
580,732

 

 
 
 
 
 
 
 
 

Amortized
Cost
 
Estimated
Fair Value
 
Yield
Held-to-maturity


 

 

Due in one year or less

$
203

 
$
204

 
0.76
%
Due after one year through five years

10,818

 
10,882

 
4.65
%
Due after five years through ten years

24,882

 
25,354

 
4.52
%
Due after ten years

16,894

 
16,984

 
2.97
%
Mortgage-backed securities—residential issued by government sponsored entities

402,012

 
404,288

 
2.36
%
Total

$
454,809

 
$
457,712

 
2.56
%
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
 
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities—residential issued by government sponsored entities
 
$
329,422

 
$
2,621

 
$
44,276

 
$
550

 
$
373,698

 
$
3,171

Total
 
$
329,422

 
$
2,621

 
$
44,276

 
$
550

 
$
373,698

 
$
3,171

Held-to-Maturity
 

 

 

 

 

 

U.S. Government agencies
 
$
14,256

 
$
32

 
$

 
$

 
$
14,256

 
$
32

Mortgage-backed securities—residential issued by government sponsored entities
 
48,313

 
362

 

 

 
48,313

 
362

Total
 
$
62,569

 
$
394

 
$

 
$

 
$
62,569

 
$
394




14

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


(Dollars in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
$
102,835

 
$
785

 
$

 
$

 
$
102,835

 
$
785

Marketable equity securities
 
931

 
15

 

 

 
931

 
15

Mortgage-backed securities—residential issued by government sponsored entities
 
339,565

 
5,580

 

 

 
339,565

 
5,580

Total
 
$
443,331

 
$
6,380

 
$

 
$

 
$
443,331

 
$
6,380

Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
14,571

 
$
401

 
$

 
$

 
$
14,571

 
$
401

State and political subdivisions—tax exempt
 
10,489

 
129

 

 

 
10,489

 
129

State and political subdivisions—taxable
 
533

 
12

 

 

 
533

 
12

Mortgage-backed securities—residential issued by government sponsored entities
 
342,333

 
5,218

 

 

 
342,333

 
5,218

Total
 
$
367,926

 
$
5,760

 
$

 
$

 
$
367,926

 
$
5,760

As of September 30, 2014 , the Company’s security portfolio consisted of 130 securities, 40 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, 2014 , and December 31, 2013 were issued by U.S. government-sponsored entities and agencies, 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 more likely than not that it will not 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, 2014 or December 31, 2013 .
At December 31, 2013, we owned a collateralized debt obligation (“CDO”) collateralized by trust preferred securities issued primarily by banks and several insurance companies. We sold our investment in the CDO on January 7, 2014. Proceeds from the sale were $0.8 million and gross gains were $0.3 million .
Investment securities having carrying values of approximately $314.1 million and $313.5 million at September 30, 2014 and December 31, 2013 , respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.

15

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


4. Loans
Major classifications of loans, including loans held for sale, are as follows:
(Dollars in thousands)

September 30, 2014
 
December 31, 2013
Non-owner occupied commercial real estate

$
797,197


$
775,733

Other commercial construction and land

243,563


300,494

Multifamily commercial real estate

71,119


67,688

1-4 family residential construction and land

76,442


71,351

Total commercial real estate

1,188,321


1,215,266

Owner occupied commercial real estate

1,026,853


1,058,148

Commercial and industrial loans

959,641


803,736

Lease financing

2,175


2,676

Total commercial

1,988,669


1,864,560

1-4 family residential

913,219


804,322

Home equity loans

373,604


386,366

Other consumer loans

242,451


170,526

Total consumer

1,529,274


1,361,214

Other

117,507


110,989

Total loans

$
4,823,771


$
4,552,029

Total loans include $6.4 million and $8.0 million of 1 -4 family residential loans held for sale and $9.2 million and $3.8 million of net deferred loan origination costs and fees as of September 30, 2014 and December 31, 2013 , respectively.
As of September 30, 2014 , other loans include $46.5 million , $47.3 million and $2.1 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively. As of December 31, 2013, other loans include $49.7 million , $36.2 million and $2.2 million of farm land, state and political subdivision obligations and deposit customer overdrafts, 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 or purchased by the Company (“New Loans”) and loans acquired through the purchase of CBKN, GRNB, SCMF and TIBB, are not subject to the loss sharing agreements and are classified as “non covered.” Additionally, certain consumer loans acquired through the acquisition of First National Bank of the South, Metro Bank and Turnberry Bank (collectively, the “Failed Banks”) from the FDIC, are specifically excluded from the loss sharing agreements.
The Company designates loans as PCI by evaluating both qualitative and quantitative factors. At the time of acquisition, the Company accounted for the PCI loans by segregating each portfolio into loan pools with similar risk characteristics. Over the lives of the acquired PCI 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 roll forward of accretable yield and income expected to be earned related to PCI loans and the amount of non-accretable difference at the end of the period. Nonaccretable difference represents estimated contractually required payments in excess of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the PCI loans. Other represents reductions of accretable yield due to non-credit events such as interest rate reductions on variable rate PCI loans and prepayment activity on PCI loans.


16

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


(Dollars in thousands)

Three Months Ended
 
Nine Months Ended
 

September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Accretable Yield








Balance at beginning of period

$
329,421

 
$
444,481


$
383,775

 
$
553,348

Accretion of income

(28,560
)
 
(39,625
)

(92,743
)
 
(126,634
)
Reclassification from nonaccretable difference

12,720

 
15,018


48,616

 
46,117

Other

(6,394
)
 
(21,459
)

(32,461
)
 
(74,416
)
Balance at end of period

$
307,187

 
$
398,415


$
307,187

 
$
398,415

 

 
 
 

 
 
 
Nonaccretable difference, balance at the end of the period

$
210,101

 
$
316,047


$
210,101

 
$
316,047

The following table represents the periods we estimate the remaining accretable yield will accrete into income based on the Company’s most recent estimates of cash flows for PCI loans:
(Dollars in thousands)
 
Periods ending December 31,
2014
 
$
26,482

2015
 
86,888

2016
 
62,361

2017
 
42,443

2018
 
28,143

Thereafter
 
60,870

Total
 
$
307,187


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 covered loans and foreclosed real estate are significantly different from those assets not covered under the loss share agreement. Refer to Note 7 – Other Real Estate Owned for the covered balances of other real estate owned.





17

Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements (Unaudited)


Non-covered Loans
The following is a summary of the major categories of non-covered loans outstanding as of September 30, 2014 and December 31, 2013 :

(Dollars in thousands)

Non-PCI Loans

 

 
September 30, 2014

New
 
Acquired

PCI Loans
 
Total
Non-covered
Loans
Non-owner occupied commercial real estate

$
327,458

 
$
61,027

 
$
369,945

 
$
758,430

Other commercial construction and land

88,013

 
266

 
141,762

 
230,041

Multifamily commercial real estate

27,439

 
13,863

 
25,109

 
66,411

1-4 family residential construction and land

65,428

 

 
11,014

 
76,442

Total commercial real estate

508,338

 
75,156

 
547,830

 
1,131,324

Owner occupied commercial real estate

700,945

 
40,683

 
228,602

 
970,230

Commercial and industrial loans

836,036

 
13,362

 
102,429

 
951,827

Lease financing

2,175

 

 

 
2,175

Total commercial

1,539,156

 
54,045

 
331,031

 
1,924,232

1-4 family residential

523,598

 
45,826

 
286,913

 
856,337

Home equity loans

87,047

 
159,270

 
85,689

 
332,006

Other consumer loans

230,889

 
4,944

 
6,543

 
242,376

Total consumer