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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
¨ | Preliminary Proxy Statement | |||
¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |||
x | Definitive Proxy Statement | |||
¨ | Definitive Additional Materials | |||
¨ | Soliciting Material Pursuant to § 240.14a-12 | |||
CAPITAL BANK CORPORATION | ||||
(Name of Registrant as Specified In Its Charter) | ||||
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
Payment of Filing Fee (Check the appropriate box): | ||||
x | No fee required. | |||
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | |||
(1) | Title of each class of securities to which transaction applies:
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(2) | Aggregate number of securities to which transaction applies:
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(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
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(4) | Proposed maximum aggregate value of transaction:
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(5) | Total fee paid: | |||
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x | Fee paid previously with preliminary materials. | |||
¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |||
(1) | Amount Previously Paid:
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(2) | Form, Schedule or Registration Statement No.:
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(3) | Filing Party:
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(4) | Date Filed:
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MERGER PROPOSED—PLEASE VOTE
Dear Shareholder:
On September 1, 2011, Capital Bank Financial Corp. (formerly known as North American Financial Holdings, Inc.) (which we refer to as “CBF”) and Capital Bank Corporation (which we refer to as “Capital Bank Corp.”) entered into an agreement and plan of merger (which we refer to as the “merger agreement”) providing for the merger of Capital Bank Corp. with and into CBF, with CBF as the surviving corporation (we refer to this transaction as the “merger”). If the merger is completed, Capital Bank Corp. will be merged into CBF, and, unless you seek to exercise your appraisal rights, each of your shares of Capital Bank Corp. common stock will be converted into 0.1354 of a share of Class A common stock of CBF, plus cash in lieu of fractional shares. We are proposing the merger as part of a corporate reorganization (which we refer to as the “reorganization”) of CBF in which, substantially concurrent with the completion of the merger, CBF expects to complete mergers with its other bank holding company subsidiaries.
We are sending you this document to notify you of and invite you to the special meeting of Capital Bank Corp. shareholders (which we refer to as the “special meeting”) being held to consider the merger agreement and a merger-related executive officer compensation proposal, and to ask that you vote at the special meeting in favor of approval of the merger agreement and compensation proposal. The approval of the merger agreement requires the affirmative vote of holders of at least a majority of the outstanding common stock of Capital Bank Corp. CBF beneficially owns approximately 83% of the common stock of Capital Bank Corp. and has indicated it will vote in favor of approving the merger agreement.
The special meeting will be held on September 24, 2012 at Capital Bank Financial Corp., located at 4725 Piedmont Row Drive, Suite 110, Charlotte, NC 28210 at 8:30 a.m. local time.
There is currently no public market for CBF Class A common stock. Substantially concurrent with the completion of the merger, CBF expects to complete an initial public offering of its Class A common stock (which we refer to as the “initial public offering”). The stock consideration issued in the merger would, assuming that CBF Class A common stock trades at values between $21 and $23 per share following the merger (which is the estimated public offering price per share in the initial public offering), have a value between $2.84 and $3.11 per share of Capital Bank Corp. common stock. In connection with the initial public offering, CBF has applied to list its Class A common stock on The Nasdaq Global Select Market (which we refer to as “Nasdaq”) under the symbol “CBF.” Whether or not we complete an initial public offering prior to or concurrent with the completion of the merger, any shares of our common stock received as merger consideration by Capital Bank Corp. shareholders will be listed on Nasdaq. On September 7, 2012, the last practicable date before the date of this document, the last reported sale price of Capital Bank Corp. common stock was $2.36. Based on the number of shares of Capital Bank Corp. common stock outstanding as of August 28, 2012, the record date for the special meeting, and assuming no Capital Bank Corp. shareholders exercise appraisal rights, CBF expects to issue approximately 2,003,532 shares of its Class A common stock in the merger.
It is important that your shares be represented at the special meeting, regardless of the number of shares you may hold. Even though you may plan to attend the special meeting in person, please submit voting instructions for your shares promptly using the directions on your proxy card to vote by one of the following methods: (1) by telephone, by calling the toll-free telephone number printed on your proxy card; (2) over the Internet, by accessing the website address printed on your proxy card; or (3) by completing and returning the enclosed proxy in the envelope provided.
By Order of the Board of Directors |
R. Eugene Taylor |
Chairman, Chief Executive Officer |
Capital Bank Corporation |
CBF is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.
Please see “Risk Factors” beginning on page 22 for a discussion of risks relating to the merger.
The shares of CBF Class A common stock to be issued in the merger will not be savings accounts, deposits or other obligations of any of CBF’s bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus/proxy statement. Any representation to the contrary is a criminal offense.
The date of this document is September 11, 2012 and is first being mailed to shareholders of Capital Bank Corp. on or about September 13, 2012.
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Capital Bank Corporation
333 Fayetteville Street, Suite 700
Raleigh, North Carolina 27601
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Our Shareholders:
We cordially invite you to attend a Special Meeting of Shareholders of Capital Bank Corporation, which we are holding on September 24, 2012, at 8:30 a.m., local time, at Capital Bank Financial Corp., located at 4725 Piedmont Row Drive, Suite 110, Charlotte, NC 28210, to consider and vote upon:
• | a proposal to approve the plan of merger contained in the Agreement and Plan of Merger, dated as of September 1, 2011, by and between Capital Bank Financial Corp. (formerly known as North American Financial Holdings, Inc.) and Capital Bank Corporation, a copy of which is included as Appendix A to the proxy statement/prospectus accompanying this notice, as such agreement may be amended from time to time (which we refer to as the “merger agreement”), pursuant to which Capital Bank Corp. will be merged with and into CBF and each outstanding share of common stock of Capital Bank Corp. will be converted into the right to receive 0.1354 of a share of Class A common stock of CBF, plus cash to be paid in lieu of fractional shares (we refer to this proposal as the “merger proposal”); and |
• | a proposal to approve, on a (non-binding) advisory basis, the compensation to be paid to Capital Bank Corp.’s named executive officers that is based on or otherwise relates to the merger, discussed under the section entitled “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger—Potential Payments Upon a Termination of Employment in Connection with a Change of Control,” beginning on page 54 (we refer to this proposal as the “named executive officer merger-related compensation proposal”). |
Shareholders of record at the close of business on August 28, 2012 are entitled to notice and to vote at the special meeting and any and all adjournments of the meeting.
THE CAPITAL BANK CORP. BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE FOREGOING PROPOSALS.
PLEASE VOTE. EACH SHAREHOLDER IS URGED TO VOTE PROMPTLY BY TELEPHONE, INTERNET OR BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD. IF A SHAREHOLDER DECIDES TO ATTEND THE MEETING, HE OR SHE MAY REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
September 11, 2012 | By Order of the Board of Directors | |||
R. Eugene Taylor | ||||
Chairman, Chief Executive Officer | ||||
Capital Bank Corporation |
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Additional Information
Information about Capital Bank Corp. is available for you to read and copy at the Securities and Exchange Commission’s (which we refer to as the “SEC”) Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, DC 20549, and through the SEC’s website, www.sec.gov. You can also obtain these documents by requesting them in writing or by telephone from the appropriate company at the following addresses:
Capital Bank Corporation | Capital Bank Financial Corp. | |
333 Fayetteville Street, Suite 700 | 121 Alhambra Plaza, Suite 1601 | |
Raleigh, North Carolina 27601 | Coral Gables, Florida 33134 | |
(919) 645-6400 | (305) 670-0200 | |
Attn: Investor Relations | Attn: Investor Relations |
You will not be charged for any of these documents that you request. If you would like to request documents, you must do so by September 17, 2012.
You should rely only on the information contained in this document. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This document does not constitute an offer to sell, or a solicitation of an offer to buy, any securities in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. The information contained in this document is accurate only as of the date of this document, regardless of the time of delivery of this document or any sale of CBF Class A common stock. The business, financial condition, results of operations and prospects of CBF or Capital Bank Corp. may have changed since that date.
No action is being taken in any jurisdiction outside the United States to permit a public offering of CBF Class A common stock or possession or distribution of this document in that jurisdiction. Persons who come into possession of this document in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this document applicable to those jurisdictions.
Market Data
Market data used in this document has been obtained from independent industry sources and publications, such as SNL Financial and Case-Shiller. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this document.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CAPITAL BANK CORP. | 13 | |||
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA | 16 | |||
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE FINANCIAL DATA | 20 | |||
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Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger | 54 | |||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 87 | |||
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Recommendation of the Board of Directors of Capital Bank Corp. | 174 | |||
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How You Can Vote Shares Held by a Broker, Bank or Other Nominee | 175 | |||
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Directions to the Capital Bank Corp. Special Meeting at Capital Bank Headquarters | 176 | |||
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APPENDIX A | ||||
APPENDIX B | ||||
APPENDIX C | ||||
APPENDIX D | ||||
APPENDIX E |
In this document, unless the context suggests otherwise, references to “CBF,” “we,” “our,” “us” and the “Company” for all periods prior and subsequent to the acquisitions described in this document refer to Capital Bank Financial Corp. (formerly known as North American Financial Holdings, Inc.), a Delaware corporation, and its consolidated subsidiaries, which includes Capital Bank, National Association or “Capital Bank, N.A.” (formerly known as NAFH National Bank), a national banking association (which we refer to as “Capital Bank”), TIB Financial Corp. (which we refer to as “TIB Financial”), Capital Bank Corporation (which we refer to as “Capital Bank Corp.”) and Green Bankshares, Inc. (which we refer to as “Green Bankshares”). In addition, references to “Southern Community Financial” refer to Southern Community Financial Corporation. References to the “Failed Banks” refer to First National Bank of the South in Spartanburg, South Carolina (which we refer to as “First National Bank”), Metro Bank of Dade County in Miami, Florida (which we refer to as “Metro Bank”) and Turnberry Bank in Aventura, Florida (which we refer to as “Turnberry Bank”).
References to “Old Capital Bank” refer to Capital Bank Corp.’s banking subsidiary prior to June 30, 2011, the date on which NAFH National Bank merged with Old Capital Bank and changed its name to Capital Bank, National Association. References to our “common stock” refer together to the CBF Class A common stock, par value $0.01 per share, and Class B non-voting common stock, par value $0.01 per share. References to “Capital Bank Corp. common stock” refer to the common stock, no par value, of Capital Bank Corp.
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The following are some questions that you, as a shareholder of Capital Bank Corp., may have regarding the merger and the other matters to be considered at the special meeting. We urge you to read carefully the remainder of this document because the information in this section does not provide all the information that might be important to you with respect to the merger and the other matters being considered at the special meeting. Additional important information is also contained in the appendices to this document.
Q: | Why am I receiving this document? |
A: | The Boards of Directors of CBF and Capital Bank Corp. have each adopted the merger agreement under which Capital Bank Corp. will merge with and into CBF. The merger is being proposed as part of a corporate reorganization of CBF in which, substantially concurrent with the completion of the merger, CBF expects to complete mergers with its other bank holding company subsidiaries. |
As a result of the merger, shareholders of Capital Bank Corp. who do not properly exercise their appraisal rights will have their shares of Capital Bank Corp. common stock converted into shares of CBF Class A common stock. Additional terms of the merger agreement are described in this document, and a copy of the merger agreement is attached to this document as Appendix A. You should read this document carefully because it contains important information about the merger. |
In order to complete the merger, Capital Bank Corp. shareholders must vote to approve the merger proposal. |
Capital Bank Corp, is holding a special meeting to obtain this approval. This document contains important information about the merger and the special meeting, and you should read it carefully. The enclosed proxy materials allow you to vote your shares without attending the special meeting. |
You are also being asked to vote on a proposal to approve, on a (non-binding) advisory basis, certain compensation payable to Capital Bank Corp.’s named executive officers that is based on or otherwise relates to the merger (which we refer to as the “named executive officer merger-related compensation proposal”). |
We encourage you to vote as soon as possible. |
Q: | When and where will the meeting be held? |
A: | The special meeting of Capital Bank Corp. shareholders is scheduled to be held at 8:30 a.m., local time, on September 24, 2012 at Capital Bank Financial Corp., located at 4725 Piedmont Row Drive, Suite 110, Charlotte, NC 28210. |
Q: | How do I vote? |
A: | You may vote shares by proxy or in person using one of the following methods: |
• | Voting by Telephone. You may vote using the directions on your proxy card by calling the toll-free telephone number printed on the card. The deadline for voting by telephone is September 24, 2012 at 12:01 a.m., Eastern Time. If you received a proxy card and vote by telephone, you need not return your proxy card. |
• | Voting by Internet. You may vote over the Internet using the directions on your proxy card by accessing the website address printed on the card. The deadline for voting over the Internet is September 24, 2012, at 12:01 a.m., Eastern Time. If you received a proxy card and vote over the Internet, you need not return your proxy card. |
• | Voting by Proxy Card. You may vote by completing and returning your signed proxy card. To vote using your proxy card, please mark, date and sign the card and return it by mail in the accompanying postage-paid envelope. You should mail your signed proxy card sufficiently in advance for it to be received by September 21, 2012. |
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• | Voting in Person. You may vote in person at the special meeting if you are the record owner of the shares to be voted. You can also vote in person at the special meeting if you present a properly signed proxy that authorizes you to vote shares on behalf of the record owner. |
Q: | How does the Capital Bank Corp. Board of Directors recommend that I vote? |
A: | The Capital Bank Corp. Board of Directors unanimously recommends that holders of Capital Bank Corp. common stock vote “FOR” the merger proposal and “FOR” the named executive officer merger-related compensation proposal. The Capital Bank Corp. Board of Directors includes seven members, five of whom are currently directors, executive officers or employees of CBF and two of whom have agreed to join the CBF Board of Directors. The Capital Bank Corp. Board of Directors represents the interests of both CBF and the other shareholders of Capital Bank Corp. |
Q: | What vote is required to adopt each proposal? |
A: | The approval of the merger proposal requires the affirmative vote of holders of a majority of the outstanding shares of common stock of Capital Bank Corp. entitled to vote on the proposal. The named executive officer merger-related compensation proposal requires the affirmative vote of holders of a majority of the shares of Capital Bank Corp. common stock entitled to vote on the proposal present or represented by proxy at the special meeting. |
CBF, which holds approximately 83% of the Capital Bank Corp. common stock, has indicated that it plans to vote in favor of both proposals at the special meeting. Accordingly, the merger proposal and the named executive officer merger-related compensation proposal are both expected to pass even if all shareholders of Capital Bank Corp. other than CBF vote against these proposals. |
As of the record date for the Capital Bank Corp. special meeting, the directors and executive officers of Capital Bank Corp. as a group owned and were entitled to vote 71,767,129 shares of the common stock of Capital Bank Corp., or approximately 83.65% of the outstanding shares of the common stock of Capital Bank Corp. on that date. Capital Bank Corp. currently expects that its directors and executive officers will vote their shares in favor of adoption of the merger agreement. |
Q: | What will happen if I fail to vote or if I abstain from voting? |
A: | Your failure to vote, or failure to instruct your broker, bank or nominee to vote, will have the same effect as a vote against the merger proposal, but will have no effect on the named executive officer merger-related compensation proposal. Your abstention from voting will have the same effect as a vote against the merger proposal and the named executive officer merger-related compensation proposal. |
Q: | What constitutes a quorum? |
A: | A quorum will be present at the special meeting if the holders of a majority of the outstanding shares of the common stock of Capital Bank Corp. entitled to vote on the record date are present, in person or by proxy. |
Q: | If my shares are held in street name by my broker, bank or other nominee? |
A: | If your shares are held in the name of a broker, bank or other nominee, you will receive instructions from the holder of record. You must follow the instructions of the holder of record in order for your shares to be voted. If your shares are not registered in your own name and you plan to vote your shares in person at the special meeting, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the special meeting in order to vote. |
If you hold your shares in “street name” through a broker, bank or other nominee, the broker, bank or other nominee may not be permitted to exercise voting discretion with respect to the matters to be acted upon. Thus, if you do not give your broker, bank or other nominee specific instructions, your shares may not be voted on those matters and will not be counted in determining the number of shares necessary for approval. |
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Q: | What will happen if I return my proxy card without indicating how to vote? |
A: | If you sign and return your proxy card without indicating how to vote on any particular proposal, the Capital Bank Corp. common stock represented by your proxy will be voted in favor of that proposal. |
Q: | Can I change my vote? |
A: | Yes. You may revoke any proxy at any time before it is voted by (1) attending the special meeting and voting in person, (2) delivering a written revocation letter to Capital Bank Corp.’s corporate secretary, (3) timely submitting another signed proxy card bearing a later date or (4) timely voting again by telephone or Internet. Attendance at the special meeting will not automatically revoke your proxy. A revocation or later-dated proxy received by Capital Bank Corp. after the vote will not affect the vote. If you hold your stock in “street name” through a bank or broker, you should contact your bank or broker to revoke your proxy. |
Q: | What will I receive in the merger? |
A: | Following the completion of the merger, you will receive 0.1354 shares of CBF Class A common stock for each share of Capital Bank Corp. common stock that you hold on the effective date of the merger. The exchange ratio will not be adjusted as a result of any changes in the trading prices of CBF common stock or Capital Bank Corp. common stock. CBF will not issue fractional shares of its Class A common stock in the merger. You will receive cash based on the market price of CBF Class A common stock following CBF’s initial public offering. The value of the consideration you receive will depend on the value of CBF Class A common stock and, because there is no minimum consideration that Capital Bank Corp. shareholders must receive, it is possible that the consideration received in exchange for each share of Capital Bank Corp. common stock could be less than the market value of such share of Capital Bank Corp. common stock prior to the merger. |
For a more complete description of how fractional shares will be treated in the merger, see “The Merger Agreement—Structure of the Merger.” |
Q: | How was the exchange ratio determined? |
A: | The exchange ratio is based on the relative pro forma tangible book values per share of CBF and Capital Bank Corp. as of June 30, 2011. Pro forma tangible book value is equal to reported book value less allocated goodwill and core deposit intangibles, net of related deferred tax liabilities, and reflects the pro forma effect of CBF’s controlling investment in Green Bankshares and the merger of GreenBank with and into Capital Bank. As of June 30, 2012, CBF’s reported tangible book value per share was $17.69, and its pro forma tangible book value, which reflects the pro forma effect or the completion of CBF’s pending acquisition of Southern Community Financial and the reorganization, per share was $17.09. The reported tangible book value per share of Capital Bank Corp. was $2.30, and its pro forma tangible book value per share was $2.31. |
Sterne, Agee & Leach, Inc., an investment banking firm (which we refer to as “Sterne Agee”), has concluded that, subject to the assumptions, limitations and qualifications contained in the fairness opinion, as of the date of the fairness opinion, the consideration to be received in the merger is fair to you, from a financial point of view. See “The Merger—Fairness Opinion from Sterne Agee.” |
Q: | What are the U.S. federal income tax consequences of the merger to Capital Bank Corp. shareholders? |
A: | The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (which we refer to as “the Code”), and holders of Capital Bank Corp. common stock are not expected to recognize any gain or loss for United States federal income tax purposes on the exchange of shares of Capital Bank Corp. common stock for shares of CBF Class A common stock in the merger, except with respect to any cash received instead of fractional shares of CBF Class A common stock. See “Material U.S. Federal Income Tax Consequences of the Merger.” |
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Q: | Why have Capital Bank Corp. and CBF adopted the merger agreement? |
A: | Capital Bank Corp. and CBF believe that the merger will provide substantial benefits to Capital Bank Corp. shareholders. Substantially concurrent with the merger, CBF also expects to complete mergers with its other bank holding company subsidiaries, which will result in CBF’s having a single directly and wholly owned bank subsidiary, Capital Bank, N.A. The benefits of the merger to CBF’s and Capital Bank Corp.’s shareholders include: |
• | Capital Bank Corp. shareholders will hold shares in CBF, which is expected to have a significantly larger market capitalization and substantially greater trading volume in its stock following the merger than Capital Bank Corp. had prior to the merger; and |
• | consolidation of CBF’s bank holding company subsidiaries, including Capital Bank Corp., into CBF is expected to lower costs by eliminating the costs associated with the separate corporate existence (and therefore the need to prepare separate financial statements) and public company status of CBF’s bank holding company subsidiaries, including Capital Bank Corp. |
For information on the background of the merger, see “The Merger—Background and Reasons for the Merger.” |
Q: | Am I entitled to appraisal rights? |
A: | Yes. Under North Carolina law, holders of Capital Bank Corp. common stock who perfect their appraisal rights in accordance with applicable law will have appraisal rights, also referred to as dissenters’ rights, as a result of the merger. Failure to follow the applicable procedures described in this document will result in the loss of appraisal rights. See “The Merger—Dissenters’ or Appraisal Rights.” Please see Appendix C for the text of the applicable provisions of the North Carolina Business Corporation Act as in effect with respect to the merger. |
Q: | What do I need to do now? |
A: | After you have carefully read this document and have decided how you wish to vote your shares, please vote your shares promptly so that your shares are represented and voted at the special meeting. If you hold stock in your name as a shareholder of record, you must complete, sign, date and mail your proxy card in the enclosed postage-paid return envelope as soon as possible, or call the toll-free telephone number or use the Internet as described in the instructions included with your proxy card or voting instruction card. If you hold your stock in “street name” through a bank or broker, you must direct your bank or broker to vote in accordance with the instructions you have received from your bank or broker. “Street name” shareholders who wish to vote at the special meeting will need to obtain a proxy form from the institution that holds their shares. |
Q: | When do you expect the merger to be completed? |
A: | We expect to complete the merger substantially concurrent with the completion of the CBF initial public offering. We currently anticipate the completion of the merger to occur in the second half of 2012. While the merger agreement does not contain conditions to the completion of the merger, the timing of the merger may change based on the timing of CBF’s initial public offering and the timing of CBF’s planned mergers with its other bank holding company subsidiaries. CBF may choose to complete the merger even if it does not complete its initial public offering. |
Q: | Should I send in my Capital Bank Corp. stock certificates now? |
A: | No. Capital Bank Corp. shareholders should not send in any stock certificates now. After the merger is completed, CBF’s exchange agent will send you written instructions and a letter of transmittal explaining |
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what you must do to exchange your Capital Bank Corp. stock certificates for the merger consideration payable to you. The shares of CBF Class A common stock you receive in the merger will be issued in book-entry form. |
Q: | What should I do if I hold my shares of Capital Bank Corp. common stock in book-entry form? |
A: | You are not required to take any specific actions if your shares of Capital Bank Corp. common stock are held in book-entry form. After the completion of the merger, shares of Capital Bank Corp. common stock held in book-entry form will automatically be exchanged for shares of CBF Class A common stock in book-entry form and cash to be paid instead of fractional shares of CBF Class A common stock. |
Q: | May I place my Capital Bank Corp. stock certificate(s) into book-entry form prior to the merger? |
A: | Yes. Capital Bank Corp. stock certificates may be placed into book-entry form prior to the merger. For more information, please contact Registrar and Transfer Company at 800-368-5948. |
Q: | Where can I find more information about Capital Bank Corp. and CBF? |
A: | More information about each company is available from sources described under “Additional Information” on page (i). |
Q: | Are there risks associated with the merger? |
A: | Yes. You should read carefully the section entitled “Risk Factors” beginning on page 22. |
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This summary highlights material information from this document. We urge you to carefully read the entire document and the other documents to which we refer in order to fully understand the merger and your rights as a Capital Bank Corp. shareholder. See “Additional Information” on page (i). Each item in this summary refers to the page of this document on which that subject is discussed in more detail.
Information About CBF and Capital Bank Corp. (see pages 71 and 174, respectively)
CBF
CBF is a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. CBF was founded by a group of experienced bankers with a record of leading, operating, acquiring and integrating financial institutions. In December 2009 and January and July 2010, CBF raised approximately $900 million to make acquisitions through a series of private placements of its common stock. On June 24, 2011, CBF filed a registration statement with the SEC related to its proposed initial public offering of up to $300 million of its Class A common stock.
Since its founding, CBF has acquired six depository institutions, including the assets and certain deposits of three failed banks from the FDIC, and operates branches located in North Carolina, South Carolina, Florida, Tennessee and Virginia. CBF expects to complete the acquisition of a seventh institution through its acquisition of Southern Community Financial in the second half of 2012. Through its branches, CBF offers a wide range of commercial and consumer loans and deposits, as well as ancillary financial services. CBF’s banking business is primarily conducted through its indirect-majority held subsidiary, Capital Bank, N.A.
Substantially concurrent with the completion of the merger, CBF expects to complete mergers with its other bank holding company subsidiaries, which will result in CBF’s having a single directly and wholly owned bank subsidiary, Capital Bank, N.A.
CBF’s principal executive offices are located at 121 Alhambra Plaza, Suite 1601, Coral Gables, Florida 33134 and its telephone number is (305) 670-0200.
Capital Bank Corp.
Capital Bank Corp. is a bank holding company headquartered in Raleigh, North Carolina. CBF is the owner of approximately 83% of the common stock of Capital Bank Corp. In addition, five of the seven directors of Capital Bank Corp., and Capital Bank Corp.’s Chief Executive Officer, Chief Financial Officer and Chief Risk Officer are affiliated with CBF. Because Capital Bank Corp.’s assets consist primarily of approximately 26% of the capital stock of Capital Bank, N.A., which is also the principal business operated by CBF, the business of Capital Bank Corp. is described above under the heading “CBF” and under the heading “Information About CBF.”
Capital Bank Corp.’s principal executive offices are located at 333 Fayetteville Street, Suite 700, Raleigh, North Carolina 27601 and its phone number is (919) 645-6400.
The merger agreement provides for the merger of Capital Bank Corp. with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of Capital Bank Corp. common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or Capital Bank Corp., will be converted into the right to
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receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of Capital Bank Corp. common stock will be entitled to receive cash in lieu thereof.
On January 28, 2011, CBF invested $181.1 million in Capital Bank Corp. at a per share purchase price of $2.55 and received 84.6% of the then outstanding Capital Bank Corp. common stock. Also, in connection with CBF’s investment in Capital Bank Corp., each shareholder of Capital Bank Corp. as of January 27, 2011 received one contingent value right per share owned as of such date. These contingent value rights could result in payments to these Capital Bank Corp. shareholders in the aggregate of between $0 and $9.7 million (or $0 to $0.75 per share). The management of Capital Bank Corp. currently believes that these Capital Bank Corp. shareholders are not likely to receive any payment under the contingent value rights. The stock consideration issued in the merger would, assuming that CBF Class A common stock trades at values between $21 and $23 per share following the merger (which is the estimated public offering price per share in the initial public offering), have a value between $2.84 and $3.11 per share of Capital Bank Corp. common stock.
Recommendation of the Board of Directors of Capital Bank Corp. (see page 175)
The Capital Bank Corp. Board of Directors unanimously recommends that holders of Capital Bank Corp. common stock vote “FOR” the merger proposal and “FOR” the named executive officer merger-related compensation proposal. For a more complete description of Capital Bank Corp.’s reasons for the merger and the recommendation of its Board of Directors, see “The Merger—Background and Reasons for the Merger.” For a discussion of the interests of Capital Bank Corp.’s directors and executive officers in the merger that may be different from, or in addition to, the interests of Capital Bank Corp.’s shareholders generally, see “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger.”
Opinion of Sterne Agee (see Appendix B)
Capital Bank Corp. retained Sterne Agee to render an opinion to Capital Bank Corp. in connection with the merger. On August 31, 2011, Sterne Agee delivered its written opinion to Capital Bank Corp.’s board of directors that, as of such date, and based upon and subject to factors and assumptions set forth therein, the consideration to be received in the merger was fair, from a financial point of view, to the shareholders of Capital Bank Corp. The full text of Sterne Agee’s written opinion, dated August 31, 2011, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken, in connection with the opinion, is attached as Appendix B to this document and is incorporated herein by reference. You are encouraged to read the opinion and the description beginning on pages B-1 and 55, respectively, carefully and in their entirety.
Interests of Capital Bank Corp. Directors and Executive Officers in the Merger (see page 54)
Some of Capital Bank Corp.’s directors and executive officers have interests in the merger that are different from or in addition to, the interests of Capital Bank Corp.’s shareholders generally. The Capital Bank Corp. board of directors was aware of and considered these interests, among other matters, in evaluating the merger agreement and the merger and recommending that shareholders approve the merger.
Following the consummation of the merger, certain members of the Capital Bank Corp. board of directors will be directors of CBF and certain executive officers will continue as executive officers of CBF.
Dissenters’ or Appraisal Rights (see page 59)
Holders of shares of Capital Bank Corp. common stock who perfect their appraisal rights under North Carolina law will have appraisal rights, also referred to as dissenters’ rights, as a result of the merger. The procedures required to prefect appraisal rights are described in this document, and a copy of Article 13 of the North Carolina Business Corporation Act, which grants appraisal rights and governs such procedures, is attached as Appendix C to this document. See “The Merger—Dissenters’ or Appraisal Rights.”
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Regulatory Approvals Required for the Merger (see page 64)
We are not aware of any material regulatory requirements applicable to the merger under any U.S. state or federal law or regulation, other than any requirements under applicable federal and state securities laws and regulations and North Carolina and Delaware corporate law.
Accounting Treatment of the Merger (see page 65)
The merger will be accounted for as a “purchase” of a noncontrolling interest, as such term is used under generally accepted accounting principles (which we refer to as “GAAP”), for accounting and financial reporting purposes.
Treatment of Capital Bank Corp. Stock Options (see page 66)
At the effective time of the merger, each option to purchase Capital Bank Corp. common stock granted by Capital Bank Corp. that is then outstanding will be converted automatically into an option for shares of CBF Class A common stock, subject to the same terms and conditions that applied to the Capital Bank Corp. option before the effective time of the merger. The number of shares of CBF Class A common stock subject to these stock options, and the exercise price of the Capital Bank Corp. stock options, will be adjusted based on the exchange ratio of 0.1354.
Material U.S. Federal Income Tax Consequences of the Merger (see page 68)
The merger is intended to be treated as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, the merger generally will be tax-free to a holder of Capital Bank Corp. common stock for United States federal income tax purposes as to the shares of CBF Class A common stock he or she receives in the merger, except for any gain or loss that may result from the receipt of cash instead of fractional shares of CBF Class A common stock that such holder of Capital Bank Corp. common stock would otherwise be entitled to receive. See “Material U.S. Federal Income Tax Consequences of the Merger.”
The United States federal income tax consequences described above may not apply to all holders of Capital Bank Corp. common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the merger to you.
Comparison of Shareholder Rights (see page 221)
Capital Bank Corp. is a North Carolina corporation. CBF is a Delaware corporation. The shares of Class A common stock that you will receive in the merger will be shares of a Delaware corporation. Capital Bank Corp. shareholder rights under North Carolina law and CBF shareholder rights under Delaware law are different. In addition, CBF’s certificate of incorporation and bylaws contain provisions that are different from those in Capital Bank Corp.’s articles of incorporation and bylaws.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CBF
The following table sets forth our selected historical consolidated financial information. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this document. The summary historical consolidated financial information set forth below as of June 30, 2012 and for the six months ended June 30, 2012 and 2011 has been derived from our unaudited consolidated financial statements included elsewhere in this document. The summary historical consolidated financial information set forth below as of June 30, 2011 has been derived from our unaudited consolidated financial statements which are not included in this document. The selected historical consolidated financial information set forth below as of and for the years ended December 31, 2011 and December 31, 2010 and for the period from November 30, 2009 (date of inception) through December 31, 2009 is derived from our audited consolidated financial statements included elsewhere in this document.
On July 16, 2010, we purchased certain assets and assumed certain liabilities, including substantially all deposits, of First National Bank, Metro Bank and Turnberry Bank from the FDIC, as receiver. On September 30, 2010, January 28, 2011 and September 7, 2011, we consummated controlling investments in TIB Financial, Capital Bank Corp. and Green Bankshares, respectively. On March 26, 2012, we agreed to acquire all of the common equity interest in Southern Community Financial. Our acquisition of Southern Community Financial is subject to Southern Community Financial stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the second half of 2012. Although we were formed in November 2009, our activities prior to our first acquisition consisted solely of organizational, capital raising and related activities and activities related to identifying and analyzing potential acquisition candidates. We did not engage in any substantive operations (including banking operations) prior to our first acquisition. We have omitted certain historical financial information of First National Bank, Metro Bank and Turnberry Bank required by Rule 3-05 of Regulation S-X and the related pro forma financial information under Article 11 of Regulation S-X pursuant to the guidance provided in Staff Accounting Bulletin Topic 1:K,Financial Statements of Acquired Troubled Financial Institutions(“SAB 1:K”) and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances where a registrant engages in an acquisition of a troubled financial institution in which federal assistance is an essential and significant part of the transaction and for which audited financial statements are not reasonably available.
The selected historical consolidated financial information presented in the following tables as of and for the year ended December 31, 2011 includes our results, including First National Bank, Metro Bank, Turnberry Bank and TIB Financial as well as the results of Capital Bank Corp. subsequent to January 28, 2011 and Green Bankshares subsequent to September 7, 2011.
The selected historical consolidated financial information in the following tables as of and for the six months ended June 30, 2012 includes our results, including First National Bank, Metro Bank, Turnberry Bank, TIB Financial, Capital Bank Corp and Green Bankshares. The selected historical consolidated financial information presented in the following tables as of and for the six months ended June 30, 2011 includes our results, including First National Bank, Metro Bank, Turnberry Bank and TIB Financial as well as the results of Capital Bank Corp. subsequent to January 28, 2011.
Because substantially all of our business is composed of acquired operations and because the operations of each acquired business were substantially changed in connection with its acquisition, our results of operations reflect different operations in different periods (or portions of periods) and therefore cannot be meaningfully compared. In addition, results of operations for these periods reflect, among other things, the acquisition method of accounting. Under the acquisition method of accounting, all of the assets acquired and liabilities assumed were initially recorded on our consolidated balance sheet at their estimated fair values as of the dates of acquisition. These estimated fair values differed substantially from the carrying amounts of the assets acquired and liabilities assumed as reflected in the financial statements of the Failed Banks, TIB Financial, Capital Bank Corp. and Green Bankshares immediately prior to the respective acquisitions.
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(Dollars in thousands, except per share data) | As of and for the Six Months Ended June 30, 2012 | As of and for the Six Months Ended June 30, 2011 | As of and for Year Ended December 31, 2011 | As of and for Year Ended December 31, 2010 | As of December 31, 2009 and for the Period From November 30 Through December 31, 2009 | |||||||||||||||
Summary Results of Operations | ||||||||||||||||||||
Interest and dividend income | $ | 147,034 | $ | 89,848 | $ | 227,912 | $ | 42,745 | $ | 72 | ||||||||||
Interest expense | 19,837 | 16,325 | 36,592 | 6,234 | – | |||||||||||||||
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Net interest income | 127,197 | 73,523 | 191,320 | 36,511 | 72 | |||||||||||||||
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Provision for loan losses | 11,984 | 9,760 | 38,396 | 753 | – | |||||||||||||||
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Net interest income after provision for loan losses | 115,213 | 63,763 | 152,924 | 35,758 | 72 | |||||||||||||||
Non-interest income | 26,681 | 12,400 | 41,227 | 19,615 | – | |||||||||||||||
Non-interest expense | 121,546 | 72,525 | 182,195 | 44,377 | 214 | |||||||||||||||
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Income (loss) before income taxes | 20,348 | 3,638 | 11,956 | 10,996 | (142 | ) | ||||||||||||||
Income tax expense (benefit) | 7,812 | 1,258 | 4,434 | (1,041 | ) | (50 | ) | |||||||||||||
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Net income (loss) before attribution of noncontrolling interests | 12,536 | 2,380 | 7,552 | 12,037 | (92 | ) | ||||||||||||||
Net income (loss) attributable to noncontrolling interests | 1,772 | 394 | 1,310 | 7 | – | |||||||||||||||
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Net income (loss) attributable to Capital Bank Financial Corp. | $ | 10,764 | $ | 1,986 | $ | 6,212 | $ | 12,030 | $ | (92 | ) | |||||||||
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Summary Balance Sheet Data | ||||||||||||||||||||
Cash and cash equivalents | $ | 229,020 | $ | 526,131 | $ | 709,963 | $ | 886,925 | $ | 526,711 | ||||||||||
Investment securities | 1,162,729 | 862,085 | 826,911 | 479,716 | – | |||||||||||||||
Loans held for sale | 12,451 | 4,713 | 20,746 | 9,690 | – | |||||||||||||||
Loans receivable: | ||||||||||||||||||||
Not covered under FDIC loss sharing agreements | 3,716,744 | 2,348,159 | 3,731,125 | 1,046,463 | – | |||||||||||||||
Covered under FDIC loss sharing agreements. | 461,820 | 621,931 | 550,592 | 696,284 | – | |||||||||||||||
Allowance for loan losses | (45,472 | ) | (7,486 | ) | (34,749 | ) | (753 | ) | – | |||||||||||
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Net loans | 4,133,092 | 2,962,604 | 4,246,968 | 1,741,994 | – | |||||||||||||||
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Other real estate owned | 158,235 | 77,887 | 168,781 | 70,817 | – | |||||||||||||||
FDIC indemnification asset | 60,750 | 72,747 | 66,282 | 91,467 | – | |||||||||||||||
Receivable from FDIC | 9,699 | 22,652 | 13,315 | 46,585 | – | |||||||||||||||
Goodwill and intangible assets, net | 140,367 | 105,504 | 142,652 | 51,878 | – | |||||||||||||||
Other assets | 397,541 | 238,151 | 390,762 | 117,919 | 50 | |||||||||||||||
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Total assets | $ | 6,303,884 | $ | 4,872,474 | $ | 6,586,380 | $ | 3,496,991 | $ | 526,761 | ||||||||||
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Deposits | 4,980,228 | 3,501,423 | 5,125,184 | 2,260,097 | – | |||||||||||||||
Advances from FHLB | 67,520 | 244,939 | 221,018 | 243,067 | – | |||||||||||||||
Borrowings | 190,254 | 133,985 | 194,634 | 84,856 | – | |||||||||||||||
Other liabilities | 48,199 | 39,393 | 54,634 | 27,735 | 441 | |||||||||||||||
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Total liabilities | 5,286,201 | 3,919,740 | 5,595,470 | 2,615,755 | 441 | |||||||||||||||
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Shareholders’ equity | 1,017,683 | 952,734 | 990,910 | 881,236 | 526,320 | |||||||||||||||
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Total liabilities and shareholders’ equity | $ | 6,303,884 | $ | 4,872,474 | $ | 6,586,380 | $ | 3,496,991 | $ | 526,761 | ||||||||||
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(Dollars in thousands, except per share data) | As of and for the Six Months Ended June 30, 2012 | As of and for the Six Months Ended June 30, 2011 | As of and for Year Ended December 31, 2011 | As of and for Year Ended December 31, 2010 | As of December 31, 2009 and for the Period From November 30 Through December 31, 2009 | |||||||||||||||
Per Share Data | ||||||||||||||||||||
Earnings | ||||||||||||||||||||
Basic | $ | 0.24 | $ | 0.04 | $ | 0.14 | $ | 0.31 | $ | (0.01 | ) | |||||||||
Diluted | $ | 0.24 | $ | 0.04 | $ | 0.14 | $ | 0.31 | $ | (0.01 | ) | |||||||||
Tangible book value(1) | $ | 17.69 | $ | 17.70 | $ | 17.25 | $ | 18.39 | $ | 18.86 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||
Basic | 45,182,675 | 45,120,175 | 45,121,716 | 38,205,677 | 8,243,830 | |||||||||||||||
Diluted | 45,553,675 | 45,270,175 | 45,383,716 | 38,205,677 | 8,243,830 | |||||||||||||||
Common shares outstanding | 46,456,561 | 46,149,998 | 46,149,998 | 45,120,175 | 27,906,524 | |||||||||||||||
Performance Ratios | ||||||||||||||||||||
Return on average assets | 0.39 | % | 0.10 | % | 0.14 | % | 0.76 | % | (0.64 | )% | ||||||||||
Return on average equity | 2.51 | % | 0.51 | % | 0.79 | % | 1.67 | % | (0.64 | )% | ||||||||||
Net interest margin | 4.54 | % | 3.63 | % | 4.05 | % | 2.51 | % | 0.50 | % | ||||||||||
Interest rate spread | 4.39 | % | 3.42 | % | 3.86 | % | 2.14 | % | 0.50 | % | ||||||||||
Efficiency ratio(2) | 78.99 | % | 84.41 | % | 78.35 | % | 79.07 | % | NM | |||||||||||
Average interest-earning assets to average interest-bearing liabilities | 121.17 | % | 126.52 | % | 124.46 | % | 186.59 | % | NA | |||||||||||
Average loans receivable to average deposits | 83.05 | % | 83.25 | % | 83.87 | % | 79.59 | % | NA | |||||||||||
Cost of interest-bearing liabilities | 0.85 | % | 1.01 | % | 0.96 | % | 0.80 | % | NA | |||||||||||
Asset Quality | ||||||||||||||||||||
Non-performing loans to loans receivable(3) | ||||||||||||||||||||
Not covered under loss sharing agreements with the FDIC | 6.12 | % | 6.16 | % | 6.00 | % | 3.25 | % | NA | |||||||||||
Covered under loss sharing agreements with the FDIC | 2.24 | % | 4.43 | % | 2.89 | % | 7.88 | % | NA | |||||||||||
Total non-performing loans to loans receivable | 8.36 | % | 10.59 | % | 8.89 | % | 11.12 | % | NA | |||||||||||
Non-performing assets to total assets | ||||||||||||||||||||
Not covered under loss sharing agreements with the FDIC | 5.89 | % | 4.44 | % | 5.82 | % | 2.28 | % | NA | |||||||||||
Covered under loss sharing agreements with the FDIC | 2.22 | % | 3.70 | % | 2.59 | % | 5.37 | % | NA | |||||||||||
Total non-performing assets to total assets | 8.11 | % | 8.14 | % | 8.41 | % | 7.65 | % | NA | |||||||||||
Allowance for loan losses to non-performing loans | ||||||||||||||||||||
Not covered under loss sharing agreements with the FDIC | 12.04 | % | 2.65 | % | 8.88 | % | 1.33 | % | NA | |||||||||||
Covered under loss sharing agreements with the FDIC | 15.58 | % | 2.14 | % | 9.51 | % | NA | NA | ||||||||||||
Total allowance for loan losses to non-performing loans | 12.98 | % | 2.44 | % | 9.08 | % | 0.39 | % | NA | |||||||||||
Capital Ratios | ||||||||||||||||||||
Average equity to average total assets | 15.56 | % | 20.18 | % | 17.97 | % | 45.51 | % | 99.79 | % | ||||||||||
Tangible common equity(4) | 14.23 | % | 17.77 | % | 13.16 | % | 24.08 | % | 99.92 | % | ||||||||||
Tier 1 leverage | 13.74 | % | 17.66 | % | 12.55 | % | 24.30 | % | NM | |||||||||||
Tier 1 risk-based capital | 19.87 | % | 30.17 | % | 19.31 | % | 41.80 | % | NM | |||||||||||
Total risk-based capital | 21.04 | % | 30.62 | % | 20.24 | % | 41.90 | % | NM |
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(1) | We calculate tangible book value, which is a non-GAAP measure but which we believe is helpful to investors in understanding our business. Tangible book value is equal to book value less goodwill and core deposit intangibles, net of related deferred tax liabilities. The following table sets forth a reconciliation of tangible book value to book value, which is the most directly comparable GAAP measure: |
(Dollars in thousands, except per share data) | As of and for the Six Months Ended June 30, 2012 | As of and for the Six Months Ended June 30, 2011 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||
Total shareholders’ equity | $ | 1,017,683 | $ | 952,734 | $ | 990,910 | $ | 881,236 | $ | 526,320 | ||||||||||
Less: Noncontrolling interest | (76,610 | ) | (48,846 | ) | (74,505 | ) | (5,933 | ) | – | |||||||||||
Less: CBF Corp. proportional share of goodwill(*) | (105,526 | ) | (76,594 | ) | (105,526 | ) | (36,226 | ) | – | |||||||||||
Less: CBF Corp. proportional share of core deposit intangibles, net of taxes(*) | (13,571 | ) | (10,294 | ) | (14,841 | ) | (9,217 | ) | – | |||||||||||
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Tangible Book Value | $ | 821,976 | $ | 817,000 | $ | 796,038 | $ | 829,860 | $ | 526,320 | ||||||||||
Book Value Per Share | $ | 20.26 | $ | 19.59 | $ | 19.86 | $ | 19.40 | $ | 18.86 | ||||||||||
Tangible Book Value Per Share | $ | 17.69 | $ | 17.70 | $ | 17.25 | $ | 18.39 | $ | 18.86 |
(*) | Proportional share is calculated based upon our ownership of TIB Financial, Capital Bank Corp. and Green Bankshares at each respective period. |
(2) | We calculate our efficiency ratio by dividing non-interest expense by the sum of net interest income and non-interest income. |
(3) | Non-performing loans include non-accrual loans and loans past due over 90 days that retain accrual status due to accretion of income on purchased credit-impaired loans (which we refer to as “PCI loans”). |
(4) | The tangible common equity ratio is a non-GAAP measure which we believe provides investors with information useful in understanding our financial performance and, specifically, our capital position. The tangible common equity ratio is calculated as tangible common equity (calculated in accordance with the Order of the FDIC, dated July 16, 2010 and amended on December 21, 2011 (which we refer to as the “FDIC Order”)) by tangible assets. Tangible common equity is calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net and tangible assets are total assets less goodwill and other intangible assets, net. The following table provides reconciliations of tangible common equity to GAAP total common shareholders’ equity and tangible assets to GAAP total assets: |
(Dollars in thousands) | As of and for the Six Months Ended June 30, 2012 | As of and for the Six Months Ended June 30, 2011 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||
Shareholders’ equity | $ | 1,017,683 | $ | 952,734 | $ | 990,910 | $ | 881,236 | $ | 526,320 | ||||||||||
Less: Preferred stock | – | – | – | – | – | |||||||||||||||
Less: Goodwill and other intangible assets, net | (140,367 | ) | (105,504 | ) | (142,652 | ) | (51,878 | ) | – | |||||||||||
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Tangible common shareholders’ equity | $ | 877,316 | $ | 847,230 | $ | 848,258 | $ | 829,358 | $ | 526,320 | ||||||||||
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Total assets | $ | 6,303,884 | $ | 4,872,474 | $ | 6,586,380 | $ | 3,496,991 | $ | 526,761 | ||||||||||
Less: Goodwill and other intangible assets, net | (140,367 | ) | (105,504 | ) | (142,652 | ) | (51,878 | ) | – | |||||||||||
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Tangible assets | 6,163,517 | 4,766,970 | $ | 6,443,728 | $ | 3,445,113 | $ | 526,761 | ||||||||||||
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Tangible common equity ratio | 14.23 | % | 17.77 | % | 13.16 | % | 24.07 | % | 99.92 | % | ||||||||||
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12
Table of Contents
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CAPITAL BANK CORP.
The following table sets forth selected historical consolidated financial information for Capital Bank Corp. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for Capital Bank Corp. and the consolidated financial statements for Capital Bank Corp. and the related notes thereto included elsewhere in this document. The selected historical consolidated financial information set forth below as of and for each of the years in the five year period ended December 31, 2011 is derived from the audited consolidated financial statements of Capital Bank Corp. of which 2009, 2008 and 2007 are not included in this document. The selected historical consolidated financial information set forth below as of and for the six months ended June 30, 2012 and 2011 is derived from the unaudited consolidated financial statements of Capital Bank Corp. of which June 30, 2011 is not included in this document.
Selected Balance Sheet Data
(Dollars in thousands) | Successor Company | Predecessor Company | ||||||||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||||||||||
2012 | 2011 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||
Selected Balance Sheet Data | ||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 985 | $ | 2,163 | $ | 12,477 | $ | 66,745 | $ | 29,513 | $ | 54,455 | $ | 40,172 | ||||||||||||||||
Investment securities | – | – | – | 223,292 | 245,492 | 278,138 | 259,116 | |||||||||||||||||||||||
Loans | – | – | – | 1,254,479 | 1,390,302 | 1,254,368 | 1,095,107 | |||||||||||||||||||||||
Allowance for loan losses | – | – | – | 36,061 | 26,081 | 14,795 | 13,571 | |||||||||||||||||||||||
Investment in and advance to Capital Bank, N.A. | 250,637 | 243,691 | 232,264 | – | – | – | – | |||||||||||||||||||||||
Intangible assets | – | – | – | 1,774 | 2,711 | 3,857 | 63,345 | |||||||||||||||||||||||
Total assets | 255,787 | 249,705 | 248,562 | 1,585,547 | 1,734,668 | 1,654,232 | 1,517,603 | |||||||||||||||||||||||
Deposits | – | – | – | 1,343,286 | 1,377,965 | 1,315,314 | 1,098,698 | |||||||||||||||||||||||
Borrowings and repurchase agreements | – | – | – | 121,000 | 173,543 | 147,010 | 208,642 | |||||||||||||||||||||||
Subordinated debentures | 19,274 | 19,163 | 19,036 | 34,323 | 30,930 | 30,930 | 30,930 | |||||||||||||||||||||||
Shareholders’ equity | 231,130 | 224,827 | 229,419 | 76,688 | 139,785 | 148,514 | 164,300 | |||||||||||||||||||||||
Tangible common equity(1) | 231,130 | 224,827 | 229,419 | 33,635 | 95,795 | 103,378 | 100,955 |
(1) | Tangible common equity is a non-GAAP measure calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net. |
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The following tables set forth the Company’s selected financial data for each period presented:
(Dollars in thousands) | Successor Company | Predecessor Company | ||||||||||||||||||||||||||||||||
Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | Year Ended Dec. 31, 2008 | Year Ended Dec. 31, 2007 | |||||||||||||||||||||||||||
Summary of Operations | ||||||||||||||||||||||||||||||||||
Interest income | $ | 170 | $ | 31,441 | $ | 31,271 | $ | 5,955 | $ | 77,722 | $ | 83,141 | $ | 85,020 | $ | 94,537 | ||||||||||||||||||
Interest expense | 731 | 6,528 | 5,811 | 1,996 | 26,759 | 34,263 | 42,424 | 50,423 | ||||||||||||||||||||||||||
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Net interest income | (561 | ) | 24,913 | 25,460 | 3,959 | 50,963 | 48,878 | 42,596 | 44,114 | |||||||||||||||||||||||||
Provision for loan losses | – | 1,450 | 1,450 | 40 | 58,545 | 23,064 | 3,876 | 3,606 | ||||||||||||||||||||||||||
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Net interest income (loss) after provision for loan losses | (561 | ) | 23,463 | 24,010 | 3,919 | (7,582 | ) | 25,814 | 38,720 | 40,508 | ||||||||||||||||||||||||
Noninterest income | 6,025 | 7,362 | 3,317 | 832 | 15,549 | 10,167 | 11,051 | 9,511 | ||||||||||||||||||||||||||
Noninterest expense | 414 | 25,277 | 25,026 | 4,155 | 54,309 | 49,810 | 106,662 | 39,037 | ||||||||||||||||||||||||||
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Net income (loss) before taxes | 5,050 | 5,548 | 2,301 | 596 | (46,342 | ) | (13,829 | ) | (56,891 | ) | 10,982 | |||||||||||||||||||||||
Income tax expense (benefit) | (319 | ) | 281 | 566 | – | 15,124 | (7,013 | ) | (1,207 | ) | 3,124 | |||||||||||||||||||||||
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Net income (loss) | 5,369 | 5,267 | 1,735 | 596 | (61,466 | ) | (6,816 | ) | (55,684 | ) | 7,858 | |||||||||||||||||||||||
Dividends and accretion on preferred stock | – | – | – | 861 | 2,355 | 2,352 | 124 | – | ||||||||||||||||||||||||||
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Net income (loss) attributable to common shareholders | $ | 5,369 | $ | 5,267 | $ | 1,735 | $ | (265 | ) | $ | (63,821 | ) | $ | (9,168 | ) | $ | (55,808 | ) | $ | 7,858 | ||||||||||||||
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Successor Company | Predecessor Company | |||||||||||||||||||||||||||||||||
Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | Year Ended Dec. 31, 2008 | Year Ended Dec. 31, 2007 | |||||||||||||||||||||||||||
Per Share Data | ||||||||||||||||||||||||||||||||||
Net income (loss) – basic | $ | 0.06 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | $ | (4.98 | ) | $ | (0.80 | ) | $ | (4.94 | ) | $ | 0.69 | ||||||||||||||
Net income (loss) – diluted | 0.06 | 0.06 | 0.02 | (0.02 | ) | (4.98 | ) | (0.80 | ) | (4.94 | ) | 0.68 | ||||||||||||||||||||||
Book value | 2.69 | 2.62 | 2.67 | NA | 2.75 | 8.68 | 9.54 | 14.71 | ||||||||||||||||||||||||||
Tangible book value | 2.30 | 2.23 | 2.25 | NA | 2.67 | 8.50 | 9.29 | 9.16 | ||||||||||||||||||||||||||
Common stock dividends | – | – | – | – | – | 0.32 | 0.32 | 0.32 | ||||||||||||||||||||||||||
Common shares outstanding | 85,802,164 | 85,802,164 | 85,802,164 | 12,877,846 | 12,877,846 | 11,348,117 | 11,238,085 | 11,169,777 | ||||||||||||||||||||||||||
Diluted shares outstanding | 85,802,164 | 85,649,203 | | 85,802,173 | | 13,188,612 | 12,810,905 | 11,470,314 | 11,302,769 | 11,492,728 | ||||||||||||||||||||||||
Basic shares outstanding | 85,802,164 | 85,649,203 | | 85,802,164 | | 13,188,612 | 12,810,905 | 11,470,314 | 11,302,769 | 11,424,171 | ||||||||||||||||||||||||
Performance Ratios | ||||||||||||||||||||||||||||||||||
Return on average shareholders’ equity | 4.71 | % | 2.54 | % | 0.76 | % | 9.12 | % | (47.86 | )% | (4.62 | )% | (32.93 | )% | 4.78 | % | ||||||||||||||||||
Return on average assets | 4.24 | % | 0.64 | % | 0.10 | % | 0.45 | % | (3.63 | )% | (0.40 | )% | (3.52 | )% | 0.54 | % | ||||||||||||||||||
Net interest margin(1) | (33.16 | )% | 4.13 | % | 4.23 | % | 3.09 | % | 3.27 | % | 3.14 | % | 3.07 | % | 3.52 | % | ||||||||||||||||||
Efficiency ratio(2) | 7.58 | % | 78.32 | % | 86.97 | % | 86.73 | % | 81.65 | % | 84.36 | % | 77.30 | % | 72.80 | % | ||||||||||||||||||
Capital Ratios | ||||||||||||||||||||||||||||||||||
Tangible equity to tangible assets | 90.36 | % | 90.04 | % | 92.30 | % | NA | 4.73 | % | 7.91 | % | 8.77 | % | 6.94 | % | |||||||||||||||||||
Tangible common equity to tangible assets | 90.36 | % | 90.04 | % | 92.30 | % | NA | 2.12 | % | 5.53 | % | 6.26 | % | 6.94 | % | |||||||||||||||||||
Average shareholders’ equity to average total assets | 90.17 | % | 25.22 | % | 13.53 | % | 4.92 | % | 7.59 | % | 8.72 | % | 10.68 | % | 11.32 | % | ||||||||||||||||||
Leverage ratio | 97.22 | % | 96.56 | % | 14.29 | % | NA | 6.45 | % | 8.94 | % | 10.58 | % | 9.10 | % | |||||||||||||||||||
Tier 1 risk-based capital | 96.79 | % | 96.95 | % | 103.51 | % | NA | 8.07 | % | 10.16 | % | 12.17 | % | 10.19 | % | |||||||||||||||||||
Total risk-based capital | 98.20 | % | 98.39 | % | 105.04 | % | NA | 9.59 | % | 11.41 | % | 13.24 | % | 11.28 | % |
(1) | Net interest margin is presented on a tax equivalent basis. |
(2) | Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income, net of the goodwill impairment charge in 2008. |
Successor Company | Predecessor Company | |||||||||||||||||||||||||||||||||
Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | Year Ended Dec. 31, 2008 | Year Ended Dec. 31, 2007 | |||||||||||||||||||||||||||
Asset Quality Ratios | ||||||||||||||||||||||||||||||||||
Nonperforming loans to gross loans | NA | NA | NA | NA | 5.73 | % | 2.84 | % | 0.73 | % | 0.55 | % | ||||||||||||||||||||||
Nonperforming assets to total assets | NA | NA | NA | NA | 5.69 | 2.90 | 0.63 | 0.50 | ||||||||||||||||||||||||||
Allowance for loan losses to gross loans | NA | NA | NA | NA | 2.87 | 1.88 | 1.18 | 1.24 | ||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | NA | NA | NA | NA | 50.12 | 66.01 | 162.31 | 226.86 | ||||||||||||||||||||||||||
Net charge-offs to average loans | NA | NA | NA | NA | 3.60 | 0.89 | 0.30 | 0.32 |
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following tables set forth our summary unaudited pro forma condensed combined financial data. You should read this information in conjunction with “Selected Historical Consolidated Financial Data of CBF,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this document.
On July 16, 2010, we purchased certain assets and assumed certain liabilities, including substantially all of the deposits of First National Bank, Metro Bank and Turnberry Bank from the FDIC, as receiver. On September 30, 2010, January 28, 2011 and September 7, 2011, we consummated controlling investments in TIB Financial, Capital Bank Corp. and Green Bankshares, respectively. On March 26, 2012, we agreed to acquire all of the common equity interest in Southern Community Financial. Our acquisition of Southern Community Financial is subject to Southern Community Financial stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the second half of 2012. Although we were formed in November 2009, our activities prior to our first acquisition consisted solely of organizational, capital raising and related activities and activities related to identifying and analyzing potential acquisition candidates. We did not engage in any substantive operations (including banking operations) prior to our first acquisition.
The summary unaudited pro forma results of operations and condensed combined balance sheet information set forth below as of and for the six months ended June 30, 2012 has been derived from CBF’s, Capital Bank Corp.’s, Green Bankshares’ and Southern Community Financial’s historical unaudited financial statements as of and for the six months ended June 30, 2012. The summary unaudited pro forma results of operations and condensed combined balance sheet information set forth below for the year ended December 31, 2011 has been derived from CBF’s, Capital Bank Corp.’s, Green Bankshares’ and Southern Community Financial’s historical audited financial statements for the year ended December 31, 2011. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the operating results of the combined companies had they actually been combined on January 1, 2011.
The unaudited pro forma condensed combined financial information gives effect to and shows the pro forma impact on our historical financial statements of (1) the completion of our acquisition of Southern Community Financial, (2) the completion of our investments in TIB Financial, Capital Bank Corp. and Green Bankshares, and (3) the issuance of approximately 3,709,832 shares of Class A common stock to minority stockholders of TIB Financial, Capital Bank Corp. and Green Bankshares, each of which will be merged with the Company in the reorganization.
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Pro Forma | ||||||||
(Dollars in thousands, other than per share data) | For the Six Months Ended June 30, 2012 | For the Year Ended December 31, 2011 | ||||||
Summary Results of Operations | ||||||||
Interest income | $ | 170,245 | $ | 345,470 | ||||
Interest expense | 26,518 | 68,697 | ||||||
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Net interest income | 143,727 | 276,773 | ||||||
Provision for loan losses | 17,184 | 97,328 | ||||||
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Net interest income after provision for loan losses | 126,543 | 179,445 | ||||||
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Noninterest income | 34,011 | 73,589 | ||||||
Noninterest expense | 143,561 | 307,893 | ||||||
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Income (loss) before income taxes | 16,993 | (54,859 | ) | |||||
Income tax expense (benefit) | 6,538 | (20,955 | ) | |||||
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Net income (loss) before attribution of noncontrolling interests | 10,455 | (33,904 | ) | |||||
Net income (loss) attributable to noncontrolling interests | — | — | ||||||
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Net income (loss) attributable to CBF | $ | 10,455 | $ | (33,904 | ) | |||
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Per Share Data | ||||||||
Earnings (loss) | ||||||||
Basic | $ | 0.21 | $ | (0.69 | ) | |||
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Diluted | $ | 0.21 | $ | (0.69 | ) | |||
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Weighted average shares outstanding | ||||||||
Basic | 48,892,832 | 48,831,832 | ||||||
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Diluted | 49,187,832 | 49,093,832 | ||||||
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Pro Forma | ||||
(Dollars in thousands, except per share data) | June 30, 2012 | |||
Summary Balance Sheet Data | ||||
Cash and cash equivalents | $ | 256,880 | ||
Investment securities | 1,477,731 | |||
Loans held for sale | 16,483 | |||
Loans receivable: | ||||
Not covered under FDIC loss sharing agreements | 4,563,915 | |||
Covered under FDIC loss sharing agreements | 461,820 | |||
Allowance for loan losses | (45,472 | ) | ||
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Net loans | 4,980,263 | |||
Other real estate owned | 174,108 | |||
FDIC indemnification asset | 60,750 | |||
Receivable from FDIC | 9,699 | |||
Goodwill and intangible assets, net | 171,568 | |||
Other assets | 515,524 | |||
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Total assets | $ | 7,663,006 | ||
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Deposits | $ | 6,114,929 | ||
Advances from FHLB | 145,469 | |||
Borrowings | 323,499 | |||
Other liabilities | 61,426 | |||
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Total liabilities | 6,645,323 | |||
Shareholders’ equity | $ | 1,017,683 | ||
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Total liabilities and shareholders’ equity | $ | 7,663,006 | ||
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Per Share Data | ||||
Tangible book value(1) | $ | 17.09 | ||
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Common shares outstanding | 50,166,353 | |||
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(1) | We calculate tangible book value, which is a non-GAAP measure but which we believe is helpful to investors in understanding our business. Tangible book value is equal to book value less goodwill and core deposit intangibles, net of related deferred tax liabilities. The following table sets forth a reconciliation of tangible book value to book value, which is the most directly comparable GAAP measure: |
Pro Forma | ||||
(Dollars in thousands, except per share data) | As of and for the Six Months Ended June 30, 2012 | |||
Total shareholders’ equity | $ | 1,017,683 | ||
Less: Noncontrolling interest | — | |||
Less: Goodwill | (142,161 | ) | ||
Less: Core deposit intangibles, net of taxes | (17,962 | ) | ||
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Tangible book value | $ | 857,560 | ||
Book value per share | $ | 20.29 | ||
Tangible book value per share | $ | 17.09 |
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Pro Forma | ||
(Dollars in thousands, except per share data) | As of and for the Six Months Ended June 30, 2012 | |
Capital Ratios | ||
Average equity to average total assets | 12.80% | |
Tangible common equity | 11.29 | |
Tier 1 leverage | 11.02 | |
Tier 1 risk-based capital | 15.38 | |
Total risk-based capital | 16.31 |
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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE FINANCIAL DATA
The following table presents: (1) historical per share information for CBF; (2) pro forma per share information of the combined company after giving effect to the merger, the acquisition of Southern Community Financial by CBF and the mergers of CBF’s other bank holding company subsidiaries into CBF; and (3) historical and equivalent pro forma per share information for Capital Bank Corp.
The combined company pro forma per share information was derived by combining information from the historical consolidated financial statements discussed under the heading “Summary Unaudited Pro Forma Condensed Combined Financial Data.” You should read this table together with the financial statements discussed under that heading. You should not rely on the pro forma per share information as being necessarily indicative of actual results had the merger occurred on January 1, 2011 for statement of operations purposes or June 30, 2012 for book value per share data.
As of and for Six Months Ended June 30, 2012 | �� | |||||||||||||||
CBF | Capital Bank Corp. | |||||||||||||||
Historical | Pro Forma Combined | Historical | Pro Forma Equivalent(1) | |||||||||||||
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Earnings per share—basic | $ | 0.24 | $ | 0.21 | $ | 0.06 | $ | 0.03 | ||||||||
Earnings per share—diluted | $ | 0.24 | $ | 0.21 | $ | 0.06 | $ | 0.03 | ||||||||
Book value per share | $ | 20.26 | $ | 20.29 | $ | 2.69 | $ | 2.75 | ||||||||
Cash dividends declared per share | $ | — | $ | — | $ | — | $ | — |
As of and for the Year Ended December 31, 2011 | ||||||||||||||||||||
CBF | Capital Bank Corp. | |||||||||||||||||||
Historical | Pro Forma Combined | Successor Company – Jan. 29, 2011 to Dec. 31, 2011 | Predecessor Company – Jan. 1, 2011 to Jan. 28, 2011 | Pro Forma Equivalent(1) | ||||||||||||||||
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Earnings per share—basic | $ | 0.14 | $ | (0.69) | $ | 0.06 | $ | (0.02) | $ | (0.09) | ||||||||||
Earnings per share—diluted | $ | 0.14 | $ | (0.69) | $ | 0.06 | $ | (0.02) | $ | (0.09) | ||||||||||
Book value per share | $ | 19.86 | $ | 19.87 | $ | 2.62 | $ | N/A | $ | 2.69 | ||||||||||
Cash dividends declared per share | $ | — | $ | — | $ | — | $ | — | $ | — |
(1) | Derived by multiplying the combined company pro forma per share information by the exchange ratio of 0.1354. |
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There is currently no public market for shares of CBF Class A common stock. Substantially concurrent with the completion of the merger, CBF expects to complete an initial public offering of its Class A common stock. In connection with that initial public offering, CBF has applied to list its Class A common stock on the Nasdaq Global Select Market under the symbol “CBF.” Whether or not we complete an initial public offering prior to or concurrent with the completion of the merger, any shares of our common stock received as merger consideration by Capital Bank Corp. shareholders will be listed on the Nasdaq Global Select Market. Shares of Capital Bank Corp. common stock are listed and trade on the Nasdaq Capital Market under the symbol “CBKN.”
The following table presents the closing sales prices of shares of Capital Bank Corp. common stock as reported on the Nasdaq Global Select Market, on (i) September 7, 2011 the last trading day for which market information is available prior to the public announcement of CBF’s intention to effect the merger and (ii) September 7, 2012, the last practicable trading day prior to the date of this document.
Capital Bank Corp. Common Stock | ||||
September 7, 2011 | $ | 2.43 | ||
September 7, 2012 | $ | 2.36 |
The market price of Capital Bank Corp. common stock will fluctuate between the date of this document and the completion of the merger. We can give no assurance concerning the market price of CBF Class A common stock upon the completion of its initial public offering or following the merger.
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In addition to the other information included in and incorporated by reference into this document, including the matters addressed in “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the following risk factors.
The merger may be approved without your vote.
CBF owns approximately 83% of the common stock of Capital Bank Corp. and has indicated that it intends to vote in favor of the proposals described in this document. As a result, the merger may be completed even if opposed by all of the Capital Bank Corp. shareholders unaffiliated with CBF.
Neither CBF nor Capital Bank Corp. has hired anyone to represent you and Capital Bank Corp. has a conflict of interest in the merger.
CBF and Capital Bank Corp. have not (1) negotiated the merger at arm’s length or (2) hired independent persons to negotiate the terms of the merger for you. CBF initiated and structured the merger without negotiating with Capital Bank Corp. or any independent person and has an interest in acquiring your shares at the lowest possible price. If independent persons had been hired to negotiate with CBF, the terms of the merger may have been more favorable to you.
Because there is currently no market for CBF Class A common stock and a market for CBF Class A common stock may not develop, you cannot be sure of the market value of the merger consideration you will receive.
Upon completion of the merger, each share of Capital Bank Corp. common stock will be converted into merger consideration consisting of 0.1354 of a share of CBF Class A common stock. Prior to the initial public offering of CBF Class A common stock, which CBF expects to complete substantially concurrent with the merger, there has been no established public market for CBF Class A common stock. An active, liquid trading market for CBF Class A common stock may not develop or be sustained following CBF’s initial public offering. If an active trading market does not develop, holders of CBF Class A common stock may have difficulty selling their shares at an attractive price, or at all. CBF has applied to have its Class A common stock listed on Nasdaq, but its application may not be approved. In addition, the liquidity of any market that may develop or the price that CBF stockholders may obtain for their shares of Class A common stock cannot be predicted. The initial public offering price for CBF Class A common stock will be determined by negotiations between CBF, its stockholders who choose to sell their shares in the initial public offering and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following the offering. Furthermore, CBF’s initial public offering may be completed at a price that is below the range of prices set forth in this document.
The outcome of CBF’s initial public offering will affect the market value of the consideration Capital Bank Corp. shareholders will receive upon completion of the merger. Accordingly, you will not know or be able to calculate the market value of the merger consideration you would receive upon completion of the merger. There will be no adjustment to the exchange ratio for changes in the anticipated outcome of CBF’s initial public offering or changes in the market price of Capital Bank Corp. common stock.
If CBF completes the merger without completing its initial public offering, the size of the outstanding public float of CBF Class A common stock will be low and the value and liquidity of its common stock may be adversely affected.
While CBF expects to complete the merger substantially concurrent with its initial public offering, CBF controls when the merger will take place and there can be no guarantee that the initial public offering will occur substantially concurrent with the merger or at all. If CBF completes the merger and the initial public offering is
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delayed or does not occur, shares of our Class A common stock received as merger consideration by Capital Bank Corp. shareholders will be listed on Nasdaq, but there will be fewer publicly traded shares outstanding than if CBF completes the initial public offering as anticipated and, as a result, the value and liquidity of the shares of Class A common stock that you receive in the merger may be adversely affected.
Some of the directors and executive officers of Capital Bank Corp. may have interests and arrangements that may have influenced their decisions to support or recommend that you approve the merger agreement.
The interests of some of the directors and executive officers of Capital Bank Corp. may be different from those of Capital Bank Corp. shareholders. These interests are described in more detail in the section of this document entitled “Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger.”
The shares of CBF Class A common stock to be received by Capital Bank Corp. shareholders as a result of the merger will have different rights than the shares of Capital Bank Corp. common stock.
The rights associated with Capital Bank Corp. common stock are different from the rights associated with CBF Class A common stock. For example, CBF shareholders may only bring proposals before an annual meeting of CBF shareholders if, among other things, they deliver certain information about their direct, indirect and derivative ownership of CBF common stock. Capital Bank Corp. does not impose this requirement on its shareholders. Also, Capital Bank Corp. shareholders are permitted to fill vacancies on the Capital Bank Corp. Board of Directors, whereas vacancies on the CBF Board of Directors may only be filled by the CBF Board of Directors. See the section of this document entitled “Comparison of Rights of CBF Shareholders and Capital Bank Corp. Shareholders” on page 221 for a more detailed description of the shareholder rights of each corporation.
Risks Relating to CBF’s Banking Operations
We have recently completed six acquisitions and have a limited operating history from which investors can evaluate our profitability and prospects.
We were organized in November 2009 and acquired certain of the assets and assumed certain liabilities of the three Failed Banks in July 2010. We also completed controlling investments in TIB Financial in September 2010, Capital Bank Corp. in January 2011 and Green Bankshares in September 2011. Because our banking operations began in 2010, we do not have a meaningful operating history upon which investors can evaluate our operational performance or compare our recent performance to historical performance. Although we acquired certain assets and assumed certain liabilities or made investments in six depository institutions which had operated for longer periods of time than we have, their business models and experiences are not reflective of our plans. Accordingly, our limited time running these companies’ operations may make it difficult to predict our future prospects and financial performance based on the prior performance of such depository institutions. Moreover, because a portion of the loans and other real estate we acquired in the acquisitions are covered by the loss sharing agreements and other loans and real estate we acquired were marked to fair value in connection with our acquisition of the Failed Banks’ businesses, the historical financial results of the acquired banks are less important to an understanding of our future operations. Certain other factors may also make it difficult to predict our future financial and operating performance, including, among others:
• | our current asset mix, loan quality and allowances are not representative of our anticipated future asset mix, loan quality and allowances, which may change materially as we undertake organic loan origination and banking activities and grow through future acquisitions; |
• | a portion of the loans and other real estate of the Failed Banks that we acquired are covered by the loss sharing agreements with the FDIC, which reimburse 80% of losses experienced on these assets and, thus, we may face higher losses once the FDIC loss sharing expires; |
• | the income we report from certain acquired assets due to discount accretion and the amortization of the FDIC indemnification asset does not reflect the same amount of cash inflows to us and, if we are |
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unable to replace these acquired assets with new performing loans and other performing assets, we may be unable to generate sufficient cash flows; |
• | our significant cash reserves and liquid securities portfolio, which result in large part from the proceeds of our 2009 and 2010 private placement financings and cash payments from the FDIC in connection with our acquisition of the Failed Banks subject to loss sharing agreements, are not necessarily representative of our future cash position; |
• | our cost structure and capital expenditure requirements for historical periods are not reflective of our anticipated cost structure and capital spending as we integrate future acquisitions and continue to grow our organic banking platform; and |
• | our regulatory capital ratios, which are required by agreements we have reached with our regulators and which result in part from the proceeds of our 2009 and 2010 private placement financings and cash payments from the FDIC in connection with our acquisition of the Failed Banks subject to loss sharing agreements, are not necessarily representative of our future regulatory capital ratios. |
Our acquisition history may not be indicative of our ability to execute our growth strategy.
Our prior acquisitions should be viewed in the context of the recent opportunities available to us as a result of the confluence of our access to capital at a time when market dislocations of historical proportions resulted in attractive asset acquisition opportunities. As conditions change, we may prove to be unable to execute our growth strategy, which could impact our future earnings, reputation and results of operations. We have recently completed the process of integrating six of the acquired banking platforms into a single unified operating platform (the Failed Banks, TIB Financial, Capital Bank Corp. and Green Bankshares). See “—Risks Relating to CBF’s Growth Strategy.”
Continued or worsening general business and economic conditions could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy is unable to steadily emerge from the recent recession that began in 2007 or we experience worsening economic conditions, such as a so-called “double-dip” recession, our growth and profitability could be adversely affected. Weak economic conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors would be detrimental to our business. On August 5, 2011, Standard & Poor’s lowered the long-term sovereign credit rating of U.S. Government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect on financial markets and although we are unable to predict the longer-term impact on such markets and the participants therein, it may be material and adverse.
In addition, significant concern regarding the creditworthiness of some of the governments in Europe, most notably Greece, Ireland, Portugal and, more recently, Spain, has contributed to volatility in financial markets in Europe and globally, and to funding pressures on some globally active European banks, leading to greater investor and economic uncertainty worldwide. A failure to adequately address sovereign debt concerns in Europe could hamper economic recovery or contribute to a return to recessionary economic conditions and severe stress in the financial markets, including in the United States.
Our business is also significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and cash flows.
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The geographic concentration of our markets in the southeastern region of the United States makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could be detrimental to our financial condition.
Unlike larger financial institutions that are more geographically diversified, we are a regional banking franchise concentrated in the southeastern region of the United States. We operate branches located in Florida, North Carolina, South Carolina, Tennessee and Virginia. As of June 30, 2012, 33% of our loans were in Florida, 25% were in Tennessee, 27% were in North Carolina, 14% were in South Carolina and 1% were in Virginia. A deterioration in local economic conditions in the loan market or in the residential, commercial or industrial real estate market could have a material adverse effect on the quality of our portfolio, the demand for our products and services, the ability of borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of our expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected Capital Bank’s capital, we and Capital Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital. See “Supervision and Regulation.”
We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership and experience in the banking industry of our Chief Executive Officer R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America and has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks. The loss of service of Mr. Taylor or one or more of our other executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer and the value of our common stock could be materially adversely affected. Leadership changes will occur from time to time and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although Messrs. Taylor, Marshall, Singletary and Posner have each entered into an employment agreement with us, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.
Our loss sharing agreements impose restrictions on the operation of our business; failure to comply with the terms of our loss sharing agreements with the FDIC or other regulatory agreements or orders may result in significant losses or regulatory sanctions, and we are exposed to unrecoverable losses on the Failed Banks’ assets that we acquired.
In July 2010, we purchased substantially all of the assets and assumed all of the deposits and certain other liabilities of the Failed Banks in FDIC-assisted transactions, and a material portion of our revenue is derived from such assets. Certain of the purchased assets are covered by the loss sharing agreements with the FDIC, which provide that the FDIC will bear 80% of losses on the covered loan assets we acquired in our acquisition of the Failed Banks. We are subject to audit by the FDIC at its discretion to ensure we are in compliance with the terms of these agreements. We, may experience difficulties in complying with the requirements of the loss sharing agreements, the terms of which are extensive and failure to comply with any of the terms could result in a specific asset or group of assets losing their loss sharing coverage.
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The FDIC has the right to refuse or delay payment partially or in full for such loan losses if we fail to comply with the terms of the loss sharing agreements, which are extensive. Additionally, the loss sharing agreements are limited in duration. Therefore, any losses that we experience after the terms of the loss sharing agreements have ended will not be recoverable from the FDIC, and would negatively impact our net income. See “Information about CBF—Our Acquisitions—Loss Sharing Agreements” for a description of the loss sharing arrangements with the FDIC.
Our loss sharing agreements also impose limitations on how we manage loans covered by loss sharing. For example, under the loss sharing agreements, we are not permitted to sell a covered loan even if in the ordinary course of our business we determine that taking such action would be advantageous for us. These restrictions could impair our ability to manage problem loans and extend the amount of time that such loans remain on our balance sheet and could negatively impact our business, financial condition, liquidity and results of operations.
In addition to the loss sharing agreements, in August 2010, Capital Bank entered into an Operating Agreement with the OCC (which we refer to as the “OCC Operating Agreement”), in connection with our acquisition of the Failed Banks. Capital Bank (and, with respect to certain provisions, the Company) is also subject to the FDIC Order issued in connection with the FDIC’s approval of our deposit insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the business and may restrict Capital Bank’s ability to pay dividends to us and to make changes to its capital structure. A failure by us or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could subject us to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions, by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent us from executing our business strategy and negatively impact our business, financial condition, liquidity and results of operations.
Any requested or required changes in how we determine the impact of loss share accounting on our financial information could have a material adverse effect on our reported results.
A material portion of our financial results is based on loss share accounting, which is subject to assumptions and judgments made by us, the regulatory agencies to whom we report such information. Loss share accounting is a complex accounting methodology. If these assumptions are incorrect or the regulatory agencies to whom we report require that we change or modify our assumptions, such change or modification could have a material adverse effect on our financial condition, operations or our previously reported results. As such, any financial information generated through the use of loss share accounting is subject to modification or change. Any significant modification or change in such information could have a material adverse effect on our results of operations and our previously reported results.
Our financial information reflects the application of the acquisition method of accounting. Any change in the assumptions used in such methodology could have an adverse effect on our results of operations.
As a result of our recent acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair market value. Our interest income, interest expense and net interest margin (which were equal to $227.9 million, $36.6 million and 4.05%, respectively, in 2011) reflect the impact of accretion of the fair value adjustments made to the carrying amounts of interest earning assets and interest-bearing liabilities and our non-interest income (which totaled $41.2 million in 2011) for periods subsequent to the acquisitions includes the effects of discount accretion and amortization of the FDIC indemnification asset. In addition, the balances of non-performing assets were significantly reduced by the adjustments to fair value recorded in conjunction with the relevant acquisition. If our assumptions are incorrect or the regulatory agencies to whom we report require that we change or modify our assumptions, such change or modification could have a material adverse effect on our financial condition or
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results of operations or our previously reported results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Accounting for Acquired Loans” for additional information on the impact of acquisition method of accounting to our financial operations.
Our business is highly susceptible to credit risk.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral (if any) securing the payment of their loans may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The credit standards, procedures and policies that we have established for borrowers may not prevent the incurrence of substantial credit losses.
Although we do not have a long enough operating history to have restructured many of our loans for borrowers in financial difficulty, in the future, we may restructure originated or acquired loans if we believe the borrowers have a viable business plan to fully pay off all obligations. However, for our originated loans, if interest rates or other terms are modified upon extension of credit or if terms of an existing loan are renewed in such a situation and a concession is granted, we may be required to classify such action as a troubled debt restructuring (which we refer to as a “TDR”). We would classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Generally, these loans would be restructured to provide the borrower additional time to execute its business plan. With respect to restructured loans, we may grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured agreement, the loan would be placed on nonaccrual status and written down to the underlying collateral value.
The ratio of our total non-performing loans not covered under loss sharing agreements with the FDIC to total loans has increased from 3.25% as of December 31, 2010 to 6.12% as of June 30, 2012 due primarily to our acquisitions of Capital Bank Corp. and Green Bankshares. In addition, the migration of loans to non-performing status based on our evaluation and re-grading of the portfolios of acquired loans following each acquisition, including the acquisitions of the Failed Banks and TIB Financial, has contributed to the increase in such ratio. At the same time, the overall ratio of non-performing loans to total loans declined from 11.12% as of December 31, 2010 to 8.36% as of June 30, 2012. This decline is due primarily to the increased proportion of loans originated by us under our credit policies and underwriting standards and the lower relative proportion of non-performing loans we acquired through the acquisitions of Capital Bank Corp. and Green Bankshares as compared to the Failed Banks. Non-performing loans include loans classified as non-accrual as well as loans which may be contractually past due 90 or more days but are still accruing interest either because they are well secured and in the process of collection or because they are accounted for according to accounting guidance for acquired impaired loans. One important component of our business strategy is sound risk management, including resolution of criticized and classified loans that totaled $748.6 million as of June 30, 2012. If management is unable to effectively resolve these loans, they would have a material adverse effect on our consolidated results of operations.
Recent economic and market developments and the potential for continued economic disruption present considerable risks to us and it is difficult to determine the depth and duration of the economic and financial market problems and the many ways in which they may impact our business in general. Any failure to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.
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A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.
A significant portion of our loan portfolio is secured by real estate. As of June 30, 2012, approximately 84% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in our primary market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and shareholders’ equity could be adversely affected.
Additionally, recent weakness in the secondary market for residential lending could have an adverse impact on our profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, any future mortgage loan originations and gains on sale of mortgage loans. Continued declines in real estate values and home sales volumes and financial stress on borrowers as a result of job losses or other factors could have further adverse effects on borrowers that result in higher delinquencies and charge-offs in future periods, which could adversely affect our financial position and results of operations.
Our construction and land development loans are based upon estimates of costs and the values of the complete projects.
While we intend to focus on originating loans other than non-owner occupied commercial real estate loans, our portfolio includes construction and land development loans (which we refer to as “C&D loans”) extended to builders and developers, primarily for the construction and/or development of properties. These loans have been extended on a presold and speculative basis and they include loans for both residential and commercial purposes.
In general, C&D lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. The repayment of construction and land acquisition and development loans is often dependent, in part, on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring. In addition, speculative construction loans to a residential builder are often associated with homes that are not presold and, thus, pose a greater potential risk than construction loans to individuals on their personal residences. Slowing housing sales have been a contributing factor to an increase in non-performing loans as well as an increase in delinquencies.
As of June 30, 2012, C&D loans totaled $440.4 million (or 11% of our total loan portfolio), of which $74.6 million was for construction and/or development of residential properties and $365.8 million was for construction/development of commercial properties. As of June 30, 2012, non-performing C&D loans covered under FDIC loss share agreements totaled $27.4 million and non-performing C&D loans not covered under FDIC loss share agreements totaled $94.8 million.
Our non-owner occupied commercial real estate loans may be dependent on factors outside the control of our borrowers.
While we intend to focus on originating loans other than non-owner occupied commercial real estate loans, in the acquisitions we acquired non-owner occupied commercial real estate loans for individuals and businesses
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for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. Non-owner occupied commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. In such cases, we may be compelled to modify the terms of the loan or engage in other potentially expensive work-out techniques. If we foreclose on a non-owner occupied commercial real estate loan, our holding period for the collateral typically is longer than a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
As of June 30, 2012, our non-owner occupied commercial real estate loans totaled $849.8 million (or 20% of our total loan portfolio). As of June 30, 2012, non-performing non-owner occupied commercial real estate loans covered under FDIC loss share agreements totaled $22.8 million and non-performing non-owner occupied commercial real estate loans not covered under FDIC loss share agreements totaled $36.4 million.
Repayment of our commercial business loans is dependent on the cash flows of borrowers, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
Our business plan focuses on originating different types of commercial business loans. We classify types of commercial loans offered as owner-occupied term real estate loans, business lines of credit and term equipment financing. Commercial business lending involves risks that are different from those associated with non-owner occupied commercial real estate lending. Our commercial business loans are primarily underwritten based on the cash flow of the borrower and secondarily on the underlying collateral, including real estate. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Some of our commercial business loans are collateralized by equipment, inventory, accounts receivable or other business assets, and the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use.
As of June 30, 2012, our commercial business loans totaled $1.5 billion (or 35% of our total loan portfolio). Of this amount, $1.0 billion was secured by owner-occupied real estate and $473.6 million was secured by business assets. As of June 30, 2012, non-performing commercial business loans covered under FDIC loss share agreements totaled $11.1 million and non-performing commercial business loans not covered under FDIC loss share agreements totaled $73.1 million.
Our allowance for loan losses and fair value adjustments may prove to be insufficient to absorb losses for loans that we originate.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
• | cash flow of the borrower and/or the project being financed; |
• | the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan; |
• | the duration of the loan; |
• | the discount on the loan at the time of acquisition; |
• | the credit history of a particular borrower; and |
• | changes in economic and industry conditions. |
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Non-performing loans covered under loss share agreements with the FDIC totaled $93.7 million, and non-performing loans not covered under loss share agreements with the FDIC totaled $256.5 million as of June 30, 2012. We maintain an allowance for loan losses with respect to loans we originate, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management team through periodic reviews. As of June 30, 2012, the allowance on loans covered by loss share agreements with the FDIC was $14.6 million, and the allowance on loans not covered by loss share agreements with the FDIC was $30.9 million. As of June 30, 2012, the ratio of our allowance for loan losses to nonperforming loans covered by loss share agreements with the FDIC was 15.6%, and the ratio of our allowance for loan losses to non-performing loans not covered by loss share agreements with the FDIC was 12.0%.
The application of the acquisition method of accounting to our completed acquisitions impacted our allowance for loan losses. Under the acquisition method of accounting, all loans were recorded in our financial statements at their fair value at the time of their acquisition and the related allowance for loan loss was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into consideration estimated credit quality. We may in the future determine that our estimates of fair value are too high, in which case we would provide for additional loan losses associated with the acquired loans. As of June 30, 2012, the allowance for loan losses on PCI loan pools totaled $33.7 million, of which $14.6 million was related to loan pools covered by loss share agreements with the FDIC and $19.0 million was related to loan pools not covered by loss share agreements with the FDIC.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans that we originate, identification of additional problem loans originated by us and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. If current trends in the real estate markets continue, we expect that we will continue to experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations.
We continue to hold and acquire other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.
We foreclose on and take title to the real estate serving as collateral for many of our loans as part of our business. Real estate owned by us and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. At June 30, 2012, we had $158.2 million of OREO. Increased OREO balances have led to greater expenses as we incur costs to manage and dispose of the properties. We expect that our earnings will continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Any further decrease in real estate market prices may lead to additional OREO write-downs, with a corresponding expense in our statement of operations. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. The expenses associated with OREO and any further property write-downs could have a material adverse effect on our financial condition and results of operations.
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We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
Delinquencies and defaults in residential mortgages have increased, creating a backlog in courts and an increase in industry scrutiny by regulators, as well as resulting in proposed new laws and regulations governing foreclosures. Such laws and regulations might restrict or delay our ability to foreclose and collect payments for single family residential loans under the loss sharing agreements.
Recent laws delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans (some for a limited period of time), or otherwise limit the ability of residential loan servicers to take actions that may be essential to preserve the value of the mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increased servicing costs. As a servicer of mortgage loans, any restriction on our ability to foreclose on a loan, any requirement that we forego a portion of the amount otherwise due on a loan or any requirement that we modify any original loan terms will in some instances require us to advance principal, interest, tax and insurance payments, which may negatively impact our business, financial condition, liquidity and results of operations.
In addition, for the single family residential loans covered by the loss sharing agreements, we cannot collect loss share payments until we liquidate the properties securing those loans. These loss share payments could be delayed by an extended foreclosure process, including delays resulting from a court backlog, local or national foreclosure moratoriums or other delays, and these delays could have a material adverse effect on our results of operations.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities mature or reprice more quickly
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than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, and because the magnitude of repricing of interest earning assets is often greater than interest-bearing liabilities, falling interest rates could reduce net interest income.
Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates, while a decrease in the general level of interest rates may adversely affect the fair value of our financial assets and liabilities and our ability to realize gains on the sale of assets. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios and our overall results. Changes in interest rates may also have a significant impact on any future mortgage loan origination revenues. Historically, there has been an inverse correlation between the demand for mortgage loans and interest rates. Mortgage origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the assets on our balance sheet. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System (which we refer to as the “Federal Reserve”). We cannot predict the nature and timing of the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions, which could negatively impact our financial performance.
We have benefited in recent periods from a favorable interest rate environment, but we believe that this environment cannot be sustained indefinitely and interest rates would be expected to rise as the economy recovers. A strengthening U.S. economy would be expected to cause the Board of Governors of the Federal Reserve to increase short-term interest rates, which would increase our borrowing costs.
The fair value of our investment securities can fluctuate due to market conditions out of our control.
As of June 30, 2012, approximately 99% of our investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises mortgage-backed securities and securities of municipalities. As of June 30, 2012, the fair value of our investment securities portfolio was approximately $1.2 billion. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the credit markets. In addition, we have historically taken a conservative investment posture, concentrating on government issuances of short duration. In the future, we may seek to increase yields through more aggressive investment strategies, which may include a greater percentage of corporate issuances and structured credit products. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on our business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
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We have a significant deferred tax asset that may not be fully realized in the future.
Our net deferred tax asset totaled $140.7 million as of June 30, 2012, of which $108.7 million was excluded from Tier 1 Capital. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses and the limitations of Section 382 of the Internal Revenue Code. If our estimates and assumptions about future taxable income are not accurate, the value of our deferred tax asset may not be recoverable and may result in a valuation allowance that would impact our earnings.
Recent market disruptions have caused increased liquidity risks and, if we are unable to maintain sufficient liquidity, we may not be able to meet the cash flow requirements of our depositors and borrowers.
The recent disruption and illiquidity in the credit markets have generally made potential funding sources more difficult to access, less reliable and more expensive. Our liquidity is generally used to make loans and to repay deposit liabilities as they become due or are demanded by customers, and further deterioration in the credit markets or a prolonged period without improvement of market liquidity could present significant challenges in the management of our liquidity and could adversely affect our business, results of operations and prospects. For example, if as a result of a sudden decline in depositor confidence resulting from negative market conditions, a substantial number of bank customers tried to withdraw their bank deposits simultaneously, our reserves may not be able to cover the withdrawals.
Furthermore, an inability to increase our deposit base at all or at attractive rates would impede our ability to fund our continued growth, which could have an adverse effect on our business, results of operations and financial condition. Collateralized borrowings such as advances from the FHLB are an important potential source of liquidity. Our borrowing capacity is generally dependent on the value of the collateral pledged to the FHLB. An adverse regulatory change could reduce our borrowing capacity or eliminate certain types of collateral and could otherwise modify or even eliminate our access to FHLB advances, Federal Fund line borrowings and discount window advances. Liquidity may also be adversely impacted by bank supervisory and regulatory authorities mandating changes in the composition of our balance sheet to asset classes that are less liquid. Any such change or termination may have an adverse effect on our liquidity.
Our access to other funding sources could be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets. We may need to incur additional debt in the future to achieve our business objectives, in connection with future acquisitions or for other reasons. Any borrowings, if sought, may not be available to us or, if available, may not be on favorable terms. Without sufficient liquidity, we may not be able to meet the cash flow requirements of our depositors and borrowers, which could have a material adverse effect on our financial condition and results of operations.
We may not be able to retain or develop a strong core deposit base or other low-cost funding sources.
We expect to depend on checking, savings and money market deposit account balances and other forms of customer deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow a strong deposit base. Because 38% of our deposits as of June 30, 2012 were time deposits, it may prove harder to maintain and grow our deposit base than would otherwise be the case. We are also working to transition certain of our customers to lower cost traditional banking services as higher cost funding sources, such as high interest certificates of deposit, mature. There may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Customers may not transition to lower yielding savings or investment products or continue their business with us, which could adversely affect our operations. In addition, with recent concerns about bank failures, customers have become concerned about the extent to which their deposits are insured by the FDIC, particularly customers that may maintain deposits in excess of insured limits. Customers may withdraw deposits in an effort to ensure
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that the amount that they have on deposit with us is fully insured and may place them in other institutions or make investments that are perceived as being more secure. Further, even if we are able to grow and maintain our deposit base, the account and deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments (or similar products at other institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact our growth strategy and results of operations.
We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may decrease our growth or profits.
Consumer and commercial banking is highly competitive. Our market contains not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources may possess an advantage by being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed Internet platform.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Also, technology has lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for certain products and services than we can.
Our ability to compete successfully depends on a number of factors, including:
• | the ability to develop, maintain and build upon long-term customer relationships based on quality service and high ethical standards; |
• | the ability to attract and retain qualified employees to operate our business effectively; |
• | the ability to expand our market position; |
• | the scope, relevance and pricing of products and services offered to meet customer needs and demands; |
• | the rate at which we introduce new products and services relative to our competitors; |
• | customer satisfaction with our level of service; and |
• | industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.
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We may be adversely affected by the lack of soundness of other financial institutions.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.
We are subject to losses due to the errors or fraudulent behavior of employees or third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. When we originate loans, we rely upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
In addition, we provide our customers the ability to bank remotely, including online over the Internet. The secure transmission of confidential information is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject us to additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.
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As a public company, we will be required to meet periodic reporting requirements under the rules and regulations of the United States Securities and Exchange Commission. Complying with federal securities laws as a public company is expensive, and we will incur significant time and expense enhancing, documenting, testing and certifying our internal control over financial reporting. Any deficiencies in our financial reporting or internal controls could adversely affect our business and the trading price of our Class A common stock.
Prior to becoming a public company, we have not been required to comply with Securities and Exchange Commission (which we refer to as the “SEC”) requirements to have our financial statements completed and reviewed or audited within a specified time. As a publicly traded company following completion of the merger, we will be required to file periodic reports containing our financial statements with the SEC within a specified time following the completion of quarterly and annual periods. We will also be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 concerning internal controls over financial reporting commencing in the 2013 fiscal year as described below. We may experience difficulty in meeting the SEC’s reporting requirements. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and reduce the trading price of our Class A common stock.
As a public company, we will incur significant legal, accounting, insurance and other expenses. Compliance with other rules of the SEC and the rules of Nasdaq will increase our legal and financial compliance costs and make some activities more time consuming and costly. Beginning with our Annual Report on Form 10-K for our fiscal year ending December 31, 2013, SEC rules will require that our Chief Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of our internal controls over financial reporting. Beginning with the fiscal year ending December 31, 2018, or such earlier time as we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (which we refer to as the “JOBS Act”), our independent registered public accounting firm will be required to attest to our assessment of our internal controls over financial reporting. This process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing staff and our outside auditors and testing of our internal controls over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and expense, may strain our internal resources and have an adverse impact on our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter.
During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal controls over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal controls over financial reporting are effective and would preclude our independent auditors from issuing an unqualified opinion that our internal controls over financial reporting are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the trading price of our Class A common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting, it may negatively impact our business, results of operations and reputation.
A material weakness in our internal control over financial reporting was identified for the year ended December 31, 2011 and we have determined that we must enhance our internal audit function. Material weaknesses in our financial reporting or internal controls or gaps in our internal audit procedures could adversely affect our business and the trading price of our Class A common stock.
In connection with management’s assessment of internal control over financial reporting, we identified a material weakness in such internal control during the audit of our consolidated financial statements for the year ended December 31, 2011 related to third-party data inputs used in the accounting of impaired loans under ASC 310-30 in the fourth quarter of 2011. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of
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the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we identified was considered in determining the nature, timing, and extent of audit tests applied in the audit of our consolidated financial statements for the year ended December 31, 2011 and did not affect our independent auditor’s report on the consolidated financial statements dated April 10, 2012, which expressed an unqualified opinion on our consolidated financial statements. We have implemented and will continue to implement measures designed to improve our internal control over financial reporting and strengthen our internal audit function. These measures include, among other things, supplementing the personnel involved in overseeing financial reporting. We have also validated the calculations of, and added additional control points to the development of the manual and spreadsheet outputs generated by, the third-party valuation specialists engaged to assist in estimating the cash flow re-estimation, impairment and accretion values in the loan accounting process. While we believe that the actions we are taking and will continue to take to address the existing weakness in internal control over financial reporting and strengthen our internal audit function will mitigate the risk related to the aforementioned internal control material weakness and internal audit matters, we cannot be certain that, at some point in the future, another material weakness will not be identified or our internal audit procedures will not fail to detect a matter they are designed to prevent, and failure to remedy such material weaknesses or enhance our internal audit function could have an adverse impact on our financials and the operation of our business.
In addition to the material weakness we reported, Green Bankshares reported a material weakness in its internal control over financial reporting in its financial statements for the year ended December 31, 2010. Failure to remediate such material weaknesses of our subsidiaries could also have an adverse effect on us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Material Trends and Developments” for information regarding actions we have taken to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors. In addition, our election not to opt out of JOBS Act extended accounting transition period may make our financial statements less easily comparable to the financial statements of other companies.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies immediately after the initial public offering, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million). We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
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that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market areas in the southeastern region of the United States are susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and manmade disasters, such as the 2010 oil spill in the Gulf of Mexico. Our market areas in Tennessee are susceptible to natural disasters, such as tornadoes and floods. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters.
Risks Relating to CBF’s Growth Strategy
We may not be able to effectively manage our growth.
Our future operating results depend to a large extent on our ability to successfully manage our rapid growth. Our rapid growth has placed, and it may continue to place, significant demands on our operations and management. Whether through additional acquisitions or organic growth, our current plan to expand our business is dependent upon:
• | the ability of our officers and other key employees to continue to implement and improve our operational, credit, financial, management and other internal risk controls and processes and our reporting systems and procedures in order to manage a growing number of client relationships; |
• | to scale our technology platform; |
• | to integrate our acquisitions and develop consistent policies throughout the various businesses; and |
• | to manage a growing number of client relationships. |
We may not successfully implement improvements to, or integrate, our management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in expected loan volume and the infrastructure that comes with new branches and banks. Thus, our growth strategy may divert management from our existing businesses and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow our banking franchise, our business and our consolidated results of operations and financial condition could be materially and adversely impacted. In addition, if we are unable to manage future expansion in our operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect our business.
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Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of banks and other financial institutions. Generally, any acquisition of target financial institutions or assets by us will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on such applications of approval, federal banking regulators consider, among other factors:
• | the effect of the acquisition on competition; |
• | the financial condition and future prospects of the applicant and the banks involved; |
• | the managerial resources of the applicant and the banks involved; |
• | the convenience and needs of the community, including the record of performance under the Community Reinvestment Act (which we refer to as the “CRA”); and |
• | the effectiveness of the applicant in combating money-laundering activities. |
Such regulators could deny our application based on the above criteria or other considerations or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell branches as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of any acquisition.
The success of future transactions will depend on our ability to successfully identify and consummate transactions with target financial institutions that meet our investment criteria. Because of the significant competition for acquisition opportunities and the limited number of potential targets, we may not be able to successfully consummate acquisitions necessary to grow our business.
The success of future transactions will depend on our ability to successfully identify and consummate transactions with target financial institutions that meet our investment criteria. There are significant risks associated with our ability to identify and successfully consummate transactions with target financial institutions. There are a limited number of acquisition opportunities, and we expect to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and effecting acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater technical, human and other resources than we do, and our financial resources will be relatively limited when contrasted with those of many of these competitors. These organizations may be able to achieve greater cost savings through consolidating operations than we could. Our ability to compete in acquiring certain sizable target institutions will be limited by our available financial resources. These inherent competitive limitations give others an advantage in pursuing the acquisition of certain target financial institutions. In addition, increased competition may drive up the prices for the types of acquisitions we intend to target, which would make the identification and successful consummation of acquisition opportunities more difficult. Competitors may be willing to pay more for target financial institutions than we believe are justified, which could result in us having to pay more for target financial institutions than we prefer or to forego target financial institutions. As a result of the foregoing, we may be unable to successfully identify and consummate future transactions to grow our business on commercially attractive terms, or at all.
Because the institutions we intend to acquire may have distressed assets, we may not be able to realize the value we predict from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future writedowns taken in respect of, these assets.
Delinquencies and losses in the loan portfolios and other assets of financial institutions that we acquire may exceed our initial forecasts developed during the due diligence investigation prior to acquiring those institutions. Even if we conduct extensive due diligence on an entity we decide to acquire, this diligence may not reveal all
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material issues that may affect a particular entity. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that is typical for these depository institutions. If, during the diligence process, we fail to identify issues specific to an entity or the environment in which the entity operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in other reporting losses. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions we acquire and of the Company as a whole. If any of the foregoing adverse events occur with respect to one subsidiary, they may adversely affect other of our subsidiaries or the Company as a whole. Current economic conditions have created an uncertain environment with respect to asset valuations and there is no certainty that we will be able to sell assets of target institutions if we determine it would be in our best interests to do so. The institutions we will target may have substantial amounts of asset classes for which there is currently limited or no marketability.
The success of future transactions will depend on our ability to successfully combine the target financial institution’s business with our existing banking business and, if we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.
The success of future transactions will depend, in part, on our ability to successfully combine the target financial institution’s business with our existing banking business. As with any acquisition involving financial institutions, there may be business disruptions that result in the loss of customers or cause customers to remove their accounts and move their business to competing banking institutions. It is possible that the integration process could result in additional expenses in connection with the integration processes and the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts, including integration of the target financial institution’s systems into our systems may divert our management’s attention and resources, and we may be unable to develop, or experience prolonged delays in the development of, the systems necessary to operate our acquired banks, such as a financial reporting platform or a human resources reporting platform call center. If we experience difficulties with the integration process, the anticipated benefits of any future transaction may not be realized fully or at all or may take longer to realize than expected. Additionally, we may be unable to recognize synergies, operating efficiencies and/or expected benefits within expected timeframes or expected cost projections, or at all. We may also not be able to preserve the goodwill of the acquired financial institution.
Our pending transaction with Southern Community Financial may present certain risks to our business and operations.
On March 26, 2012, we entered into an agreement to acquire Southern Community Financial, which agreement was amended on June 25, 2012. This investment presents the following risks, among others:
• | the possibility that the expected benefits of the transaction may not materialize in the timeframe expected or at all, or may be more costly to achieve; |
• | the possibility that the parties may be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers and other assets of Southern Community Financial in a manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies and integrating Southern Community Financial’s workforce while maintaining focus on providing consistent, high-quality customer service; |
• | the possibility that required regulatory, stockholder or other approvals, including approval of Southern Community Financial’s stockholders, might not be obtained or other closing conditions might not be satisfied in a timely manner or at all; |
• | reputational risks and the reaction of the companies’ customers to the transaction; and |
• | the investment may require diversion of the attention of our management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us. |
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Projected operating results for entities to be acquired by us may be inaccurate and may vary significantly from actual results.
We will generally establish the pricing of transactions and the capital structure of entities to be acquired by us on the basis of financial projections for such entities. In general, projected operating results will be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from actual results. General economic, political and market conditions, which are not predictable, can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect our business and our consolidated results of operations and financial condition.
Our officers and directors may have conflicts of interest in determining whether to present business opportunities to us or another entity with which they are, or may become, affiliated.
Our officers and directors may become subject to fiduciary obligations in connection with their service on the boards of directors of other corporations. To the extent that our officers and directors become aware of acquisition opportunities that may be suitable for entities other than us to which they have fiduciary or contractual obligations, or they are presented with such opportunities in their capacities as fiduciaries to such entities, they may honor such obligations to such other entities. In addition, our officers and directors will not have any obligation to present us with any acquisition opportunity that does not fall within certain parameters of our business (which opportunities and parameters are described in more detail in the section entitled “Information about CBF”). You should assume that to the extent any of our officers or directors becomes aware of an opportunity that may be suitable both for us and another entity to which such person has a fiduciary obligation or contractual obligation to present such opportunity as set forth above, he or she may first give the opportunity to such other entity or entities and may give such opportunity to us only to the extent such other entity or entities reject or are unable to pursue such opportunity. In addition, you should assume that to the extent any of our officers or directors becomes aware of an acquisition opportunity that does not fall within the above parameters but that may otherwise be suitable for us, he or she may not present such opportunity to us. In general, officers and directors of a corporation incorporated under Delaware law are required to present business opportunities to a corporation if the corporation could financially undertake the opportunity, the opportunity is within the corporation’s line of business and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. However, our certificate of incorporation provides that we renounce any interest or expectancy in certain acquisition opportunities that our officers or directors become aware of in connection with their service to other entities to which they have a fiduciary or contractual obligation.
Changes in accounting standards may affect how we report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (which we refer to as the “FASB”) or other regulatory authorities change the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.
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Risks Relating to the Regulation of CBF’s Industry
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in them or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that we can pay, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry as a result of the financial crisis in the banking and financial markets. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on our operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on our business are:
• | changes to regulatory capital requirements; |
• | exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier 1 capital; |
• | creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products); |
• | potential limitations on federal preemption; |
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• | changes to deposit insurance assessments; |
• | regulation of debit interchange fees we earn; |
• | changes in retail banking regulations, including potential limitations on certain fees we may charge; and |
• | changes in regulation of consumer mortgage loan origination and risk retention. |
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to investors in our Class A common stock. For a more detailed description of the Dodd-Frank Act, see “Supervision and Regulation—Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”
The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules is uncertain.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital, to be phased in over time until fully phased in by January 1, 2019.
Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their Tier 1 capital. In June 2012, the Federal Reserve, OCC and FDIC released proposed rules which would implement the Basel III and Dodd-Frank Act capital requirements. While the Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict how any new standards will ultimately be applied to us and our subsidiary bank.
The FDIC’s restoration plan and the related increased assessment rate could adversely affect our earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the deposit insurance fund of the FDIC (which we refer to as the “DIF”) and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and
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the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations, including by reducing our profitability or limiting our ability to pursue certain business opportunities.
We are subject to federal and state and fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (which we refer to as “OFAC”). If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
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The Federal Reserve may require us to commit capital resources to support our subsidiary bank.
The Federal Reserve, which examines us and our subsidiaries, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to our subsidiary bank if it experiences financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.
Stockholders may be deemed to be acting in concert or otherwise in control of Capital Bank, which could impose prior approval requirements and result in adverse regulatory consequences for such holders.
We are a bank holding company regulated by the Federal Reserve. Accordingly, acquisition of control of us (or our bank subsidiary) requires prior regulatory notice or approval. With certain limited exceptions, federal regulations prohibit potential investors from, directly or indirectly, acquiring ownership or control of, or the power to vote, more than 10% (more than 5% if the acquiror is a bank holding company) of any class of our voting securities, or obtaining the ability to control in any manner the election of a majority of directors or otherwise exercising a controlling influence over our management or policies, without prior notice or application to, and approval of, the Federal Reserve under the Change in Bank Control Act or the Bank Holding Company Act of 1956, as amended (which we refer to as the “BHCA”). Any bank holding company or foreign bank with a U.S. presence also is required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain more than 5% of our outstanding voting securities.
In addition to regulatory approvals, any stockholder deemed to “control” us for purposes of the BHCA would become subject to investment and activity restrictions and ongoing regulation and supervision. Any entity owning 25% or more of any class of our voting securities, or a lesser percentage if such holder or group otherwise exercises a “controlling influence” over us, will be subject to regulation as a “bank holding company” in accordance with the BHCA. In addition, such a holder may be required to divest holdings 5% or more of the voting securities of investments that may be deemed impermissible for a bank holding company, such as an investment in a company engaged in non-financial activities.
Regulatory determination of “control” of a depository institution or holding company is based on all of the relevant facts and circumstances. In certain instances, stockholders may be determined to be “acting in concert” and their shares aggregated for purposes of determining control for purposes of the Change in Bank Control Act. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. How this definition is applied in individual circumstances can vary among the various federal bank regulatory agencies and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert, including whether:
• | stockholders are commonly controlled or managed; |
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• | stockholders are parties to an oral or written agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding company; |
• | the holders each own stock in a bank and are also management officials, controlling stockholders, partners or trustees of another company; or |
• | both a holder and a controlling stockholder, partner, trustee or management official of the holder own equity in the bank or bank holding company. |
Our common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for purposes of determining whether those holders have control of a bank or bank holding company for Change in Bank Control Act purposes. Because the control regulations under the Change in Bank Control Act and the BHCA are complex, potential investors should seek advice from qualified banking counsel before making an investment in our Class A common stock.
Risks Related to CBF’s Common Stock
The market price of our Class A common stock could decline due to the large number of outstanding shares of our common stock eligible for future sale.
Sales of substantial amounts of our Class A common stock in the public market following the initial public offering or in future offerings, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future, at a time and place that we deem appropriate.
In addition, we intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of approximately 4.5 million shares of Class A common stock for issuance under our 2010 Equity Incentive Plan. Any shares issued in connection with acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by investors who acquire our shares in the merger.
If shares of Class B non-voting common stock are converted into shares of Class A common stock, your voting power will be diluted.
Generally, holders of Class B non-voting common stock have no voting power and have no right to participate in any meeting of stockholders or to have notice thereof. However, holders of Class B non-voting common stock that are converted into Class A common stock will have all the voting rights of the other holders of Class A common stock. Class B non-voting common stock is not convertible in the hands of the initial holder. However, a transferee unaffiliated with the initial holder that receives Class B non-voting common stock subsequent to transfer permitted by our certificate of incorporation may elect to convert each share of Class B non-voting common stock into one share of Class A common stock. Upon conversion of any Class B non-voting common stock, your voting power will be diluted in proportion to the decrease in your ownership of the total outstanding Class A common stock.
The market price of our Class A common stock may be volatile, which could cause the value of an investment in our Class A common stock to decline.
The market price of our Class A common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
• | general market conditions; |
• | domestic and international economic factors unrelated to our performance; |
• | actual or anticipated fluctuations in our quarterly operating results; |
• | changes in or failure to meet publicly disclosed expectations as to our future financial performance; |
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• | downgrades in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts; |
• | changes in market valuations or earnings of similar companies; |
• | any future sales of our common stock or other securities; and |
• | additions or departures of key personnel. |
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our Class A common stock. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources and harm our business or results of operations. For example, we are currently operating in, and have benefited from, a protracted period of historically low interest rates that will not be sustained indefinitely, and future fluctuations in interest rates could cause an increase in volatility of the market price of our Class A common stock.
We do not currently intend to pay dividends on shares of our common stock in the foreseeable future after the merger and our ability to pay dividends will be subject to restrictions under applicable banking laws and regulations.
We do not currently intend to pay cash dividends on our common stock in the foreseeable future after the merger. The payment of cash dividends in the future will be dependent upon various factors, including our earnings, if any, cash balances, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then-existing Board of Directors. It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations in the foreseeable future after the merger and, accordingly, our Board of Directors does not currently anticipate declaring any dividends. Because we do not expect to pay cash dividends on our common stock for some time, any gains on an investment in our Class A common stock issued in the merger will be limited to the appreciation, if any, of the market value of our Class A common stock.
Banks and bank holding companies are subject to certain regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. The payment of dividends by us depending on our financial condition could be deemed an unsafe or unsound practice. Our ability to pay dividends will directly depend on the ability of our subsidiary bank to pay dividends to us, which in turn will be restricted by the requirement that it maintains an adequate level of capital in accordance with requirements of its regulators and, in the future, can be expected to be further influenced by regulatory policies and capital guidelines. In addition, on August 24, 2010, Capital Bank entered into the OCC Operating Agreement, which in certain circumstances will restrict Capital Bank’s ability to pay dividends to us, to make changes to its capital structure and to make certain other business decisions. See “Historical Market Prices and Dividend Information.”
Certain provisions of our certificate of incorporation and the loss sharing agreements may have anti-takeover effects, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management. In addition, Delaware law may inhibit takeovers of us and could limit our ability to engage in certain strategic transactions our Board of Directors believes would be in the best interests of stockholders.
Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of our Board of Directors to designate the terms of and issue new series of preferred stock, which may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities, including our Class A common stock. See “Description of Capital Stock.”
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Our loss sharing agreements with the FDIC require that we receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to us or our stockholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the relevant loss sharing arrangement. Among other things, prior FDIC consent is required for (1) a merger or consolidation of us or our bank subsidiary with or into another company if our stockholders will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of any of our bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of Capital Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of any class of our voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of 25% or more of any class of our voting securities). If we or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share protection, there could be a material adverse effect on our financial condition, results of operations and cash flows. In addition, statutes, regulations and policies that govern bank holding companies, including the BHCA, may restrict our ability to enter into certain transactions. See “Supervision and Regulation.”
We are also subject to anti-takeover provisions under Delaware law. We have not opted out of Section 203 of the Delaware General Corporation Law (which we refer to as the “DGCL”), which, subject to certain exceptions, prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless (1) prior to such time the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. Any statements about CBF’s or Capital Bank Corp’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Accordingly, these statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. The actual results of CBF and Capital Bank Corp. could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption “Risk Factors” and elsewhere in this document, including the appendices hereto.
Any or all of the forward-looking statements in this document may turn out to be inaccurate. The inclusion of this forward-looking information should not be regarded as a representation by CBF, Capital Bank Corp. or any other person that the future plans, estimates or expectations contemplated by CBF or Capital Bank Corp. will be achieved. CBF and Capital Bank Corp. have based these forward-looking statements largely on their respective current expectations and projections about future events and financial trends that they believe may affect their respective financial condition, results of operations, business strategy and financial needs. There are important factors that could cause actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements including, but not limited to, statements regarding:
• | changes in general economic and financial market conditions; |
• | changes in the regulatory environment; |
• | economic conditions generally and in the financial services industry; |
• | changes in the economy affecting real estate values; |
• | CBF’s ability to achieve loan and deposit growth; |
• | the completion of CBF’s pending and future acquisitions or business combinations and CBF’s ability to integrate the acquired business into its business model; |
• | projected population and income growth in CBF’s targeted market areas; and |
• | volatility and direction of market interest rates and a weakening of the economy which could materially impact credit quality trends and the ability to generate loans. |
All forward-looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this document. In particular, you should consider the numerous risks described in the “Risk Factors” section of this document. Further, any forward-looking statement speaks only as of the date on which it is made and neither CBF nor Capital Bank Corp. undertakes any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. You should, however, review the risk factors we describe in the reports we will file from time to time with the SEC after the date of this document. See “Additional Information.”
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The following discussion contains material information pertaining to the merger. This discussion is subject, and qualified in its entirety by reference, to the merger agreement attached as Appendix A to this document. We encourage you to read carefully this entire document, including the merger agreement included as Appendix A, for a more complete understanding of the merger.
The Boards of Directors of CBF (formerly known as North American Financial Holdings, Inc.) and Capital Bank Corp. have approved and adopted the merger agreement. The merger agreement provides for the merger of Capital Bank Corp. with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of Capital Bank Corp. common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or Capital Bank Corp., will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of Capital Bank Corp. common stock will be entitled to receive cash in lieu thereof.
We expect to complete the merger substantially concurrent with the completion of CBF’s initial public offering. We currently anticipate the completion of the merger to occur in the second half of 2012. While the merger agreement does not contain conditions to the completion of the merger, the timing of the merger may change based on the timing of CBF’s initial public offering and the timing of CBF’s planned mergers with its other bank holding company subsidiaries, which are part of the reorganization. CBF may choose to complete the merger even if it does not complete its initial public offering.
Background and Reasons for the Merger
CBF’s Investment in Capital Bank Corp.
Since raising approximately $900 million in December 2009 and January and July 2010, CBF has pursued acquisition opportunities consistent with its business strategy that it believes will produce attractive returns for its stockholders.
On October 28, 2010, Capital Bank Corp. and its subsidiary bank executed a Memorandum of Understanding with the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks, which required, among other things, that Capital Bank Corp. increase its regulatory capital. Capital Bank Corp. had been pursuing strategic alternatives to raise capital and strengthen its balance sheet for more than a year, including two attempted underwritten public offerings that were withdrawn, a completed private placement of units consisting of 60% common stock and 40% in subordinated promissory notes for $8.5 million, and discussions about potential sales of certain assets, private placements and change in control transactions.
Throughout 2010, Capital Bank Corp. permitted several potential investors/acquirers to conduct due diligence on Capital Bank Corp. pursuant to confidentiality agreements. CBF was among the potential investors/acquirers that entered into a confidentiality agreement. During late May and early June, 2010, CBF conducted due diligence on Capital Bank Corp. and continued negotiations with Capital Bank Corp.’s management and advisors.
In September 2010, following the withdrawal of Capital Bank Corp.’s second attempted underwritten public offering of its common stock, its Board of Directors appointed a special committee of the Board to work closely with management and outside advisors to evaluate potential alternatives for raising additional capital.
In October 2010, CBF delivered a proposal to make a majority investment in Capital Bank Corp. Following review and consideration of CBF’s investment proposal, the special committee recommended the proposal to
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Capital Bank Corp.’s Board of Directors. After considering CBF’s investment proposal, Capital Bank Corp.’s Board of Directors determined that the transaction proposed by CBF was in the best interests of Capital Bank Corp.’s shareholders.
On November 3, 2010, CBF entered into an Investment Agreement (which we refer to, as amended, as the “Investment Agreement”) with Capital Bank Corp. and its then wholly owned subsidiary, Capital Bank (which we refer to as “Old Capital Bank”). The Investment Agreement provided for Capital Bank Corp. to sell to CBF, subject to certain conditions, 71,000,000 shares of Capital Bank Corp. common stock for $181.1 million (which we refer to as the “Investment”). In connection with the Investment, each existing Capital Bank Corp. shareholder would also receive one contingent value right (which we refer to as a “CVR”) per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s existing loan portfolio. Also in connection with the Investment, pursuant to an agreement among CBF, the U.S. Department of the Treasury and Capital Bank Corp., Capital Bank Corp.’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A and warrant to purchase shares of common stock issued by Capital Bank Corp. to the Treasury in connection with the Treasury’s Troubled Asset Relief Program would be repurchased. In connection with the Investment, Capital Bank Corp. also agreed to provide CBF with customary registration rights for its shares of Capital Bank Corp. common stock.
On December 16, 2010, at a special meeting of Capital Bank Corp. shareholders, the shareholders of Capital Bank Corp. voted to approve the Investment.
On January 28, 2011, after having received the required regulatory and other approvals, the Investment, along with the related transactions described above, was completed. In connection with the Investment, CBF’s Chief Executive Officer, R. Eugene Taylor, Chief Financial Officer, Christopher G. Marshall, Chief Risk Officer, R. Bruce Singletary, and two of its outside Directors, Peter N. Foss and William A. Hodges, were each appointed to the board of directors of Capital Bank Corp. Two existing members of the Capital Bank Corp. board, Oscar A. Keller, III and Charles F. Atkins, remained on the Capital Bank Corp. Board. All other members of the Board of Directors of Capital Bank Corp. resigned effective January 28, 2011.
After the completion of the Investment and prior to March 11, 2011, CBF owned approximately 85% of Capital Bank Corp.’s common stock. Under the terms of the Investment Agreement, Capital Bank Corp. conducted a rights offering to its shareholders as of January 27, 2011 in which shareholders were able to purchase shares of Capital Bank Corp. common stock at the same price that CBF received under the Investment Agreement, subject to certain limitations. Approximately 1,613,165 shares of Capital Bank Corp.’s common stock were issued in exchange for approximately $4.1 million upon completion of the rights offering on March 11, 2011. As a result of this rights offering, CBF’s ownership interest in Capital Bank Corp. was reduced to approximately 83%.
The Merger of Capital Bank with CBF’s Depository Institution Subsidiary
Following the completion of its investment in Capital Bank Corp., CBF worked to integrate Capital Bank Corp.’s management, policies and systems with those of CBF’s existing operations. In addition, CBF worked to integrate the legal entities through which CBF conducted its banking operations.
As a result of CBF’s acquisition of the Failed Banks and its investments in TIB Financial, Capital Bank Corp. and Green Bankshares, CBF has a majority interest in three public bank holding companies, each of which also has a portion of its shares owned by the public. In addition, prior to April 29, 2011, CBF held controlling interests in three banks: a 100% direct interest in NAFH National Bank and indirect controlling interests in TIB Financial Corp.’s banking subsidiary, TIB Bank, and Capital Bank Corp.’s banking subsidiary, Old Capital Bank.
Beginning in December 2010, CBF’s management began discussions, in conjunction with its advisors, concerning the optimal corporate structure for CBF. In February 2011, after discussions with its management and
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outside advisors, CBF’s Board of Directors determined that it would be advisable to explore (1) combining Old Capital Bank and NAFH National Bank, (2) combining Capital Bank Corp. and CBF, (3) combining TIB Bank and NAFH National Bank and (4) combining TIB Financial and CBF.
In April 2011, CBF’s Board of Directors and NAFH National Bank’s Board of Directors each met and authorized management to combine TIB Bank with NAFH National Bank in an all-stock transaction with an exchange ratio based on the relative tangible book values per share of TIB Bank and NAFH National Bank. Also in April 2011, the Board of Directors of TIB Financial and TIB Bank, including all of the members of the TIB Financial and TIB Bank Boards of Directors that are not also members of CBF’s Board of Directors, met and approved the combination of TIB Bank with NAFH National Bank in an all-stock transaction with an exchange ratio based on the relative tangible book values per share of TIB Bank and NAFH National Bank.
On April 27, 2011, TIB Bank and NAFH National Bank entered into a merger agreement, and on April 29, 2011, after receiving required regulatory approval, TIB Bank merged with and into NAFH National Bank. In the merger, each share of TIB Bank common stock was converted into the right to receive shares of NAFH National Bank common stock. Following the merger, TIB Financial owned approximately 53% of NAFH National Bank and CBF directly owned the remaining 47%.
In June 2011, CBF’s Board of Directors and NAFH National Bank’s Board of Directors each met and authorized management to combine Old Capital Bank with NAFH National Bank in an all-stock transaction, also with an exchange ratio based on the relative tangible book values per share of Old Capital Bank and NAFH National Bank. Also in June 2011, the Boards of Directors of Capital Bank Corp. and Old Capital Bank, including all of the members of the Capital Bank Corp. Board of Directors and Old Capital Bank Board of Directors that are not also members of CBF’s Board of Directors, met and approved the combination of Old Capital Bank with NAFH National Bank in an all-stock transaction with an exchange ratio based on the relative tangible book values per share of Old Capital Bank and NAFH National Bank.
On June 30, 2011, after receiving required regulatory approvals, Old Capital Bank and NAFH National Bank entered into a merger agreement and on the same day Old Capital Bank merged with and into NAFH National Bank. In the merger, each share of Old Capital Bank common stock was converted into the right to receive shares of NAFH National Bank common stock. Following the merger, Capital Bank Corp. owned approximately 38% of NAFH National Bank, CBF directly owned approximately 29% of NAFH National Bank and TIB Financial owned the remaining approximately 33%. In connection with the merger, NAFH National Bank changed its name to Capital Bank, National Association.
As a result of the discussions referred to above regarding CBF’s optimal corporate structure, the Investment Agreement with Green Bankshares contemplated that GreenBank would be merged with and into Capital Bank within three business days of the completion of the Investment. Prior to CBF’s completion of the Investment, the Board of Directors and shareholders of Green Bankshares approved the merger of GreenBank with and into Capital Bank in an all-stock transaction with an exchange ratio equal to the ratio of the tangible book value of GreenBank to the tangible book value of Capital Bank.
On September 7, 2011, after receiving required regulatory approvals and immediately after the completion of the Investment, GreenBank and Capital Bank entered into a merger agreement and GreenBank subsequently merged with and into Capital Bank. In the merger, each share of GreenBank common stock was converted into the right to receive shares of Capital Bank common stock. Following the merger, Green Bankshares owned approximately 34% of Capital Bank, CBF directly owned approximately 19% of Capital Bank, TIB Financial owned approximately 21% of Capital Bank and Capital Bank Corp. owned approximately 26% of Capital Bank.
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The Merger of Capital Bank Corp. and CBF
Following the consolidation of CBF’s banking subsidiaries into a single legal entity, CBF, TIB Financial and Capital Bank worked to integrate the legal entities that directly and indirectly held interests in Capital Bank, N.A.
On September 1, 2011, the Board of Directors of CBF adopted resolutions pursuant to which TIB Financial would be merged with and into CBF in a short-form merger without the approval of TIB Financial’s shareholders as permitted by Florida law. The exchange ratio in that merger selected was based on the relative tangible book values per share of CBF and TIB Financial as of June 30, 2011, after giving pro forma effect to CBF’s acquisition of Green Bankshares.
On September 1, 2011, CBF’s Board of Directors met and adopted the merger agreement providing for the merger of Capital Bank Corp. with and into CBF. The exchange ratio selected was based on the relative tangible book values per share of CBF and Capital Bank Corp. as of June 30, 2011, after giving pro forma effect to CBF’s acquisition of Green Bankshares.
On September 1, 2011, the Board of Directors of Capital Bank Corp., including all of the members of the Capital Bank Corp. Board of Directors that are not also members of CBF’s Board of Directors, met and adopted the merger agreement providing for the merger of Capital Bank Corp. with and into CBF with an exchange ratio based on the relative tangible book values per share of CBF and Capital Bank Corp. as of June 30, 2011, after giving pro forma effect to CBF’s acquisition of Green Bankshares. At such meeting, the Board of Directors of Capital Bank Corp. considered the opinion of Sterne Agee to the effect that, as of the date of the opinion, the exchange ratio was fair to the shareholders of Capital Bank Corp. from a financial point of view.
Thereafter, on September 1, 2011 CBF and Capital Bank Corp. each executed the merger agreement.
On September 8, 2011, the Board of Directors of CBF adopted resolutions pursuant to which Green Bankshares would be merged with and into CBF in a short-form merger without the approval of Green Bankshares’ shareholders, as permitted by Tennessee law. The exchange ratio in that merger is based on the pro forma relative tangible book values per share of CBF and Green Bankshares as of June 30, 2011.
Reasons for the Merger
In reaching its decision to adopt and approve the merger, CBF’s Board of Directors consulted with management and considered a number of factors, including:
• | the combinations are expected to lower costs by eliminating the costs associated with the separate corporate existence (and therefore the need to prepare separate financial statements) and public company status of CBF’s bank holding company subsidiaries, including Capital Bank Corp.; and |
• | the combinations are expected to simplify CBF’s corporate governance structure by resulting in a single bank holding company with a single group of public stockholders. CBF expects this will reduce the risk of potential conflicts of interest between CBF’s current stockholders and the former public minority shareholders of CBF’s subsidiaries. |
In reaching its decision to approve the merger, the Capital Bank Corp. Board of Directors consulted with management and considered both of the factors described above and also considered the fact that the merger will result in Capital Bank Corp. shareholders holding shares in CBF, which is expected to have a significantly larger market capitalization and substantially greater trading volume in its stock following the merger than Capital Bank Corp. had prior to the merger. The Capital Bank Corp. Board of Directors also relied on the experience of Sterne Agee for analyses of the financial terms of the merger and for its opinion as to the fairness, from a financial point of view, of the consideration in the merger to Capital Bank Corp.
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The foregoing discussion of the factors considered by the CBF Board of Directors and the Capital Bank Corp. Board of Directors is not intended to be exhaustive, but rather includes the material factors considered by the CBF Board of Directors and the Capital Bank Corp. Board of Directors. In reaching their respective decisions to approve the merger, neither Board of Directors quantified or assigned any relative weights to the factors considered, and individual directors may have given different weights to different factors. Each Board of Directors considered all these factors as a whole, including discussions with, and questioning of, management, and overall considered the factors to be favorable to, and to support, its determination.
Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger
Some of Capital Bank Corp.’s directors and executive officers have interests in the merger that are different from or in addition to, the interests of Capital Bank Corp.’s shareholders generally. The Capital Bank Corp. board of directors was aware of and considered these interests, among other matters, in evaluating the merger agreement and the merger and recommending that shareholders approve the merger.
Ongoing Service with CBF
Following the consummation of the merger, Messrs. Keller and Atkins of the Capital Bank Corp. board of directors will become directors of CBF and Messrs. Taylor, Foss and Hodges will continue to be directors of CBF. In addition, each of Messrs. Taylor, Marshall and Singletary will continue as executive officers of CBF in their current roles as Chief Executive Officer, Chief Financial Officer and Chief Risk Officer.
Potential Payments Upon a Termination of Employment in Connection with a Change of Control
The merger will not be a change in control under any plan, agreement or arrangement in respect of the executive officers of Capital Bank Corp. Accordingly, none of the executive officers will receive enhanced or additional payments or benefits as a result of or in connection with the merger.
The following table reflects the compensation and benefits, if any, that will be paid or provided to each of the named executive officers of Capital Bank Corp. in the event a named executive officer’s employment is terminated by Capital Bank Corp. without cause or the named executive officer resigns his employment with Capital Bank Corp. for good reason, in connection with a change of control.
Golden Parachute Compensation
Name | Cash ($) | Perquisites/Benefits ($) | Total ($) | |||||||||
R. Eugene Taylor | – | – | – | |||||||||
Christopher G. Marshall | – | – | – | |||||||||
R. Bruce Singletary | – | – | – | |||||||||
B. Grant Yarber | – | – | – | |||||||||
David C. Morgan | – | – | – | |||||||||
Mark J. Redmond | – | – | – |
Fairness Opinion from Sterne Agee
By letter dated August 30, 2011, Capital Bank Corp. retained Sterne, Agee & Leach, Inc. to render an opinion to Capital Bank Corp. in connection with the merger of Capital Bank Corp. with and into CBF, pursuant to the merger agreement between CBF and Capital Bank Corp. As set forth more fully in the merger agreement, as a result of the merger, each share of common stock, no par value of Capital Bank Corp. (other than shares for which appraisal rights are properly exercised and certain shares held by CBF or Capital Bank Corp.) will be
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converted into the right to receive 0.1354 shares (which we refer to as the “Exchange Ratio”), par value $0.01 per share, of CBF Class A common stock. Capital Bank Corp.’s Board of Directors retained Sterne Agee as a financial advisor because Sterne Agee is a nationally recognized investment banking firm with substantial expertise in transactions similar to the proposed transaction, and because it was familiar with CBF, TIB Financial and Capital Bank Corp. and their respective businesses due to Sterne Agee’s prior engagements by TIB Financial and Capital Bank Corp. during the spring and summer of 2011, respectively, regarding the mergers of TIB Financial’s and Capital Bank Corp.’s subsidiary banks into Capital Bank. Sterne Agee, as part of its investment banking business, is regularly involved in the valuation of businesses and their securities in connection with mergers and acquisitions and other corporate transactions. Sterne Agee did not act as financial advisor to any of CBF, Capital Bank Corp., TIB Financial or Green Bankshares in connection with, and has not participated in the negotiations leading to, the merger, the Green Bankshares Investment or the Other Transactions (both as defined below).
On August 31, 2011, Sterne Agee delivered its written opinion to Capital Bank Corp.’s board of directors that, as of such date, and based upon and subject to factors and assumptions set forth therein, the Exchange Ratio was fair, from a financial point of view, to the shareholders of Capital Bank Corp. The full text of Sterne Agee’s written opinion, dated August 31, 2011, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken, in connection with the opinion, is attached as Appendix B to this document and is incorporated herein by reference. The description of the opinion set forth herein is qualified in its entirety by reference to the full text of the opinion. Capital Bank Corp.’s shareholders are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.
In connection with rendering its opinion, Sterne Agee had, among other things:
1. | reviewed a draft of the merger agreement, provided to it on August 30, 2011; |
2. | reviewed drafts of the Plan of Merger between CBF and TIB Financial and the Plan of Merger between CBF and Green Bankshares (collectively, the “Other Agreements”), provided to it on or before August 30, 2011; |
3. | reviewed certain publicly-available financial statements of CBF, Capital Bank Corp., TIB Financial and Green Bankshares; |
4. | reviewed certain internal financial analyses and pro forma financial information for CBF, Capital Bank Corp., TIB Financial and Green Bankshares, as applicable; |
5. | reviewed certain materials detailing the merger, the mergers of TIB Financial and Green Bankshares with and into CBF pursuant to the Other Agreements (collectively, the “Other Transactions”) and the investment by CBF in Green Bankshares (the “Green Bankshares Investment”), prepared by CBF or its affiliates or legal and accounting advisors; |
6. | conducted conversations with employees of CBF or its affiliates or legal and accounting advisors regarding the matters described in clauses 1-5 above and regarding the structure and rationale for the merger; |
7. | compared certain financial metrics of CBF, Capital Bank Corp., TIB Financial and Green Bankshares; |
8. | reviewed the overall environment for depository institutions in the United States; and |
9. | conducted such other financial studies, analyses and investigations as it deemed appropriate. |
In conducting its review and arriving at its opinion, Sterne Agee relied upon and assumed, with the consent of the Capital Bank Corp. board of directors, and without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by it. Where it deemed appropriate, Sterne Agee also relied upon publicly available information, without independent verification, that it believed to be reliable, accurate and
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complete, but it did not guarantee the reliability, accuracy or completeness of any such publicly available information. With respect to the pro forma information supplied to it, Sterne Agee assumed, with the consent of the Capital Bank Corp. board of directors, that such information was reasonably prepared on the basis reflecting the best currently available estimates and judgments of CBF and its affiliates. In rendering its opinion, Sterne Agee expressed no view as to the reasonableness of such information or the assumptions on which it was based. Sterne Agee also relied upon the materials provided to it, and its studies, analyses and investigations, in connection with its previous engagement by the Capital Bank Corp. board of directors in April 2011 with respect to the merger of Capital Bank with and into NAFH National Bank.
For the purposes of rendering its opinion, Sterne Agee also assumed, with the consent of the Capital Bank Corp. board of directors, that (i) the merger agreement was a valid, binding and enforceable agreement upon the parties and their affiliates and will not be terminated or breached by either party; (ii) there had been no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of CBF, Capital Bank Corp., TIB Financial or Green Bankshares and their respective affiliates since either (1) the date of the last financial statements made available to it and (2) the dates of the drafts of the merger agreement and the Other Agreements reviewed by it; (iii) no legal, political, economic, regulatory or other developments have occurred that will adversely affect these entities; (iv) all required governmental, regulatory, shareholder and third-party approvals had or will be received in a timely fashion and without any conditions or requirements that could adversely affect the merger; and (v) the Green Bankshares Investment and the subsequent merger of GreenBank with and into Capital Bank would be completed prior to the consummation of the merger.
Sterne Agee is not a legal, regulatory, tax or accounting expert and relied on the assessments made by CBF, its affiliates and their respective advisors with respect to such issues. Sterne Agee did not make an independent evaluation of the assets or liabilities of CBF, Capital Bank Corp., TIB Financial or Green Bankshares or their respective affiliates, including, but not limited to, any derivative or off-balance sheet assets or liabilities.
The Sterne Agee opinion is limited to the fairness, from a financial point of view, of the Exchange Ratio, is subject to the assumptions, limitations, qualifications and other conditions contained therein, was necessarily based on economic, market and other conditions as existed on, and could be evaluated as of, the date of the opinion and on the information made available to it as of the date of the opinion. Sterne Agee expressly disclaimed any obligation to update, revise or reaffirm its opinion based on events and developments occurring after the date of its opinion.
Except as expressly stated therein, the Sterne Agee opinion does not address the fairness of the merger, or any consideration received in connection therewith, to the holders of any class of securities, creditors or other constituencies of Capital Bank Corp., nor does it address the fairness of the contemplated benefits of the merger. The Sterne Agee opinion does not address the merits of the underlying business decision of Capital Bank Corp. to engage in the merger or the relative merits of the merger as compared to any strategic alternatives that may be available to Capital Bank Corp. In addition, Sterne Agee did not express any view or opinion with respect to the fairness, financial or otherwise, of the amount or nature or any other aspect of any compensation payable to or to be received by any officers, directors or employees of any parties to the merger relative to the Exchange Ratio.
The Sterne Agee opinion was approved and authorized for issuance by a fairness opinion committee and was addressed to, and provided solely and exclusively for the information and assistance of the board of directors of Capital Bank Corp. in connection with its consideration of the Exchange Ratio and is not a recommendation to the shareholders of Capital Bank Corp. as to how they should vote with respect to the merger or any related matter.
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Summary of Analysis
The following is a summary of the material financial analyses contained in the presentation delivered by Sterne Agee to the Capital Bank Corp. board of directors and that were used by Sterne Agee in connection with rendering its opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Sterne Agee, nor does the order in which the analyses are described represent the relative importance or weight given to the analyses by Sterne Agee. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Sterne Agee’s financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on financial information, is based on information as it existed on June 30, 2011, and is not necessarily indicative of the current financial condition of each company.
Pro Forma Ownership/Exchange Ratio
Sterne Agee reviewed and compared the following financial information for CBF, Capital Bank Corp., TIB Financial and Green Bankshares:
As of June 30, 2011 | ||||||||||||||||||||
CBF | Capital Bank Corp. | TIB Financial | Green Bankshares | |||||||||||||||||
(Actual) | (Pro Forma)(1) | (Actual) | (Actual) | (Pro Forma)(2) | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Shareholders’ Equity | $ | 951,692 | $ | 982,552 | $ | 228,377 | $ | 180,036 | $ | 249,082 | ||||||||||
Less: Noncontrolling Interest | 48,670 | 83,405 | – | – | – | |||||||||||||||
Adjusted Shareholders’ Equity | 903,022 | 899,147 | 228,377 | 180,036 | 249,082 | |||||||||||||||
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Actual Goodwill & Intangibles | 80,549 | 124,493 | – | 3,288 | – | |||||||||||||||
Allocation of Bank Intangibles(3) | – | – | 33,343 | 28,823 | 45,254 | |||||||||||||||
Less: Tax-Effect of Intangibles | 6,511 | 10,345 | 2,513 | 3,440 | 3,410 | |||||||||||||||
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Adjusted Goodwill & Intangibles | 74,038 | 114,147 | 30,830 | 28,671 | 41,844 | |||||||||||||||
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Tangible Book Value | $ | 828,984 | $ | 785,000 | $ | 197,547 | $ | 151,365 | $ | 207,238 | ||||||||||
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Shares Outstanding | 46,149,998 | 46,149,998 | 85,802,164 | 12,349,935 | 133,147,109 | |||||||||||||||
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Tangible Book Value per Share | $ | 17.96 | $ | 17.01 | $ | 2.30 | $ | 12.26 | $ | 1.56 | ||||||||||
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(1) | Pro forma for the acquisition of Green Bankshares and immediately prior to the reorganization |
(2) | Based on actual financial results as of June 30, 2011, adjusted for the Green Bankshares Investment and subsequent merger of GreenBank with and into Capital Bank, N.A. (formerly known as NAFH National Bank) |
(3) | Allocation of bank intangibles based on ownership position in Capital Bank, N.A., pro forma for the impact of the Green Bankshares Investment and subsequent merger of GreenBank with and into Capital Bank, N.A. |
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Using this financial information, Sterne Agee calculated an exchange ratio of 0.1354x for the merger using the tangible book value per share of Capital Bank Corp. as of June 30, 2011 and the pro forma tangible book value per share of CBF as of June 30, 2011. Based on its experience and expertise, Sterne Agee concluded that tangible book value was the appropriate valuation metric in the current environment for depository institutions to use in determining the exchange ratio.
CBF Combined Ownership | Exchange Ratios | ||||||||||||||
Legacy Shareholders: | Shares (in thousands) | Ownership | |||||||||||||
CBF | 46,150 | 92.6 | % | N/A | |||||||||||
Capital Bank Corp. | 2,004 | 4.0 | % | 0.1354 | |||||||||||
TIB Financial | 492 | 1.0 | % | 0.7205 | |||||||||||
Green Bankshares | 1,213 | 2.4 | % | 0.0915 | |||||||||||
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49,859 | 100.0 | % | |||||||||||||
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Sterne Agee also calculated the pro forma ownership of CBF, assuming consummation of the Green Bankshares Investment, the merger and the Other Transactions. The percentage of total equity, after adjusting for CBF’s ownership position, is equal to the pro forma ownership based on the exchange ratios.
Capital Bank Corp. | TIB Financial | Green Bankshares | CBF Pro Forma | |||||||||||||
Adjusted Tangible Book Value | $ | 197,547 | $ | 151,365 | $ | 207,238 | $ | 785,000 | ||||||||
Less: % Owned by CBF | (163,467 | ) | (142,991 | ) | (186,603 | ) | – | |||||||||
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Adjusted TBV Attributable to Minority Owners | $ | 34,080 | $ | 8,374 | $ | 20,635 | $ | 785,000 | ||||||||
Percentage of Total Equity | 4.0 | % | 1.0 | % | 2.4 | % | 92.6 | % |
Transaction Rationale
Sterne Agee reviewed and analyzed the June 30, 2011 balance sheet of Capital Bank Corp. and made the following observations:
• | Following the merger of Capital Bank and NAFH National Bank on June 30, 2011, Capital Bank Corp. accounts for its ownership in Capital Bank as an equity method investment |
• | The amount recorded on the balance sheet reflected Capital Bank Corp.’s pro rata ownership of Capital Bank’s shareholders’ equity as of June 30, 2011, plus an advance totaling $3.4 million; |
• | In future periods, the equity investment will be adjusted based on Capital Bank’s net income and comprehensive income; |
• | Subordinated debentures represented the fair value of variable rate trust preferred securities and fixed rate sub debt |
• | The principal amount due, which excludes the fair market value adjustment, equaled approximately $34.3 million; and |
• | Other liabilities consisted primarily of the fair value of the Contingent Value Right (which we refer to as the “CVR”) granted to Capital Bank Corp.’s shareholders at the time of initial investment by CBF |
• | The value of the CVR was based on the expected performance of Capital Bank Corp.’s legacy loan portfolio. |
Based on its review and analysis, Sterne Agee concluded that no other assets or liabilities of Capital Bank Corp. existed as of June 30, 2011 that would materially impact the Exchange Ratio.
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In performing its analyses, Sterne Agee also took into account the following factors:
• | The merger of Capital Bank with and into NAFH National Bank was completed on June 30, 2011 using consistent methodology to calculate the Exchange Ratio (Tangible Book Value as of March 31, 2011); |
• | Following the merger of Capital Bank and NAFH National Bank, Capital Bank Corp. operates only as a mid-tier holding company whose principal asset is its minority equity investment in Capital Bank; |
• | Capital Bank is the principal asset of both Capital Bank Corp. and CBF |
• | a minority equity investment in Capital Bank is currently the principal asset of Capital Bank Corp. and, following a series of proposed transactions, Capital Bank will be 100% owned by CBF; |
• | The nature of the Capital Bank Corp. legacy shareholders’ investment is not impacted by the merger |
• | Capital Bank Corp.’s legacy shareholders currently have a minority position in Capital Bank Corp. and, post-transaction, will have a minority position in CBF; |
• | If the proposed initial public offering by CBF occurs, a more liquid trading market is likely to develop over time in CBF than in Capital Bank Corp.; and |
• | If the proposed initial public offering by CBF occurs and if the merger is not completed, Capital Bank Corp.’s market multiples would, over time, likely be consistent with CBF (as its majority owner). |
Sterne Agee’s Compensation and Other Relationships with Capital Bank Corp.
Under the engagement letter between Capital Bank Corp. and Sterne Agee, Capital Bank Corp. agreed to pay Sterne Agee a fee of $50,000 upon delivery of the written fairness opinion. No portion of Sterne Agee’s fee is contingent upon either the conclusion expressed in Sterne Agee’s opinion or whether or not the merger is successfully consummated. Pursuant to the engagement letter, Capital Bank Corp. agreed to reimburse Sterne Agee for reasonable, documented out-of-pocket expenses, including any fees and expenses of Sterne Agee’s legal counsel, incurred in connection with the engagement and to indemnify Sterne Agee and related parties against certain liabilities, including liabilities under federal securities laws, relating to, or arising out of, its engagement. In 2011, Sterne Agee was also engaged to deliver fairness opinions, and received a fee upon delivery of such opinions, by (i) the TIB Financial board of directors and the Green Bankshares board of directors with respect to the Other Transactions, for which Sterne Agee received $50,000, (ii) the Capital Bank Corp. board of directors with respect to the merger of Capital Bank with and into NAFH National Bank, for which Sterne Agee received $50,000 and (iii) the TIB Financial board of directors with respect to the merger of TIB Bank with and into NAFH National Bank, for which Sterne Agee received $50,000. Other than the engagements described in the preceding sentence, Sterne Agee has not provided investment banking services to any of CBF, Capital Bank Corp., TIB Financial or Green Bankshares or their respective affiliates during the past two years; however, Sterne Agee may do so in the future.
Dissenters’ or Appraisal Rights
Holders of Capital Bank Corp. common stock will have appraisal rights in connection with the merger, and therefore may elect to be paid in cash for such shareholder’s shares in accordance with the procedures set forth in Article 13 of the North Carolina Business Corporation Act (which we refer to as the “NCBCA”).
The following is a summary of the material terms of the statutory procedures to be followed by holders of Capital Bank Corp. common stock in order to dissent from the merger and perfect appraisal rights under the NCBCA. In the following discussion, references to “Capital Bank Corp.” with respect to actions taken or to be taken at any time following the effectiveness of the merger will mean CBF as the surviving corporation of the merger. The following is a discussion of the material provisions but is not a complete description of the law relating to appraisal rights available under North Carolina law and is qualified in its entirety by the full text of Article 13 of the NCBCA, which is reprinted in its entirety as Appendix C to this document. If you wish to
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exercise appraisal rights, you should review carefully the following discussion and Appendix C. Capital Bank Corp. urges you to consult a lawyer before electing or attempting to exercise these rights.
If the merger is completed, and you are a holder of Capital Bank Corp. common stock who objects to the merger and who fully complies with Article 13 of the NCBCA, you will be entitled to demand and receive payment in cash of an amount equal to the fair value of your shares of Capital Bank Corp. common stock. The amount you would receive in connection with the exercise of statutory appraisal rights would be the fair value of your common stock immediately before the merger completion date, excluding any appreciation or depreciation in anticipation of the merger unless exclusion would be inequitable, using customary and current valuation concepts and techniques generally employed for similar business in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status.
Under Article 13 of the NCBCA, all holders of Capital Bank Corp. common stock entitled to appraisal rights in the merger must be notified in the meeting notice relating to the merger that shareholders are entitled to assert appraisal rights. This document constitutes that notice.
If you are a holder of Capital Bank Corp. common stock and desire to dissent and receive cash payment for the fair value of your Capital Bank Corp. common stock, you must:
• | Deliver to Capital Bank Corp., prior to the shareholder vote on the merger proposal, a written notice of your intent to demand payment if the merger is completed. |
• | Not vote, or cause to permit to be voted, any of your Capital Bank Corp. shares in favor of the approval of the plan of merger contained in the merger agreement and the merger. |
If you do not satisfy both of those conditions and the merger is consummated, you will not be entitled to payment for your shares under the provisions of Article 13 of the NCBCA.
Except as described in the following sentence, the notice of intent to demand payment for your shares of Capital Bank Corp. common stock must be executed by the holder of record of shares of Capital Bank Corp. common stock as to which appraisal rights are to be exercised. A beneficial owner who is not the holder of record may assert appraisal rights only if the beneficial owner does both of the following: (i) submits to Capital Bank Corp. the record holder’s written consent to the assertion of rights no fewer than 40 nor more than 60 days after the date the appraisal notice and form described below are sent, and (ii) submits the written consent with respect to all common stock they beneficially own. A record owner, such as a broker or bank, who holds shares of Capital Bank Corp. common stock as a nominee for others, may exercise appraisal rights as to fewer than all the shares registered in the record shareholder’s name but owned by a beneficial shareholder only if the record shareholder (i) objects with respect to all common stock owned by the beneficial shareholder, and (ii) notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted.
If the merger proposal becomes effective, Capital Bank Corp. will deliver to all holders of Capital Bank Corp. common stock who have satisfied the requirements described above, a written appraisal notice and form described below. The appraisal notice must be sent no earlier than the date the merger proposal becomes effective and no later than 10 days after that date, and it must include the following:
• | A form (i) specifying the first date of any announcement to shareholders, made prior to the date the merger became effective, of the principal terms of the proposed merger, or if such an announcement was made, the form shall require a shareholder asserting appraisal rights to certify whether beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date, and (ii) requiring a shareholder asserting appraisal rights to certify that the common stock holder did not vote for or consent to the merger. |
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• | Disclosure of where the form must be sent and where certificates for certificated shares must be deposited, as well as the date by which those certificates must be deposited. The certificate deposit date must not be earlier than the date for receiving the appraisal form described in the next sentence. |
• | Disclosure of the date by which Capital Bank Corp. must receive the payment demand, which date may not be fewer than 40 nor more than 60 days after the date the appraisal notice and form are sent. The form shall also state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by Capital Bank Corp. by the specified date. |
• | Disclosure of Capital Bank Corp.’s estimate of the fair value of the shares. |
• | Disclosure that, if requested in writing, Capital Bank Corp. will provide to the shareholder so requesting, within 10 days after the date the appraisal notice and form are sent, the number of shareholders who return the forms by the specified date and the total number of shares owned by them. |
• | Disclosure of the date by which the notice to withdraw from the appraisal process must be received, which date must be within 20 days after the date the appraisal form must be received by Capital Bank Corp. |
• | A copy of Article 13 of the NCBCA. |
A holder of Capital Bank Corp. common stock who receives an appraisal notice must demand payment and deposit the shareholder’s Capital Bank Corp. common stock certificates in accordance with the terms of the appraisal notice. A holder of Capital Bank Corp. common stock who demands payment and deposits common stock certificates loses all rights as a shareholder, unless the shareholder withdraws from the appraisal process. A holder of Capital Bank Corp. common stock who does not sign and return the form and, in the case of certificated shares, deposit that shareholder’s share certificates where required, each by the date set forth in the appraisal notice, will not be entitled to payment under Article 13 of the NCBCA.
Except in the case of After-Acquired Shares (as defined below), within 30 days after the appraisal form is due, Capital Bank Corp. will pay in cash to the shareholders who complied with the statutory requirements the amount that Capital Bank Corp. estimates to be the fair value of their common stock, plus interest. Capital Bank Corp.’s payment to each shareholder will be accompanied by the following:
• | Capital Bank Corp.’s annual financial statements. The date of the financial statements will not be more than 16 months before the date of payment and will comply with the NCBCA. If annual financial statements that meet these requirements are not reasonably available, Capital Bank Corp. will provide reasonably equivalent financial information. |
• | Capital Bank Corp.’s latest available quarterly financial statements, if any. |
• | A statement of Capital Bank Corp.’s estimate of the fair value of the shares. The estimate must equal or exceed Capital Bank Corp.’s estimate provided in its appraisal notice and form. |
• | A statement that if you have perfected your appraisal rights, you have the right to demand further payment under Section 55-13-28 of the NCBCA and that if you do not do so within the time period specified therein, then you shall be deemed to have accepted such payment in full satisfaction of Capital Bank Corp.’s obligations under Article 13 of the NCBCA. |
Capital Bank Corp. may elect to withhold payment from you if you were required to, but did not certify, that beneficial ownership of all of your shares for which appraisal rights are asserted were acquired before the date the principal terms of the proposed corporate action were first announced to shareholders (which we refer to as “After-Acquired Shares”). If Capital Bank Corp. elects to withhold payment under these circumstances, within 30 days after the appraisal form is due, Capital Bank Corp. will notify you of the following:
• | Capital Bank Corp.’s financial statements must accompany Capital Bank Corp’s payment listed above. |
• | Capital Bank Corp.’s estimate of fair value of your shares. |
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• | That you may accept Capital Bank Corp.’s estimate of fair value, plus interest, in full satisfaction of your demands or may demand appraisal. |
• | That if you wish to accept Capital Bank Corp.’s offer, you must notify Capital Bank Corp. of your acceptance of the offer within 30 days after receiving the offer. |
• | That if you do not satisfy the requirements for demanding appraisal under Article 13 of the NCBCA, you shall be deemed to have accepted Capital Bank Corp.’s offer. |
If you accept Capital Bank Corp’s estimate of fair value, plus interest, in full satisfaction of your demands, then Capital Bank Corp. must pay in cash the amount it offered within 10 days after receiving your acceptance. If you neither accept Capital Bank Corp.’s estimate of fair value nor demand appraisal, Capital Bank Corp. will pay in cash its estimate of fair value to you within 40 days after sending its notice to you regarding your After-Acquired Shares as described above. If Capital Bank Corp. pays you its estimation of the fair value of its common stock, and you are dissatisfied with the amount of payment, you must notify Capital Bank Corp. in writing of your own estimate of the fair value of your stock, and demand payment of that estimate, plus interest (less any payment made by Capital Bank Corp. as a result of Capital Bank Corp.’s estimation of the fair value of its shares).
If you are offered payment by Capital Bank Corp. for your After-Acquired Shares and are dissatisfied with that offer, you must reject the offer and demand payment of your stated estimate of the fair value of the shares, plus interest.
You waive the right to demand payment, and will only be entitled to the payment of fair value offered by Capital Bank Corp. if you fail to notify Capital Bank Corp. in writing of your demand to be paid your stated estimate of the fair value within 30 days after receiving Capital Bank Corp.’s payment or offer of payment.
If, within 60 days of Capital Bank Corp. receiving a shareholder’s demand for payment, the payment amount has not been settled, Capital Bank Corp. will commence a proceeding by filing a complaint with the Superior Court Division of the North Carolina General Court of Justice requesting that the fair value of the shareholder’s Capital Bank Corp. common stock and the accrued interest be determined. You will not have a right to a trial by jury. The court will have discretion to make all holders of Capital Bank Corp. common stock whose demands remain unsettled parties to the proceeding.
If Capital Bank Corp. does not commence the proceeding within the 60-day period, Capital Bank Corp. will pay you in cash the amount you demanded, plus interest.
The court in an appraisal proceeding also may assess the expenses for the respective parties, in the amounts the court finds equitable, as follows:
• | against Capital Bank Corp. if the court finds that Capital Bank Corp. did not substantially comply with the procedures for the exercise of appraisal rights prescribed by Article 13 of the NCBCA; or |
• | against Capital Bank Corp. or the shareholders demanding appraisal, if the court finds that the party against whom the expenses are assessed acted arbitrarily, vexatiously or not in good faith. |
If the court in an appraisal proceeding finds that the expenses of any shareholder were of substantial benefit to other shareholders and that these expenses should not be assessed against Capital Bank Corp., the court may direct that the expenses be paid out of the amounts awarded the shareholders who were benefited. In the event Capital Bank Corp. fails to make a required payment under Article 13 of the NCBCA, the shareholder may sue directly for the amount owed and, to the extent successful, will be entitled to recover from Capital Bank Corp. all expenses of the suit.
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In view of the complexity of these provisions and the requirement that they be strictly complied with, if you hold Capital Bank Corp. common stock and are considering exercising your appraisal rights under the NCBCA, you should consult a lawyer promptly.
The NCBCA provides that the exercise of appraisal rights will generally be the exclusive method for a holder of Capital Bank Corp. common stock to challenge the merger in the absence of a showing that the merger was either (1) unauthorized under the NCBCA, Capital Bank Corp.’s’ articles of incorporation or bylaws, or the board resolution authorizing the merger, (2) procured as a result of fraud, a material misrepresentation, or an omission of a material fact necessary to make statements made, in light of the circumstances in which they were made, not misleading or (3) constitutes an interested transaction unless authorized under the NCBCA. All written communications from shareholders with respect to the exercise of appraisal rights should be mailed to:
Nancy A. Snow
Capital Bank Corp.
333 Fayetteville Street, Suite 700
Raleigh, NC 27601
Capital Bank Corp. recommends that such communications be sent by registered or certified mail, return receipt requested.
Not voting in favor of the merger proposal is not sufficient to perfect your appraisal rights and receive the fair value of your Capital Bank Corp. common stock, plus interest. You must also comply with all other conditions set forth in Article 13 of the NCBCA, including the conditions relating to the separate written notice of intent to demand payment, the separate written demand for payment of the fair value of your shares of Capital Bank Corp. common stock, the deposit of your Capital Bank Corp. common stock certificates, and the separate notification and demand for payment in excess of an initial payment made by Capital Bank Corp.
The summary set forth above does not purport to be a complete statement of the provisions of the NCBCA relating to the rights of dissenting shareholders and is qualified in its entirety by reference to the applicable sections of the NCBCA, which are included as Appendix C to this document.
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REGULATORY APPROVALS REQUIRED FOR THE MERGER
The merger is not subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules promulgated under that Act by the Federal Trade Commission, which prevent some transactions from being completed until required information and materials are furnished to the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission and the waiting periods end or expire. We are not aware of any material regulatory requirements applicable to the merger under any U.S. state or federal law or regulation, other than any requirements under applicable federal and state securities laws and regulations and North Carolina and Delaware corporate law.
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The merger will be accounted for as a “purchase” of a noncontrolling interest, as such term is used under generally accepted accounting principles, for accounting and financial reporting purposes. Accordingly, CBF’s noncontrolling interest will be reclassified to additional paid in capital.
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The following describes the material provisions of the merger agreement. The following description of the merger agreement is subject, and qualified in its entirety by reference, to the merger agreement, which is attached to this document as Appendix A and is incorporated by reference into this document. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.
The Boards of Directors of Capital Bank Corp. and CBF (formerly known as North American Financial Holdings, Inc.) have approved the merger agreement, which provides for the merger of Capital Bank Corp. with and into CBF. CBF will be the surviving entity in the merger.
Merger Consideration
Each share of Capital Bank Corp. common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and except for specified shares of Capital Bank Corp. common stock held by CBF or Capital Bank Corp., will be converted into the right to receive 0.1354 of a share of CBF Class A common stock.
Fractional Shares
CBF will not issue any fractional shares of its Class A common stock in the merger. Instead, a Capital Bank Corp. shareholder who otherwise would have received a fraction of a share of CBF Class A common stock will receive an amount in cash rounded to the nearest cent. This cash amount will be determined by multiplying the fraction of a share of CBF Class A common stock to which the holder would otherwise be entitled by the average of the closing sale prices of CBF Class A common stock on Nasdaq for the three trading days immediately following the date on which the merger is completed.
Surviving Corporation, Governing Documents and Directors
At the effective time of the merger, CBF’s certificate of incorporation and bylaws in effect immediately prior to the effective time will be the certificate of incorporation and bylaws of CBF as the surviving corporation after completion of the merger until thereafter amended in accordance with their respective terms and applicable law. At the effective time of the merger, CBF’s Board of Directors immediately prior to the effective time of the merger will be the board of directors of CBF as the surviving corporation of the merger.
Treatment of Capital Bank Corp. Stock Options
At the effective time of the merger, each outstanding option to acquire Capital Bank Corp. common stock granted under Capital Bank Corp.’s stock incentive plan will be converted automatically into an option to purchase a number of shares of CBF Class A common stock equal to the product (rounded down to the nearest whole share) of (1) the number of shares of Capital Bank Corp. common stock subject to the option and (2) the exchange ratio of 0.1354. Each converted stock option will be subject to the same terms and conditions (including expiration date, vesting and exercise provisions) as were applicable immediately prior to the effective time of the merger. The per share exercise price for each converted stock option will equal the quotient (rounded up to the nearest whole cent) of (x) the per share exercise price of the option in effect immediately prior to the effective time of the merger and (y) the exchange ratio of 0.1354.
Under the terms of the CVR, Capital Bank Corp. may not merge into any other entity, unless that entity expressly assumes payment and other obligations of Capital Bank Corp. under the CVR. In accordance with the terms of the CVR, at the effective time of the merger, CBF will assume the obligations of Capital Bank Corp. under the CVR.
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Conversion of Shares; Exchange of Certificates
The conversion of Capital Bank Corp. common stock into the right to receive merger consideration will occur automatically at the effective time of the merger. As soon as reasonably practicable after completion of the merger, the exchange agent will exchange certificates or direct registration statements representing or evidencing shares of Capital Bank Corp. common stock for the merger consideration to be received pursuant to the terms of the merger agreement. American Stock Transfer & Trust Company, LLC will be the exchange agent.
Letter of Transmittal
As soon as reasonably practicable after the completion of the merger, the exchange agent will mail a letter of transmittal to each record holder of Capital Bank Corp. common stock certificates at the effective time of the merger. This mailing will contain instructions on how to surrender Capital Bank Corp. common stock certificates in exchange for direct registration shares of book-entry ownership of CBF Class A common stock. A check in the amount of cash to be paid instead of fractional shares will be sent to you as soon as reasonably practicable following the fourth trading day immediately following the effective time of the merger. When you deliver your Capital Bank Corp. stock certificates to the exchange agent along with a properly executed letter of transmittal and any other required documents, your Capital Bank Corp. stock certificates will be cancelled and you will receive a direct registration statement indicating book-entry ownership of CBF Class A common stock representing the number of full shares of CBF Class A common stock to which you are entitled under the merger agreement. You also will receive a cash payment for any fractional shares of CBF Class A common stock that would have been otherwise issuable to you as a result of the merger.
Holders of Capital Bank Corp. common stock should not submit their Capital Bank Corp. stock certificates for exchange until they receive the transmittal instructions and a letter of transmittal form from the exchange agent.
If a certificate for Capital Bank Corp. common stock has been lost, stolen or destroyed, the exchange agent will issue the consideration properly payable under the merger agreement upon receipt of appropriate evidence as to that loss, theft or destruction and will require the posting of a bond indemnifying CBF and the exchange agent for any claim that may be made against CBF as a result of the lost, stolen or destroyed certificates. After completion of the merger, there will be no further transfers on the stock transfer books of Capital Bank Corp., except as required to settle trades executed prior to the completion of the merger.
Withholding
The exchange agent will be entitled to deduct and withhold from the cash in lieu of fractional shares payable to any Capital Bank Corp. stockholder the amounts the exchange agent is required to deduct and withhold under any applicable federal, state, local or foreign tax law. If the exchange agent withholds any amounts, these amounts will be treated for all purposes of the merger as having been paid to the stockholders from whom they were withheld.
Termination of the Merger Agreement
The merger agreement may be terminated by the mutual consent of Capital Bank Corp. and CBF at any time prior to the completion of the merger.
The merger will become effective when (1) a certificate of merger is filed with the Delaware Secretary of State and (2) articles of merger are filed with the North Carolina Secretary of State or (3) such later time as is specified in the certificate of merger and the articles of merger. We expect to complete the merger substantially concurrent with the completion of CBF’s initial public offering. We currently anticipate the completion of the merger to occur in the second half of 2012. The timing of the merger may change based on the timing of CBF’s initial public offering and the timing of CBF’s planned mergers with its other bank holding company subsidiaries, which are part of the reorganization. CBF may choose to complete the merger even if it does not complete its initial public offering.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general discussion of certain material United States federal income tax consequences of the merger to U.S. holders (as defined below) of Capital Bank Corp. common stock that exchange their shares of Capital Bank Corp. common stock for shares of CBF Class A common stock in the merger. This discussion does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any United States federal laws other than those pertaining to the income tax. This discussion is based upon the Internal Revenue Code of 1986, as amended, (which we refer to as “the Code”), the regulations promulgated under the Code and court and administrative rulings and decisions, all as in effect on the date of this document. These authorities may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in this discussion. Neither CBF nor Capital Bank Corp. has sought or will seek any ruling from the Internal Revenue Service regarding any matters relating to the merger, and as a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.
This discussion addresses only those U.S. holders of Capital Bank Corp. common stock that hold their shares of Capital Bank Corp. common stock as a “capital asset” within the meaning of Section 1221 of the Code. Further, this discussion does not address all aspects of United States federal income taxation that may be relevant to particular U.S. holders in light of their individual circumstances or to U.S. holders that are subject to special treatment under the United States federal income tax laws, including:
• | financial institutions; |
• | tax-exempt organizations; |
• | regulated investment companies; |
• | real estate investment trusts; |
• | S corporations or other pass-through entities (or investors in an S corporation or other pass-through entity); |
• | insurance companies; |
• | mutual funds; |
• | “controlled foreign corporations” or “passive foreign investment companies”; |
• | dealers or brokers in stocks and securities, or currencies; |
• | traders in securities that elect to use mark-to-market method of accounting; |
• | holders of Capital Bank Corp. common stock subject to the alternative minimum tax provisions of the Code; |
• | holders of Capital Bank Corp. common stock that received Capital Bank Corp. common stock through the exercise of an employee stock option, through a tax qualified retirement plan or otherwise as compensation; |
• | holders of Capital Bank Corp. common stock that have a functional currency other than the U.S. dollar; |
• | holders of Capital Bank Corp. common stock that exercise appraisal rights in the merger; |
• | holders of Capital Bank Corp. common stock that hold Capital Bank Corp. common stock as part of a hedge, straddle, constructive sale, conversion or other integrated transaction; |
• | persons that are not U.S. holders (as defined below); or |
• | United States expatriates or certain former citizens or long-term residents of the United States. |
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For purposes of this discussion, the term “U.S. holder” means a beneficial owner of Capital Bank Corp. common stock that is for United States federal income tax purposes (1) an individual citizen or resident of the United States, (2) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof or the District of Columbia, (3) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) such trust has made a valid election to be treated as a U.S. person for United States federal income tax purposes or (4) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source.
If an entity or an arrangement treated as a partnership for United States federal income tax purposes holds Capital Bank Corp. common stock, and any partners in such partnership, should consult their own tax advisors.
Determining the actual tax consequences of the merger to you may be complex and will depend on your specific situation and on factors that are not within our control. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws.
Tax Consequences of the Merger Generally
The parties intend for the merger to be treated as a reorganization within the meaning of Section 368(a) of the Code for United States federal income tax purposes. In connection with the filing of the registration statement of which this document is a part, Wachtell, Lipton, Rosen & Katz will deliver an opinion to CBF to the effect that the merger will qualify for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code.
Accordingly, and based on the foregoing opinion, the material U.S. federal income tax consequences of the merger should be as follows. Upon exchanging your Capital Bank Corp. common stock for CBF Class A common stock, you generally will not recognize gain or loss, except with respect to cash received instead of fractional shares of CBF Class A common stock (as discussed below). The aggregate tax basis in the shares of Class A common stock that you receive in the merger, including any fractional share interests deemed received and redeemed as described below, will equal your aggregate adjusted tax basis in the Capital Bank Corp. common stock you surrender in the merger. Your holding period for the shares of Class A common stock that you receive in the merger (including a fractional share interest deemed received and redeemed as described below) will include your holding period for the shares of Capital Bank Corp. common stock that you surrender in the merger.
Cash Instead of a Fractional Share
If you receive cash instead of a fractional share of CBF Class A common stock, you will be treated as having received the fractional share of Class A common stock pursuant to the merger and then as having sold that fractional share of Class A common stock for cash. As a result, you generally will recognize gain or loss equal to the difference between the amount of cash received and the basis in your fractional share of Class A common stock as set forth above. This gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such fractional share (including the holding period of Capital Bank Corp. common stock surrendered therefor) is greater than one year. Long-term capital gains of individuals are generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
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If you are a non-corporate holder of Capital Bank Corp. common stock you may be subject, under certain circumstances, to information reporting and backup withholding (currently at a rate of 28%) on any cash payments you receive. You generally will not be subject to backup withholding, however, if you:
• | furnish a correct taxpayer identification number, certify that you are not subject to backup withholding on the substitute Form W-9 or successor form included in the election form/letter of transmittal you will receive and otherwise comply with all the applicable requirements of the backup withholding rules; or |
• | provide proof that you are otherwise exempt from backup withholding. |
Any amounts withheld under the backup withholding rules are not an additional tax and will generally be allowed as a refund or credit against your United States federal income tax liability, provided you timely furnish the required information to the Internal Revenue Service.
This discussion of certain material U.S. federal income tax consequences is for general information only and is not tax advice. Holders of Capital Bank Corp. common stock are urged to consult their tax advisors with respect to the application of United States federal income tax laws to their particular situations as well as any tax consequences arising under the United States federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.
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Our Company
We are a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. In December 2009 and January and July 2010, we raised approximately $900 million to make acquisitions through a series of private placements of our common stock. Since then, we have acquired six depository institutions, including the assets and certain deposits of the three Failed Banks from the FDIC. We expect to complete the acquisition of a seventh institution through our acquisition of Southern Community Financial in the second half of 2012. As of June 30, 2012, and after giving pro forma effect to our acquisition of Southern Community Financial, we operated 165 branches in Tennessee, Florida, North Carolina, South Carolina and Virginia. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.
We were founded by a group of experienced bankers with a multi-decade record of leading, operating, acquiring and integrating financial institutions. Our executive management team is led by our Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America, where his career spanned 38 years, including tenure as President of the Consumer and Commercial Bank Corp. He also has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc. Our Chief Financial Officer, Christopher G. Marshall, has over 30 years of financial and managerial experience, including service as the Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America’s Global Consumer and Small Business Bank. Our Chief Risk Officer, R. Bruce Singletary, has over 32 years of experience, including 19 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region and as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Kenneth A. Posner serves as our Chief of Investment Analytics and Research. Mr. Posner spent 13 years as an equity research analyst at Morgan Stanley focusing on a wide range of financial services firms.
After giving pro forma effect to our acquisition of Southern Community Financial, as of June 30, 2012, we had approximately $7.7 billion in total assets, $5.0 billion in loans, $6.1 billion in deposits and $1.0 billion in shareholders’ equity.
Our Acquisitions
Overview
Our banking operations commenced on July 16, 2010, when we purchased approximately $1.2 billion of assets and assumed approximately $960.1 million of deposits of the three Failed Banks from the FDIC. We did not pay the FDIC a premium for the deposits of the Failed Banks. In connection with these acquisition, we entered into loss sharing agreements with the FDIC covering approximately $796.1 million of outstanding loans balances and real estate of the Failed Banks that we acquired. Under the loss sharing arrangements, the FDIC has agreed to absorb 80% of all future credit losses and workout expenses on these assets which occur prior to the expiration of the loss sharing agreements. On September 30, 2010, we invested approximately $175.0 million in TIB Financial, a publicly held financial services company that had total assets of approximately $1.7 billion and operated 28 branches in southwest Florida and the Florida Keys. On January 28, 2011, we invested approximately $181.1 million in Capital Bank Corp., a publicly held financial services company that had approximately $1.7 billion in assets and operated 32 branches in central and western North Carolina. In addition, on September 7, 2011, we invested approximately $217.0 million in Green Bankshares, a publicly held financial services company that had approximately $2.4 billion in assets and operated 63 branches across East and Middle Tennessee in addition to one branch in each of Virginia and North Carolina. Within an 18-month period, we have integrated and centralized the underwriting, risk and pricing functions of our first six acquired institutions and combined them all onto a single information processing system. Southern Community Financial currently operates on a different information system, but, like all previously acquired information platforms, we expect to convert it to conform to our single platform structure soon after the closing of the acquisition.
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The Failed Banks
On July 16, 2010, we purchased substantially all of the assets and assumed all of the deposits of First National Bank in Spartanburg, South Carolina, Metro Bank in Miami, Florida and Turnberry Bank in Aventura, Florida. None of the Failed Banks were affiliated with one another. First National Bank, founded in 1999, was a mid-sized community bank targeting customers located in the Spartanburg, Greenville, Charleston, Columbia and York County markets in South Carolina that operated 13 branches at the time we acquired it from the FDIC. Metro Bank, founded in 1984, was a privately held community bank that operated six branches in Miami, Coral Gables, Sunrise and Lighthouse Point, Florida at the time we acquired it from the FDIC. Turnberry Bank, founded in 1985, was a privately held community bank that operated four branches in Aventura, Coral Gables, Pinecrest and South Miami, Florida at the time we acquired it from the FDIC.
Our acquisition of the Failed Banks resulted in our acquiring assets with an estimated fair value of $1.2 billion, which included $768.6 million of loans, $74.4 million of investment securities, $184.3 million of cash and cash equivalents and a $137.3 million FDIC indemnification asset. We also assumed liabilities with a fair value of $1.1 billion, which included $960.1 million of deposits and $148.6 million of borrowings.
These transactions gave us an initial market presence in Miami, which we targeted because of its size and concentrated business activity, and South Carolina, which we targeted because of its attractive demographic growth trends.
Loss Sharing Agreements
In connection with our acquisition of the Failed Banks, we entered into loss sharing agreements with the FDIC covering approximately $796.1 million of loans and real estate owned by the Failed Banks that we acquired. Under the loss sharing agreements, the FDIC agreed to absorb 80% of all future credit losses and workout expenses on these assets which occur prior to the expiration of the loss sharing agreements. We will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid us a reimbursement under the loss sharing agreements and 50% of certain fully charged-off assets.
The loss sharing agreements consists of three (one for each Failed Bank) single-family shared-loss agreements and three (one for each Failed Bank) commercial and other loans shared-loss agreements. The single family shared-loss agreements provide for FDIC loss sharing and reimbursement to us for recoveries to the FDIC for ten years from July 16, 2010 for single-family residential loans. The commercial shared-loss agreements provide for FDIC loss sharing for five years from July 16, 2010 and our reimbursement for recoveries to the FDIC for eight years from July 16, 2010 for all other covered assets.
The covered assets that we acquired in connection with our acquisition of the Failed Banks include one-to-four family residential real estate loans (both owner occupied and non-owner occupied), home equity loans and commercial loans.
We have agreed to make a true-up payment, also known as clawback liability, to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final resolution of all covered assets under the loss sharing agreements in the event losses thereunder fail to reach expected levels, not to exceed ten years from the date of our acquisition of the Failed Banks. The estimated fair value of the true-up payment as of the acquisition date was $1.0 million.
Under the loss sharing agreements, we are limited in our ability to dispose of covered assets and we are required to follow specific servicing procedures and to undertake loss mitigation efforts. Additionally, the FDIC has information rights with respect to our performance, requiring us to maintain detailed compliance records.
The carrying value of the FDIC indemnification asset at June 30, 2012 was $60.8 million.
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TIB Financial Corp.
On September 30, 2010, we invested approximately $175.0 million in TIB Financial, a publicly held bank holding company headquartered in Naples, Florida that had total assets of approximately $1.7 billion and operated 28 branches in southwest Florida and the Florida Keys. Upon the closing of the TIB Financial investment on September 30, 2010, we owned approximately 99% of the outstanding voting power of TIB Financial. TIB Financial subsequently completed a rights offering to legacy TIB Financial stockholders, which reduced our ownership interest in TIB Financial to approximately 94%. In connection with our TIB Financial investment, we acquired a warrant to purchase an additional $175.0 million in TIB common stock on substantially the same terms as our initial investment, exercisable in whole or in part until March 30, 2012. On March 31, 2012, the warrant expired unexercised. On April 29, 2011, we combined TIB Financial’s banking subsidiary, TIB Bank, with our banking subsidiary, NAFH National Bank (whose name has since changed to Capital Bank, National Association) in an all-stock transaction.
TIB Financial has been executing a community bank business strategy for individuals and businesses in the Florida Keys for 37 years. Prior to TIB Bank’s merger with NAFH National Bank, it had 27 full-service banking offices in Florida that were located in Monroe, Miami-Dade, Collier, Lee and Sarasota counties.
The TIB Financial investment resulted in us acquiring assets with a fair value of $1.7 billion, which included $1.0 billion of loans, $309.3 million of investment securities and $229.7 million of cash and cash equivalents. We also assumed liabilities with a fair value of $1.6 billion, which included $1.3 billion of deposits and $208.8 million of subordinated debt and other borrowings.
In connection with the TIB Financial investment, Messrs. Taylor, Marshall, Foss, Hodges and Singletary were each appointed to the board of directors of TIB Financial. Two existing members of the TIB Financial board, Mr. Howard Gutman and Mr. Brad Boaz, also remain on the TIB Financial board.
This acquisition expanded our geographic reach in Florida to include markets that we believe have particularly attractive deposit customer characteristics and provided a platform to support our future growth.
Capital Bank Corp.
On January 28, 2011, we invested approximately $181.1 million in Capital Bank Corp., a publicly held bank holding company headquartered in Raleigh, North Carolina, that had approximately $1.7 billion in assets and operated 32 branches in central and western North Carolina. Upon closing of the Capital Bank Corp. investment, we owned approximately 85% of the voting power of Capital Bank Corp. Also, in connection with the investment, each existing Capital Bank Corp. stockholder received one contingent value right (which we refer to as a “CVR”) per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Capital Bank Corp.’s existing loan portfolio. Holders of CVRs will receive payments under the CVR only if the total amount of credit losses are less than $103,000,000 (or $8.00 per CVR) during such five-year period. Total credit losses through June 30, 2012 were $90.9 million (or $7.05 per CVR). The maximum amount that may be payable under the Capital Bank Corp. CVR at the end of its five-year term is approximately $9.7 million. The management of Capital Bank Corp. currently believes that holders of the CVRs are not likely to receive any payment under the CVRs. Capital Bank Corp. subsequently completed a rights offering to legacy Capital Bank Corp. stockholders, which reduced our ownership interest to approximately 83%. On June 30, 2011, we combined Capital Bank Corp.’s banking subsidiary, Capital Bank, with our banking subsidiary, NAFH National Bank, in an all-stock transaction and, simultaneously with the consummation of the transaction, changed the name of NAFH National Bank to Capital Bank, National Association.
Capital Bank Corp., incorporated in 1998, is a community bank engaged in the general commercial banking business, primarily in markets in central and western North Carolina. It operates 32 branch offices in North Carolina: five branch offices in Raleigh, four in Asheville, four in Fayetteville, three in Burlington, three in Sanford, two in Cary and one in each of Clayton, Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Siler City, Pittsboro, Wake Forest and Zebulon.
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The Capital Bank Corp. investment resulted in us acquiring assets with an estimated fair value of $1.7 billion at the acquisition date, which included $1.1 billion of loans, $225.3 million of investment securities and $208.3 million of cash and cash equivalents. We also assumed liabilities with a fair value of $1.5 billion, which included $1.4 billion of deposits and $143.2 million of subordinated debt and other borrowings.
In connection with the Capital Bank Corp. investment, Messrs. Taylor, Marshall, Foss, Hodges and Singletary were each appointed to the board of directors of Capital Bank Corp. Two existing members of the Capital Bank Corp. board of directors, Mr. Oscar A. Keller, III and Mr. Charles F. Atkins, also remain on the Capital Bank Corp. board. Additionally in connection with the Capital Bank Corp. investment, we agreed to appoint two Capital Bank Corp. board members to our Board of Directors. As the two remaining legacy directors of the Capital Bank Corp. board, we intend to appoint Messrs. Keller and Atkins to these positions. This transaction gave us a strong presence in fast-growing North Carolina markets, including the Raleigh MSA, which, according to SNL Financial, has the eleventh highest projected population growth rate in the nation, with over 12% growth projected between 2011 and 2016.
Green Bankshares, Inc.
On September 7, 2011, we invested approximately $217.0 million in Green Bankshares, a publicly held bank holding company headquartered in Greeneville, Tennessee, that had approximately $2.4 billion in assets reported at the date of acquisition and operated 63 branches across East and Middle Tennessee in addition to one branch in each of Virginia and North Carolina. Total assets at the date of acquisition included gross loans of $1.3 billion. Also, in connection with the investment, each existing Green Bankshares stockholder received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Green Bankshares’ existing loan portfolio. We estimate that the maximum amount that may be payable under the Green Bankshares CVR at the end of its five-year term to be approximately $10.0 million, based on the number of Green Bankshares common stock outstanding as of September 6, 2011. Upon completion of our investment, we owned approximately 90.0% of Green Bankshares’ common stock. On September 7, 2011, following the completion of our controlling investment in Green Bankshares, we merged GreenBank, Green Bankshares’ banking subsidiary, into Capital Bank in an all-stock transaction similar to the other bank mergers described above.
Green Bankshares is the third largest bank holding company headquartered in Tennessee and parent company of GreenBank, a Tennessee-chartered commercial bank established in 1890. GreenBank provides general banking services through its branches located in Greene, Blount, Cocke, Hamblen, Hawkins, Knox, Loudon, McMinn, Monroe, Sullivan and Washington Counties in East Tennessee and in Davidson, Lawrence, Macon, Montgomery, Rutherford, Smith, Sumner and Williamson Counties in Middle Tennessee. GreenBank also operates one branch in Madison County, North Carolina and one branch in Bristol, Virginia as well as a mortgage banking operation in Knox County, Tennessee.
The Green Bankshares investment resulted in us acquiring assets with a reported carrying value at the date of acquisition of $2.4 billion, including $1.3 billion of loans, $174.2 million of investment securities and $542.7 million of cash and cash equivalents. We also assumed liabilities with a reported carrying value at the date of acquisition of $2.1 billion, including $1.9 billion of deposits and $231.2 million of subordinated debt and other borrowings.
In connection with the Green Bankshares investment we appointed Messrs. Taylor, Marshall, Foss, Hodges and Singletary to the board of directors of Green Bankshares. Two existing members of the Green Bankshares’ board of directors, Ms. Martha M. Bachman and Mr. Samuel E. Lynch, remained on the Green Bankshares board, with the remaining existing directors resigning. Additionally, we agreed that following the closing of the Green Bankshares investment, we will also appoint the two legacy Green Bankshares directors to our Board of Directors. As the two remaining legacy directors of the Green Bankshares board, we intend to appoint Ms. Bachman and Mr. Lynch to these positions.
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This transaction extended our market area in the fast-growing Tennessee metropolitan areas of Nashville and Knoxville.
Southern Community Financial Corporation
On March 26, 2012, we agreed to acquire all of the common equity interest in Southern Community Financial, a publicly held bank holding company headquartered in Winston Salem, North Carolina that had approximated $1.4 billion in assets reported as of June 30, 2012 and operated 22 branches in Winston-Salem, the Piedmont Triad and other North Carolina markets. On June 25, 2012, we amended our agreement with Southern Community Financial to change the form of consideration offered to Southern Community stockholders. The merger consideration for all of the common equity interest consists of approximately $52.4 million in cash. Total assets at June 30, 2012 included gross loans of $0.9 billion. Also, in connection with the acquisition, each existing shareholder of Southern Community Financial will receive one CVR per share that entitles the holder to receive up to $1.30 in cash per share at the end of a five-year period based on the credit performance of Southern Community Financial’s existing loan portfolio. We estimate that the maximum amount that may be payable under the Southern Community Financial CVR at the end of its five-year term to be approximately $21.9 million, based on the number of Southern Community Financial common stock outstanding as of June 30, 2012. Our acquisition of Southern Community Financial is subject to Southern Community Financial stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the second half of 2012.
Southern Community Financial, founded in 1996, is the parent of Southern Community Bank and Trust and currently controls the third largest share of deposits in the Winston-Salem metropolitan statistical area (which we refer to as “MSA”) and the fifth largest MSA in North Carolina. It operates in the neighboring counties of Guilford, Stokes, Surry and Yadkin counties with a branch each in Raleigh and Asheville.
Upon completion, the Southern Community Financial acquisition will result in us acquiring assets with a reported carrying value at June 30, 2012 of $1.4 billion, including $0.9 billion of loans, $0.3 billion of investment securities and $0.1 billion of cash and cash equivalents. We will also assume liabilities with a reported carrying value at June 30, 2012 of $1.3 billion, including $1.1 billion of deposits and $0.2 billion of subordinated debt and other borrowings.
The terms of the Southern Community Financial acquisition provide that, upon completion of our acquisition, we will appoint a legacy Southern Community Financial director to our Board of Directors and to appoint two legacy directors to Capital Bank’s board of directors.
This acquisition will extend our market area in the North Carolina markets, including Winston-Salem and the Piedmont Triad.
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Reorganization
Substantially concurrent with the completion of the merger, we intend to merge each of our other majority-held bank holding company subsidiaries (TIB Financial and Green Bankshares) with the Company. In connection with the mergers of our majority-held subsidiaries, we expect that existing third-party stockholders of these subsidiaries will receive shares of Class A common stock in exchange for their minority existing shares. We estimate that we will issue approximately 3,709,832 shares of Class A common stock to the other shareholders of our bank holding company subsidiaries that will be merged with the Company in the reorganization. Following the completion of the initial public offering and the reorganization, we will be a publicly traded bank holding company with a single directly and wholly owned bank subsidiary, Capital Bank, N.A.
The following diagrams illustrate our ownership structure, including our principal subsidiaries, as of the date of this document and immediately after the completion of the reorganization:
(1) | On April 29, 2011, we combined TIB Financial’s banking subsidiary, TIB Bank, with NAFH National Bank in an all-stock transaction (see “—Our Acquisitions—TIB Financial Corp.”); on June 30, 2011, we combined Capital Bank Corp.’s banking subsidiary, Capital Bank, with NAFH National Bank in an all-stock transaction and, simultaneously with the consummation of the transaction, changed the name of NAFH National Bank to Capital Bank, National Association (see “—Our Acquisitions—Capital Bank Corp.”); and, on September 7, 2011, we combined Green Bankshares’ banking subsidiary, GreenBank, with Capital Bank in an all-stock transaction (see “—Our Acquisitions—Green Bankshares, Inc.”). |
(2) | At the time of completion of the acquisition of Southern Community Financial, Southern Community Financial will be merged with and into our wholly owned subsidiary formed for the purpose of the acquisition. Immediately following the completion of our acquisition of Southern Community Financial, we expect to merge Southern Community Bank and Trust, the wholly owned bank subsidiary of Southern Community Financial, with and into Capital Bank, N.A. |
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(1) | At the time of completion of the acquisition of Southern Community Financial, Southern Community Financial will be merged with and into our wholly owned subsidiary formed for the purpose of the acquisition. Immediately following the completion of our acquisition of Southern Community Financial, we expect to merge Southern Community Bank and Trust, the wholly owned bank subsidiary of Southern Community Financial, with and into Capital Bank, N.A. |
Our Business Strategy
Our business strategy is to build a mid-sized regional bank by operating, integrating and growing our existing operations as well as to acquire other banks, including failed, underperforming and undercapitalized banks and other complementary assets. We believe recent and continuing dislocations in the southeastern U.S. banking industry have created an opportunity for us to create a mid-sized regional bank that will be able to realize greater economies of scale compared to smaller community banks while still providing more personalized, local service than larger-sized banks.
Operating Strategy
Our operating strategy emphasizes relationship banking focused on commercial and consumer lending and deposit gathering. We have organized operations under a line of business operating model, under which we have appointed experienced bankers to oversee loan and deposit production in each of our markets, while centralizing credit, finance, technology and operations functions. Our management team possesses significant executive-level leadership experience at Fortune 500 financial services companies, and we believe this experience is an important advantage in executing this regional, more focused, bank business model.
Organic Loan and Deposit Growth
The primary components of our operating strategy are to originate high-quality loans and low-cost customer deposits. Our executive management team has developed a hands-on operating culture focused on performance and accountability, with frequent and detailed oversight by executive management of key performance indicators. We have implemented a sales management system for our branches that is focused on growing loans and core deposits in each of our markets. We believe that this system holds loan officers and branch managers accountable for achieving loan production goals, which are subject to the conservative credit standards and disciplined underwriting practices that we have implemented as well as compliance, profitability and other standards that we monitor. We also believe that accountability is crucial to our results. Our executive management monitors production, credit quality and profitability measures on a quarterly, monthly, weekly and, in some cases, daily basis and provides ongoing feedback to our business unit leaders. During the first six months
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of 2012, we originated $447.3 million of new commercial and consumer loans. During the first six months of 2012, we also grew our core deposits by $129.5 million (or 8.8% annualized growth).
The current market conditions have forced many banks to focus internally, which we believe creates an opportunity for organic growth by strongly capitalized banks such as ourselves. We seek to grow our loan portfolio by offering personalized customer service, local market knowledge and a long-term perspective. We have selectively hired experienced loan officers with local market knowledge and existing client relationships. Additionally, our executive management team takes an active role in soliciting, developing and maintaining client relationships.
Efficiency and Cost Savings
Another key element of our strategy is to operate efficiently by carefully managing our cost structure and taking advantage of economies of scale afforded by our acquisitions to control operating costs. We have been able to reduce headcount by consolidating duplicative operations of the acquired banks and streamlining management. In addition, we expect to recognize additional cost savings once we have fully integrated Southern Community Financial, which is currently operating on a different processing platform, with the rest of our business. We plan to further improve efficiency by boosting the productivity of our sales force through our focus on accountability and employee incentives and through selective hiring of experienced loan officers with existing books of business.
To evaluate and control operating costs, we monitor certain performance metrics including our efficiency ratio, which equals total non-interest expense divided by net revenue (net interest income plus non-interest income). Our efficiency ratio has been and is expected to continue to be significantly impacted by certain costs that follow acquisitions of financial institutions. Our efficiency ratio for the six months ended June 30, 2012 was 79.0%, which was impacted by $3.0 million in merger reflected expenses and contract termination and other expenses related to the integration of our operations onto common technology platforms and $3.6 million of investment security gains. The system conversions are intended to create operating efficiencies and better position us for future growth. Excluding the impact of these items and $10.7 million of non-cash equity compensation expense, our adjusted efficiency ratio for the six months ended June 30, 2012 was 71.8%. Our efficiency ratio for the year ended December 31, 2011 was 78.3%, which was impacted by $9.2 million of non-cash equity compensation, $7.6 million of conversion expenses due to integration of the acquired banks, $1.5 million of legal fees related to the acquisitions of Capital Bank and Green Bankshares and $2.9 million of impairment of intangible assets and $4.4 million of investment security gains. Excluding the impact of these items, our adjusted efficiency ratio for the year ended December 31, 2011 was 70.6%. The adjusted efficiency ratio is a non-GAAP measure which we believe provides investors with information useful in understanding our business and our operating efficiency. Comparison of our adjusted efficiency ratio with those of other companies may not be possible because other companies may calculate the adjusted efficiency ratio differently. The adjusted efficiency ratio, which equals adjusted non-interest expense (non-interest expense less conversion expense) divided by net revenues (net interest income plus non-interest income), for the six months ended June 30, 2012 and the year ended December 31, 2011 is as follows:
Efficiency Ratio for the Six Months Ended June 30, 2012 | Efficiency Ratio for the Year Ended December 31,2011 | |||||||||||||||
(Dollars in thousands) | Non-adjusted | Adjusted | Non-adjusted | Adjusted | ||||||||||||
Non-interest expense | $ | 121,546 | $ | 121,546 | $ | 182,195 | $ | 182,195 | ||||||||
Less: Non-cash equity compensation | — | (10,685 | ) | — | (9,236 | ) | ||||||||||
Less: Information technology conversion | — | (3,045 | ) | — | (7,620 | ) | ||||||||||
Less: Legal fees | — | — | — | (1,500 | ) | |||||||||||
Less: Impairment of intangible asset | — | — | — | (2,872 | ) | |||||||||||
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Non-interest expense, adjusted | $ | 121,546 | $ | 107,816 | $ | 182,195 | $ | 160,967 | ||||||||
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Net interest income | $ | 127,197 | $ | 127,197 | $ | 191,320 | $ | 191,320 | ||||||||
Non-interest income | 26,681 | 26,681 | 41,227 | 41,227 | ||||||||||||
Less: Investment security gains | — | (3,648 | ) | — | (4,401 | ) | ||||||||||
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Net revenue | $ | 153,878 | $ | 150,230 | $ | 232,547 | $ | 228,146 | ||||||||
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Efficiency Ratio | 78.99 | % | 71.77 | % | 78.35 | % | 70.55 | % |
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Acquisition and Integration Strategy
We seek acquisition opportunities consistent with our business strategy that we believe will produce attractive returns for our stockholders. We plan to pursue acquisitions that position us in southeastern U.S. markets with attractive demographics and business growth trends, expand our branch network in existing markets, increase our earnings power or enhance our suite of products. Our future acquisitions may include distressed assets sold by the FDIC or another seller where our operations, underwriting and servicing capabilities or management experience give us an advantage in evaluating and resolving the assets.
Our acquisition process begins with detailed research of target institutions and the markets they serve. We then draw on our management team’s extensive experience and network of industry contacts in the southeastern region of the United States. Our research and analytics team, led by our Chief of Investment Analytics and Research, maintains lists of priority targets for each of our markets. The team analyzes financial, accounting, tax, regulatory, demographic, transaction structures and competitive considerations for each target and prepares acquisition projections for review by our executive management team and Board of Directors.
As part of our diligence process in connection with potential acquisitions, we undertake a detailed portfolio- and loan-level analysis conducted by a team of experienced credit analysts led by our Chief Risk Officer. In addition, our executive management team engages the target management teams in active dialogue and personally conducts extensive on-site diligence at target branches.
Our executive management team has demonstrated success not only in acquiring financial institutions and combining them onto a common platform, but also in managing the integration of those financial institutions. Our management team develops integration plans prior to the closing of a given transaction that allows us to (1) reorganize the acquired institution’s management team under our line of business model immediately after closing; (2) implement our credit risk and interest rate risk management, liquidity and compliance and governance policies and procedures; and (3) integrate our target’s technology and processing systems rapidly. Using our procedures, we have already integrated credit and operational policies across each of our acquisitions. We reorganized the management of the Failed Banks within three months of closing, and we merged their core processing systems with TIB Financial’s platform within six months. We also fully integrated Capital Bank Corp. in July 2011 and Green Bankshares in February 2012.
Sound Risk Management
Sound risk management is an important element of our commercial/retail bank business model and is overseen by our Chief Risk Officer, Bruce Singletary, who has over 19 years of experience managing credit risk. Our credit risk policy, which has been implemented across our organization, establishes prudent underwriting guidelines, limits portfolio concentrations by geography and loan type and incorporates an independent loan review function. Mr. Singletary has created a special assets division with approximately 50 employees to work out or dispose of legacy problem assets using a detailed process taking into account a borrower’s repayment capacity, available guarantees, collateral value, interest accrual and other factors. We believe our risk management policies establish conservative regulatory capital ratios, robust liquidity (including contingency planning), limitations on wholesale funding (including brokered CDs, holding company debt and advances from the FHLB), and restrictions on interest rate risk.
Our Competitive Strengths
• | Experienced and Respected Management Team with a Successful Track Record. Members of our executive management team and Board of Directors have served in executive leadership roles at Fortune 500 financial services companies, including Bank of America, Fifth Third Bancorp and Morgan Stanley. The executive management team has extensive experience overseeing commercial and consumer banking, mergers and acquisitions, systems integrations, technology, operations, credit and regulatory compliance. Many members of our executive management team are from the |
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southeastern region of the United States and have an extensive network of contacts with banking executives, existing and potential customers, and business and civic leaders throughout the region. We believe our executive management team’s reputation and track record give us an advantage in negotiating acquisitions and hiring and retaining experienced bankers. |
• | Growth-Oriented Business Model. Our executive management team seeks to foster a strong sales culture with a focus on developing key client relationships, including direct participation in sales calls, and through regular reporting and accountability while emphasizing risk management. Our executive management and line of business executives monitor performance on a quarterly, monthly, weekly and in some cases daily basis, and our compensation plans reward core deposit and responsible commercial loan growth, subject to credit quality, compliance and profitability standards. We have an integrated, scalable core processing platform and centralized credit, finance and technology operations that we believe will support future growth. Our business model contributed to our $447.3 million of commercial and consumer loan originations and $129.5 million in core deposit growth in the first six months of 2012. |
• | Highly Skilled and Disciplined Acquirer. We executed and integrated six acquisitions in just 18 months and plan to execute a seventh during the second half of 2012. We integrated our first four investments into a common core processing platform within six months, the fifth in July 2011 and the sixth in February 2012. We believe our track record of completing and integrating transactions quickly has helped us negotiate transactions on more economically favorable terms. We have conducted due diligence on more than 100 financial institutions, many of which our diligence process indicated would not meet our strategic objectives. |
• | Reduced-Risk Legacy Portfolio. Our acquired loan portfolios have been marked-to-market with the application of the acquisition method of accounting, meaning that the carrying value of these assets at the time of their acquisitions reflected our estimate of lifetime credit losses. In addition, as of June 30, 2012, approximately 11.0% of our loan portfolio was covered by the loss sharing agreements we entered into with the FDIC, resulting in limited credit risk exposure for these assets. |
• | Excess Capital and Liquidity. As a result of our private placements and the capital we expect to raise as a result of our initial public offering as well as the disciplined deployment of capital, we expect to have ample capital with which to make acquisitions. As of June 30, 2012, we had a 14.23% tangible common equity ratio (which is a non-GAAP measure used by certain regulators, financial analysts and others to measure core capital strength) and a 13.7% Tier 1 leverage ratio, which provides us with $228.4 million in excess capital relative to the 10% Tier 1 leverage standard required under Capital Bank’s operating agreement with the OCC. This operating agreement requires us to maintain this 10% Tier 1 leverage standard through July 16, 2013. As of June 30, 2012, Capital Bank had a 11.4% Tier 1 leverage ratio, a 16.4% Tier 1 risk-based ratio and a 17.6% total risk-based capital ratio. As of June 30, 2012, we had cash and securities equal to 22.1% of total assets, representing $446.2 million of liquidity in excess of our target of 15%, which provides ample liquidity to support our existing banking franchises. Further, our investment portfolio consists primarily of U.S. agency-guaranteed mortgage-backed securities, which have limited credit or liquidity risk. In our acquisition of Southern Community Financial, we expect to pay $99.1 million to Southern Community Financial’s common and preferred shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of the use of the tangible common equity ratio in our business and the reconciliation of tangible common equity ratio. |
• | Scalable Back-Office Systems. All of our acquired institutions operate on a single information processing system. Southern Community Financial currently operates on a different information system, but, like all previously acquired information platforms, we expect to convert it to conform to our single platform structure soon after the closing of the acquisition. Our systems are designed to accommodate all of our projected future growth and allow us to offer our customers virtually all of the services currently offered by the nation’s largest financial institutions, including state-of-the-art online banking. Enhancements made to our systems are intended to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support. |
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Our Market Area
We view our market area as the southeastern region of the United States. Our seven acquisitions (including our pending acquisition of Southern Community Financial) have established a footprint defined by the Miami-Raleigh-Nashville triangle, which includes the Carolinas, Southwest Florida (Naples) and Southeast Florida (Miami-Dade and the Keys). These markets include a combination of large and fast-growing metropolitan areas that we believe will offer us opportunities for organic loan and deposit growth. According to SNL Financial, the Raleigh MSA has the eleventh highest projected population growth rate in the nation, with over 12% growth projected between 2011 and 2016. Similarly, the Nashville MSA is projected to grow by 7.1%. The Miami MSA is already considered a large metropolitan area with a population in excess of 5 million. Approximately 47% of our current branches are located in our target MSAs. The following table highlights key demographics of our target market areas:
Target Metropolitan Statistical Area | Number of Our Branches(1) | June 30, 2012 Total MSA Deposits(1)(2) | 2011 Total Population(2)* | 2011-16 Projected Pop. Growth* | 2011 Median Household Income* | 2011-16 Projected Household Income Growth* | ||||||||||||||||||
Miami-Fort Lauderdale-Pompano Beach-Homestead, FL | 11 | $ | 428,978 | 5,572 | 3.0 | % | $ | 44,980 | 19.00 | % | ||||||||||||||
Charlotte-Gastonia-Rock Hill, NC-SC | 1 | 36,553 | 1,792 | 8.8 | 53,790 | 12.45 | ||||||||||||||||||
Nashville-Davidson-Murfreesboro-Franklin, TN | 21 | 605,849 | 1,615 | 7.1 | 50,429 | 11.58 | ||||||||||||||||||
Raleigh-Cary, NC | 13 | 429,361 | 1,158 | 12.3 | 57,511 | 12.57 | ||||||||||||||||||
Columbia, SC | 5 | 117,552 | 778 | 7.2 | 46,718 | 14.62 | ||||||||||||||||||
Knoxville, TN | 10 | 203,139 | 705 | 5.2 | 40,794 | 22.18 | ||||||||||||||||||
Durham-Chapel Hill, NC | 2 | 88,262 | 511 | 6.8 | 46,117 | 17.81 | ||||||||||||||||||
Spartanburg, SC | 3 | 177,393 | 287 | 4.7 | 42,292 | 19.54 | ||||||||||||||||||
Winston-Salem, NC | 11 | 705,027 | 482 | 5.1 | 44,136 | 19.12 | ||||||||||||||||||
Target MSAs(3) | 77 | 2,792,114 | 12,900 | 6.0 | 47,111 | 16.8 | ||||||||||||||||||
CBF Consolidated(3) | 165 | 6,196,922 | 19,528 | 4.8 | 44,566 | 16.2 | ||||||||||||||||||
National Aggregate | 310,704 | 3.4 | 50,227 | 14.6 |
* | Source: SNL Financial. |
(1) | Pro forma giving effect to our pending acquisition of Southern Community Financial. |
(2) | In thousands. |
(3) | Population growth and median household income metrics are deposit weighted by MSA. |
Products and Services
Banking Services by Business Line
We have integrated our first six acquisitions under a single line of business operating model and are in the process of integrating the seventh. Under this model, we have appointed experienced bankers to oversee loan and deposit growth in each of our markets, while we have centralized other functions, including credit, finance, operations, marketing, human resources and information technology.
The Commercial Bank
Our commercial bank business consists of teams of commercial loan officers operating under the leadership of commercial banking executives in Florida, the Carolinas and Tennessee. The commercial banking executives are responsible for production goals for loans, deposits and fees. They work with senior credit officers to ensure that loan production is consistent with our loan policies and with financial officers to ensure that loan pricing is consistent with our profitability goals. We focus our commercial bank business on loan originations for
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established small and middle-market businesses with whom we develop personal relationships that we believe give us a competitive advantage and differentiates us from larger banking institutions. In addition, our commercial lending teams coordinate with personnel in our consumer bank business to provide personal loans and other services to the owners and managers and employees of the bank’s commercial clients. At June 30, 2012, commercial loans totaled $2.8 billion (or 67.8% of our total loan portfolio). Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. Our commercial lending teams offer a wide range of commercial loan products, including:
• | owner occupied commercial real estate construction and term loans; |
• | working capital loans and lines of credit; |
• | demand, term and time loans; and |
• | equipment, inventory and accounts receivable financing. |
During the first six months of 2012, we originated $277.1 million of new commercial loans. Our commercial lending teams also seek to gather low-cost deposits from commercial customers in connection with extending credit. In addition to business demand, savings and money market accounts, we also provide specialized cash management services and deposit products.
The Consumer Bank
Our consumer bank business consists of Capital Bank’s retail banking branches and associated businesses. Similar to our commercial bank business, we have organized the consumer bank by geographical market, with divisions consisting of our Florida, Carolina, and Tennessee branches. Each division reports to a consumer banking executive responsible for achieving core deposit and consumer loan growth goals. Pricing of our deposit products is reviewed and approved by our asset-liability committee and the standards for consumer loan credit quality are documented in our loan policy and reviewed by our credit executives.
We seek to differentiate our consumer bank business from competitors through the personalized service offered by our branch managers, customer service representatives, tellers and other staff. We offer various services to meet the needs of our customers, including checking, savings and money market accounts, certificates of deposit and debit and credit cards. Our products are designed to foster relationships by rewarding our best customers for desirable activities such as debit card transactions, e-statements and direct deposit. In addition to traditional products and services, we offer competitive technology in Internet banking services, which we plan to further upgrade in order to keep pace with technological improvements. Consumer loan products we offer include:
• | home equity lines of credit; |
• | residential first lien mortgages; |
• | second lien mortgages; |
• | new and used auto loans; |
• | new and used boat loans; |
• | overdraft protection; and |
• | unsecured personal credit lines. |
Branch managers and their staff are charged with growing core deposits with a special focus on new demand deposit accounts and expected to conduct outbound telephone campaigns, generate qualified referrals, collaborate with business partners in the commercial lending teams and evaluate, and make informed decisions with respect to, existing and prospective customers. In the first six months of 2012, we generated organic core deposit growth of $129.5 million (or 8.9% annualized growth). As of June 30, 2012, consumer loans totaled $1.3 billion. During the first six months of 2012, we originated $121.5 million of new consumer loans.
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Ancillary Fee-Based Businesses
Mortgage Banking
Through our newly established mortgage banking business, we aim to originate high-quality loans for customers who are willing to establish a deposit relationship with us. The mortgage loans in our portfolio that do not meet this criteria are sold in to the secondary market to buyers, such as Fannie Mae and Freddie Mac, and provide an additional source of fee income. Our mortgage banking capabilities include conventional and nonconforming mortgage underwriting and construction and permanent financing.
Trust and Investment Management
We offer wealth management services to affluent clients, business owners and retirees, building new relationships and expanding existing relationships to grow deposits, loans and fiduciary and investment management fee income. Through wealth management, we offer deposit products, commercial and consumer loans, including mortgage financing, and investment accounts providing access to a wide range of mutual funds, annuities and other financial products, as well as access to our subsidiary, Naples Capital Advisors, which is a registered investment advisor with approximately $54.4 million in assets under management as of June 30, 2012.
Lending Activities
We originate a variety of loans, including loans secured by real estate, loans for construction, loans for commercial purposes, loans to individuals for personal and household purposes, loans to municipalities and loans for new and used cars. A significant portion of our loan portfolio is related to real estate. As of June 30, 2012, loans related to real estate totaled $3.5 billion (or 84% of our total loan portfolio). The economic trends in the regions we serve are influenced by the industries within those regions. Consistent with our emphasis on being a community-oriented financial institution, most of our lending activity is with customers located in and around counties in which we have banking offices. As of June 30, 2012, our owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, residential mortgage loans and commercial and industrial loans represented 24%, 20%, 18% and 11%, respectively, of our $4.2 billion loan portfolio.
We use a centralized risk management process to ensure uniform credit underwriting that adheres to our loan policies as approved annually by our Board of Directors. Lending policies are reviewed on a regular basis to confirm that we are prudent in setting underwriting criteria. Credit risk is managed through a number of methods, including a loan approval process that establishes consistent procedures for the processing and approval of loan requests, risk grading of all commercial loans and certain consumer loans and coding of all loans by purpose, class and collateral type. We seek to focus on underwriting loans that enhance a balanced, diversified portfolio. Management analyzes our commercial real estate concentrations by market and region on a regular basis in an attempt to prevent overexposure to any one type of commercial real estate loan and incorporates third-party real estate and market analysis to monitor market conditions. As of June 30, 2012, the carrying value of our commercial real estate loans in North Carolina, South Carolina, Florida, Tennessee and Virginia totaled $647.6 million, $342.9 million, $791.7 million, $587.5 million and $0.1 million, respectively, and the reported value of Southern Community Financial’s commercial real estate loans, which are in North Carolina, totaled $446.7 million, of which $115.1 million was owner-occupied. At June 30, 2012, commercial real estate loans in all regions totaled $2.3 billion (24% of which was owner occupied commercial real estate). We have recently tightened underwriting and pricing standards for indirect auto and residential mortgage lending and de-emphasized originations of commercial real estate mortgages.
We believe that early detection of potential credit problems through regular contact with our clients, coupled with consistent reviews of the borrowers’ financial condition, are important factors in overall credit risk management. Our approach to proactively manage credit quality is to aggressively work with customers for whom a problem loan has been identified and assist in resolving issues before a default occurs.
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A key component of our growth strategy is to grow our loan portfolio by originating high-quality commercial and consumer loans, other than non-owner occupied real estate loans, that comply with our conservative credit policies and that produce revenues consistent with our financial objectives. From December 31, 2011 to June 30, 2012, our loan portfolio declined by $111.4 million as a result of $267.3 million of resolutions and $291.4 million of principal repayments offset by $447.3 million in new originations. Additionally, we are working to reduce excessive concentrations in commercial real estate, which characterized our acquisitions’ legacy portfolios, in order to achieve a more diversified portfolio. It is our long-term goal to reduce the commercial real estate concentration to approximately 20% of our total loan portfolio.
In addition, we operate an indirect auto lending business which originates loans for new and used cars through relationships with dealers in Southwest Florida, Southeast Florida, the Florida Keys, and Tennessee. Loans are approved subject to review of FICO credit scores, vehicle age, and loan-to-value. We are in the process of implementing an expert scoring model which will include additional proprietary underwriting factors. We set pricing for loans based on credit score, vehicle age, and loan term. As of June 30, 2012, we had $93.7 million of auto loans.
Deposits
Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense. Deposits are attracted principally from clients within our branch network through the offering of a wide selection of deposit instruments to individuals and businesses, including non-interest- bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, certificates of deposit and individual retirement accounts. We are focused on reducing our reliance on high-cost certificates of deposit as a source of funds by replacing them with low-cost deposit accounts, Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (1) the interest rates offered by competitors, (2) the anticipated amount and timing of funding needs, (3) the availability and cost of alternative sources of funding and (4) the anticipated future economic conditions and interest rates. Client deposits are attractive sources of funding because of their stability and relatively low cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other services. In addition, we gather a portion of our deposit base through brokered deposits. At June 30, 2012, total deposits were $5.0 billion of which $4.8 billion (or 97%) were non-brokered deposits and $131.4 million (or 3%) were brokered deposits. At June 30, 2012, our core deposits (total deposits less time deposits) consisted of $735.0 million of non-interest checking accounts, $1.1 billion of negotiable order of withdrawal accounts, $378.4 million of savings accounts and $890.4 million of money market deposits. For the foreseeable future, we remain focused on retaining and growing a strong deposit base and transitioning certain of our customers to low-cost banking services as high-cost funding sources, such as high-interest certificates of deposit, mature.
Marketing
Our marketing activities support all of our products and services described above. Historically, most of our marketing efforts have supported our real estate mortgage, commercial and retail banking businesses. Our marketing strategy aims to:
• | capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors in both the commercial and residential mortgage lending businesses; |
• | meet our growth objectives based on current economic and market conditions; |
• | attract core deposits held in checking, savings, money market and certificate of deposit accounts; |
• | provide customers with access to our local executives; |
• | appeal to customers in our region who value quality banking products and personal service; |
• | pursue commercial and industrial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors; |
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• | cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability; |
• | utilize existing industry relationships cultivated by our senior management team; and |
• | adhere to safe and sound credit standards. |
We use a variety of targeted marketing media including the Internet, print, direct mail and financial newsletters. Our online marketing activities include paid advertising, as well as cross-sale marketing through our website and Internet banking services. We believe our marketing strategy will enable us to take advantage of lower average customer acquisition costs, build valuable brand awareness and lower our funding costs.
Information Technology Systems
We have made and continue to make investments in our information technology systems for our banking and lending operations and cash management activities. We seek to integrate our acquisitions quickly and successfully and believe this is a necessary investment in order to enhance our capabilities to offer new products and overall customer experience and to provide scale for future growth and acquisitions. Our enhancements are tailored to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support. We work closely with certain third-party service providers to which we outsource certain of our systems and infrastructure. We use the Jack Henry SilverLake System as our banking platform and believe that the scalability of our infrastructure will support our growth strategy and that this platform will support our growth needs.
Competition
The financial services industry in general and our primary markets of South Florida, Tennessee and the Carolinas are highly competitive. We compete actively with national, regional and local financial services providers, including banks, thrifts, credit unions, mortgage bankers and finance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restrictions imposed upon us. Our largest competitors include Bank of America, Wells Fargo, BB&T, First Citizens, Royal Bank of Canada, SunTrust, Regions, FNB United Corp., Toronto-Dominion, Synovus, First Financial, SCBT, JPMorgan Chase, Citigroup, EverBank, Fifth Third Bancorp, First Horizon, Pinnacle Financial, First South and U.S. Bancorp.
Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The primary factors driving commercial and consumer competition for loans and deposits are interest rates, the fees charged, customer service levels and the range of products and services offered. In addition, other competitive factors include the location and hours of our branches and customer service.
Employees
At June 30, 2012, we had over 1,362 full-time employees and 118 part-time employees. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be adequate.
Facilities and Real Estate
We currently lease approximately 354,000 square feet of office and operations space in Florida, North Carolina, South Carolina and Tennessee. In addition, we own approximately 150,000 square feet and lease approximately 145,000 square feet of non-branch office space. We operate 35 branches in Florida, 32 in North
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Carolina, 12 in South Carolina, 63 in Tennessee and one in Virginia. Of these branches, 50 were leased and the rest were owned. Southern Community Financial operates 22 branches in North Carolina. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s-length bargaining.
Legal Proceedings
On November 18, 2010, a shareholder of Green Bankshares filed a putative class action lawsuit (styled Bill Burgraffv. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, NortheasternDivision,Case No. 2:10-cv-00253) against Green Bankshares and certain of its current and former officers in the United States District Court for the Eastern District of Tennessee in Greeneville, Tennessee on behalf of all persons that acquired shares of Green Bankshares’ common stock between January 19, 2010 and November 9, 2010. On January 18, 2011, a separate shareholder of Green Bankshares filed a putative class action lawsuit (styledBrian Molnarv. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division,Case No. 2:11-cv-00014) against Green Bankshares and certain of its current and former officers in the same court on behalf of all persons that acquired shares of Green Bankshares’ common stock between January 19, 2010 and October 20, 2010. These lawsuits were filed following, and relate to the drop in value of Green Bankshares’ common stock price after, Green Bankshares announced its third quarter performance results on October 20, 2010. The plaintiffs allege that defendants made false and/or misleading statements or failed to disclose that Green Bankshares was purportedly overvaluing collateral of certain loans; failing to timely take impairment charges of these certain loans; failing to properly account for loan charge-offs; lacking adequate internal and financial controls; and providing false and misleading financial results. The plaintiffs have asserted federal securities laws claims against all defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The plaintiffs have also asserted control person liability claims against the individual defendants named in the complaints pursuant to Section 20(a) of the Exchange Act. The two cases were consolidated on February 4, 2011. On February 11, 2011, the Court appointed movant Jeffrey Blomgren as lead plaintiff. On May 3, 2011, the plaintiff filed an amended and consolidated complaint alleging a class period of January 19, 2010 to November 9, 2010. On July 11, 2011, the defendants filed a motion to dismiss the consolidated amended complaint. The parties have reached a proposed settlement, which is scheduled to be presented before the Court on September 26, 2012 for approval. The costs of the proposed settlement are expected to be paid by Green Bankshares’ insurer.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the “Selected Historical Consolidated Financial Information,” and our financial statements and related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.
The following discussion pertains to our historical results, which includes the operations of First National Bank, Metro Bank, Turnberry Bank, TIB Financial, Capital Bank Corp. and Green Bankshares subsequent to our acquisition of each such entity. In this discussion, unless the context suggests otherwise, references to “Old Capital Bank” refer to Capital Bank Corp.’s banking subsidiary prior to June 30, 2011, the date on which NAFH National Bank merged with Old Capital Bank and changed its name to Capital Bank, National Association.
Throughout this discussion we collectively refer to the above acquisitions as the “acquisitions”.
Overview
We are a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. In December 2009 and January and July 2010, we raised approximately $900 million to make acquisitions through a series of private placements of our common stock. Since then, we have acquired six depository institutions, including the assets and certain deposits of the three Failed Banks from the FDIC. We expect to complete the acquisition of a seventh institution owned by Southern Community Financial in the second half of 2012. As of June 30, 2012, and after giving pro forma effect to our acquisition of Southern Community Financial, we operated 165 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.
We were founded by a group of experienced bankers with a multi-decade record of leading, operating, acquiring and integrating financial institutions. Our executive management team is led by our Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America Corp., where his career spanned 38 years, including tenure as President of the Consumer and Commercial Bank. He also has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc. Our Chief Financial Officer, Christopher G. Marshall, has over 30 years of financial and managerial experience, including service as the Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America’s Global Consumer and Small Business Bank. Our Chief Risk Officer, R. Bruce Singletary, has over 32 years of experience, including 19 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region and as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Kenneth A. Posner serves as our Chief of Investment Analytics and Research. Mr. Posner spent 13 years as an equity research analyst at Morgan Stanley focusing on a wide range of financial services firms.
Acquisitions
Our banking operations commenced on July 16, 2010, when we purchased approximately $1.2 billion of assets and assumed approximately $960.1 million of deposits of three Failed Banks from the FDIC: First National Bank, Metro Bank and Turnberry Bank. The acquired assets included loans with an estimated fair value
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of $768.6 million at the acquisition date. These transactions gave us an initial market presence in Miami, which we targeted because of its size and concentrated business activity, and South Carolina, which we targeted because of its attractive demographic growth trends. In connection with the acquisition, we entered into loss-sharing arrangements with the FDIC covering approximately $796.1 million of loans and real estate owned of the Failed Banks that we acquired.
On September 30, 2010, we invested approximately $175.0 million in TIB Financial, a publicly held bank holding company headquartered in Naples, Florida with approximately $1.7 billion in assets at the acquisition date and, after giving effect to a subsequent rights offering to legacy TIB Financial shareholders, we acquired approximately 94% of TIB Financial’s common stock. The acquired assets included loans with an estimated fair value of $1.0 billion at the acquisition date. This acquisition expanded our geographic reach in Florida to include markets that we believe have particularly attractive deposit customer characteristics and provided a platform to support our future growth.
On January 28, 2011, we invested approximately $181.1 million in Capital Bank Corp., a publicly held bank holding company headquartered in Raleigh, North Carolina with approximately $1.7 billion in assets at the acquisition date and, after giving effect to a subsequent rights offering to legacy Capital Bank Corp. shareholders, we acquired approximately 83% of Capital Bank Corp.’s common stock. The acquired assets included loans with an estimated fair value of $1.1 billion at the acquisition date. This transaction gave us a strong presence in fast-growing North Carolina markets, including the Raleigh MSA, which, according to SNL Financial, has the eleventh highest projected population growth rate in the nation, with over 12% growth projected between 2011 and 2016.
On September 7, 2011, we invested approximately $217.0 million in Green Bankshares, a publicly held bank holding company headquartered in Greeneville, Tennessee with approximately $2.4 billion in assets at the acquisition date, and we acquired approximately 90% of Green Bankshares’ common stock. The acquired assets included loans with an estimated fair value of $1.3 billion at the acquisition date. This transaction extended our market area into the fast-growing Tennessee metropolitan areas of Nashville and Knoxville.
On March 26, 2012, we agreed to acquire all of the common equity interest in Southern Community Financial, a publicly held bank holding company headquartered in Winston Salem, North Carolina. On June 25, 2012, we amended our agreement with Southern Community Financial to change the form of consideration offered to Southern Community stockholders. The merger consideration for all of the common equity interest consists of approximately $52.4 million in cash. Our acquisition of Southern Community Financial is subject to Southern Community Financial stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the second half of 2012. Total assets as of June 30, 2012 included $0.9 billion of gross loans. This acquisition will extend our market area in the North Carolina markets, including Winston-Salem, the fifth largest MSA in North Carolina, and the Piedmont Triad.
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The following table sets forth the fair value of the assets we acquired in each of our acquisitions as of the applicable acquisition date and shows the acquisition price as a percentage of the most recently reported tangible book value of the assets prior to acquisition accounting and the tangible book value in accordance with the acquisition method of accounting:
(Dollars in millions) | Announcement Date | Fair Value of Assets Acquired | Acquisition Price Per Share | |||||||||||||||||
Target | Acquisition Date | Percent of Last Reported Tangible Book Value(1) | Percent of Tangible Book Value Per Share in Accordance with Acquisition Accounting(2) | |||||||||||||||||
First National Bank | July 16, 2010 | July 16, 2010 | $ | 602 | NA | 109.3 | % | |||||||||||||
Metro Bank | July 16, 2010 | July 16, 2010 | $ | 393 | NA | 30.0 | % | |||||||||||||
Turnberry Bank | July 16, 2010 | July 16, 2010 | $ | 228 | NA | NM | (3) | |||||||||||||
TIB Financial | June 28, 2010 | September 30, 2010 | $ | 1,737 | 25.4 | % | 125.4 | % | ||||||||||||
Capital Bank Corp. | November 3, 2010 | January 28, 2011 | $ | 1,728 | 45.1 | % | 125.1 | % | ||||||||||||
Green Bankshares | May 5, 2011 | September 7, 2011 | $ | 2,365 | (4) | 41.0 | % | 117.2 | % | |||||||||||
Southern Community Financial | March 27, 2012 | N/A | $ | 1,458 | (5) | 94.5 | % | 141.9 | %(5) |
(1) | Last reported tangible book value is based on the tangible book value per share amount as disclosed by the institution in the quarter immediately preceding the announcement of the acquisition. |
(2) | Tangible book value for the investment or purchase by us reflects all assets and liabilities recorded at fair value in accordance with acquisition accounting subsequent to repurchase and cancellation of TARP preferred stock as applicable. Tangible book value per share is calculated by subtracting goodwill and intangible assets, net of any associated deferred tax liabilities, from the total stockholders’ equity of the acquired entity, subsequent to acquisition accounting adjustments, and dividing this difference by the total number of common shares of the acquired entity. For the Failed Banks, the number of common shares is assumed to be 1. For the acquisition of TIB Financial, the denominator includes the common share equivalents assuming the conversion of the preferred shares issued to us as of the acquisition date. |
(3) | Not a meaningful ratio because consideration of $16.9 million was received on this transaction. Tangible book value acquired was a negative $13.0 million. |
(4) | The fair values of assets acquired are within the re-measurement period. |
(5) | Ratio reflects management’s estimate as acquisition accounting has not yet been performed. |
Comparability to Past Periods
The consolidated financial information presented throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the quarter and six months ended June 30, 2012 includes our consolidated results, including First National Bank, Metro Bank, Turnberry Bank, TIB Financial, Capital Bank and Green Bankshares. For the quarter and six months ended June 30, 2011, our consolidated results includes First National Bank, Metro Bank, Turnberry Bank and TIB Financial, as well as the results of Capital Bank Corp. subsequent to January 28, 2011.
For the year ended December 31, 2011, our consolidated financial information includes our consolidated results, including First National Bank, Metro Bank, Turnberry Bank and TIB Financial, as well as the results of Capital Bank Corp. subsequent to January 28, 2011 and Green Bankshares subsequent to September 7, 2011.
For the year ended December 31, 2010, our consolidated financial information includes our consolidated results, including First National Bank, Metro Bank and Turnberry Bank subsequent to July 16, 2010 and TIB Financial subsequent to September 30, 2010. Prior to July 16, 2010, we did not have any banking operations.
Because substantially all of our business is composed of acquired operations and because the operations of each acquired business were substantially changed in connection with its acquisition, our results of operations for the three and six months ended June 30, 2012 and 2011 and the years ended December 31, 2011 and 2010 reflect different operations in different periods (or portions of periods) and therefore cannot be meaningfully compared. In addition, results of operations for these periods reflect, among other things, the acquisition method of
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accounting. Under the acquisition method of accounting, all of the assets acquired and liabilities assumed were initially recorded on our consolidated balance sheet at their estimated fair values as of the dates of acquisition. These estimated fair values differed substantially from the carrying amounts of the assets acquired and liabilities assumed as reflected in the financial statements of the Failed Banks and of TIB Financial, Capital Bank Corp. and Green Bankshares immediately prior to the acquisition. Therefore, comparisons to prior periods have been intentionally omitted unless observations we deem meaningful could be disclosed herein.
For more information on the acquisition method of accounting as well as the indemnification asset we recorded in connection with our acquisition of the Failed Banks, see “—Critical Accounting Policies and Estimates.”
Material Trends and Developments
Our financial performance reflects the acquisitions we have completed, our progress in restructuring the acquired banks and implementing our performance-based strategy and general economic and competitive trends in our markets. As noted above, we have completed six acquisitions since our inception.
As of February 2012, we have completed the integration and restructuring of all six acquisitions. We restructured the management teams of the three Failed Banks during the third quarter of 2010 and integrated them under our line of business model and policies and procedures, completed the conversion to our core processing platform during the fourth quarter of 2010 and merged them together with TIB Bank, TIB Financial’s banking subsidiary, into NAFH National Bank, our OCC-regulated bank, in April 2011. After closing our investment in Capital Bank Corp., during January 2011, we immediately restructured the management team, integrated Old Capital Bank, Capital Bank Corp.’s banking subsidiary, under our line of business model and policies and procedures and merged Old Capital Bank with and into NAFH National Bank, which was renamed Capital Bank, National Association, in June 2011. We completed the conversion of Old Capital Bank to our core processing platform in July 2011 and completed the conversion of Green Bankshares in February 2012. Conversion related expenses of $7.6 million were related to $4.2 million of accruals for the early termination of certain information technology system related contracts and $3.4 million of expense related to the conversion of the Company’s operations onto a common technology platform during 2011.
In connection with our plans to become a public registrant, the additional costs of being a public entity should not materially affect our overall non-interest expense and efficiency ratios as three of our subsidiaries are currently public companies, and, through the consolidation of these entities, we expect to realize cost savings through the elimination of duplicative or redundant costs.
In connection with management’s assessment of internal control over financial reporting, we identified a material weakness in such internal control during the audit of our consolidated financial statements for the year ended December 31, 2011 related to third-party data inputs used in the accounting of impaired loans under ASC 310-30 in the fourth quarter. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we identified was considered in determining the nature, timing, and extent of audit tests applied in the audit of our consolidated financial statements for the year ended December 31, 2011 and did not affect our independent auditor’s report on the consolidated financial statements dated April 10, 2012, which expressed an unqualified opinion on our consolidated financial statements. We have implemented and will continue to implement measures designed to improve our internal control over financial reporting and strengthen our internal audit function. These measures include, among other things, supplementing the personnel involved in overseeing financial reporting. We have also validated the calculations of, and added additional control points to the development of the manual and spreadsheet outputs generated by the third-party valuation specialists engaged to assist in estimating the cash flow re-estimation, impairment and accretion values in the loan accounting process. We believe that the actions we are taking and will continue to take to address the existing
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weakness in internal control over financial reporting and strengthen our internal audit function will mitigate the risk related to the aforementioned internal control material weakness and internal audit matters.
In its Annual Report on Form 10-K for the fiscal year ended December 31, 2010, Green Bankshares disclosed a material weakness in internal control over financial reporting related to the valuation of impaired loans and real estate owned. Management of Green Bankshares has described certain activities in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 intended to remediate this material weakness and improve upon its internal control activities, which included actions to timely update appraisals and have them independently reviewed by third-party specialists as well as actions to strengthen their internal review, approval and documentation of those independently reviewed appraisals and related impairment analyses. We completed the conversion of Green Bankshares’ accounting systems’ processes and their credit risk management policies and procedures to our common platform during the first quarter of 2012. Accounting for acquired balances and subsequent activity are subject to our internal control structure, including our management’s supervision and review. Further, due to the application of acquisition accounting to the Green Bankshares’ transaction, we have engaged third-party valuation specialists to assist in estimating the fair value for Green Bankshares’ assets and liabilities as of the acquisition date and our management has conducted the preliminary purchase price allocation and related accounting for this acquisition. We believe that application of accounting policies and practices consistent with our existing internal control structure as well as the revaluation of the Green Bankshares’ balance sheet, which includes the loan portfolio and real estate owned, at acquisition will mitigate the risk related to the aforementioned Green Bankshares’ internal control material weakness.
As part of the process of integrating these banks into our line of business model, we have appointed experienced bankers to oversee loan and deposit production in each of our markets, centralized and consolidated back office operations and eliminated certain duplicative positions, improved productivity in our sales forces and established line of business reporting. These steps have helped us accelerate new loan production and core deposit growth. New loan production for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011 was $447.3 million and $728.4 million, respectively. Approximately 61.9% consisted of commercial loans for the six months ended June 30, 2012 and 63.8% consisted of commercial loans for the twelve months ended December 31, 2011. Core deposits were $3.1 billion at June 30, 2012, an increase of $129.5 million from $2.9 billion on December 31, 2011 and a $282.1 million increase from the second quarter of 2011, excluding the initial increase in deposits resulting from the acquisition of Green Bankshares. Growth in core deposits was $334.1 million for the twelve months ended December 31, 2011, excluding the initial increase in deposits resulting from the acquisitions of Capital Bank Corp. and Green Bankshares, up from growth of $52.1 million in the fourth quarter of 2010. These increases helped further lower the contractual rate on deposits to 0.7% as of June 30, 2012, down from 0.9% as of December 31, 2011 and 1.2% as of December 2010.
Florida, South Carolina, North Carolina, Tennessee and Virginia accounted for 30.7%, 16.5%, 25.8%, 26.7% and 0.3%, respectively, of our new loan originations for the six months ended June 30, 2012.
Excluding the effect of the increase in deposits resulting from the acquisition of Green Bankshares, a significant portion of our core deposit growth resulted from inflows into savings and non-interest bearing accounts. Savings and non-interest bearing accounts increased by $82.1 million or 27.7% and $51.3 million or 7.5%, respectively, during the six months ended June 30, 2012.
Florida loan originations increased during 2011 as we selectively hired new commercial loan officers and credit analysts and also benefited from residential mortgage and indirect auto loan volumes. South Carolina loan originations benefited from improved results in commercial lending. Loan originations were steady in North Carolina as we closed the investment in Capital Bank Corp. and reorganized the management team during the first quarter of 2011. Florida, South Carolina, North Carolina, and Tennessee accounted for 36.6%, 26.9%, 31.0%, and 5.5%, respectively, of our new loan originations for year ended December 31, 2011.
In addition to our recent acquisitions, we plan to pursue acquisitions that position us in southeastern U.S. markets with attractive demographics and business growth trends, expand our branch network in existing
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markets, increase our earnings power or enhance our suite of products. Our future acquisitions may include distressed assets auctioned by the FDIC or another seller where our operations, underwriting and servicing capabilities or management experience give us an advantage in evaluating and resolving the assets.
We are operating in an environment characterized by a slow-paced economic recovery with ongoing pressure on employment and property values and continued dislocations in the banking industry. South Florida continues to suffer from elevated unemployment and continued pressure on home prices, which have declined in the Miami MSA by approximately 45% over the five year period ending March 31, 2012, according to data compiled by the Federal Housing Finance Agency based on conforming mortgages held or insured by Fannie Mae and Freddie Mac. North Carolina, South Carolina and Tennessee are also experiencing employment and home price pressure, although not as severe as south Florida. We experience competition from both large regional banks and small community banks, but are nonetheless finding opportunities to originate high-quality loans and to grow low-cost customer deposits, consistent with our operating strategy. Large numbers of banks in our markets continue to struggle with weak capital levels, credit quality and earnings performance, and many are subject to regulatory orders.
Primary Factors Used to Evaluate Our Business
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and income statement, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our budgeted performance and the financial condition and performance of comparable financial institutions in our region and nationally. Our financial information is prepared in accordance with GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our consolidated financial statements and accompanying notes. For more information on our accounting policies and estimates, see “—Critical Accounting Policies and Estimates.”
Income Statement Metrics
Net Interest Income
Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. The net interest margin represents net interest income divided by average interest-earning assets. We earn interest income from interest, dividends and fees earned on interest-earning assets, the recognition of accretable yield associated with purchased credit impaired loans, and the amortization and accretion of discounts and premiums on investment securities. We incur interest expense on interest-bearing liabilities, including interest-bearing deposits, borrowings and other forms of indebtedness as well as from amortization and accretion of discounts and premiums on purchased time deposits and debt. We seek to improve our net interest margin by originating commercial and consumer loans we believe to be high-quality and funding these assets primarily with low-cost customer deposits. References throughout this discussion to “commercial loans” include commercial & industrial and owner occupied commercial real estate loans, and references to “commercial real estate loans” include non-owner occupied commercial real estate loans, C&D loans and multifamily commercial real estate loans.
Provision for Loan Losses
The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.
Non-interest Income
Non-interest income includes service charges on deposit accounts, debit card income, fees on mortgage loans, investment advisory and trust fees, accretion on the FDIC indemnification asset, other operating income and investment securities gains and losses.
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Non-interest Expense
Non-interest expense includes salary and employee benefits, net occupancy expense, conversion related expenses, accounting, legal and other professional expenses, FDIC and state assessments, foreclosed asset related expenses and other operating expenses. We monitor the ratio of non-interest expense to net revenues (net interest income plus non-interest income), which is commonly known as the efficiency ratio.
Net Income
We evaluate our net income using the common industry ratio, return on assets (which we refer to as “ROA”), which is equal to net income for the period annualized, divided by the average of total assets for the period. As part of our budgeting process, we plan to improve the returns on assets of banks we acquire from the lower levels characteristic of institutions operating under financial distress.
Balance Sheet Drivers
Loan Growth
We monitor new loan production on a weekly basis by loan type, borrower type, market and profitability. Our operating strategy focuses on growing assets by originating commercial and consumer loans that we believe to be high quality. For the six months ended June 30, 2012, we originated $277.1 million of commercial loans, $117.5 million of consumer loans, $48.7 million of commercial real estate loans and $4.0 million of other loans. For the year ended December 31, 2011, we originated $464.9 million of commercial loans, $157.0 million of consumer loans, $96.9 million of commercial real estate loans and $9.6 million of other loans. In addition, our acquisition strategy, which focuses on acquiring assets and businesses in southeastern U.S. markets, has resulted in an increase of the number of commercial and consumer loans.
Asset Quality
In order to operate with a sound risk profile, we have focused on originating loans we believe to be of high quality and disposing of non-performing assets as rapidly as possible.
We are working to improve the diversification of our portfolio by reducing the concentration of commercial real estate loans in the legacy portfolios of the acquisitions and increasing the contribution of newly originated commercial and consumer loans. We monitor the levels of each loan type in our portfolio on a quarterly basis.
In marking the legacy loan portfolios to market at acquisition, we segregated similar loans into pools and value those pools by projecting lifetime cash flows for each loan based on assumptions about yield, average life and credit losses and then discounting those cash flows to present value. Because of this accounting treatment, we no longer report these loans as non-accrual loans or report charge-offs with respect to these loans. Rather, we monitor the performance of our legacy portfolio by tracking the ratio of non-performing loans against our projections. Each quarter we update our assessment of cash flows for the loans in each pool. To the extent that we make unfavorable changes to estimates of lifetime credit losses for loans in a given pool (other than due to decreases in interest rate indices) which result in the present value of cash flows from the pool being less than our recorded investment of the pool, we record a provision for loan losses, resulting in an increase in the allowance for loan losses for that pool. For any pool where the present value of our most recent estimate of future cumulative lifetime cash flows has increased above its recorded investment, we will first reverse any previously established allowance for loan losses for the pool. If such estimate exceeds the amount of any previously established allowance, we will increase future interest income as a prospective yield adjustment over the remaining life of the pool to a rate which, when used to discount the expected cash flows, results in the present value of such cash flows equaling the recorded investment of the pool at the time of the estimate.
Deposit Growth
We monitor deposit growth by account type, market and rate on a daily and weekly basis. We seek to fund loan growth primarily with low-cost customer deposits either originated or acquired by us.
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Liquidity
We manage liquidity based upon policy limits and cash flow modeling. To maintain adequate liquidity, we also monitor indicators of potential liquidity risk, utilize cash flow projection models to forecast liquidity needs, model liquidity stress scenarios and develop contingency plans, and identify alternative back-up sources of liquidity.
Capital
We manage capital to comply with our internal planning targets and regulatory capital standards, including the requirements of the OCC Operating Agreement. We review capital levels on a quarterly basis, and we project capital levels in connection with our organic growth plans and acquisitions to ensure continued compliance. We evaluate a number of capital ratios, including Tier 1 capital to total adjusted assets (the leverage ratio) and Tier 1 capital to risk-weighted assets.
Results of Operations
Net Interest Income
Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, federal funds sold and securities purchased under agreements to resell. Our interest-bearing liabilities include deposits, advances from the FHLB, federal funds purchased, subordinated debentures underlying the trust preferred securities we acquired in connection with our investments in TIB Financial, Capital Bank Corp. and Green Bankshares, repurchase agreements and other short-term borrowings.
Our net interest income decreased from $63.9 million in the first quarter of 2012 to $63.3 million in the second quarter of 2012, which represents a decrease of approximately 0.8%. The main driver of the decline in net interest income was the reduction in interest earning assets led by problem loan resolutions and portfolio principal repayments. These factors were partially offset by a 10 basis point expansion of the net interest margin which increased to 4.60% in the second quarter of 2012 in comparison to 4.50% in the first quarter of 2012. During the quarter, average earning assets declined from $5.8 billion during the first quarter to $5.6 billion, as strong loan production of $250.5 million was offset by special assets resolutions and principal repayments resulting in a $39.2 million net decline in total loans. The yield on interest earning assets increased from 5.22% to 5.29% as low yielding interest bearing cash was redeployed through reinvestment in investment securities and continued deleveraging and deposit repricing. Partially offsetting the increase in asset yield was a decrease in loan yields (from 6.47% to 6.37%).
The cost of funds decreased during the second quarter of 2012 to 0.72% as compared to 0.91% in the second quarter of 2011 and 0.75% in the first quarter of 2012 due to growth in the relative proportion of, and reduced costs of, core deposits. Also contributing to the increased margin and decreased cost of funds was a $264.9 million increase in average non-interest bearing deposits during the second quarter of 2012 as compared to the same quarter last year. This increase reflects the inclusion of the loan portfolio acquired in the acquisition of Green Bankshares
Our net interest income for the year ended December 31, 2011 increased by approximately $154.8 million, or 424.0%, to $191.3 million, as compared to the year ended December 31, 2010. The net interest margin increased by 154 basis points during the year ended 2011 to 4.05% in comparison to 2.51% in the year ended 2010. This increase reflects the inclusion of the loan portfolio acquired in the acquisitions of Green Bankshares and Capital Bank Corp. We have also experienced upward yield revisions in our loan portfolio due to better-than-expected credit performance in certain legacy loan pools. These yield revisions increased the yield on covered purchased credit impaired loans from the original acquisition date weighted average of 5.68% to 6.89% for the $2.8 billion outstanding as of June 30, 2012.
As of June 30, 2012, we held cash and securities equal to 22.1% of total assets, which represented $446.2 million of liquidity in excess of our target of 15%. We intend to use the net proceeds from our initial public offering and current excess liquidity and capital for general corporate purposes, including loan growth as
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well as the acquisition of depository institutions that meet our investment standards. Because our current and anticipated future excess liquidity and capital levels serve to decrease the leverage on our balance sheet, our profitability ratios (e.g., return on equity, return on assets and net interest margin) are negatively affected. Our loan originations for the three and six months ended June 30, 2012 totaled $250.5 million and $447.3 million, respectively. Assuming no other changes to the balance sheet and excluding consideration of paydowns on the existing loan portfolio, at the current loan origination pace, we would continue to have excess liquidity into the second half of 2012.
Three Months Ended June 30, 2012 | Three Months Ended March 31, 2012 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 4,210,746 | $ | 66,682 | 6.37 | % | $ | 4,253,444 | $ | 68,445 | 6.47 | % | ||||||||||||
Investment securities(2) | 1,215,494 | 5,931 | 1.96 | % | 1,040,689 | 5,628 | 2.18 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 101,657 | 65 | 0.26 | % | 418,451 | 229 | 0.22 | % | ||||||||||||||||
FHLB stock | 37,966 | 488 | 5.17 | % | 38,725 | 345 | 3.58 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | $ | 5,565,863 | $ | 73,166 | 5.29 | % | $ | 5,751,309 | $ | 74,647 | 5.22 | % | ||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 97,379 | $ | 92,118 | ||||||||||||||||||||
Other assets |
|
691,840 |
| 709,965 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-earning assets | $ | 789,219 | $ | 802,083 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 6,355,082 | $ | 6,553,392 | ||||||||||||||||||||
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|
|
| |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Time deposits | $ | 1,982,499 | $ | 5,336 | 1.08 | % | $ | 2,118,417 | $ | 5,464 | 1.04 | % | ||||||||||||
Money market | 902,334 | 1,000 | 0.45 | % | 897,119 | 1,299 | 0.58 | % | ||||||||||||||||
Negotiable order of withdrawal accounts |
|
1,069,756 |
|
|
691 |
|
|
0.26 |
% | 1,081,588 | 825 | 0.31 | % | |||||||||||
Savings deposits | 360,347 | 276 | 0.31 | % | 308,681 | 267 | 0.35 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing deposits | $ | 4,314,936 | $ | 7,303 | 0.68 | % | $ | 4,405,805 | $ | 7,855 | 0.72 | % | ||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||
Short-term borrowings and FHLB advances |
$ |
132,517 |
|
$ |
317 |
|
|
0.96 |
% | $ | 217,480 | $ | 490 | 0.91 | % | |||||||||
Long-term borrowings | 135,477 | 1,928 | 5.72 | % | 125,650 | 1,944 | 6.22 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | $ | 4,582,930 | $ | 9,548 | 0.84 | % | $ | 4,748,935 | $ | 10,289 | 0.87 | % | ||||||||||||
Non-interest-bearing liabilities and shareholders’ equity: | ||||||||||||||||||||||||
Demand deposits | $ | 722,929 | $ | 750,822 | ||||||||||||||||||||
Other liabilities | 38,483 | 50,639 | ||||||||||||||||||||||
Shareholders’ equity | 1,010,740 | 1,002,996 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-bearing liabilities and shareholders’ equity | $ | 1,772,152 | $ | 1,804,457 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 6,355,082 | $ | 6,553,392 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread (tax equivalent basis) | 4.45 | % | 4.35 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income (tax equivalent basis) | $ | 63,618 | $ | 64,358 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 4.60 | % | 4.50 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 121.45 | % | 121.11 | % |
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(1) | Average loans include non-performing loans. |
(2) | Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. |
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 4,210,746 | $ | 66,682 | 6.37 | % | $ | 2,922,482 | $ | 43,337 | 5.95 | % | ||||||||||||
Investment securities(2) | 1,215,494 | 5,931 | 1.96 | % | 802,893 | 5,840 | 2.92 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 101,657 | 65 | 0.26 | % | 578,135 | 588 | 0.41 | % | ||||||||||||||||
FHLB stock | 37,966 | 488 | 5.17 | % | 29,526 | 117 | 1.59 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | $ | 5,565,863 | $ | 73,166 | 5.29 | % | $ | 4,333,036 | $ | 49,882 | 4.62 | % | ||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 97,379 | $ | 51,875 | ||||||||||||||||||||
Other assets | 691,840 | 499,574 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-earning assets | $ | 789,219 | $ | 551,449 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 6,355,082 | $ | 4,884,485 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Time deposits | $ | 1,982,499 | $ | 5,336 | 1.08 | % | $ | 1,967,308 | $ | 5,361 | 1.09 | % | ||||||||||||
Money market | 902,334 | 1,000 | 0.45 | % | 486,088 | 884 | 0.73 | % | ||||||||||||||||
Negotiable order of withdrawal accounts | 1,069,756 | 691 | 0.26 | % | 415,952 | 582 | 0.56 | % | ||||||||||||||||
Savings deposits | 360,347 | 276 | 0.31 | % | 166,663 | 224 | 0.54 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest-bearing deposits | $ | 4,314,936 | $ | 7,303 | 0.68 | % | $ | 3,036,011 | $ | 7,051 | 0.93 | % | ||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||
Short-term borrowings and FHLB advances | $ | 132,517 | $ | 317 | 0.96 | % | $ | 303,864 | $ | 691 | 0.91 | % | ||||||||||||
Long-term borrowings | 135,477 | 1,928 | 5.72 | % | 97,799 | 1,117 | 4.58 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest-bearing liabilities | $ | 4,582,930 | $ | 9,548 | 0.84 | % | $ | 3,437,674 | $ | 8,859 | 1.03 | % | ||||||||||||
Non-interest-bearing liabilities and shareholders’ equity: | ||||||||||||||||||||||||
Demand deposits | $ | 722,929 | $ | 457,980 | ||||||||||||||||||||
Other liabilities | 38,483 | 41,053 | ||||||||||||||||||||||
Shareholders’ equity | 1,010,740 | 947,778 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-bearing liabilities and shareholders’ equity | $ | 1,772,152 | $ | 1,446,811 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 6,355,082 | $ | 4,884,485 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread (tax equivalent basis) | 4.45 | % | 3.59 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income (tax equivalent basis) | $ | 63,618 | $ | 41,023 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 4.60 | % | 3.80 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 121.45 | % | 126.52 | % |
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Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 4,233,066 | $ | 134,959 | 6.41 | % | $ | 2,714,315 | $ | 79,016 | 5.87 | % | ||||||||||||
Investment securities(2) | 1,127,866 | 11,559 | 2.06 | % | 712,789 | 9,850 | 2.79 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 260,054 | 296 | 0.23 | % | 663,330 | 1,297 | 0.39 | % | ||||||||||||||||
FHLB stock | 38,346 | 833 | 4.37 | % | 29,012 | 262 | 1.82 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | $ | 5,659,332 | $ | 147,647 | 5.25 | % | $ | 4,119,446 | $ | 90,425 | 4.43 | % | ||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 94,749 | $ | 50,714 | ||||||||||||||||||||
Other assets | 701,836 | 460,745 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-earning assets | $ | 796,585 | $ | 511,459 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 6,455,917 | $ | 4,630,905 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Time deposits | $ | 2,050,458 | $ | 10,800 | 1.06 | % | $ | 1,879,441 | $ | 9,959 | 1.07 | % | ||||||||||||
Money market | 899,727 | 2,299 | 0.51 | % | 443,471 | 1,605 | 0.73 | % | ||||||||||||||||
Negotiable order of withdrawal accounts | 1,075,672 | 1,516 | 0.28 | % | 383,093 | 1,004 | 0.53 | % | ||||||||||||||||
Savings deposits | 334,514 | 543 | 0.33 | % | 152,336 | 409 | 0.54 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing deposits | $ | 4,360,371 | $ | 15,158 | 0.70 | % | $ | 2,858,341 | $ | 12,977 | 0.92 | % | ||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||
Short-term borrowings and FHLB advances | $ | 174,999 | $ | 807 | 0.93 | % | $ | 310,468 | $ | 1,349 | 0.88 | % | ||||||||||||
Long-term borrowings | 135,247 | 3,872 | 5.76 | % | 87,216 | 1,999 | 4.62 | % | ||||||||||||||||
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|
|
|
|
|
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Total interest-bearing liabilities | $ | 4,670,617 | $ | 19,837 | 0.85 | % | $ | 3,256,025 | $ | 16,325 | 1.01 | % | ||||||||||||
Non-interest-bearing liabilities and shareholders’ equity: | ||||||||||||||||||||||||
Demand deposits | $ | 736,618 | $ | 401,994 | ||||||||||||||||||||
Other liabilities | 44,212 | 38,360 | ||||||||||||||||||||||
Shareholders’ equity | 1,004,470 | 934,526 | ||||||||||||||||||||||
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Total non-interest-bearing liabilities and shareholders’ equity | $ | 1,785,300 | $ | 1,374,880 | ||||||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 6,455,917 | $ | 4,630,905 | ||||||||||||||||||||
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|
| |||||||||||||||||||||
Interest rate spread (tax equivalent basis) | 4.39 | % | 3.42 | % | ||||||||||||||||||||
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|
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| |||||||||||||||||||||
Net interest income (tax equivalent basis) | $ | 127,810 | $ | 74,100 | ||||||||||||||||||||
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|
|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 4.54 | % | 3.63 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 121.17 | % | 126.52 | % |
(1) | Average loans include non-performing loans. |
(2) | Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. |
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Twelve Months Ended December 31, 2011 | Twelve Months Ended December 31, 2010 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans(1)(2) | $ | 3,294,853 | $ | 205,867 | 6.25 | % | $ | 586,860 | $ | 36,453 | 6.21 | % | ||||||||||||
Investment securities(2) | 771,943 | 20,346 | 2.64 | % | 124,731 | 2,752 | 2.21 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 657,077 | 2,328 | 0.35 | % | 737,739 | 3,462 | 0.47 | % | ||||||||||||||||
FHLB stock | 31,934 | 758 | 2.37 | % | 8,372 | 141 | 1.68 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | $ | 4,755,807 | $ | 229,299 | 4.82 | % | $ | 1,457,702 | $ | 42,808 | 2.94 | % | ||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 64,723 | $ | 10,243 | ||||||||||||||||||||
Other assets | 505,384 | 112,975 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-earning assets | $ | 570,107 | $ | 123,218 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 5,325,914 | $ | 1,580,920 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Time deposits | $ | 2,022,480 | $ | 21,296 | 1.05 | % | $ | 446,372 | $ | 3,609 | 0.81 | % | ||||||||||||
Money market | 591,319 | 3,974 | 0.67 | % | 131,949 | 708 | 0.54 | % | ||||||||||||||||
Negotiable order of withdrawal accounts | 604,019 | 2,509 | 0.42 | % | 66,994 | 191 | 0.29 | % | ||||||||||||||||
Savings deposits | 201,238 | 925 | 0.46 | % | 25,064 | 148 | 0.59 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing deposits | $ | 3,419,056 | $ | 28,704 | 0.84 | % | $ | 670,379 | $ | 4,656 | 0.69 | % | ||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||
Short-term borrowings and FHLB advances | $ | 315,114 | $ | 2,652 | 0.84 | % | $ | 102,899 | $ | 1,120 | 1.09 | % | ||||||||||||
Long-term borrowings | 86,941 | 5,236 | 6.02 | % | 7,944 | 458 | 5.77 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | $ | 3,821,111 | $ | 36,592 | 0.96 | % | $ | 781,222 | $ | 6,234 | 0.80 | % | ||||||||||||
Non-interest-bearing liabilities and shareholders’ equity: | ||||||||||||||||||||||||
Demand deposits | $ | 509,264 | $ | 66,967 | ||||||||||||||||||||
Other liabilities | 38,420 | 13,298 | ||||||||||||||||||||||
Shareholders’ equity | 957,119 | 719,433 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non-interest-bearing liabilities and shareholders’ equity | $ | 1,504,803 | $ | 799,698 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 5,325,914 | $ | 1,580,920 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread (tax equivalent basis) | 3.86 | % | 2.14 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income (tax equivalent basis) | $ | 192,707 | $ | 36,574 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin (tax equivalent basis) | 4.05 | % | 2.51 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 124.46 | % | 186.59 | % |
(1) | Average loans include non-performing loans. |
(2) | Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. |
Three months ended June 30, 2012
Net interest income was $63.3 million during the three months ended June 30, 2012 and included the effects of a reduction of excess liquidity and an expansion of the net interest margin.
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Three months ended June 30, 2011
Net interest income was $40.7 million for the three months ended June 30, 2011 and included the effects of maintaining a high level of cash and highly liquid investment securities during the period. The increase in net interest income over prior quarter was partially due to the reinvestment of excess cash in mortgage backed securities which increased by $113.4 million which contributed to the 40 basis point increase in the yield of assets during the quarter. Net interest income includes $1.8 million associated with the recognition of the unamortized discount on certain non-PCI loans which were paid in full prior to their contractual maturity resulting in a favorable impact to the net interest margin of 17 basis points during the second quarter of 2011.
Six months ended June 30, 2012
Net interest income was $127.2 million during the six months ended June 30, 2012 and included the effects of a reduction of excess liquidity and an expansion of the net interest margin. In the first quarter of 2012, we repaid $137.5 million of FHLB Advances with higher contractual rates.
Six months ended June 30, 2011
Net interest income was $73.5 million for the six months ended June 30, 2011 and included the effects of maintaining a high level of cash and highly liquid investment securities during the period. Net interest income includes $1.8 million associated with the recognition of the unamortized discount on certain non-PCI loans which were paid in full prior to their contractual maturity resulting in a favorable impact to the net interest margin of 9 basis points during the first half of 2011.
Year ended December 31, 2011
Net interest income was $191.3 million for the year ended December 31, 2011 which included 115 days of Green Bankshares operations and eleven months of Old Capital Bank operations. Net interest income during the period includes the effects of maintaining a high level of cash and highly liquid investment securities. In the third quarter of 2011, we repaid $160.0 million of FHLB advances with higher contractual rates. Net interest income includes the favorable impact of $1.8 million associated with the recognition of the unamortized discount on certain non-PCI loans which were paid in full prior to their contractual maturities.
Year ended December 31, 2010
Net interest income was $36.5 million for the year ended December 31, 2010 and included the effects of maintaining a high level of cash and highly liquid investment securities during the period.
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Rate/Volume Analysis
The tables below detail the components of the changes in net interest income for the three months ended June 30, 2012 compared to the three months ended March 31, 2012, the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011, and the year ended December 31, 2011 compared to the year ended December 31, 2010. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
Three Months Ended June 30, 2012 Compared to Three Months Ended March 31, 2012 Due to Changes in | ||||||||||||
(Dollars in thousands) | Average Volume | Average Rate | Net Increase (Decrease) | |||||||||
Interest income | ||||||||||||
Loans(1)(2) | $ | (683 | ) | $ | (1,080 | ) | $ | (1,763 | ) | |||
Investment securities(1) | 887 | (584 | ) | 303 | ||||||||
Interest-bearing deposits in other banks | (197 | ) | 33 | (164 | ) | |||||||
FHLB stock | (7 | ) | 150 | 143 | ||||||||
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Total interest income | $ | – | $ | (1,481 | ) | $ | (1,481 | ) | ||||
Interest expense | ||||||||||||
Time deposits | $ | (360 | ) | $ | 233 | $ | (127 | ) | ||||
Money market | 8 | (307 | ) | (299 | ) | |||||||
Negotiable order of withdrawal accounts | (9 | ) | (125 | ) | (134 | ) | ||||||
Savings deposits | 42 | (33 | ) | 9 | ||||||||
Short-term borrowings and FHLB advances | (202 | ) | 29 | (173 | ) | |||||||
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Long-term borrowings | 146 | (162 | ) | (16 | ) | |||||||
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Total interest expense | $ | (375 | ) | $ | (365 | ) | $ | (740 | ) | |||
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Change in net interest income | $ | 375 | $ | (1,116 | ) | $ | (741 | ) | ||||
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(1) | Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. |
(2) | Average loan volumes include non-performing loans which results in the impact of the non-accrual of interest being reflected in the change in average rate on loans. |
The decrease in average rate on loans for the three months ended June 30, 2012 as compared to the three months ended March 31, 2012 is primarily due to the reduction in interest earning assets led by problem loan resolutions and portfolio principal repayments. Performing a rate volume analysis similar to the above using interest earning assets and the yield thereon as a basis, a $2.4 million reduction of interest income would be allocated to the decline in volume, partially offset by a $0.9 million increase in average rate.
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Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 Due to Changes in | ||||||||||||
(Dollars in thousands) | Average Volume | Average Rate | Net Increase (Decrease) | |||||||||
Interest income | ||||||||||||
Loans(1)(2) | $ | 19,969 | $ | 3,376 | $ | 23,345 | ||||||
Investment securities(1) | 2,228 | (2,137 | ) | 91 | ||||||||
Interest-bearing deposits in other banks | (346 | ) | (177 | ) | (523 | ) | ||||||
FHLB stock | 45 | 326 | 371 | |||||||||
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Total interest income | $ | 21,896 | $ | 1,388 | $ | 23,284 | ||||||
Interest expense | ||||||||||||
Time deposits | $ | 39 | $ | (64 | ) | $ | (25 | ) | ||||
Money market | 501 | (385 | ) | 116 | ||||||||
Negotiable order of withdrawal accounts | 503 | (394 | ) | 109 | ||||||||
Savings deposits | 178 | (126 | ) | 52 | ||||||||
Short-term borrowings and FHLB advances | (398 | ) | 24 | (374 | ) | |||||||
Long-term borrowings | 513 | 298 | 811 | |||||||||
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Total interest expense | $ | 1,336 | $ | (647 | ) | $ | 689 | |||||
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Change in net interest income | $ | 20,560 | $ | 2,035 | $ | 22,595 | ||||||
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(1) | Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. |
(2) | Average loan volumes include non-performing loans which results in the impact of the non-accrual of interest being reflected in the change in average rate on loans. |
The increase in average rate on loans for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 is primarily due to increases in pool yields as a result of favorable performance in certain acquired loan pools. The increase in average volume was primarily due to the acquisition of Green Bankshares.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 Due to Changes in | ||||||||||||
(Dollars in thousands) | Average Volume | Average Rate | Net Increase (Decrease) | |||||||||
Interest income | ||||||||||||
Loans(1)(2) | $ | 29,910 | $ | 26,033 | $ | 55,943 | ||||||
Investment securities(1) | 3,473 | (1,764 | ) | 1,709 | ||||||||
Interest-bearing deposits in other banks | (439 | ) | (562 | ) | (1,001 | ) | ||||||
FHLB stock | 52 | 519 | 571 | |||||||||
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Total interest income | $ | 32,996 | $ | 24,226 | $ | 57,222 | ||||||
Interest expense | ||||||||||||
Time deposits | $ | 476 | $ | 365 | $ | 841 | ||||||
Money market | 975 | (281 | ) | 694 | ||||||||
Negotiable order of withdrawal accounts | 963 | (451 | ) | 512 | ||||||||
Savings deposits | 288 | (154 | ) | 134 | ||||||||
Short-term borrowings and FHLB advances | (371 | ) | (171 | ) | (542 | ) | ||||||
Long-term borrowings | 815 | 1,058 | 1,873 | |||||||||
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Total interest expense | $ | 3,146 | $ | 366 | $ | 3,512 | ||||||
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Change in net interest income | $ | 29,850 | $ | 23,860 | $ | 53,710 | ||||||
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(1) | Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. |
(2) | Average loan volumes include non-performing loans which results in the impact of the non-accrual of interest being reflected in the change in average rate on loans. |
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The increase in average rate on loans for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 is primarily due to increases in pool yields as a result of favorable performance in certain acquired loan pools. The increase in average volume was primarily due to the acquisitions of Green Bankshares and Capital Bank Corp.
Twelve Months Ended December 31, 2011 Compared to Twelve Months Ended December 31, 2010 Due to Changes in | ||||||||||||
(Dollars in thousands) | Average Volume | Average Rate | Net Increase (Decrease) | |||||||||
Interest income | ||||||||||||
Loans(1)(2) | $ | 113,771 | $ | 55,643 | $ | 169,414 | ||||||
Investment securities(1) | 12,279 | 5,315 | 17,594 | |||||||||
Interest-bearing deposits in other banks | (84 | ) | (1,050 | ) | (1,134 | ) | ||||||
FHLB stock | 276 | 341 | 617 | |||||||||
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Total interest income | $ | 126,242 | $ | 60,249 | $ | 186,491 | ||||||
Interest expense | ||||||||||||
Time deposits | $ | 10,729 | $ | 6,958 | $ | 17,687 | ||||||
Money market | 1,897 | 1,369 | 3,266 | |||||||||
Negotiable order of withdrawal accounts | 1,855 | 463 | 2,318 | |||||||||
Savings deposits | 663 | 114 | 777 | |||||||||
Short-term borrowings and FHLB advances | 982 | 550 | 1,532 | |||||||||
Long-term borrowings | 3,682 | 1,096 | 4,778 | |||||||||
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Total interest expense | $ | 19,808 | $ | 10,550 | $ | 30,358 | ||||||
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Change in net interest income | $ | 106,434 | $ | 49,699 | $ | 156,133 | ||||||
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(1) | Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. |
(2) | Average loan volumes include non-performing loans which results in the impact of the non-accrual of interest being reflected in the change in average rate on loans. |
The increase in average rate on loans for the year ended December 31, 2011 as compared to the year ended December 31, 2010 is primarily due to increases in pool yields as a result of favorable performance in certain acquired loan pools and upwards revision to accretable yield along with the acquisitions of Green Bankshares and Capital Bank Corp. With respect to the comparison from inception through December 31, 2009 to the year ended December 31, 2010, as the periods required to be presented are of different lengths, such a rate and volume comparison would not be meaningful.
Provision for Loan Losses
Three months ended June 30, 2012
The provision for loan losses of $6.6 million recorded during the second quarter of 2012 reflects approximately $3.3 million related to additional impairment identified with respect to acquired impaired loans, $0.3 million related to acquired loans which were not considered impaired at the date of acquisition and $3.0 million related to the increase in the allowance for loan losses established for originated loans and to replenish net charge-offs. We originated $250.5 million in new loans during the second quarter of 2012. Of the $3.3 million related to the acquired impaired loans, approximately $4.4 million resulted from the non-covered portfolio which was partially offset by a $1.1 million reversal of previously recognized impairment from improvement of the covered portfolio. We are covered by an indemnification agreement from the FDIC for the covered loan portfolio, and an increase in the value of the indemnification asset of approximately $2.2 million was associated with the provision for loan losses required for these loans during the three months ended June 30, 2012.
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PCI loans, loans acquired where there was evidence of credit deterioration since origination and where it was probable that we will not collect all contractually required principal and interest payments, are aggregated in pools of loans with similar risk characteristics and accounted for as purchased credit-impaired. Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If we have unfavorable changes in our estimates of cash flows expected to be collected for a loan pool (other than due to decreases in interest rate indices) which result in the present value of such cash flows being less than the recorded investment of the pool, we record a provision for loan losses, resulting in an increase in the allowance for loan losses for that pool. 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 accrue 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.
Changes in expected cash flows on loan pools resulted from several factors, which include actual and projected maturity date extensions through renewals of certain loans along with maturity extensions related to workout strategies or borrower requests on other loans; improved precision in the cash flow estimation; actual payment and loss experience on certain loans; and changes to the internal risk ratings of certain loans. When actual and projected maturity dates are extended beyond the dates assumed in previous cash flow estimations, the expected lives of those loans are extended and cash flows as well as impairment and accretable yield can change. We forecast the payment stream of each pool of PCI loans at the original acquisition-date valuation as well as at each subsequent re-estimation date; however, previously un-forecasted loan renewals or extensions can occur as the borrowers’ cash flow needs and other circumstances change over time. Cash flow estimates have generally improved since the acquisition dates as our lending officers and credit administration department have been in regular contact with each borrower and have developed a fuller understanding of each borrowers’ financial condition and business or personal needs. Actual payment experience on certain loans can also change expected cash flows as problem loan resolutions, loan payoffs and prepayments occur. Finally, changes to the risk ratings of certain PCI loans occur based on our evaluation of the financial condition of its borrowers. As the financial condition and repayment ability of borrowers improve over time, our policy is to upgrade the risk ratings associated with these loans and increase our cash flow expectations for these loans. Conversely, as the financial condition and repayment ability of borrowers deteriorate over time, our policy is to downgrade the associated risk ratings and decrease our cash flow expectations for these loans accordingly.
The table below illustrates the impact of our second quarter of 2012 estimates of expected cash flows on PCI loans on impairment and prospective yield:
(Dollars in thousands) | Cumulative Impairment | Weighted Average Prospective Yields | ||||||||||
Based on Original Estimates of Expected Cash Flows | Based on Most Recent Estimates of Expected Cash Flows | |||||||||||
Covered portfolio: | ||||||||||||
Loan pools with impairment | $ | 14,597 | 5.98 | % | 9.14 | % | ||||||
Loan pools with improvement | – | 6.39 | % | 9.39 | % | |||||||
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Covered portfolio total | $ | 14,597 | 6.09 | % | 9.20 | % | ||||||
Non-covered portfolio: | ||||||||||||
Loan pools with impairment | $ | 19,092 | 5.89 | % | 6.58 | % | ||||||
Loan pools with improvement | – | 5.29 | % | 6.38 | % | |||||||
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Non-covered portfolio total | $ | 19,092 | 5.59 | % | 6.47 | % | ||||||
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Total | $ | 33,689 | 5.68 | % | 6.89 | % | ||||||
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Three months ended June 30, 2011
The provision for loan losses of $8.2 million recorded during the three months ended June 30, 2011 reflects approximately $3.3 million related to additional impairment identified with respect to acquired impaired loans, $2.7 million related to acquired loans which were not considered impaired at the date of acquisition and $2.2 million related to the increase in the allowance for loan losses established for originated loans. Of the $3.3 million related to the acquired impaired loans, approximately $2.3 million and $1.0 million resulted from the covered portfolio and the non-covered portfolio, respectively. We are covered by an indemnification agreement from the FDIC for the covered loan portfolio, and an increase in the value of the indemnification asset of approximately $3.2 million was associated with the provision for loan losses required for these loans during the second quarter of 2011.
Six months ended June 30, 2012
The provision for loan losses of $12.0 million recorded during the first six months of 2012 reflects approximately $7.4 million related to additional impairment identified with respect to acquired impaired loans, $0.5 million related to acquired loans which were not considered impaired at the date of acquisition and $4.1 million related to the increase in the allowance for loan losses established for originated loans and to replenish net charge-offs. We originated $447.3 million in new loans during the six months ended June 30, 2012. Of the $7.4 million related to the acquired impaired loans, approximately $2.8 million and $4.6 million resulted from the covered portfolio and the non-covered portfolio, respectively. We are covered by an indemnification agreement from the FDIC for the covered loan portfolio, and an increase in the value of the indemnification asset of approximately $2.8 million was associated with the provision for loan losses required for these loans during the six months ended June 30, 2012.
Six months ended June 30, 2011
The provision for loan losses of $9.8 million recorded during the first six months of 2011 reflects approximately $3.3 million related to additional impairment identified with respect to acquired impaired loans, $2.7 million related to acquired loans which were not considered impaired at the date of acquisition and $3.8 million related to the increase in the allowance for loan losses established for originated loans. Of the $3.3 million related to the acquired impaired loans, approximately $2.3 million and $1.0 million resulted from the covered portfolio and the non-covered portfolio, respectively. We are covered by an indemnification agreement from the FDIC for the covered loan portfolio, an increase in the value of the indemnification asset of approximately $3.2 million was associated with the provision for loan losses required for these loans during the six months ended June 30, 2011.
Year ended December 31, 2011
The provision for loan losses of $38.4 million recorded as of December 31, 2011 reflects approximately $26.3 million related to additional impairment identified with respect to acquired impaired loans, $4.2 million related to acquired loans which were not considered impaired at the date of acquisition and $7.9 million related to the increase in the allowance for loan losses established for originated loans. We reported new loan originations of approximately $728.4 million during 2011. Of the $26.3 million provision related to acquired impaired loans, approximately $11.8 million resulted from the covered portfolio and $14.5 million resulted from the non-covered portfolio. As we are covered by an indemnification agreement from the FDIC for the covered loan portfolio, an increase in the value of the indemnification asset of approximately $9.5 million was associated with the provision for loan losses required for these loans during 2011.
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The table below illustrates the impact of our 2011 estimates of expected cash flows on PCI loans on impairment and prospective yield:
(Dollars in thousands) | Cumulative Impairment | Weighted Average Prospective Yields | ||||||||||
Based on Original Estimates of Expected Cash Flows | Based on Most Recent Estimates of Expected Cash Flows | |||||||||||
Covered portfolio: | ||||||||||||
Loan pools with impairment | $ | 11,809 | 6.34 | % | 9.92 | % | ||||||
Loan pools with improvement | – | 3.43 | % | 6.94 | % | |||||||
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Covered portfolio total | $ | 11,809 | 6.09 | % | 9.60 | % | ||||||
Non-covered portfolio: | ||||||||||||
Loan pools with impairment | $ | 14,508 | 5.93 | % | 7.00 | % | ||||||
Loan pools with improvement | – | 5.81 | % | 6.09 | % | |||||||
Non-covered portfolio total | $ | 14,508 | 5.91 | % | 6.81 | % | ||||||
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Total | $ | 26,317 | 5.95 | % | 7.48 | % | ||||||
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Non-interest Income
Non-interest income increased from $7.9 million for the three months ended June 30, 2011 to $12.2 million for the three months ended June 30, 2012 primarily due to increases in service charges on deposit accounts, debit card income and fee income on mortgage loans sold. The increase was attributable to the inclusion of Green Bankshares’ results which we acquired on September 7, 2011. The following table sets forth the components of non-interest income for the periods indicated:
(Dollars in thousands) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | ||||||
Service charges on deposit accounts | $ | 6,332 | $ | 2,152 | ||||
Accretion on FDIC indemnification asset | (164 | ) | 2,540 | |||||
Debit card income | 2,589 | 1,036 | ||||||
Fees on mortgage loans sold | 1,205 | 649 | ||||||
Investment advisory and trust fees | 142 | 413 | ||||||
Earnings on bank owned life insurance policies | 167 | 240 | ||||||
Brokerage fees | 158 | 212 | ||||||
Wire transfer fees | 160 | 156 | ||||||
Loss on extinguishment of debt | – | – | ||||||
Investment securities gains (losses), net | 895 | 75 | ||||||
Bargain purchase gain | – | – | ||||||
Other | 695 | 426 | ||||||
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Total non-interest income | $ | 12,179 | $ | 7,899 | ||||
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Non-interest income increased from $12.4 million for the six months ended June 30, 2011 to $26.7 million for the six months ended June 30, 2012 primarily due to increases in service charges on deposit accounts, debit card income and gains on investment securities. The increase was attributable to the inclusion of Green Bankshares’ results which we acquired on September 7, 2011, and Capital Bank’s results which we acquired on January 28, 2011. The following table sets forth the components of non-interest income for the periods indicated:
(Dollars in thousands) | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||
Service charges on deposit accounts | $ | 12,323 | $ | 4,065 | ||||
Accretion on FDIC indemnification asset | 158 | 2,858 | ||||||
Debit card income | 5,350 | 1,811 | ||||||
Fees on mortgage loans sold | 2,308 | 1,180 | ||||||
Investment advisory and trust fees | 294 | 800 | ||||||
Earnings on bank owned life insurance policies | 379 | 361 | ||||||
Brokerage fees | 444 | 309 | ||||||
Wire transfer fees | 335 | 282 | ||||||
Loss on extinguishment of debt | (321 | ) | – | |||||
Investment securities gains (losses), net | 3,648 | 18 | ||||||
Bargain purchase gain | – | – | ||||||
Other | 1,763 | 716 | ||||||
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Total non-interest income | $ | 26,681 | $ | 12,400 | ||||
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Non-interest income increased from $19.6 million for the year ended December 31, 2010 to $36.5 million for the year ended December 31, 2011 (excluding $4.7 million net gains on investment securities). The increase was attributable to the inclusion of Green Bankshares’ results which we acquired on September 7, 2011, and Capital Bank’s results which we acquired on January 28, 2011. The following table sets forth the components of non-interest income for the periods indicated:
(Dollars in thousands) | Year Ended December 31, 2011 | Year Ended December 31, 2010 | Period From November 30, 2009 (Inception) Through December 31, 2009 | |||||||||
Service charges on deposit accounts | $ | 13,385 | $ | 1,992 | $ | – | ||||||
Accretion on FDIC indemnification asset | 7,627 | 736 | – | |||||||||
Debit card income | 6,281 | 382 | – | |||||||||
Fees on mortgage loans sold | 2,791 | 449 | – | |||||||||
Investment advisory and trust fees | 1,438 | 354 | – | |||||||||
Earnings on bank owned life insurance policies | 636 | 110 | – | |||||||||
Brokerage fees | 543 | – | – | |||||||||
Wire transfer fees | 585 | 51 | – | |||||||||
Gain on extinguishment of debt | 416 | – | – | |||||||||
Investment securities gains (losses), net | 4,738 | – | – | |||||||||
Bargain purchase gain | – | 15,175 | – | |||||||||
Other | 2,787 | 366 | – | |||||||||
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Total non-interest income | $ | 41,227 | $ | 19,615 | $ | – | ||||||
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For the year ended December 31, 2011, gains on the sale of securities were $5.4 million (partially offset by $0.6 million in impairment losses). Indemnification asset income for the year ended December 31, 2011 was $7.6 million which is comprised of an increase in the indemnification asset of $11.0 million associated with increases in loss estimates for covered assets, offset by $3.4 million in amortization of the indemnification asset.
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Subsequent to the acquisition of Green Bankshares, approximately $110.0 million of FHLB advances were prepaid for approximately $416,000 less than their acquisition date fair value, which was included in non-interest income as a gain on extinguishment of debt.
During the year ended December 31, 2010, bargain purchase gains of $15.2 million were recorded resulting from the acquisitions of Metro Bank and Turnberry Bank.
We generated no non-interest income during the period from November 30, 2009 through December 31, 2009, because we had not yet commenced banking activities.
Non-interest Expense
We monitor the ratio of non-interest expense to net revenues (net interest income plus non-interest income), which is commonly known as the efficiency ratio. For the three and six months ended June 30, 2012, our efficiency ratio was approximately 77.6% and 79.0%. The efficiency ratio was significantly impacted by $1.8 million and $3.0 million of expenses associated with contract termination and other expenses related to the integration of the Company’s operations onto common technology platforms, $4.2 million and $10.7 million of non-cash equity compensation and $895 thousand and $3.6 million of investment security gains during the three and six months ended June 30, 2012. The system conversions are intended to create operating efficiencies and better position the Company for future growth. Excluding the conversion expenses, investment security gains and the non-cash equity compensation expense during the three and six months ended June 30, 2012, the efficiency ratio would have been approximately 70.6% and 71.8%. The adjusted efficiency ratio is a non-GAAP measure which we believe provides investors with information useful in understanding our business and our operating efficiency.
For the three and six months ended June 30, 2011, our efficiency ratio was approximately 77.2% and 84.4%. The efficiency ratio was significantly impacted by expenses associated with conversion and merger related expenses, non cash equity compensation expense and investment security gains totaling $4.1 million and $8.3 million during the three and six months ended June 30, 2011. Excluding these accruals, the efficiency ratio would have been approximately 68.9% and 74.7% for the three and six months ended June 30, 2011.
The following table sets forth the components of non-interest expense for the periods indicated:
(Dollars in thousands) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | ||||||
Salary and employee benefits | $ | 25,535 | $ | 19,257 | ||||
Net occupancy expense | 10,901 | 6,356 | ||||||
Accounting, legal and other professional | 4,952 | 1,809 | ||||||
Foreclosed asset related expense | 5,150 | 1,666 | ||||||
Computer services | 2,190 | 1,386 | ||||||
FDIC and state assessments | 1,596 | 1,186 | ||||||
Amortization of intangibles | 1,181 | 1,146 | ||||||
Conversion- and merger-related expenses | 1,757 | 1,012 | ||||||
Insurance, non-building | 551 | 551 | ||||||
Postage, courier and armored car | 1,006 | 506 | ||||||
Operating supplies | 852 | 351 | ||||||
Marketing and community relations | 318 | 344 | ||||||
Other operating expense | 2,645 | 1,915 | ||||||
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Total non-interest expense | $ | 58,634 | $ | 37,485 | ||||
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Non-interest expense increased from $37.5 million for the three months ended June 30, 2011 to $58.6 million for the three months ended June 30, 2012 primarily due to increases in salaries and employee compensation and the inclusion of Green Bank operations which we acquired on September 7, 2011.
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Three Months Ended June 30, 2012
Non-interest expense was $58.6 million for the three months ended June 30, 2012. Salaries and employee benefits of $25.5 million includes $4.2 million of non-cash equity compensation expense related primarily to the second quarter stock option and restricted stock grants to certain executives. In addition, there were $1.8 million in expenses during the second quarter related to the information technology conversions and merger related expenses. Foreclosed asset related expenses were $5.2 million included $5.4 million in OREO valuation adjustments. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses were $2.7 million. Such costs include real estate taxes, insurance and other costs to own and maintain the properties. Also included in the foreclosed asset related expense was approximately $2.9 million in net gains on the sale of OREO.
Three Months Ended June 30, 2011
Non-interest expense was $37.5 million for the three months ended June 30, 2011 which included a full three months of operations of Capital Bank which was acquired on January 28, 2011. Approximately $1.0 million in expense was related to the conversion and integration of the Company’s operations onto a common technology platform in the second quarter of 2011. Foreclosed asset related expenses were $1.7 million included $1.6 million in OREO valuation adjustments. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses were $1.8 million. Such costs include real estate taxes, insurance and other costs to own and maintain the properties. Also included in the foreclosed asset related expense was approximately $1.8 million in net gains on the sale of OREO.
The following table sets forth the components of non-interest expense for the periods indicated:
(Dollars in thousands) | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||
Salary and employee benefits | $ | 55,679 | $ | 34,350 | ||||
Net occupancy expense | 21,452 | 11,693 | ||||||
Accounting, legal and other professional | 11,194 | 4,069 | ||||||
Foreclosed asset related expense | 9,357 | 2,844 | ||||||
Computer services | 4,544 | 2,323 | ||||||
FDIC and state assessments | 3,301 | 3,319 | ||||||
Amortization of intangibles | 2,274 | 1,957 | ||||||
Conversion- and merger-related expenses | 3,045 | 4,749 | ||||||
Insurance, non-building | 941 | 1,060 | ||||||
Postage, courier and armored car | 2,001 | 936 | ||||||
Operating supplies | 1,441 | 775 | ||||||
Marketing and community relations | 815 | 908 | ||||||
Other operating expense | 5,502 | 3,542 | ||||||
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Total non-interest expense | $ | 121,546 | $ | 72,525 | ||||
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Non-interest expense increased from $72.5 million for the six months ended June 30, 2011 to $121.5 million for the six months ended June 30, 2012 primarily due to increases in salaries and employee compensation and the inclusion of Green Bank operations which we acquired on September 7, 2011.
Six Months Ended June 30, 2012
Non-interest expense was $121.5 million for the six months ended June 30, 2012. Salaries and employee benefits of $55.7 million include $10.7 million of non-cash equity compensation expense related primarily to the
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year to date stock option and restricted stock grants to certain executives. As certain of the stock options granted during the period were fully vested on the date of grant, the entire $2.5 million fair value of these awards were recorded during the first quarter. In addition, there were $3.0 million in expenses during the period related to the information technology conversions and merger related expenses. The total professional expense of $11.2 million includes approximately $1.0 million of settlement expense for legal claims. Foreclosed asset related expenses were $9.4 million included $8.5 million in OREO valuation adjustments. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses were $4.9 million. Such costs include real estate taxes, insurance and other costs to own and maintain the properties. Also included in the foreclosed asset related expense was approximately $4.0 million in net gains on the sale of OREO.
Six Months Ended June 30, 2011
Non-interest expense was $72.5 million for the six months ended June 30, 2011 which included a full five months of operations of Capital Bank which was acquired on January 28, 2011. Conversion related expenses of $4.7 million were related to $3.7 million of accruals for the early termination of certain information technology system related contracts and $1.0 million of expense related to the conversion of the Company’s operations onto a common technology platform in the second quarter of 2011. Foreclosed asset related expenses were $2.8 million included $1.6 million in OREO valuation adjustments Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses were $3.0 million. Such costs include real estate taxes, insurance and other costs to own and maintain the properties. Also included in the foreclosed asset related expense was approximately $1.9 million in net gains on the sale of OREO.
The following table sets forth the components of non-interest expense for the periods indicated:
(Dollars in thousands) | Year Ended December 31, 2011 | Year Ended December 31, 2010 | Period From November 30, 2009 (Inception) Through December 31, 2009 | |||||||||
Salary and employee benefits | $ | 81,405 | $ | 17,229 | $ | 40 | ||||||
Net occupancy expense | 29,493 | 4,629 | – | |||||||||
Accounting, legal and other professional | 12,382 | 9,511 | 48 | |||||||||
Foreclosed asset related expense | 12,776 | 701 | – | |||||||||
Computer services | 6,525 | 2,098 | – | |||||||||
FDIC and state assessments | 5,914 | 2,097 | – | |||||||||
Amortization of intangibles | 4,248 | 818 | – | |||||||||
Conversion-related expenses | 7,620 | 1,991 | – | |||||||||
Insurance, non-building | 1,953 | 640 | – | |||||||||
Postage, courier and armored car | 2,467 | 460 | – | |||||||||
Operating supplies | 1,810 | 289 | – | |||||||||
Marketing and community relations | 3,224 | 498 | – | |||||||||
Organizational expense | – | 2,100 | 91 | |||||||||
Impairment of intangible asset | 2,872 | – | – | |||||||||
Other operating expense | 9,506 | 1,316 | 35 | |||||||||
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Total non-interest expense | $ | 182,195 | $ | 44,377 | $ | 214 | ||||||
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Year Ended December 31, 2011
Non-interest expense was $182.2 million for the year ended December 31, 2011 which included a full eleven months of operations of Old Capital Bank, which was acquired on January 28, 2011, and four months of operations of Green Bankshares, which was acquired on September 7, 2011. Conversion related expenses of $7.6 million were related to $4.2 million of accruals for the early termination of certain information technology system related contracts and $3.4 million of expense related to the conversion of the Company’s operations onto a common technology platform. Foreclosed asset related expenses of $12.8 million included $5.9 million in OREO valuation adjustments. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses were $6.7 million. Such costs include real estate taxes, insurance and other costs to own and maintain the properties. Also included in the foreclosed asset related expense was approximately $152,000 in net losses on the sale of OREO. Legal and other professional fees included $1.5 million of legal expense related to the acquisition of Capital Bank Corp. on January 28, 2011 and Green Bankshares on September 7, 2011 and $2.7 million of expense related to loan valuations and workouts. Marketing included approximately $661,000 of expense related to our re-branding campaign of Capital Bank, N.A. The impairment of intangible asset of $2.9 million was related to the impairment of a customer relationship intangible. The impairment resulted from a decrease of assets under management subsequent to the termination of employment of several employees of the Company’s registered investment advisor, Naples Capital Advisors, Inc.
For the year ended December 31, 2011, our efficiency ratio was approximately 78.3%. The efficiency ratio was significantly impacted by expenses associated with the early termination of information systems contracts, conversion costs and legal fees related to the acquisition of Capital Bank Corp. and Green Bankshares and impairment of intangible asset, investment security gains and non-cash equity compensation expense totaling $25.6 million during the year ended December 31, 2011. Excluding these items, the efficiency ratio would have been approximately 70.6% for the year ended December 31, 2011. See “Information about CBF—Our Business Strategy—Operating Strategy—Efficiency and Cost Savings” for a discussion of the use of the adjusted efficiency ratio in our business and the reconciliation of adjusted efficiency ratio.
Non-interest expense increased from $44.4 million for the year ended December 31, 2010 to $182.2 million for the year ended December 31, 2011 due to foreclosed asset valuation adjustments and related expenses, higher conversion costs, the impairment of an intangible asset and the inclusion of a full year of the operations of the Failed Banks and TIB Financial which we acquired on July 16, 2010 and September 30, 2010, respectively, the operations of Green Bankshares, which we acquired on September 7, 2011, and the operations of Capital Bank, which we acquired on January 28, 2011.
Year Ended December 31, 2010
Non-interest expense of $44.4 million for the year ended December 31, 2010 included five and a half months of operations of First National Bank, Metro Bank and Turnberry Bank, which were acquired on July 16, 2010, along with $2.1 million in organizational expenses, and $2.0 million of conversion related expense.
Income Taxes
The calculation of our income tax provision is complex and requires the use of estimates and judgments. As part of our analysis and implementation of business strategies, consideration is given to the tax laws and regulations that apply to the specific facts and circumstances for any tax position under evaluation. For tax positions that are uncertain in nature, management determines whether the tax position is more likely than not to be sustained upon examination. For tax positions that meet the threshold, management then estimates the amount of the tax benefit to recognize in the financial statements. Management closely monitors tax developments in order to evaluate the effect they may have on our overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.
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The provision for income taxes includes federal and state income taxes. Fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. At June 30, 2012, we had a deferred tax asset of $140.7 million, which principally reflects the tax effect of the acquisition accounting adjustments made in connection with each of the acquisitions, subject to the limits of Section 382 of the Internal Revenue Code of 1986, as amended (which we refer to as the “Internal Revenue Code”), which determines our ability to preserve the tax benefits of existing net operating losses and built-in losses in a change of control.
Our future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments we make and our overall level of taxable income. See the notes to our consolidated financial statements for additional information about the calculation of income tax expense and the various components thereof. Additionally, there were no unrecognized tax benefits at June 30, 2012, December 31, 2011 and 2010, and we do not expect the total of unrecognized tax benefits to significantly increase in the next 12 months.
Three and six months ended June 30, 2012
The provision for income taxes was $3.9 million and $7.8 million for the three and six months ended June 30, 2012, respectively. The effective income tax rates were approximately 38.0% and 38.4% for the three and six months ended June 30, 2012, respectively.
Three and six months ended June 30, 2011
The provision for income taxes was $853,000 and $1.3 million for the three and six months ended June 30, 2011, respectively. The effective income tax rates were approximately 29.6% and 34.6% for the three and six months ended June 30, 2011, respectively. As we operated at near breakeven levels during the first and second quarters of 2011, changes in our operations and amounts not included or deducted in arriving at taxable income during these periods caused significant variances on our expected effective tax rate for the year. Accordingly the provision for income taxes recorded during the second quarter of 2011 was higher than that recorded for the first quarter of 2011 as we recorded the provision for income taxes for the six months ended June 30, 2011 that was consistent with our most recent expectations of the effective income tax rates applicable in 2011.
Year ended December 31, 2011
The provision for income taxes was $4.4 million for the year ended December 31, 2011. The effective income tax rate was approximately 37.1%.
Year ended December 31, 2010 and the period from November 30, 2009 (inception) to December 31, 2009
The effective income tax rates for the year ended December 31, 2010 and the period from inception through December 31, 2009 were (9.5%) and 35.2%, respectively. A tax benefit was recorded during the year ended December 31, 2010 primarily due to $15.2 million in gains on the acquisitions of Metro Bank and Turnberry Bank which are not included in taxable income. Accordingly, the tax benefit recorded during the period was calculated excluding these gains and based upon the resulting consolidated loss, for tax purposes. As we operated at near break-even levels during 2010 and 2009, amounts not included or deducted in arriving at taxable income during the period had a significant impact on our effective tax rate for the year.
Net Income
Three months ended June 30, 2012
For the three months ended June 30, 2012, our net income of $6.4 million represented an ROA of 0.40% and an ROE of 2.54% of which net income of $862,000 was attributable to noncontrolling stockholders. This resulted in net income attributable to CBF of $5.5 million (or $0.12 per basic and diluted share). Net income includes an
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impairment of legacy acquired impaired loans of $3.3 million, $933,000 of gains on sales of investment securities, $1.8 million in expenses related to information technology conversion and merger related expenses and non-cash equity compensation expense of $4.2 million. Net interest income of $63.3 million and non-interest income of $12.2 million were partially offset by the provision for loan losses of $6.6 million and non-interest expense of $58.6 million.
Three months ended June 30, 2011
For the three months ended June 30, 2011, our net income of $2.0 million represented an ROA of 0.17% and an ROE of 0.86%. Net income of $444,000 attributable to noncontrolling stockholders resulted in net income attributable to CBF of $1.6 million (or $0.04 per basic share and $0.03 per diluted share). Net income includes $1.0 million of expense related to the conversion of the Company’s operations onto a common technology platform in the second quarter of 2011 and non-cash equity compensation expense of $3.0 million. Net income also includes additional accretion on the FDIC indemnification asset of approximately $2.5 million due to unfavorable changes in estimated cash flows for certain pools of PCI loan and losses incurred in excess of unamortized discounts on certain covered non-PCI loans, partially offset by the impact of the payoff of certain covered non-PCI loans prior to maturity. Net interest income of $40.7 million and non-interest income of $7.9 million were partially offset by the provision for loan losses of $8.2 million and non-interest expense of $37.5 million.
Six months ended June 30, 2012
For the six months ended June 30, 2012, our net income of $12.5 million represented an ROA of 0.39% and an ROE of 2.51% of which net income of $1.8 million was attributable to noncontrolling stockholders. This resulted in net income attributable to CBF of $10.8 million (or $0.24 per basic and diluted share). Our equity-to-assets ratio at June 30, 2012 was 16.1%. Net income includes an impairment of legacy acquired impaired loans of $7.4 million, $3.7 million of gains on sales of investment securities, $321,000 loss on extinguishment of debt, $3.0 million in expenses related to information technology conversion and merger related expenses and non-cash equity compensation expense of $10.7 million. Net interest income of $127.2 million and non-interest income of $26.7 million were partially offset by the provision for loan losses of $12.0 million and non-interest expense of $121.5 million.
Six months ended June 30, 2011
For the six months ended June 30, 2011, our net income of $2.4 million represented an ROA of 0.10% and an ROE of 0.51%. Net income of $394,000 attributable to noncontrolling stockholders resulted in net income attributable to CBF of $2.0 million (or $0.04 per basic and diluted share). Net income includes a deduction for an accrual of $3.7 million for the early termination of certain information technology system related contracts and $1.0 million of expense related to the conversion of the Company’s operations onto a common technology platform, acquisition–related legal costs $750,000 (which are not tax-deductible) and non-cash equity compensation expense of $3.6 million. Offsetting this decrease was additional accretion on the indemnification asset of $2.9 million due to unfavorable changes in loss estimates. Net interest income of $73.5 million and non-interest income of $12.4 million were partially offset by the provision for loan losses of $9.8 million and non-interest expense of $72.5 million.
Year ended December 31, 2011
For the year ended December 31, 2011, our net income of $6.2 million, or $0.14 basic and diluted net income per common share, represented an ROA of 0.14% and an ROE of 0.79%. Our equity-to-assets ratio was 15.0%. Net income includes $12.8 million of foreclosed asset expenses and $9.2 million of non-cash equity compensation expense related primarily to founder grants for which the remainder will be expensed over a weighted average remaining life of one year. During 2011, we also recorded $9.1 million of acquisition-related
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expenses comprised of $4.2 million related to the early termination of certain information technology system contracts, $3.4 million of expense related to the conversion of our operations onto a common technology platform, and legal costs of $1.5 million. Going forward we expect equity-based compensation expense and acquisition-related expenses (due to the growth of our operations) to have a less significant impact on our operating results and performance ratios.
Partially offsetting the decrease in net income in 2011 was accretion on the indemnification asset of $7.6 million due to unfavorable changes in loss estimates for covered loans, $5.4 million related to net gains on sales of securities and a gain on extinguishment of debt of $416,000. Net interest income of $191.3 million and non interest income of $41.2 million were partially offset by the provision for loan losses of $38.4 million and non-interest expense of $182.2 million.
Year ended December 31, 2010
We reported net income of $12.0 million for the year ended December 31, 2010, which equated to an ROA of 0.76%, an ROE of 1.67% and basic and diluted net income per common share of $0.31. Our equity to assets ratio was 25.0%. Net interest income of $36.5 million and non-interest income of $19.6 million were partially offset by the provision for loan losses of $753,000 and non-interest expense of $44.4 million. Non-interest income reported during 2010 included $15.2 million related to a gain on the acquisitions of Metro Bank and Turnberry Bank. Excluding the acquisition-related gain, we would have reported a net loss of $8.9 million, an ROA of (0.19%) and an ROE of (0.39%) for 2010. The provision for loan losses recorded reflects the allowance for loan losses established for loans originated subsequent to the acquisition of our banking subsidiaries. No net charge-offs or losses on the disposition of other real estate owned were recorded as credit losses experienced were incorporated in the acquisition accounting adjustments to record loans and other real estate at fair value on the dates of acquisition.
Period from November 30, 2009 (inception) to December 31, 2009
The net loss for the period from inception to December 31, 2009 was $92,000 or basic and diluted loss per common share was $0.01. Our operations during the year ended December 31, 2009 were limited to organizational matters and activities relating to the completion of our original private offerings.
Financial Condition
Our assets totaled $6.3 billion, $6.6 billion and $3.5 billion at June 30, 2012, December 31, 2011 and December 31, 2010, respectively. Total loans at June 30, 2012, December 31, 2011 and December 31, 2010 were $4.2 billion, $4.3 billion and $1.7 billion, respectively. Total deposits were $5.0 billion, $5.1 billion and $2.3 billion at June 30, 2012, December 31, 2011 and December 31, 2010, respectively. Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable and subordinated debentures, totaled $257.8 million, $415.7 million and $327.9 million at June 30, 2012, December 31, 2011, and December 31, 2010 respectively. The increases in total assets, loans, deposits and borrowings during the year ended December 31, 2011 were primarily due to the acquisition of Capital Bank Corp. and Green Bankshares. The increases in these items during 2010 were primarily due to the acquisitions of the Failed Banks and TIB Financial.
Shareholders’ equity was $1.0 billion, $990.9 million and $881.2 million at June 30, 2012, December 31, 2011 and December 31, 2010, respectively. The increase in shareholders’ equity during the year ended December 31, 2011 was primarily due to the noncontrolling interest originating from the acquisitions of Capital Bank Corp. and Green Bankshares and the completions of shareholders’ rights offerings to legacy shareholders of Capital Bank Corp. and TIB Financial. The increase in shareholders’ equity during 2010 was primarily due to private placements of common stock resulting in net proceeds of $339.7 million.
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Loans
Our loan portfolio is our primary earning asset. Our strategy is to grow the loan portfolio by originating commercial and consumer loans that we believe to be of high quality, that comply with our conservative credit policies and that produce revenues consistent with our financial objectives. Additionally, we are working to reduce excessive concentrations in commercial real estate loans, which were the predominant portion of the acquisitions’ legacy portfolios, in order to achieve a more diversified portfolio mix.
The following table sets forth the carrying amounts of our loan portfolio.
(Dollars in thousands) | As of June 30, 2012 | As of December 31, 2011 | Sequential Change | |||||||||||||||||||||
Loan Type | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Non-owner occupied commercial real estate | $ | 849,820 | 20.3 | % | $ | 903,914 | 21.0 | % | $ | (54,094 | ) | (6.0 | )% | |||||||||||
Other commercial C&D | 365,832 | 8.7 | % | 423,932 | 9.8 | % | (58,100 | ) | (13.7 | )% | ||||||||||||||
Multifamily commercial real estate | 76,933 | 1.8 | % | 98,207 | 2.3 | % | (21,274 | ) | (21.7 | )% | ||||||||||||||
1-4 family residential C&D | 74,533 | 1.8 | % | 85,978 | 2.0 | % | (11,445 | ) | (13.3 | )% | ||||||||||||||
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Total commercial real estate | 1,367,118 | 32.6 | % | $ | 1,512,031 | 35.1 | % | $ | (144,913 | ) | (9.6 | )% | ||||||||||||
Owner occupied commercial real estate | 1,002,448 | 23.9 | % | 902,816 | 21.0 | % | 99,632 | 11.0 | % | |||||||||||||||
Commercial and industrial | 473,592 | 11.3 | % | 467,047 | 10.9 | % | 6,545 | 1.4 | % | |||||||||||||||
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Total commercial | $ | 1,476,040 | 35.2 | % | $ | 1,369,863 | 31.9 | % | $ | 106,177 | 7.8 | % | ||||||||||||
1-4 family residential | 762,886 | 18.2 | % | 818,547 | 19.0 | % | (55,661 | ) | (6.8 | )% | ||||||||||||||
Home equity | 368,557 | 8.8 | % | 383,768 | 8.9 | % | (15,211 | ) | (4.0 | )% | ||||||||||||||
Consumer | 136,211 | 3.2 | % | 123,121 | 2.9 | % | 13,090 | 10.6 | % | |||||||||||||||
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Total consumer | $ | 1,267,654 | 30.2 | % | $ | 1,325,436 | 30.8 | % | $ | (57,782 | ) | (4.4 | )% | |||||||||||
Other | 80,203 | 2.0 | % | 95,133 | 2.2 | % | (14,930 | ) | (15.7 | )% | ||||||||||||||
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Total | $ | 4,191,015 | 100.0 | % | $ | 4,302,463 | 100.0 | % | $ | (111,448 | ) | (2.6 | )% | |||||||||||
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(Dollars in thousands) | As of December 31, 2011 | As of December 31, 2010 | Sequential Change | |||||||||||||||||||||
Loan Type | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Non-owner occupied commercial real estate | $ | 903,914 | 21.0 | % | $ | 500,470 | 28.6 | % | $ | 403,444 | 80.6 | % | ||||||||||||
Other commercial C&D | 423,932 | 9.8 | % | 113,681 | 6.5 | % | 310,251 | 272.9 | % | |||||||||||||||
Multifamily commercial real estate | 98,207 | 2.3 | % | 56,105 | 3.2 | % | 42,102 | 75.0 | % | |||||||||||||||
1-4 family residential C&D | 85,978 | 2.0 | % | 16,341 | 0.9 | % | 69,637 | 426.1 | % | |||||||||||||||
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Total commercial real estate | $ | 1,512,031 | 35.1 | % | $ | 686,597 | 39.2 | % | $ | 825,434 | 120.2 | % | ||||||||||||
Owner occupied commercial real estate | 902,816 | 21.0 | % | 347,741 | 19.8 | % | 555,075 | 159.6 | % | |||||||||||||||
Commercial and industrial | 467,047 | 10.9 | % | 94,302 | 5.4 | % | 372,745 | 395.3 | % | |||||||||||||||
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Total commercial | $ | 1,369,863 | 31.9 | % | $ | 442,043 | 25.2 | % | $ | 927,820 | 209.9 | % | ||||||||||||
1-4 family residential | 818,547 | 19.0 | % | 431,747 | 24.6 | % | 386,800 | 89.6 | % | |||||||||||||||
Home equity | 383,768 | 8.9 | % | 119,039 | 6.8 | % | 264,729 | 222.4 | % | |||||||||||||||
Consumer | 123,121 | 2.9 | % | 43,054 | 2.5 | % | 80,067 | 186.0 | % | |||||||||||||||
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Total consumer | $ | 1,325,436 | 30.8 | % | $ | 593,840 | 33.9 | % | $ | 731,596 | 123.2 | % | ||||||||||||
Other | 95,133 | 2.2 | % | 29,957 | 1.7 | % | 65,176 | 217.6 | % | |||||||||||||||
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Total | $ | 4,302,463 | 100.0 | % | $ | 1,752,437 | 100.0 | % | $ | 2,550,026 | 145.5 | % | ||||||||||||
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During the six months ended June 30, 2012, our loan portfolio decreased by $111.4 million due to $267.3 million in resolutions and $291.4 million in net principal repayments, offset by $447.3 million of new loan originations during the period. The composition of new loan production is indicative of our business strategy of emphasizing commercial and industrial and consumer loans and reducing our overall concentration of commercial real estate loans. As illustrated in greater detail in the table below, commercial and industrial loans and consumer and other loans represented approximately 61.9% and 27.2%, respectively, of new loan production for the six months ended June 30, 2012. We expect that this production emphasis, which resulted in nearly 89.1% of our new loan production for the six months ended June 30, 2012 in categories other than commercial real estate, along with normal runoff of the legacy portfolios, will, over time, lead to the reduction of our concentration in commercial real estate loans which represented approximately 32.6% of the outstanding balance of the loan portfolio at June 30, 2012.
Commercial loan production for the six months ended June 30, 2012 was $277.1 million. As a result of stronger volumes, commercial loans made up over one-half of our new loan originations during the six months ended June 30, 2012, while commercial real estate loans were 10.9% of new loan originations, consistent with our plans to reduce concentrations in this category.
During the year ended December 31, 2011, our loan portfolio increased by $2.6 billion due to the acquisitions of Capital Bank Corp. and Green Bankshares and new loan originations of $728.4 million. While the change in the composition of the loan portfolio between December 31, 2010 and December 31, 2011 was most significantly impacted by the acquisitions of Capital Bank Corp. and Green Bankshares, the composition of new loan production is indicative of our business strategy of emphasizing commercial and industrial and consumer loans and reducing our overall concentration of commercial real estate loans. As illustrated in greater detail in the table below, commercial and industrial loans and consumer and other loans represented approximately 63.8% and 22.9%, respectively, of new loan originations during the year ended December 31, 2011. We expect that this production emphasis, which resulted in nearly 86.7% of our new loan production in categories other than commercial real estate, along with normal runoff of the legacy portfolios, will, over time, lead to the reduction of our concentration in commercial real estate loans which represented approximately 35.1% of the outstanding balance of the loan portfolio at December 31, 2011 and 39.2% at December 31, 2010.
Commercial loan production during the year ended December 31, 2011 rose to $464.9 million, from $16.0 million in the fourth quarter of 2010, as we implemented the CBF line of business model at the acquisitions. As a result of stronger volumes, commercial loans made up over one-half of our new loan originations during the year ended December 31, 2011, while commercial real estate loans were 13.3% of our new loan originations, consistent with our plans to reduce concentrations in this category.
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The following table sets forth our new loan originations (excluding renewals of existing loans) segmented by loan type.
(Dollars in millions) | Three months ended March 31, 2012 | Three months ended June 30, 2012 | Six months ended June 30, 2012 | Twelve months ended December 31, 2011 | ||||||||||||||||||||||||||||
Loan Type | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 9.4 | 4.8 | % | $ | 15.0 | 6.0 | % | $ | 24.4 | 5.5 | % | $ | 43.7 | 6.0 | % | ||||||||||||||||
Other commercial C&D | 5.3 | 2.7 | % | 2.3 | 0.9 | % | 7.6 | 1.7 | % | 23.2 | 3.2 | % | ||||||||||||||||||||
Multifamily commercial real estate | 0.2 | 0.1 | % | 0.8 | 0.3 | % | 1.0 | 0.2 | % | 0.8 | 0.1 | % | ||||||||||||||||||||
1-4 family residential C&D | 9.2 | 4.7 | % | 6.5 | 2.6 | % | 15.7 | 3.5 | % | 29.2 | 4.0 | % | ||||||||||||||||||||
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Total commercial real estate | $ | 24.1 | 12.3 | % | $ | 24.6 | 9.8 | % | $ | 48.7 | 10.9 | % | $ | 96.9 | 13.3 | % | ||||||||||||||||
Owner occupied commercial real estate | 52.5 | 26.7 | % | 57.9 | 23.1 | % | 110.4 | 24.7 | % | 260.8 | 35.8 | % | ||||||||||||||||||||
Commercial and industrial | 73.9 | 37.6 | % | 92.8 | 37.1 | % | 166.7 | 37.2 | % | 204.1 | 28.0 | % | ||||||||||||||||||||
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Total commercial | $ | 126.4 | 64.2 | % | $ | 150.7 | 60.2 | % | $ | 277.1 | 61.9 | % | $ | 464.9 | 63.8 | % | ||||||||||||||||
1-4 family residential | 18.7 | 9.5 | % | 40.9 | 16.3 | % | 59.6 | 13.3 | % | 81.7 | 11.2 | % | ||||||||||||||||||||
Home equity | 6.0 | 3.0 | % | 5.8 | 2.3 | % | 11.8 | 2.6 | % | 13.0 | 1.8 | % | ||||||||||||||||||||
Consumer | 20.2 | 10.3 | % | 25.9 | 10.4 | % | 46.1 | 10.4 | % | 62.3 | 8.6 | % | ||||||||||||||||||||
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Total consumer | $ | 44.9 | 22.8 | % | $ | 72.6 | 29.0 | % | $ | 117.5 | 26.3 | % | $ | 157.0 | 21.6 | % | ||||||||||||||||
Other | 1.4 | 0.7 | % | 2.6 | 1.0 | % | 4.0 | 0.9 | % | 9.6 | 1.3 | % | ||||||||||||||||||||
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Total | $ | 196.8 | 100.0 | % | $ | 250.5 | 100.0 | % | $ | 447.3 | 100.0 | % | $ | 728.4 | 100.0 | % | ||||||||||||||||
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We underwrite commercial real estate loans based on the value of the collateral, the ratio of debt service to property income and the creditworthiness of tenants. Due to the inherent risk of commercial real estate lending, we underwrite loans selectively, with the goal of reducing the concentration in our portfolio over time.
We follow a conservative approach to underwriting commercial loans, which are based on the cash flows of the underlying business and the value of collateral securing the loan. During the six months ended June 30, 2012, we originated commercial loans from a variety of businesses. The industry groups in which we originated the most loans in 2012 were retail trade, health care and social assistance, manufacturing, real estate (including rental and leasing), finance and insurance and management of companies and enterprises, which accounted for 15.7%, 13.3%, 12.7%, 10.7%, 7.3%, and 6.7% of new originations, respectively.
Florida, South Carolina, North Carolina, Tennessee and Virginia accounted for 30.7%, 16.5%, 25.8%, 26.7% and 0.3% of our new loan originations, respectively, for the six months ended June 30, 2012.
Florida loan originations increased in 2011 as we selectively hired new commercial loan officers and credit analysts and also benefited from residential mortgage and indirect auto loan volumes. South Carolina loan originations benefited from improved results in commercial lending. Loan originations were steady in North Carolina as we closed the investment in Capital Bank Corp. and reorganized the management team during the first quarter of 2011. Florida, South Carolina, North Carolina and Tennessee accounted for 36.6%, 26.9%, 31.0% and 5.5% of our new loan originations, respectively, for the twelve months ended December 31, 2011.
The industry groups in which we originated the most loans in 2011 were retail trade, real estate (including rental and leasing), manufacturing, health care and social assistance, wholesale trade, other services and arts and recreation, which accounted for 11.9%, 11.3%, 10.2%, 7.5%, 5.5%, 4.6% and 4.3% of new originations, respectively.
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We underwrite consumer loans to conservative standards, including FICO score, loan-to-value ratio and loan term, among other factors. We do not generally offer loans to consumers with FICO scores below 660. Our HELOC loans include both first- and non-first lien loans. The following table indicates how our loan originations during the six months ended June 30, 2012 tracked to two key metrics—FICO scores and loan-to-value ratios—used in underwriting consumer loans:
June 30, 2012 | ||||||||||||||||||||||||||||||||
(Dollars in millions) | Originations ($) | FICO | Loan-to-Value | Average Term (Months) | ||||||||||||||||||||||||||||
Type | Average | %680-660 | %<660 | Average | %80-90 | %>90% | ||||||||||||||||||||||||||
1-4 family residential | $ | 58.6 | 754.9 | 1.53 | % | 2.62 | % | 71.21 | % | 24.60 | % | 7.29 | % | 310.1 | ||||||||||||||||||
Auto | 27.6 | 748.4 | 4.05 | % | 0.00 | % | 107.41 | % | 9.17 | % | 77.08 | % | 67.0 | |||||||||||||||||||
HELOC/Other | 15.7 | 736.0 | 11.87 | % | 6.17 | % | 62.43 | % | 20.52 | % | 17.88 | % | 90.1 | |||||||||||||||||||
Consumer finance | 15.5 | 572.4 | 4.57 | % | 90.49 | % | N/A | N/A | N/A | 48.0 | ||||||||||||||||||||||
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Total | $ | 117.5 | 726.4 | 3.93 | % | 14.16 | % | 80.30 | % | 19.60 | % | 28.78 | % | 188.9 | ||||||||||||||||||
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The contractual maturity distributions of our loan portfolio as of June 30, 2012 and December 31, 2011 are indicated in the tables below. The majority of these are amortizing loans.
Loans Maturing (As of June 30, 2012) | ||||||||||||||||
(Dollars in thousands) | Within One Year | One to Five Years | After Five Years | Total | ||||||||||||
Non-owner occupied commercial real estate | $ | 264,993 | $ | 392,552 | $ | 192,275 | $ | 849,820 | ||||||||
Other commercial C&D | 219,453 | 121,362 | 25,017 | 365,832 | ||||||||||||
Multifamily commercial real estate | 24,727 | 38,986 | 13,220 | 76,933 | ||||||||||||
1-4 family residential C&D | 57,318 | 5,470 | 11,745 | 74,533 | ||||||||||||
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Total commercial real estate | $ | 566,491 | $ | 558,370 | $ | 242,257 | $ | 1,367,118 | ||||||||
Owner occupied commercial real estate | 149,308 | 601,408 | 251,732 | 1,002,448 | ||||||||||||
Commercial and industrial | 183,693 | 240,130 | 49,769 | 473,592 | ||||||||||||
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Total commercial | $ | 333,001 | $ | 841,538 | $ | 301,501 | $ | 1,476,040 | ||||||||
1-4 family residential | 118,674 | 176,364 | 467,848 | 762,886 | ||||||||||||
Home equity | 22,010 | 85,356 | 261,191 | 368,557 | ||||||||||||
Consumer | 14,941 | 80,164 | 41,106 | 136,211 | ||||||||||||
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Total consumer | $ | 155,625 | $ | 341,884 | $ | 770,145 | $ | 1,267,654 | ||||||||
Other | 22,151 | 20,091 | 37,961 | 80,203 | ||||||||||||
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Total | $ | 1,077,268 | $ | 1,761,883 | $ | 1,351,864 | $ | 4,191,015 | ||||||||
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Loans Maturing (As of June 30, 2012) | ||||||||||||||||
(Dollars in thousands) | Within One Year | One to Five Years | After Five Years | Total | ||||||||||||
Loans with: | ||||||||||||||||
Predetermined interest rates | $ | 405,528 | $ | 1,104,750 | $ | 397,446 | $ | 1,907,724 | ||||||||
Floating or adjustable interest rates | 671,740 | 657,133 | 954,418 | 2,283,291 | ||||||||||||
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Total loans | $ | 1,077,268 | $ | 1,761,883 | $ | 1,351,864 | $ | 4,191,015 | ||||||||
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Loans Maturing (As of December 31, 2011) | ||||||||||||||||
(Dollars in thousands) | Within One Year | One to Five Years | After Five Years | Total | ||||||||||||
Non-owner occupied commercial real estate | $ | 215,597 | $ | 511,652 | $ | 176,665 | $ | 903,914 | ||||||||
Other commercial C&D | 274,419 | 139,815 | 9,698 | 423,932 | ||||||||||||
Multifamily commercial real estate | 32,745 | 51,237 | 14,225 | 98,207 | ||||||||||||
1-4 family residential C&D | 68,797 | 6,251 | 10,930 | 85,978 | ||||||||||||
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Total commercial real estate | $ | 591,558 | $ | 708,955 | $ | 211,518 | $ | 1,512,031 | ||||||||
Owner occupied commercial real estate | 123,932 | 547,784 | 231,100 | 902,816 | ||||||||||||
Commercial and industrial | 183,593 | 228,277 | 55,177 | 467,047 | ||||||||||||
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Total commercial | $ | 307,525 | $ | 776,061 | $ | 286,277 | $ | 1,369,863 | ||||||||
1-4 family residential | 149,275 | 203,902 | 465,370 | 818,547 | ||||||||||||
Home equity | 22,841 | 111,720 | 249,207 | 383,768 | ||||||||||||
Consumer | 20,331 | 96,590 | 6,200 | 123,121 | ||||||||||||
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Total consumer | $ | 192,447 | $ | 412,212 | $ | 720,777 | $ | 1,325,436 | ||||||||
Other | 23,718 | 30,795 | 40,620 | 95,133 | ||||||||||||
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Total | $ | 1,115,248 | $ | 1,928,023 | $ | 1,259,192 | $ | 4,302,463 | ||||||||
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Loans Maturing (As of December 31, 2011) | ||||||||||||||||
(Dollars in thousands) | Within One Year | One to Five Years | After Five Years | Total | ||||||||||||
Loans with: | ||||||||||||||||
Predetermined interest rates | $ | 429,219 | $ | 1,163,183 | $ | 379,121 | $ | 1,971,523 | ||||||||
Floating or adjustable interest rates | 686,029 | 764,840 | 880,071 | 2,330,940 | ||||||||||||
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Total loans | $ | 1,115,248 | $ | 1,928,023 | $ | 1,259,192 | $ | 4,302,643 | ||||||||
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Asset Quality
Consistent with our strategy of operating with a sound risk profile, we have focused on originating loans we believe to be of high quality, disposing of non-performing assets as rapidly as possible, and reducing the size of our legacy commercial real estate loan portfolio. To achieve these objectives, we underwrite new loans and manage existing loans in accordance with our underwriting standards under the direction of our chief risk officer. Additionally, we have assigned senior credit officers to oversee the Florida, Tennessee and Carolinas markets, and we have established a special assets division to dispose of legacy problem loans and OREO.
We refer to our loans covered under loss sharing agreements with the FDIC as “covered loans.” These are the legacy loans of Metro Bank, Turnberry Bank, and First National Bank that are covered by FDIC loss sharing agreements that reimburse us for 80% of net charge-offs and OREO losses over a five-year period for commercial loans and a ten-year period for residential loans. We refer to all other loans as “non-covered loans.” These are loans we originate, loans acquired through the acquisitions of Capital Bank, TIB Bank and Greenbank and certain consumer loans of the Failed Banks that we acquired, which are not covered by any loss sharing agreement.
Covered Loans
As of June 30, 2012, covered loans were $461.8 million, representing 11.0% of our loan portfolio. Also as of June 30, 2012, the covered loans were 2.8% past due 30-89 days, 19.4% greater than 90 days past due and still accruing/accreting and 0.9% nonaccrual, reflecting the severity of the real estate downturn and the excessive concentrations in commercial real estate and poor quality underwriting that characterized the banks we acquired from the FDIC under their prior business models. We have recorded these loans at estimated fair value reflecting
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expected lifetime losses estimated as of the respective acquisition dates. Projected reimbursements from the FDIC relating to projected future losses on covered loans are recorded as the FDIC indemnification asset, which was $60.8 million as of June 30, 2012. Actual claims for reimbursement filed with the FDIC for incurred losses on covered loans but not yet paid were $9.7 million at June 30, 2012.
As of December 31, 2011, covered loans were $550.6 million, representing 12.8% of our loan portfolio. Also as of December 31, 2011, the covered loans were 4.8% past due 30-89 days, 22.1% greater than 90 days past due and still accruing/accreting and 0.5% nonaccrual, reflecting the severity of the real estate downturn and the excessive concentrations in commercial real estate and poor quality underwriting that characterized the banks we acquired from the FDIC under their prior business models. We have recorded these loans at estimated fair value reflecting expected lifetime losses estimated as of the respective acquisition dates. Projected reimbursements from the FDIC relating to projected future losses on covered loans are recorded as the FDIC indemnification asset, which was $66.3 million as of December 31, 2011. Actual claims for reimbursement filed with the FDIC for incurred losses on covered loans but not yet paid were $13.3 million at December 31, 2011.
We manage credit risk associated with loans covered under loss sharing agreements in the same manner as credit risk associated with non-covered loans. This includes following consistent policies and procedures relating to the process of working with borrowers in efforts to resolve problem loans resulting in the lowest losses possible and collection including foreclosure, repossession and the ultimate liquidation of any applicable underlying collateral. The loss sharing agreements also contain certain restrictions and conditions which, among other things, provide that certain credit risk management strategies such as loan sales, under certain conditions, could be prohibited under the agreements and may lead to the termination of coverage of any applicable losses on the related loans. Accordingly, actions taken by management in the process of prudently managing credit risk and borrower relationships, including, but not limited to, the renewal of covered loans for periods extending beyond the expiration of the applicable loss sharing agreement, the extension of additional credit or the making of certain modifications of loan terms, can lead to the termination of coverage under the loss sharing agreements for these particular loans. Additionally, the loss sharing agreements limit coverage to ten years for residential loans and five years for other covered loans.
Collection of loss claims under the loss sharing agreements requires extensive and specific recordkeeping and incremental monthly and quarterly reporting to the FDIC on the status of covered loans. The loss claims filed and the related reporting on covered loans to the FDIC are subject to review and approval by the FDIC and various subcontractors utilized by the FDIC. The requirements for such reporting and interpretations thereof are occasionally revised by the FDIC and its subcontractors. Such changes along with our ability to comply with the requirements and revisions require interpretation and can lead to delays in the collection of claims on losses incurred. Claims filed by us for losses realized through June 30, 2012, and claims filed by us for losses realized through December 31, 2011, totaling $92.4 million and $77.4 million, respectively, have been collected from the FDIC. Additionally, the loss sharing agreements provide for regular examination of compliance with loss sharing agreements including independent reviews of relevant policies and procedures and detailed audits of claims filed. Noncompliance with the provisions of the loss sharing agreements can lead to termination of the agreements.
Non-Covered Loans
As of June 30, 2012, non-covered loans were $3.7 billion, representing 89.0% of our loan portfolio. Also as of June 30, 2012, our non-covered loans were 1.4% past due 30-89 days, 6.7% greater than 90 days past due and still accruing/accreting and 0.2% nonaccrual.
As of December 31, 2011, non-covered loans were $3.8 billion, representing 87.2% of our loan portfolio. Also as of December 31, 2011, our non-covered loans were 2.1% past due 30-89 days, 6.8% greater than 90 days past due and still accruing/accreting and 0.1% nonaccrual. These loans have also been affected by the real estate downturn and excessive commercial real estate concentrations. However, the credit quality of these loans is generally higher than that of the covered loans. In connection with the acquisitions, we applied acquisition accounting adjustments to the non-covered loans not originated by us to reflect estimates at the time of acquisition of the expected lifetime losses of such loans.
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Covered and Non-Covered Loan Credit Quality Summary
The table below summarizes key loan credit quality indicators for covered and non-covered loan portfolios as of the dates indicated:
As of June 30, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||||
(Dollars in millions) | Portfolio Balance | % 30-89 Days Past Due | % Greater Than 90 Days Past Due and Accruing/ Accreting | Nonaccrual Loans | Portfolio Balance | % 30-89 Days Past Due | % Greater Than 90 Days Past Due and Accruing/ Accreting | Nonaccrual Loans | ||||||||||||||||||||||||
Covered Portfolio | ||||||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 110.7 | 3.9 | % | 20.5 | % | 0.1 | % | $ | 125.7 | 6.0 | % | 12.1 | % | 0.0 | % | ||||||||||||||||
Other commercial C&D | 34.6 | 1.0 | % | 69.3 | % | 0.0 | % | 53.4 | 2.1 | % | 67.6 | % | 0.0 | % | ||||||||||||||||||
Multifamily | 14.7 | 13.6 | % | 19.8 | % | 0.0 | % | 22.3 | 5.8 | % | 23.3 | % | 0.0 | % | ||||||||||||||||||
1-4 family residential C&D | 4.8 | 0.0 | % | 70.9 | % | 0.0 | % | 4.7 | 0.0 | % | 72.3 | % | 0.0 | % | ||||||||||||||||||
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Total commercial real estate | $ | 164.8 | 4.1 | % | 32.2 | % | 0.0 | % | $ | 206.1 | 4.8 | % | 29.1 | % | 0.0 | % | ||||||||||||||||
Owner occupied commercial real estate | 100.3 | 0.2 | % | 8.6 | % | 0.0 | % | 114.6 | 5.9 | % | 23.0 | % | 0.0 | % | ||||||||||||||||||
Commercial & Industrial | 19.2 | 1.3 | % | 11.1 | % | 1.4 | % | 24.0 | 2.9 | % | 12.5 | % | 1.7 | % | ||||||||||||||||||
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Total commercial | $ | 119.5 | 0.4 | % | 9.0 | % | 0.2 | % | $ | 138.6 | 5.4 | % | 21.2 | % | 0.3 | % | ||||||||||||||||
1-4 family residential | 106.6 | 1.4 | % | 20.0 | % | 0.0 | % | 127.2 | 5.0 | % | 19.0 | % | 0.0 | % | ||||||||||||||||||
Home equity | 65.3 | 6.4 | % | 4.3 | % | 5.6 | % | 72.6 | 4.0 | % | 4.0 | % | 3.0 | % | ||||||||||||||||||
Consumer | 0.2 | 0.0 | % | 0.0 | % | 0.0 | % | 0.2 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
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Total consumer | $ | 172.1 | 3.3 | % | 14.0 | % | 2.1 | % | $ | 200.0 | 4.7 | % | 13.6 | % | 1.1 | % | ||||||||||||||||
Other | 5.4 | 0.0 | % | 33.3 | % | 0.0 | % | 5.9 | 0.0 | % | 88.1 | % | 0.0 | % | ||||||||||||||||||
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Total covered | $ | 461.8 | 2.8 | % | 19.4 | % | 0.9 | % | $ | 550.6 | 4.8 | % | 22.1 | % | 0.5 | % | ||||||||||||||||
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Non-Covered Portfolio | ||||||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | 739.1 | 1.1 | % | 4.9 | % | 0.0 | % | 778.2 | 2.5 | % | 6.4 | % | 0.0 | % | ||||||||||||||||||
Other commercial C&D | 331.2 | 2.7 | % | 25.1 | % | 0.0 | % | 370.6 | 1.6 | % | 23.1 | % | 0.0 | % | ||||||||||||||||||
Multifamily | 62.2 | 0.3 | % | 3.1 | % | 0.0 | % | 75.9 | 0.5 | % | 5.7 | % | 0.0 | % | ||||||||||||||||||
1-4 family residential C&D | 69.8 | 1.1 | % | 16.6 | % | 0.3 | % | 81.2 | 21.4 | % | 11.0 | % | 0.4 | % | ||||||||||||||||||
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Total commercial real estate | $ | 1,202.3 | 1.5 | % | 11.1 | % | 0.0 | % | $ | 1,305.9 | 3.3 | % | 11.4 | % | 0.0 | % | ||||||||||||||||
Owner occupied commercial real estate | 902.2 | 0.4 | % | 5.3 | % | 0.1 | % | 788.2 | 0.6 | % | 5.7 | % | 0.0 | % | ||||||||||||||||||
Commercial and Industrial | 454.3 | 1.4 | % | 5.3 | % | 0.2 | % | 443.0 | 2.8 | % | 5.1 | % | 0.1 | % | ||||||||||||||||||
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Total commercial | $ | 1,356.5 | 0.7 | % | 5.3 | % | 0.1 | % | $ | 1,231.2 | 1.4 | % | 5.5 | % | 0.0 | % | ||||||||||||||||
1-4 family residential | 656.3 | 2.5 | % | 5.0 | % | 0.5 | % | 691.4 | 1.3 | % | 4.3 | % | 0.0 | % | ||||||||||||||||||
Home equity | 303.3 | 1.7 | % | 1.6 | % | 1.0 | % | 311.2 | 1.6 | % | 1.4 | % | 0.8 | % | ||||||||||||||||||
Consumer | 136.0 | 1.4 | % | 0.9 | % | 0.4 | % | 123.0 | 2.0 | % | 0.9 | % | 0.0 | % | ||||||||||||||||||
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Total consumer | $ | 1,095.6 | 2.2 | % | 3.5 | % | 0.6 | % | $ | 1,125.6 | 1.5 | % | 3.2 | % | 0.2 | % | ||||||||||||||||
Other | 74.8 | 0.6 | % | 6.2 | % | 0.0 | % | 89.2 | 0.9 | % | 4.5 | % | 0.0 | % | ||||||||||||||||||
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Total non-covered | $ | 3,729.2 | 1.4 | % | 6.7 | % | 0.2 | % | $ | 3,751.9 | 2.1 | % | 6.8 | % | 0.1 | % | ||||||||||||||||
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Total | $ | 4,191.0 | 1.5 | % | 8.1 | % | 0.3 | % | $ | 4,302.5 | 2.4 | % | 8.8 | % | 0.1 | % | ||||||||||||||||
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As of December 31, 2011 | As of December 31, 2010 | |||||||||||||||||||||||||||||||
(Dollars in millions) | Portfolio Balance | % 30-89 Days Past Due | % Greater Than 90 Days Past Due and Accruing/ Accreting | Nonaccrual Loans | Portfolio Balance | % 30-89 Days Past Due | % Greater Than 90 Days Past Due and Accruing/ Accreting | Nonaccrual Loans | ||||||||||||||||||||||||
Covered Portfolio | ||||||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 125.7 | 6.0 | % | 12.1 | % | 0.0 | % | $ | 170.6 | 4.2 | % | 16.9 | % | 0.0 | % | ||||||||||||||||
Other commercial C&D | 53.4 | 2.1 | % | 67.6 | % | 0.0 | % | 81.9 | 7.3 | % | 55.1 | % | 0.0 | % | ||||||||||||||||||
Multifamily | 22.3 | 5.8 | % | 23.3 | % | 0.0 | % | 30.4 | 0.2 | % | 30.7 | % | 0.0 | % | ||||||||||||||||||
1-4 family residential C&D | 4.7 | 0.0 | % | 72.3 | % | 0.0 | % | 7.4 | 0.0 | % | 80.7 | % | 0.0 | % | ||||||||||||||||||
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Total commercial real estate | $ | 206.1 | 4.8 | % | 29.1 | % | 0.0 | % | $ | 290.3 | 4.6 | % | 30.7 | % | 0.0 | % | ||||||||||||||||
Owner occupied commercial real estate | 114.6 | 5.9 | % | 23.0 | % | 0.0 | % | 129.2 | 7.7 | % | 9.8 | % | 0.0 | % | ||||||||||||||||||
Commercial & Industrial | 24.0 | 2.9 | % | 12.5 | % | 1.7 | % | 32.2 | 4.0 | % | 5.9 | % | 0.0 | % | ||||||||||||||||||
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Total commercial | $ | 138.6 | 5.4 | % | 21.2 | % | 0.3 | % | $ | 161.4 | 7.0 | % | 9.1 | % | 0.0 | % | ||||||||||||||||
1-4 family residential | 127.2 | 5.0 | % | 19.0 | % | 0.0 | % | 155.6 | 3.4 | % | 12.4 | % | 0.0 | % | ||||||||||||||||||
Home equity | 72.6 | 4.0 | % | 4.0 | % | 3.0 | % | 79.8 | 3.4 | % | 11.5 | % | 0.0 | % | ||||||||||||||||||
Consumer | 0.2 | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
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Total consumer | $ | 200.0 | 4.7 | % | 13.6 | % | 1.1 | % | $ | 235.4 | 3.4 | % | 12.2 | % | 0.0 | % | ||||||||||||||||
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| |||||||||||||||||||||||||||||
Other | 5.9 | 0.0 | % | 88.1 | % | 0.0 | % | 9.2 | 3.4 | % | 51.6 | % | 0.0 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total covered | $ | 550.6 | 4.8 | % | 22.1 | % | 0.5 | % | $ | 696.3 | 4.7 | % | 19.7 | % | 0.0 | % | ||||||||||||||||
Non-Covered Portfolio | ||||||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | 778.2 | 2.5 | % | 6.4 | % | 0.0 | % | 329.9 | 2.7 | % | 3.3 | % | 0.0 | % | ||||||||||||||||||
Other commercial C&D | 370.6 | 1.6 | % | 23.1 | % | 0.0 | % | 31.8 | 5.6 | % | 25.9 | % | 0.0 | % | ||||||||||||||||||
Multifamily | 75.9 | 0.5 | % | 5.7 | % | 0.0 | % | 25.7 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
1-4 family residential C&D | 81.2 | 21.4 | % | 11.0 | % | 0.4 | % | 9.0 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total commercial real estate | $ | 1,305.9 | 3.3 | % | 11.4 | % | 0.0 | % | $ | 396.4 | 2.7 | % | 4.8 | % | 0.0 | % | ||||||||||||||||
Owner occupied commercial real estate | 788.2 | 0.6 | % | 5.7 | % | 0.0 | % | 218.5 | 1.0 | % | 10.4 | % | 0.0 | % | ||||||||||||||||||
Commercial and Industrial | 443.0 | 2.8 | % | 5.1 | % | 0.1 | % | 62.1 | 2.4 | % | 0.7 | % | 0.0 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total commercial | $ | 1,231.2 | 1.4 | % | 5.5 | % | 0.0 | % | $ | 280.6 | 1.3 | % | 8.2 | % | 0.0 | % | ||||||||||||||||
1-4 family residential | 691.4 | 1.3 | % | 4.3 | % | 0.0 | % | 276.1 | 0.6 | % | 4.3 | % | 0.0 | % | ||||||||||||||||||
Home equity | 311.2 | 1.6 | % | 1.4 | % | 0.8 | % | 39.2 | 1.4 | % | 2.4 | % | 0.0 | % | ||||||||||||||||||
Consumer | 123.0 | 2.0 | % | 0.9 | % | 0.0 | % | 43.1 | 2.6 | % | 0.9 | % | 0.0 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total consumer | $ | 1,125.6 | 1.5 | % | 3.2 | % | 0.2 | % | $ | 358.4 | 0.9 | % | 3.7 | % | 0.0 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Other | 89.2 | 0.9 | % | 4.5 | % | 0.0 | % | 20.7 | 0.8 | % | 5.9 | % | 0.0 | % | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total non-covered | $ | 3,751.9 | 2.1 | % | 6.8 | % | 0.1 | % | $ | 1,056.1 | 1.7 | % | 5.4 | % | 0.0 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | $ | 4,302.5 | 2.4 | % | 8.8 | % | 0.1 | % | $ | 1,752.4 | 2.9 | % | 11.1 | % | 0.0 | % | ||||||||||||||||
|
|
|
|
Of the loans past due greater than 90 days and still in accruing/accreting status as of June 30, 2012, $89.7 million (or approximately 26.6%) were loans covered by loss sharing agreements with the FDIC. All of these loans were acquired loans and such loans were either PCI loans or, based upon their recorded investment, were considered well secured and in the process of collection and met the criteria for reporting as 90 days past due and still accruing.
Of the loans past due greater than 90 days and still in accruing/accreting status as of December 31, 2011, $121.6 million (or approximately 32.3%) were loans covered by loss sharing agreements with the FDIC. All of these loans were acquired loans and such loans were either PCI loans or, based upon their recorded investment, were considered well secured and in the process of collection and met the criteria for reporting as 90 days past due and still accruing.
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Due to the required accounting for PCI loans described above, loans designated as such that would otherwise have met our established criteria for being placed on nonaccrual are generally referred to in our consolidated financial statements, and in the discussion herein, as past due greater than 90 days and still accruing/accreting. These loans are included in the disclosures of non-performing loans as they are not performing in accordance with the contractual terms of the underlying loan agreements. Non-performing loans also include acquired loans that were not designated as PCI loans but have become severely delinquent (in excess of 90 days), but are well secured and in the process of collection. As of December 31, 2010, no loans originated by us met the criteria required for classification as nonaccrual.
Six months ended June 30, 2012
Total non-performing loans as of June 30, 2012 declined by $32.4 million to $350.2 million as compared to $382.6 million at December 31, 2011. The net decline in non-performing loans during the six months ended June 30, 2012 was attributable to $43.9 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures and $81.6 million in resolutions. Offsetting the decline was $93.2 million of loans that became non-performing.
During the six months ended June 30, 2012, we foreclosed, or received deeds in lieu of foreclosure, on $43.9 million in loans, of which approximately 53% consisted of commercial real estate loans and approximately 14% and 19% were associated with the covered loans in Florida and South Carolina, respectively. Of the loans transferred to other real estate owned during the period, 33% were covered by loss sharing agreements.
Sales of other real estate owned were $46.0 million during the six months ended June 30, 2012. Approximately 44% of the sales were commercial real estate, and approximately 11% and 15% were associated with the covered loans in Florida and South Carolina, respectively. Loss sharing agreements covered 26% of these sales.
Year ended December 31, 2011
Total non-performing loans as of December 31, 2011 were $382.6 million as compared to $193.8 million at December 31, 2010. The change in non-performing loans during the twelve months ended December 31, 2011 was attributable to $42.6 million and $44.9 million in additional non-performing loans acquired through the acquisition of Capital Bank Corp. and Green Bankshares, respectively, as well as $161.5 million of loans that became non-performing. Partially offsetting these increases were transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures and other reductions.
During the twelve months ended December 31, 2011, we foreclosed, or received deeds in lieu of foreclosure, on $104.3 million in loans, of which approximately 65% consisted of commercial real estate loans and approximately 14% and 23% were associated with the covered loans in Florida and South Carolina, respectively. Of the loans transferred to other real estate owned during the period, 37% were covered by loss sharing agreements.
Sales of other real estate owned were $83.4 million during the twelve months ended December 31, 2011. Approximately 42% of the sales were commercial real estate loans, and approximately 15% and 24% were associated with the covered loans in Florida and South Carolina, respectively. Loss sharing agreements covered 39% of these sales.
In connection with the acquisitions, we recorded the acquired loan portfolios at estimated fair value by projecting expected lifetime cash flows, taking into account our expectations for default and recovery, then discounting those cash flows to fair value based on current market yields for similar loans. The fair value adjustments reflect our judgments and estimates based on due diligence performed on the acquired portfolios and consideration of procedures performed by third-party independent valuation professionals.
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The customer-owed balances and carrying amounts as of June 30, 2012 and December 31, 2011 (which includes all amounts contractually owed by borrowers) are set forth in the table below:
(Dollars in millions) | ||||||||||||||||||||
Loan Type | Gross Customer Balance Owed June 30, 2012 | Carrying Amount June 30, 2012(1) | Carrying Amount as a Percentage of Customer Balance | Carrying Amount of Noncurrent Loans(2) | Carrying Amount of Noncurrent Loans as a Percentage of Carrying Amount | |||||||||||||||
Covered Portfolio | ||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 168.4 | $ | 110.7 | 65.7 | % | $ | 22.8 | 20.6 | % | ||||||||||
Other commercial C&D | 106.1 | 34.6 | 32.6 | % | 24.0 | 69.3 | % | |||||||||||||
Multifamily | 24.9 | 14.7 | 59.0 | % | 2.9 | 19.8 | % | |||||||||||||
1-4 family residential C&D | 7.2 | 4.8 | 66.1 | % | 3.4 | 71.6 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | $ | 306.6 | $ | 164.8 | 53.7 | % | $ | 53.1 | 32.2 | % | ||||||||||
Owner occupied commercial real estate | 121.3 | 100.3 | 82.7 | % | 8.6 | 8.6 | % | |||||||||||||
Commercial and industrial | 29.2 | 19.3 | 66.0 | % | 2.4 | 12.5 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial | $ | 150.5 | $ | 119.5 | 79.4 | % | $ | 11.0 | 9.3 | % | ||||||||||
1-4 family residential | 141.6 | 106.6 | 75.3 | % | 21.3 | 20.0 | % | |||||||||||||
Home equity | 86.8 | 65.3 | 75.3 | % | 6.5 | 10.0 | % | |||||||||||||
Consumer | 0.2 | 0.2 | 100.0 | % | 0.0 | 0.0 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total consumer | $ | 228.6 | $ | 172.1 | 75.3 | % | $ | 27.8 | 16.2 | % | ||||||||||
Other | 20.3 | 5.4 | 26.7 | % | 1.8 | 33.2 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total covered | $ | 706.0 | $ | 461.8 | (1) | 65.4 | % | $ | 93.7 | 20.3 | % | |||||||||
Non-Covered Portfolio | ||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 824.2 | $ | 739.1 | 89.7 | % | $ | 36.4 | 4.9 | % | ||||||||||
Other commercial C&D | 596.9 | 331.2 | 55.5 | % | 83.0 | 25.1 | % | |||||||||||||
Multifamily | 71.7 | 62.2 | 86.8 | % | 2.0 | 3.1 | % | |||||||||||||
1-4 family residential C&D | 86.5 | 69.8 | 80.7 | % | 11.8 | 16.9 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | $ | 1,579.3 | $ | 1,202.3 | 76.1 | % | $ | 133.2 | 11.1 | % | ||||||||||
Owner occupied commercial real estate | 954.0 | 902.2 | 94.6 | % | 48.1 | 5.3 | % | |||||||||||||
Commercial and industrial | 534.3 | 454.3 | 85.0 | % | 25.0 | 5.5 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial | $ | 1,488.3 | $ | 1,356.5 | 91.1 | % | $ | 73.1 | 5.4 | % | ||||||||||
1-4 family residential | 712.3 | 656.3 | 92.1 | % | 35.9 | 5.5 | % | |||||||||||||
Home equity | 345.0 | 303.3 | 87.9 | % | 8.0 | 2.6 | % | |||||||||||||
Consumer | 148.9 | 136.0 | 91.3 | % | 1.7 | 1.3 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total consumer | $ | 1,206.2 | $ | 1,095.6 | 90.8 | % | $ | 45.6 | 4.2 | % | ||||||||||
Other | 82.9 | 74.8 | 90.3 | % | 4.6 | 6.2 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total non-covered | $ | 4,356.7 | $ | 3,729.2 | (1) | 85.6 | % | $ | 256.5 | 6.9 | % | |||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 5,062.7 | $ | 4,191.0 | 82.8 | % | $ | 350.2 | 8.4 | % | ||||||||||
|
|
|
|
|
|
(1) | The carrying amount for total covered loans represents a discount from the total gross customer balance of $244.2 million or 34.6%. The total carrying amount of total non-covered loans represents a discount to the gross customer balance of $627.5 million or 14.4%. |
(2) | Includes losses greater than 90 days past due. |
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Table of Contents
(Dollars in millions) | ||||||||||||||||||||
Loan Type | Gross Customer Balance Owed December 31, 2011 | Carrying Amount December 31, 2011(1) | Carrying Amount as a Percentage of Customer Balance | Carrying Amount of Noncurrent Loans(2) | Carrying Amount of Noncurrent Loans as a Percentage of Carrying Amount | |||||||||||||||
Covered Portfolio | ||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 148.6 | $ | 125.7 | 84.6 | % | $ | 15.2 | 12.1 | % | ||||||||||
Other commercial C&D | 87.8 | 53.4 | 60.8 | % | 36.1 | 67.6 | % | |||||||||||||
Multifamily | 28.6 | 22.3 | 78.0 | % | 5.2 | 23.3 | % | |||||||||||||
1-4 family residential C&D | 5.6 | 4.7 | 83.9 | % | 3.4 | 72.3 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | $ | 270.6 | $ | 206.1 | 76.2 | % | $ | 59.9 | 29.1 | % | ||||||||||
Owner occupied commercial real estate | 127.8 | 114.6 | 89.7 | % | 26.4 | 23.0 | % | |||||||||||||
Commercial and industrial | 28.2 | 24.0 | 85.1 | % | 3.4 | 14.2 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial | $ | 156.0 | $ | 138.6 | 88.8 | % | $ | 29.8 | 21.5 | % | ||||||||||
1-4 family residential | 144.0 | 127.2 | 88.3 | % | 24.2 | 19.0 | % | |||||||||||||
Home equity | 88.4 | 72.6 | 82.1 | % | 5.1 | 7.0 | % | |||||||||||||
Consumer | 0.2 | 0.2 | 100.0 | % | 0.0 | 0.0 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total consumer | $ | 232.6 | $ | 200.0 | 86.0 | % | $ | 29.3 | 14.7 | % | ||||||||||
Other | 11.8 | 5.9 | 50.0 | % | 5.2 | 88.1 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total covered | $ | 671.0 | $ | 550.6 | 82.1 | % | $ | 124.2 | 22.6 | % | ||||||||||
Non-Covered Portfolio | ||||||||||||||||||||
Non-owner occupied commercial real estate | 906.9 | 778.2 | 85.8 | % | 49.5 | 6.4 | % | |||||||||||||
Other commercial C&D | 634.1 | 370.0 | 58.4 | % | 85.6 | 23.1 | % | |||||||||||||
Multifamily | 88.0 | 75.9 | 86.3 | % | 4.3 | 5.7 | % | |||||||||||||
1-4 family residential C&D | 99.4 | 81.8 | 82.3 | % | 9.3 | 11.5 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | $ | 1,728.4 | $ | 1,305.9 | 75.6 | % | $ | 148.7 | 11.4 | % | ||||||||||
Owner occupied commercial real estate | 859.4 | 788.2 | 91.7 | % | 45.0 | 5.7 | % | |||||||||||||
Commercial and industrial | 518.2 | 443.0 | 85.5 | % | 22.7 | 5.1 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total commercial | $ | 1,377.6 | $ | 1,231.2 | 89.4 | % | $ | 67.7 | 5.5 | % | ||||||||||
1-4 family residential | 760.4 | 691.4 | 90.9 | % | 30.0 | 4.3 | % | |||||||||||||
Home equity | 366.8 | 311.2 | 84.8 | % | 6.9 | 2.2 | % | |||||||||||||
Consumer | 158.7 | 123.0 | 77.4 | % | 1.1 | 0.9 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total consumer | $ | 1,285.9 | $ | 1,125.6 | 87.5 | % | $ | 38.0 | 3.4 | % | ||||||||||
Other | 106.2 | 89.2 | 84.0 | % | 4.0 | 4.5 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total non-covered | $ | 4,498.1 | $ | 3,751.9 | (1) | 83.4 | % | $ | 258.4 | 6.9 | % | |||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 5,169.1 | $ | 4,302.5 | 83.2 | % | $ | 382.6 | 8.9 | % | ||||||||||
|
|
|
|
|
|
(1) | The carrying amount for total covered loans represents a discount from the total gross customer balance of $120.4 million or 17.9%. The total carrying amount of total non-covered loans represents a discount to the gross customer balance of $746.2 million or 16.6%. |
(2) | Includes loans greater than 90 days past due. |
We regularly reassess the performance of the acquired portfolios by comparing actual to expected cash flows for a number of pools of similar loans. For those pools that exhibit performance below expectations which result in the present value of such cash flows being less than the recorded investment of the pool, we record a provision to establish or increase an allowance for losses. For loan pools that perform above expectations such that the present value exceeds the recorded investment of that pool, we will first reverse any previously established allowance and then record an increase in accretable yield, which is then amortized into net income as an increase in net interest income over the remaining life of the pool.
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The changes in expected cash flows on certain loan pools during 2012 and 2011 resulted from several factors, which included actual and projected maturity date extensions through renewals of certain loans along with maturity extensions related to workout strategies or borrower requests on other loans, improved precision in the cash flow estimation for acquired loans, actual payment and loss experience on certain loans and changes to the internal risk ratings of certain loans. When actual and projected maturity dates are extended beyond the dates assumed in previous cash flow estimations, the expected lives of those loans are extended and cash flows as well as impairment and accretable yield can change. The Company forecasts the payment stream of each pool of PCI loans at the original acquisition-date valuation as well as at each subsequent re-estimation date; however, previously un-forecasted loan renewals or extensions can occur as the borrowers’cash flow needs and other circumstances change over time. Cash flow estimates have improved for acquired loans since the acquisition date as the Company’s lending officers and credit administration department have been in regular contact with each borrower and have developed a fuller understanding of each borrower’s financial condition and business or personal needs. Actual payment experience on certain loans can also change expected cash flows as problem loan resolutions, loan payoffs and prepayments occur. Finally, changes to the risk ratings of certain PCI loans occur based on the Company’s evaluation of the financial condition of its borrowers. As the financial condition and repayment ability of borrowers improve over time, the Company’s policy is to upgrade the risk ratings associated with these loans and increase its cash flow expectations for these loans. Conversely, as the financial condition and repayment ability of borrowers deteriorate over time, the Company’s policy is to downgrade the associated risk ratings and decrease its cash flow expectations for these loans accordingly.
The following is a summary of the PCI covered loans and non-PCI covered loans outstanding as of June 30, 2012:
(Dollars in thousands) | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
June 30, 2012 | ||||||||||||
Non-owner occupied commercial real estate | $ | 110,665 | $ | 56 | $ | 110,721 | ||||||
Other commercial C&D | 34,613 | – | 34,613 | |||||||||
Multifamily commercial real estate | 14,693 | – | 14,693 | |||||||||
1-4 family residential C&D | 4,756 | – | 4,756 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | $ | 164,727 | $ | 56 | $ | 164,783 | ||||||
Owner occupied commercial real estate | 100,234 | 48 | 100,282 | |||||||||
Commercial and industrial | 18,591 | 668 | 19,259 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | $ | 118,825 | $ | 716 | $ | 119,541 | ||||||
1-4 family residential | 106,561 | 12 | 106,573 | |||||||||
Home Equity | 17,886 | 47,443 | 65,329 | |||||||||
Consumer | 180 | – | 180 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | $ | 124,627 | $ | 47,455 | $ | 172,082 | ||||||
Other | 5,414 | – | 5,414 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 413,593 | $ | 48,227 | $ | 461,820 | ||||||
|
|
|
|
|
|
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Table of Contents
The following is a summary of originated and acquired non-covered loans outstanding as of June 30, 2012:
(Dollars in thousands) | PCI Loans | Originated Loans | Non-PCI Acquired Loans | Total Non-covered Loans | ||||||||||||
June 30, 2012 | ||||||||||||||||
Non-owner occupied commercial real estate | $ | 662,706 | $ | 76,393 | $ | – | $ | 739,099 | ||||||||
Other commercial C&D | 272,994 | 58,225 | – | 331,219 | ||||||||||||
Multifamily commercial real estate | 61,665 | 575 | – | 62,240 | ||||||||||||
1-4 family residential C&D | 28,404 | 41,373 | – | 69,777 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | $ | 1,025,769 | $ | 176,566 | $ | – | $ | 1,202,335 | ||||||||
Owner occupied commercial real estate | 470,779 | 431,083 | 304 | 902,166 | ||||||||||||
Commercial and industrial | 178,963 | 273,049 | 2,321 | 454,333 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | $ | 649,742 | $ | 704,132 | $ | 2,625 | $ | 1,356,499 | ||||||||
1-4 family residential | 504,515 | 151,392 | 406 | 656,313 | ||||||||||||
Home Equity | 135,665 | 52,262 | 115,301 | 303,228 | ||||||||||||
Consumer | 47,359 | 82,773 | 5,899 | 136,031 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | $ | 687,539 | $ | 286,427 | $ | 121,606 | $ | 1,095,572 | ||||||||
Other | 63,269 | 11,520 | – | 74,789 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,426,319 | $ | 1,178,645 | $ | 124,231 | $ | 3,729,195 | ||||||||
|
|
|
|
|
|
|
|
The following is a summary of the PCI covered loans and non-PCI covered loans outstanding as of December 31, 2011:
(Dollars in thousands) | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
December 31, 2011 | ||||||||||||
Non-owner occupied commercial real estate | $ | 125,649 | $ | 56 | $ | 125,705 | ||||||
Other commercial C&D | 53,367 | – | 53,367 | |||||||||
Multifamily commercial real estate | 22,337 | – | 22,337 | |||||||||
1-4 family residential C&D | 4,745 | – | 4,745 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | $ | 206,098 | $ | 56 | $ | 206,154 | ||||||
Owner occupied commercial real estate | 114,610 | – | 114,610 | |||||||||
Commercial and industrial | 23,021 | 996 | 24,017 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | $ | 137,631 | $ | 996 | $ | 138,627 | ||||||
1-4 family residential | 127,139 | – | 127,139 | |||||||||
Home Equity | 20,180 | 52,421 | 72,601 | |||||||||
Consumer | 177 | – | 177 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | $ | 147,496 | $ | 52,421 | $ | 199,917 | ||||||
Other | 5,894 | – | 5,894 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 497,119 | $ | 53,473 | $ | 550,592 | ||||||
|
|
|
|
|
|
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Table of Contents
The following is a summary of originated and acquired non-covered loans outstanding as of December 31, 2011:
(Dollars in thousands) | PCI Loans | Originated Loans | Non-PCI Acquired Loans | Total Non-covered Loans | ||||||||||||
December 31, 2011 | ||||||||||||||||
Non-owner occupied commercial real estate | $ | 722,776 | $ | 55,309 | $ | 124 | $ | 778,209 | ||||||||
Other commercial C&D | 331,852 | 38,713 | – | 370,565 | ||||||||||||
Multifamily commercial real estate | 75,114 | 756 | – | 75,870 | ||||||||||||
1-4 family residential C&D | 47,947 | 33,286 | – | 81,233 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | $ | 1,177,689 | $ | 128,064 | $ | 124 | $ | 1,305,877 | ||||||||
Owner occupied commercial real estate | 501,821 | 286,072 | 313 | 788,206 | ||||||||||||
Commercial and industrial | 242,401 | 195,747 | 4,882 | 443,030 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | $ | 744,222 | $ | 481,819 | $ | 5,195 | $ | 1,229,936 | ||||||||
1-4 family residential | 578,828 | 112,168 | 412 | 691,408 | ||||||||||||
Home Equity | 148,252 | 18,044 | 144,871 | 311,167 | ||||||||||||
Consumer | 63,328 | 51,233 | 8,383 | 122,944 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | $ | 790,408 | $ | 181,445 | $ | 153,666 | $ | 1,125,519 | ||||||||
Other | 79,586 | 9,643 | 10 | 89,239 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,791,905 | $ | 800,971 | $ | 158,995 | $ | 3,751,871 | ||||||||
|
|
|
|
|
|
|
|
Year ended December 31, 2010
Total non-performing loans as of December 31, 2010 were $193.8 million. The change in non-performing loans during 2010 was attributable to $165.7 million in non-performing loans acquired, $61.9 million of loans that became non-performing during the period, partially offset by $33.8 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures and other reductions. During 2010, loans past due greater than 90 days and still accruing/accreting increased by $35.1 million, excluding the impact of acquired loans classified as past due greater than 90 days and still accruing/accreting.
Of the aggregate $61.9 million of loans that became classified as past due greater than 90 days and still accruing/accreting during 2010, the composition was as follows: 47% commercial real estate loans; 30% commercial loans; and 23% consumer loans.
The following is a summary of the PCI covered loans and non-PCI covered loans outstanding as of December 31, 2010:
(Dollars in thousands) | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
December 31, 2010 | ||||||||||||
Non-owner occupied commercial real estate | $ | 170,606 | $ | – | $ | 170,606 | ||||||
Other commercial C&D | 81,842 | – | 81,842 | |||||||||
Multifamily commercial real estate | 30,441 | – | 30,441 | |||||||||
1-4 family residential C&D | 7,357 | – | 7,357 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | $ | 290,246 | $ | – | $ | 290,246 | ||||||
Owner occupied commercial real estate | 129,253 | – | 129,253 | |||||||||
Commercial and industrial | 29,592 | 2,558 | 32,150 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | $ | 158,845 | $ | 2,558 | $ | 161,403 | ||||||
1-4 family residential | 155,619 | – | 155,619 | |||||||||
Home Equity | 6,217 | 73,592 | 79,809 | |||||||||
Consumer | – | – | – | |||||||||
|
|
|
|
|
| |||||||
Total consumer | $ | 161,836 | $ | 73,592 | $ | 235,428 | ||||||
Other | 9,207 | – | 9,207 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 620,134 | $ | 76,150 | $ | 696,284 | ||||||
|
|
|
|
|
|
127
Table of Contents
The following is a summary of the PCI non-covered loans and non-PCI non-covered loans outstanding as of December 31, 2010:
(Dollars in thousands) December 31, 2010 | PCI Loans | Originated Loans | Non-PCI Acquired Loans | Total Non-Covered Loans | ||||||||||||
Non-owner occupied commercial real estate | $ | 320,928 | $ | 8,939 | $ | – | $ | 329,867 | ||||||||
Other commercial C&D | 30,741 | 1,098 | – | 31,839 | ||||||||||||
Multifamily commercial real estate | 25,664 | – | – | 25,664 | ||||||||||||
1-4 family residential C&D | 5,570 | 3,411 | – | 8,981 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | $ | 382,903 | $ | 13,448 | $ | – | $ | 396,351 | ||||||||
Owner occupied commercial real estate | 210,170 | 8,318 | – | 218,488 | ||||||||||||
Commercial and industrial | 46,519 | 11,020 | 4,613 | 62,152 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | $ | 256,689 | $ | 19,338 | $ | 4,613 | $ | 280,640 | ||||||||
1-4 family residential | 251,348 | 24,780 | – | 276,128 | ||||||||||||
Home Equity | 12,220 | 2,616 | 24,394 | 39,230 | ||||||||||||
Consumer | 32,525 | 7,667 | 2,862 | 43,054 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | $ | 296,093 | $ | 35,063 | $ | 27,256 | $ | 358,412 | ||||||||
Other | 19,798 | 952 | – | 20,750 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 955,483 | $ | 68,801 | $ | 31,869 | $ | 1,056,153 | ||||||||
|
|
|
|
|
|
|
|
Criticized and Classified Loans
Loans with the following attributes are categorized as criticized and classifiedloans: 1) a potential weakness that deserves management’s close attention; 2) inadequate protection by the current net worth and paying capacity of the obligor or of the collateral pledged; or 3) weaknesses which make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. We refer to these loans together as special assets.
The following table summarizes criticized and classifiedloans at June 30, 2012 and December 31, 2011:
Criticized/Classified Loans(1) | June 30, 2012 |
| December 31, 2011 | |||||||||||||||||||||||
Covered | Non-Covered | Total |
| Covered | Non-Covered | Total | ||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 45,880 | $ | 154,423 | $ | 200,303 | $ | 58,626 | $ | 193,208 | $ | 251,834 | ||||||||||||||
Other commercial C&D | 27,826 | 147,355 | 175,181 | 43,085 | 169,837 | 212,922 | ||||||||||||||||||||
Multifamily commercial real estate | 5,572 | 13,505 | 19,077 | 7,406 | 24,550 | 31,956 | ||||||||||||||||||||
1-4 family residential C&D | 5,190 | 13,830 | 19,020 | 4,745 | 15,110 | 19,855 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total commercial real estate | 84,468 | 329,113 | 413,581 | 113,862 | 402,705 | 516,567 | ||||||||||||||||||||
Owner occupied commercial real estate | 30,125 | 100,903 | 131,028 | 37,017 | 89,876 | 126,893 | ||||||||||||||||||||
Commercial and industrial | 4,943 | 58,611 | 63,554 | 4,693 | 66,445 | 71,138 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total commercial | 35,068 | 159,514 | 194,582 | 41,710 | 156,321 | 198,031 | ||||||||||||||||||||
1-4 family residential | 32,225 | 66,518 | 98,743 | 40,426 | 73,513 | 113,939 | ||||||||||||||||||||
Home equity | 7,582 | 13,823 | 21,405 | 8,802 | 10,355 | 19,157 | ||||||||||||||||||||
Consumer | – | 2,178 | 2,178 | – | 1,271 | 1,271 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total consumer | 39,807 | 82,519 | 122,326 | 49,228 | 85,139 | 134,367 | ||||||||||||||||||||
Other | 5,170 | 12,984 | 18,154 | 5,207 | 14,659 | 19,866 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total | $ | 164,513 | $ | 584,130 | $ | 748,643 | $ | 210,007 | $ | 658,824 | $ | 868,831 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
(1) | PCI and Non-PCI loans are included in the balances presented. |
128
Table of Contents
Total criticized and classified loans as of June 30, 2012 declined $120.2 million as compared to December 31, 2011 as $43.9 million was transferred to other real estate owned and $76.3 million was resolved through net paydowns, charge offs or upgrades.
Allowance for Loan Losses
For newly originated loans, we have recorded a provision to establish an allowance against loan losses. At June 30, 2012, the allowance for loan losses was $45.5 million of which $11.8 million related to loans we originated or acquired non-PCI loans. As of June 30, 2012, we have recorded provisions of $33.7 million associated with PCI loans. As of December 31, 2011, the allowance for loan losses was $34.7 million and $8.4 million of the allowance for loan losses related to loans we originated or acquired non-PCI loans and $26.3 million for purchased credit impaired loans.
Allowance and Provision for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio. Based upon our most recent estimates of expected cash flows, approximately $33.7 million of the allowance for loan losses was required to be allocated for PCI loans as of June 30, 2012. Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses. Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and are performed primarily on commercial real estate and other commercial loans. The result is that commercial real estate loans and commercial loans are divided into the following risk categories: Pass, Special Mention, Substandard and Loss. The allowance consists of specific and general components. When appropriate, a specific reserve will be established for individual loans based upon the risk classifications and the estimated potential for loss. The specific component relates to loans that are individually classified as impaired. Otherwise, we estimate an allowance for each risk category. The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history and concentrations of credit.
Home equity loans, indirect auto loans, residential loans and consumer loans generally are not analyzed individually or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above. However, should such loans exceeding certain size thresholds exhibit signs of impairment; they are individually evaluated for impairment.
Senior management and our Board of Directors review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.
The acquisitions of our banking operations during 2010 and the acquisition of Capital Bank Corp. and GreenBank during the first and third quarter of 2011, respectively, resulted in significant preliminary accounting adjustments recorded, resulting in the majority of our balance sheet being recently valued at fair value. The most significant adjustments related to loans that previously were recorded at values reflecting estimated fair values as of the various acquisition dates. For information on the acquisitions and the value of the assets acquired, see “—Acquisitions” above. Due to these accounting adjustments, no allowance for loan losses was recorded for acquired loans upon acquisition.
The provision for loan losses is a charge to income in the current period to establish or replenish the allowance and maintain it at a level that management has determined to be adequate to absorb estimated incurred losses in the loan portfolio for originated loans. A provision for loan losses is also required for any unfavorable changes in expected cash flows related to pools of purchased impaired loans. The provision for loan losses and expectations of cash flows may be impacted by many factors, including changes in the value of real estate
129
Table of Contents
collateralizing loans, net charge-offs and credit losses incurred, changes in loans outstanding, changes in impaired loans, historical loss rates and the mix of loan types. The provisions for loan losses were $6.6 million and $8.2 million for the three months ended June 30, 2012 and 2011, respectively. During the three months ended June 30, 2012, $3.3 million of the provision for loan losses reflects impairment related to unfavorable changes in estimates of expected cash flows in certain pools of purchased impaired loans. The remainder of the provision for loan losses includes the allowance for loan losses established for loans originated by us and non-PCI acquired loans and the amount necessary to replenish net charge offs.
As the majority of our acquired loans are considered PCI loans, our provision for loan losses in future periods will be most significantly influenced in the short term by the differences between the actual credit losses resulting from the resolution of problem loans and the estimated credit losses used in determining the estimated fair values of purchased impaired loans as of their acquisition dates. As we have not yet finalized our analysis of the estimated fair value of all acquired loans or the related estimated amounts of expected credit losses with respect to the Green Bankshares acquisition, these amounts may change. For loans originated by us, the provision for loan losses will be affected by the loss potential of impaired loans and trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level.
130
Table of Contents
Changes affecting the allowance for loan losses are summarized below for the three and six months ended June 30, 2012 and 2011 and for the years ended December 31, 2011 and 2010. Due to the inception of banking operations on July 16, 2010, there was no allowance for loan losses or related activity for the period from inception through December 31, 2009.
(Dollars in thousands) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | ||||||||||||||||||
Allowance for loan losses at beginning of period | $ | 40,608 | $ | 2,287 | $ | 34,749 | $ | 753 | $ | 753 | $ | – | ||||||||||||
Charge-offs: | ||||||||||||||||||||||||
Non-owner occupied commercial real estate | – | – | – | – | – | – | ||||||||||||||||||
Other commercial C&D | 83 | – | 83 | – | – | – | ||||||||||||||||||
Multifamily commercial real estate | – | – | – | – | – | – | ||||||||||||||||||
1-4 family residential C&D | – | – | – | – | – | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial real estate | $ | 83 | $ | – | $ | 83 | $ | – | $ | – | $ | – | ||||||||||||
Owner occupied commercial real estate | – | – | – | – | – | – | ||||||||||||||||||
Commercial and industrial | – | – | 2 | – | – | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | $ | – | $ | – | $ | 2 | $ | – | $ | – | $ | – | ||||||||||||
1-4 family residential | – | – | – | – | – | – | ||||||||||||||||||
Home Equity | 517 | 2,986 | 752 | 2,986 | 4,372 | – | ||||||||||||||||||
Consumer | 446 | 30 | 451 | 41 | 54 | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | $ | 963 | $ | 3,016 | $ | 1,203 | $ | 3,027 | $ | 4,426 | $ | – | ||||||||||||
Other | 1,576 | – | 1,576 | – | – | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total charge-offs | $ | 2,622 | $ | 3,016 | $ | 2,864 | $ | 3,027 | $ | 4,426 | $ | – | ||||||||||||
Recoveries: | ||||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 37 | $ | – | $ | 762 | $ | – | $ | – | $ | – | ||||||||||||
Other commercial C&D | 50 | – | 50 | – | 17 | – | ||||||||||||||||||
Multifamily commercial real estate | – | – | – | – | – | – | ||||||||||||||||||
1-4 family residential C&D | – | – | – | – | – | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial real estate | $ | 87 | $ | – | $ | 812 | $ | – | $ | 17 | $ | – | ||||||||||||
Owner occupied commercial real estate | 14 | – | 14 | – | – | – | ||||||||||||||||||
Commercial and industrial | 148 | – | 148 | – | 4 | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | $ | 162 | $ | – | $ | 162 | $ | – | $ | 4 | $ | – | ||||||||||||
1-4 family residential | 48 | – | 48 | – | 3 | – | ||||||||||||||||||
Home Equity | 19 | – | 19 | – | – | – | ||||||||||||||||||
Consumer | 103 | – | 103 | – | 2 | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | $ | 170 | $ | – | $ | 170 | $ | – | $ | 5 | $ | – | ||||||||||||
Other | 459 | – | 459 | – | – | – | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total recoveries | $ | 878 | $ | 3,016 | $ | 1,603 | $ | 3,027 | $ | 26 | $ | – | ||||||||||||
Net charge-offs (recoveries) | 1,744 | 3,016 | 1,261 | 3,027 | 4,400 | – | ||||||||||||||||||
Provision for loan losses | 6,608 | 8,215 | 11,984 | 9,760 | 38,396 | 753 | ||||||||||||||||||
Allowance for loan losses at end of period | $ | 45,472 | $ | 7,486 | $ | 45,472 | $ | 7,486 | $ | 34,749 | $ | 753 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ratio of net charge-offs to average net loans outstanding | NM | NM | NM | NM | NM | NM |
131
Table of Contents
No portion of the allowance allocated to non-PCI loans is in any way restricted to any individual loan or group of originated or non-PCI loans, and the entire allowance is available to absorb probable incurred credit losses from any and all such loans. The following table represents management’s best estimate of the allocation of the allowance for loan losses to the various segments of the loan portfolio based on information available as of June 30, 2012 and December 31, 2011. The following table allocates the allowance for loan losses for non-PCI loans by loan category as of the dates indicated:
June 30, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance for Non-PCI Loans | Percent of Non-PCI Loans | Allowance for Non-PCI Loans | Percent of Non-PCI Loans | Allowance for Non-PCI Loans | Percent of Non-PCI Loans | ||||||||||||||||||
Non-owner occupied commercial real estate | $ | 727 | 1.0 | % | $ | 453 | 0.8 | % | $ | 79 | 0.8 | % | ||||||||||||
Other commercial C&D | 731 | 1.3 | % | 509 | 1.3 | % | 6 | 1.3 | % | |||||||||||||||
Multifamily commercial real estate | 15 | 2.6 | % | 7 | 0.9 | % | – | 0.0 | % | |||||||||||||||
1-4 family residential C&D | 557 | 1.3 | % | 444 | 1.3 | % | 19 | 1.3 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total commercial real estate | $ | 2,030 | 1.1 | % | $ | 1,413 | 1.1 | % | $ | 104 | 0.9 | % | ||||||||||||
Owner occupied commercial real estate | 3,771 | 0.9 | % | 3,022 | 1.1 | % | 70 | 0.8 | % | |||||||||||||||
Commercial and industrial | 3,100 | 1.1 | % | 1,945 | 1.0 | % | 133 | 0.7 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total commercial | $ | 6,871 | 1.0 | % | $ | 4,967 | 1.0 | % | $ | 203 | 0.8 | % | ||||||||||||
1-4 family residential | 1,395 | 0.9 | % | 866 | 0.8 | % | 215 | 1.4 | % | |||||||||||||||
Home Equity | 303 | 0.1 | % | 163 | 0.1 | % | 33 | 0.0 | % | |||||||||||||||
Consumer | 1,090 | 1.2 | % | 997 | 1.7 | % | 184 | 2.9 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total consumer | $ | 2,788 | 0.6 | % | $ | 2,026 | 0.5 | % | $ | 432 | 0.4 | % | ||||||||||||
Other | 94 | 0.8 | % | 26 | 0.3 | % | 14 | 0.2 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 11,783 | 0.9 | % | $ | 8,432 | 0.8 | % | $ | 753 | 0.5 | % | ||||||||||||
|
|
|
|
|
|
Impaired Loans
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgages, commercial and commercial real estate loans exceeding certain size thresholds established by management are individually evaluated for impairment. Non-accrual loans and restructured loans where loan term concessions benefiting the borrowers have been made are generally designated as impaired. The application of the acquisition method of accounting due to the acquisitions of our banking operations in 2010 and 2011 resulted in all acquired loans, impaired as well as non-impaired loans, being recorded in the financial statements at their fair value at the date of acquisition, and the historical allowance for loan loss associated with these loans by the predecessor institutions was eliminated. The fair value of loans is determined by the net present value of the expected cash flows, taking into consideration the credit quality and expectations of credit losses. The majority of acquired loans were classified as purchased credit impaired loans and were accounted for in pools of loans with similar risk characteristics.
Within the context of the accounting for impaired loans described in the preceding paragraph, other than the purchased credit impaired loans described above, there were three single-family residential loans and four commercial and industrial loans which were individually evaluated for impairment totaling approximately $7,747,000 as of June 30, 2012. Two single-family residential loans totaling $763,000 were individually evaluated as of December 31, 2011. No allowance for loan losses was recorded for such loans.
Based upon the most recent estimates of pool expected cash flows, impairment of purchased credit impaired loans of approximately $3.3 million was identified during the second quarter of 2012.
132
Table of Contents
Due to the pool method of accounting for purchased credit impaired loans, non-performing PCI loans are reported as 90 days past due and still accruing/accreting. Going forward, acquired loans not classified as purchased credit impaired and loans originated by us may become impaired and will be classified as such. Impaired loans also include loans which were not classified as non-accrual, but otherwise meet the criteria for classification as an impaired loan (i.e., loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). In our evaluation of the adequacy of the allowance for loan losses, we consider (1) purchased credit impaired loans and loans classified as impaired, (2) our historical portfolio loss experience and trends and (3) certain other quantitative and qualitative factors.
Non-performing Assets
Non-performing assets include accruing/accreting loans delinquent 90 days or more, non-accrual loans and investment securities, repossessed personal property and other real estate. Non-PCI loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when such assets are 90 days past due. Non-performing assets were as follows:
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(Dollars in thousands) | Covered | Non-Covered | Total | Covered | Non-Covered | Total | ||||||||||||||||||
Total non-accrual loans | $ | 4,010 | $ | 8,534 | $ | 12,544 | $ | 2,589 | $ | 3,286 | $ | 5,875 | ||||||||||||
Accruing/accreting loans delinquent 90 days or more | 89,695 | 247,997 | 337,692 | 121,579 | 255,054 | 376,633 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total non-performing loans | $ | 93,705 | $ | 256,531 | $ | 350,236 | $ | 124,168 | $ | 258,340 | $ | 382,508 | ||||||||||||
Non-accrual investment securities | – | 273 | 273 | – | 310 | 310 | ||||||||||||||||||
Repossessed personal property (primarily indirect auto loans) | – | 265 | 265 | – | 228 | 228 | ||||||||||||||||||
Other real estate owned | 46,283 | 111,952 | 158,235 | 46,550 | 122,231 | 168,781 | ||||||||||||||||||
Other assets | – | 2,486 | 2,486 | – | 2,398 | 2,398 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total non-performing assets | $ | 139,988 | $ | 371,507 | $ | 511,495 | $ | 170,718 | $ | 383,507 | $ | 554,225 | ||||||||||||
Allowance for loan losses | $ | 14,597 | $ | 30,875 | $ | 45,472 | $ | 11,809 | $ | 22,940 | $ | 34,749 | ||||||||||||
Non-performing assets as a percent of total assets | 2.22 | % | 5.89 | % | 8.11 | % | 2.59 | % | 5.82 | % | 8.41 | % | ||||||||||||
Non-performing loans as a percent of total loans | 2.24 | % | 6.12 | % | 8.36 | % | 2.89 | % | 6.00 | % | 8.89 | % | ||||||||||||
Allowance for loan losses as a percent of non-performing loans | 15.58 | % | 12.04 | % | 12.98 | % | 9.51 | % | 8.88 | % | 9.08 | % | ||||||||||||
Allowance for loan losses as a percent of non-PCI loans | – | – | 0.87 | % | – | – | 0.83 | % |
Investment Securities
Investment securities represent a significant portion of our assets. We invest in a variety of securities, including obligations of the U.S. Treasury, U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, bank eligible obligations of any state or political subdivision, privately issued mortgage-backed securities, bank eligible corporate obligations, mutual funds and limited types of equity securities.
Our investment activities are governed internally by a written, board-approved policy. The investment policy is carried out by our Treasury department. Investment strategies are reviewed by the Audit Committee based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and our overall interest rate sensitivity. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (1) to provide a margin of liquid assets sufficient to meet
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unanticipated deposit and loan fluctuations and overall funds management objectives; (2) to provide eligible securities to secure public funds and other borrowings; and (3) to earn the maximum return on funds invested that is commensurate with meeting our first two goals.
Our investment securities consisted primarily of U.S. agency mortgage-backed securities, which expose us to a lower degree of credit and liquidity risk. The following table sets forth our investment securities (including trading, available for sale and held to maturity securities) as of June 30, 2012:
(Dollars in thousands) | ||||||||||||||||||||
Security Type | Book Value | Fair Value | Percent of Total Portfolio | Yield | Effective Duration (years) | |||||||||||||||
Mortgage-backed securities government issued | $ | 1,116,085 | $ | 1,134,195 | 97.5 | % | 2.04 | % | 3.51 | |||||||||||
States and political subdivisions: | ||||||||||||||||||||
Tax-exempt | 16,658 | 17,721 | 1.5 | % | 3.84 | % | 4.80 | |||||||||||||
Taxable | 509 | 559 | 0.0 | % | 5.42 | % | 5.77 | |||||||||||||
Mortgage-backed securities—private label | 3,028 | 2,941 | 0.3 | % | 5.72 | % | 1.72 | |||||||||||||
Corporate bonds | 752 | 752 | 0.1 | % | 9.68 | % | 5.62 | |||||||||||||
Equity | 2,555 | 2,564 | 0.2 | % | NA | NA | ||||||||||||||
Industrial revenue bond | 3,750 | 3,750 | 0.3 | % | 2.17 | % | 0.24 | |||||||||||||
Collateralized debt obligations | 505 | 247 | 0.0 | % | 0.00 | % | NA | |||||||||||||
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Total | $ | 1,143,842 | $ | 1,162,729 | 100.0 | % | 2.08 | % | 3.51 | |||||||||||
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Contractual maturities of investment securities at June 30, 2012, December 31, 2011 and December 31, 2010 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Other securities include mortgage-backed securities and marketable equity securities which are not due at a single maturity date. The following table segments our investment portfolio by maturity date:
(Dollars in thousands) As of June 30, 2012 | Within One Year | After One Year Within Five Years | After Five Years Within Ten Years | After Ten Years | Other Securities | |||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||||||||||||
States and political subdivisions—tax-exempt | $ | 100 | 1.08 | % | $ | 3,138 | 2.68 | % | $ | 8,461 | 3.69 | % | $ | 6,022 | 4.72 | % | $ | – | ||||||||||||||||||
States and political subdivisions—taxable | – | – | – | – | – | – | 559 | 5.42 | % | – | ||||||||||||||||||||||||||
Marketable equity securities | – | – | – | – | – | – | – | – | 2,564 | |||||||||||||||||||||||||||
Mortgage-backed securities—government issued | – | – | – | – | – | – | – | – | 1,134,195 | |||||||||||||||||||||||||||
Mortgage-backed securities—private label | – | – | – | – | – | – | – | – | 2,941 | |||||||||||||||||||||||||||
Corporate bonds | – | – | – | – | 726 | 10.03 | % | 26 | 0.00 | % | – | |||||||||||||||||||||||||
Industrial revenue bond | – | – | – | – | – | – | 3,750 | 2.17 | % | – | ||||||||||||||||||||||||||
Collateralized debt obligations | – | – | – | – | – | – | 247 | 0.00 | % | – | ||||||||||||||||||||||||||
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Total | $ | 100 | 1.08 | % | $ | 3,138 | 2.68 | % | $ | 9,187 | 4.19 | % | $ | 10,604 | 3.73 | % | $ | 1,139,700 |
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(Dollars in thousands) As of December 31, 2011 | Within One Year | After One Year Within Five Years | After Five Years Within Ten Years | After Ten Years | Other Securities | |||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||||||||||||
States and political subdivisions—tax-exempt | $ | 698 | 2.72 | % | $ | 3,222 | 1.65 | % | $ | 7,229 | 3.56 | % | $ | 23,096 | 4.73 | % | $ | – | ||||||||||||||||||
States and political subdivisions—taxable | – | – | – | – | 2,715 | 4.61 | % | 4,987 | 5.19 | % | – | |||||||||||||||||||||||||
Marketable equity securities | – | – | – | – | – | – | – | – | 2,444 | |||||||||||||||||||||||||||
Mortgage-backed securities—government issued | – | – | – | – | – | – | – | – | 769,905 | |||||||||||||||||||||||||||
Mortgage-backed securities—private label | – | – | – | – | – | – | – | – | 5,727 | |||||||||||||||||||||||||||
Corporate bonds | – | – | – | – | 726 | 9.42 | % | 2,084 | 3.51 | % | – | |||||||||||||||||||||||||
Industrial revenue bond | – | – | – | – | – | – | 3,750 | 2.11 | % | – | ||||||||||||||||||||||||||
Collateralized debt obligations | – | – | – | – | – | – | 328 | 0.00 | % | – | ||||||||||||||||||||||||||
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Total | $ | 698 | 2.72 | % | $ | 3,222 | 1.65 | % | $ | 10,670 | 4.24 | % | $ | 34,245 | 4.39 | % | $ | 778,076 | ||||||||||||||||||
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(Dollars in thousands) As of December 31, 2010 | Within One Year | After One Year Within Five Years | After Five Years Within Ten Years | After Ten Years | Other Securities | |||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||||||||||
U.S. Government agencies and corporations | $ | 2,014 | 0.57 | % | $ | 17,300 | 0.65 | % | $ | 22,120 | 1.05 | % | $ | 7,700 | 2.69 | % | $ | – | ||||||||||||||||||
States and political subdivisions—tax-exempt | 276 | 4.88 | % | 1,109 | 2.15 | % | 2,829 | 2.93 | % | 1,578 | 4.42 | % | – | |||||||||||||||||||||||
States and political subdivisions—taxable | – | – | – | – | 1,155 | 4.71 | % | 8,198 | 5.34 | % | – | |||||||||||||||||||||||||
Marketable equity securities | – | – | – | �� | – | – | – | – | – | 74 | ||||||||||||||||||||||||||
Mortgage-backed securities— residential | – | – | – | – | – | – | – | – | 412,213 | |||||||||||||||||||||||||||
Foreign government | 250 | 5.10 | % | |||||||||||||||||||||||||||||||||
Corporate bonds | – | – | – | – | – | – | 2,105 | 3.14 | % | – | ||||||||||||||||||||||||||
Collateralized debt obligations | – | – | – | – | – | – | 795 | 0.00 | % | – | ||||||||||||||||||||||||||
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Total | $ | 2,540 | 1.48 | % | $ | 18,409 | 0.74 | % | $ | 26,104 | 1.41 | % | $ | 20,376 | 3.83 | % | $ | 412,287 | ||||||||||||||||||
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The following table presents the amortized cost, unrealized gains, unrealized losses, and fair value for the major categories of our investment portfolio (including available for sale and held to maturity securities) for each reported period:
(Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
As of June 30, 2012: | ||||||||||||||||
Available for Sale | ||||||||||||||||
States and political subdivisions—tax-exempt | $ | 16,658 | $ | 1,063 | $ | – | $ | 17,721 | ||||||||
States and political subdivisions—taxable | 509 | 50 | – | 559 | ||||||||||||
Marketable equity securities | 1,796 | 9 | – | 1,805 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 1,116,085 | 18,600 | 490 | 1,134,195 | ||||||||||||
Mortgage-backed securities—residential private label | 3,028 | 10 | 97 | 2,941 | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Corporate bonds | 752 | – | – | 752 | ||||||||||||
Collateralized debt obligations | 505 | – | 258 | 247 | ||||||||||||
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$ | 1,143,083 | 19,732 | $ | 845 | $ | 1,161,970 | ||||||||||
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(Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
As of December 31, 2011: | ||||||||||||||||
Available for Sale | ||||||||||||||||
States and political subdivisions—tax-exempt | $ | 31,552 | $ | 2,694 | $ | 1 | $ | 34,245 | ||||||||
States and political subdivisions—taxable | 7,216 | 486 | – | 7,702 | ||||||||||||
Marketable equity securities | 1,796 | 11 | – | 1,807 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 759,565 | 11,089 | 749 | 769,905 | ||||||||||||
Mortgage-backed securities—residential private label | 5,799 | 57 | 129 | 5,727 | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Corporate bonds | 2,934 | – | 124 | 2,810 | ||||||||||||
Collateralized debt obligations | 555 | 32 | 259 | 328 | ||||||||||||
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$ | 813,167 | $ | 14,369 | $ | 1,262 | $ | 826,274 | |||||||||
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As of December 31, 2010: | ||||||||||||||||
Available for Sale | ||||||||||||||||
U.S. Government agencies and corporations | $ | 49,497 | $ | 18 | $ | 382 | $ | 49,133 | ||||||||
States and political subdivisions—tax-exempt | 5,918 | 2 | 128 | 5,792 | ||||||||||||
States and political subdivisions—taxable | 9,540 | 41 | 227 | 9,354 | ||||||||||||
Mortgage-backed securities—residential | 415,961 | 948 | 4,696 | 412,213 | ||||||||||||
Marketable equity securities | 102 | – | 28 | 74 | ||||||||||||
Corporate bonds | 2,104 | 1 | – | 2,105 | ||||||||||||
Collateralized debt obligations | 807 | – | 12 | 795 | ||||||||||||
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Total available for sale | $ | 483,929 | $ | 1,010 | $ | 5,473 | $ | 479,466 | ||||||||
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Held to Maturity | ||||||||||||||||
Foreign government | $ | 250 | $ | – | $ | – | $ | 250 | ||||||||
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Total held to maturity | $ | 250 | $ | – | $ | – | $ | 250 | ||||||||
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We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of securities may result in impairment charges which may be material to our financial condition and results of operations. More specifically, our impairment analysis is based on the
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following: (1) whether it is “more likely than not” we would have to sell a security prior to recovery of the amortized cost; (2) whether we intend to sell the security; and (3) whether or not we expect to recover our recorded investment on an amortized cost basis based on credit characteristics of the investment. If, based upon our analysis, any of those conditions exist for a given security, we would generally be required to record an impairment charge in the amount of the difference between the carrying amount and estimated fair value of such security.
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 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. 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. Management engaged an independent third-party valuation firm to estimate the fair value and credit loss potential of this security.
Based on this analysis, as of June 30, 2012, the estimated fair value of the CDO declined by $41,000 during the quarter, however, the credit loss potential of the CDO improved. 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.
The Company owned an investment in 30-year trust preferred securities of a community bank in North Carolina. On June 8, 2012, the North Carolina Commissioner of Banks closed the bank and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Due to the bank’s failure, management determined the bond to have experienced full credit impairment as of June 8, 2012. The resulting $38,000 impairment was charged through earnings in the second quarter of 2012.
The table below presents a rollforward of the OTTI credit losses recognized in earnings for the three and six months ended June 30, 2012 and years ended December 31, 2011 and 2010.
(Dollars in thousands) | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 | Years Ended Dec 31, | |||||||||||||
2011 | 2010 | |||||||||||||||
Beginning balance | $ | 622 | $ | 616 | $ | – | $ | – | ||||||||
Additions/subtractions | ||||||||||||||||
Credit losses recognized during the period | 38 | 44 | 616 | – | ||||||||||||
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Ending balance | $ | 660 | $ | 660 | $ | 616 | $ | – |
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Deposits
Our strategy is to fund asset growth primarily with low-cost customer deposits in order to maintain a stable liquidity profile and net interest margin. During the six months ended June 30, 2012, we continued to emphasize growth in “core deposits,” which we define as demand deposit accounts, savings and money market accounts, in order to reduce the reliance on certificates of deposit that characterized certain of our acquired banks under their historic business models. During the six months ended June 30, 2012, we grew core deposits by $129.5 million and allowed certificates of deposit to be reduced by $274.4 million as certain high-cost and brokered certificates of deposit matured and were not replaced. The contractual rate on deposits declined from 0.89% as of December 31, 2011 to 0.73% as of June 30, 2012. The following table sets forth the balances and average contractual rates payable to customers on our deposits, segmented by account type as of the end of the period:
As of June 30, 2012 | As of December 31, 2011 | Sequential Change | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Percent of Total | Weighted Average Contractual Rate | Balance | Percent of Total | Weighted Average Contractual Rate | Amount | Percent | ||||||||||||||||||||||||
Non-interest demand deposit accounts | $ | 734,605 | 15 | % | 0.00 | % | $ | 683,258 | 13 | % | 0.00 | % | $ | 51,347 | 7.5 | % | ||||||||||||||||
Interest-bearing demand deposit accounts | 1,061,809 | 21 | % | 0.21 | % | 1,087,760 | 21 | % | 0.29 | % | (25,951 | ) | (2.4 | )% | ||||||||||||||||||
Savings | 378,415 | 8 | % | 0.28 | % | 296,355 | 6 | % | 0.39 | % | 82,059 | 27.7 | % | |||||||||||||||||||
Money market | 890,409 | 18 | % | 0.34 | % | 868,375 | 17 | % | 0.60 | % | 22,034 | 2.5 | % | |||||||||||||||||||
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Total core deposits | $ | 3,065,238 | 62 | % | 0.21 | % | $ | 2,935,748 | 57 | % | 0.34 | % | $ | 129,489 | 4.4 | % | ||||||||||||||||
Customer time deposits | 1,897,906 | 38 | % | 1.54 | % | 2,161,313 | 42 | % | 1.65 | % | (263,406 | ) | (12.2 | )% | ||||||||||||||||||
Wholesale time deposits | 17,084 | < 1 | % | 2.58 | % | 28,123 | 1 | % | 2.11 | % | (11,039 | ) | (39.3 | )% | ||||||||||||||||||
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Total time deposits | $ | 1,914,990 | 38 | % | 1.55 | % | $ | 2,189,436 | 43 | % | 1.66 | % | $ | (274,445 | ) | (12.5 | )% | |||||||||||||||
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Total deposits | $ | 4,980,228 | 100 | % | 0.73 | % | $ | 5,125,184 | 100 | % | 0.89 | % | $ | (144,956 | ) | (2.8 | )% | |||||||||||||||
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A significant portion of core deposit growth resulted from inflows into savings and money market accounts, and some of this activity reflects price-sensitive customers shifting out of certificates of deposit due to low prevailing market rates. To reduce the amount of new price-sensitive deposits we may attract, we have begun to lower money market and savings rates in a targeted fashion.
The following table sets forth our average deposits and the average rates expensed for the periods indicated:
Six Months Ended June 30, 2012 | Year Ended December 31, 2011 | |||||||||||||||
(Dollars in thousands) | Average Amount | Average Rate | Average Amount | Average Rate | ||||||||||||
Non-interest bearing deposits | $ | 736,618 | 0.00 | % | $ | 509,264 | 0.00 | % | ||||||||
Interest-bearing deposits | ||||||||||||||||
Negotiable order of withdrawal accounts | 1,075,672 | 0.28 | % | 604,019 | 0.42 | % | ||||||||||
Money market | 899,727 | 0.51 | % | 591,319 | 0.67 | % | ||||||||||
Savings deposit | 334,514 | 0.33 | % | 201,238 | 0.46 | % | ||||||||||
Time deposits(1) |
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2,050,458 |
| 1.06 | % | 2,022,480 | 1.05 | % | ||||||||
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Total |
$ |
5,096,989 |
| 0.60 | % | $ | 3,928,320 | 0.73 | % | |||||||
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(1) | The average rates on time deposits include the amortization of premiums on time deposits assumed in connection with the acquisitions. Such premiums were required to be recorded by the acquisition method of accounting to initially record these deposits at their fair values as of the respective acquisition dates. |
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The following table sets forth the growth in our deposits for the periods indicated segmented by account type, excluding the initial increase in deposits resulting from the acquisitions of Capital Bank Corp. and Green Bankshares:
Six months ended June 30, 2012 | Six months ended June 30, 2011 | Year ended December 31, 2011 | ||||||||||||||||||||||
(Dollars in millions) | Increase in Deposits | Number of New Accounts | Increase in Deposits | Number of New Accounts | Increases in Deposits | Number of New Accounts | ||||||||||||||||||
Non-interest-bearing demand deposit accounts | $ | 51.3 | 9,756 | $35.4 | 5,201 | $ | 69.7 | 13,102 | ||||||||||||||||
Interest-bearing demand deposit accounts | (25.9 | ) | 8,343 | (9.1 | ) | 3,590 | 23.2 | 13,010 | ||||||||||||||||
Savings | 82.1 | 9,144 | 47.8 | 3,839 | 62.5 | 10,298 | ||||||||||||||||||
Money market | 22.0 | 886 | 107.4 | 745 | 178.7 | 1,767 | ||||||||||||||||||
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Total Core | $ | 129.5 | 28,129 | $ | 181.5 | 13,375 | $ | 334.1 | 38,177 | |||||||||||||||
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The following table sets forth our time deposits segmented by months to maturity and deposit amount:
June 30, 2012 | ||||||||||||
(Dollars in thousands) | Time Deposits of $100 and Greater | Time Deposits of Less Than $100 | Total | |||||||||
Months to maturity: | ||||||||||||
Three or less | $ | 221,826 | $ | 209,924 | $ | 431,750 | ||||||
Over Three to Six | 87,515 | 129,963 | 217,478 | |||||||||
Over Six to Twelve | 170,093 | 215,469 | 385,562 | |||||||||
Over Twelve | 456,046 | 424,154 | 880,200 | |||||||||
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Total | $ | 935,480 | $ | 979,510 | $ | 1,914,990 | ||||||
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Liquidity and Capital Resources
In order to maintain a conservative risk profile, we operate with a prudent cushion of capital in relation to regulatory requirements and to the risk of our assets and business model. For planning purposes, we expect to operate with a minimum capital target equal to an 8% leverage ratio (defined as Tier 1 capital equal to 8% of average tangible assets), which would be in excess of regulatory standards for “well-capitalized” banks. We believe the 8% target is appropriate for our business model because of our conservative loan underwriting policies, investment portfolio composition, funding strategy, interest rate risk management limits and liquidity risk profile and because of the experience of our senior management team and Board of Directors.
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As of June 30, 2012 and December 31, 2011, we had a 14.23% and 13.16% tangible common equity ratio, respectively. We believe that this non-GAAP financial measure provides investors with information useful in understanding our financial performance and, specifically, our capital position. The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets. Tangible common equity is calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net and tangible assets are total assets less goodwill and other intangible assets, net. The following table provides reconciliations of tangible common equity to GAAP total common shareholders’ equity and tangible assets to GAAP total assets:
(Dollars in millions) | As of June 30, 2012 | As of December 31, 2011 | ||||||
Shareholders’ equity | $ | 1,017 | $ | 991 | ||||
Less: Preferred stock | – | – | ||||||
Less: Goodwill and other intangible assets, net | (140 | ) | (143 | ) | ||||
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Tangible common shareholders’ equity | $ | 877 | $ | 848 | ||||
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Total assets | $ | 6,304 | $ | 6,586 | ||||
Less: Goodwill and other intangible assets, net | (140 | ) | (143 | ) | ||||
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Tangible assets | $ | 6,164 | $ | 6,443 | ||||
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Tangible common equity ratio | 14.23 | % | 13.16 | % |
As of June 30, 2012, we had a Tier 1 leverage ratio of 13.7%, which provides us with $228.4 million in excess capital relative to the 10% Tier 1 leverage ratio required under the OCC Operating Agreement and $350.7 million in excess capital relative to our longer-term target of 8%. As of June 30, 2012, we had cash and securities equal to 22.1% of total assets, representing $446.2 million of excess liquidity in excess of our target of 15%. As of June 30, 2012, Capital Bank, N.A. had a 11.4% Tier 1 leverage ratio, a 16.4% Tier 1 risk-based ratio and a 17.6% total risk-based capital ratio.
As of December 31, 2011, we had a Tier 1 leverage ratio of 12.6%, which provides us with $163.2 million in excess capital relative to the 10% Tier 1 leverage ratio required under the OCC Operating Agreement and $291.2 million in excess capital relative to our longer-term target of 8%. As of December 31, 2011, we had cash and securities equal to 23.3% of total assets, representing $548.9 million of excess liquidity in excess of our target of 15%. As of December 31, 2011, Capital Bank, N.A. had a 10.4% Tier 1 leverage ratio, a 15.8% Tier 1 risk-based ratio and a 16.7% total risk-based capital ratio.
At present, the OCC Operating Agreement requires Capital Bank, N.A. to maintain total capital equal to at least 12% of risk-weighted assets, Tier 1 capital equal to at least 11% of risk-weighted assets and a minimum leverage ratio of 10%. We expect to operate under this capital standard until we demonstrate that we have stabilized our acquired operations, improved our profitability and reduced legacy problem assets.
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The minimum ratios along with the actual ratios for us and Capital Bank, N.A. as of June 30, 2012, December 31, 2011 and December 31, 2010 are presented in the following tables.
Well Capitalized Requirement | Adequately Capitalized Requirement | June 30, 2012 Actual | December 31, 2011 Actual | December 31, 2010 Actual | ||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||
CBF Consolidated | NA | ³ | 4.0 | % | 13.7 | % | 12.6 | % | 24.3 | % | ||||||||||
Capital Bank, N.A. (formerly NAFH National Bank) | ³ | 5.0 | % | ³ | 4.0 | % | 11.4 | % | 10.4 | % | 12.1 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||
CBF Consolidated | NA | ³ | 4.0 | % | 19.9 | % | 19.3 | % | 41.8 | % | ||||||||||
Capital Bank, N.A. (formerly NAFH National Bank) | ³ | 6.0 | % | ³ | 4.0 | % | 16.4 | % | 15.8 | % | 17.1 | % | ||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||
CBF Consolidated | NA | ³ | 8.0 | % | 21.0 | % | 20.2 | % | 41.9 | % | ||||||||||
Capital Bank, N.A. (formerly NAFH National Bank) | ³ | 10.0 | % | ³ | 8.0 | % | 17.6 | % | 16.7 | % | 17.1 | % |
(Dollars in millions) | June 30, 2012 | December 31, 2011 | December 31, 2010 | |||||||||
CBF Consolidated | ||||||||||||
Tier 1 Capital | $ | 839 | $ | 803 | $ | 838 | ||||||
Tier 1 Leverage Ratio | 13.7 | % | 12.6 | % | 24.3 | % | ||||||
Tier 1 Risk-Based Capital Ratio | 19.9 | % | 19.3 | % | 41.8 | % | ||||||
Total Risk-Based Ratio | 21.0 | % | 20.2 | % | 41.9 | % | ||||||
Excess Tier 1 Capital | ||||||||||||
vs. 10% regulatory requirement | $ | 228 | $ | 163 | $ | 493 | ||||||
vs. 8% target | 351 | 291 | 562 | |||||||||
Capital Bank, N.A. (formerly NAFH National Bank) | ||||||||||||
Tier 1 Capital | $ | 694 | $ | 651 | $ | 146 | ||||||
Tier 1 Leverage Ratio | 11.4 | % | 10.4 | % | 12.1 | % | ||||||
Tier 1 Risk-Based Capital Ratio | 16.4 | % | 15.8 | % | 17.1 | % | ||||||
Total Risk-Based Ratio | 17.6 | % | 16.7 | % | 17.1 | % | ||||||
Excess Tier 1 Capital | ||||||||||||
vs. 10% regulatory requirement | $ | 84 | $ | 25 | $ | 25 | ||||||
vs. 8% target | 206 | 150 | 49 |
Liquidity involves our ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other borrowing needs, to maintain reserve requirements and to otherwise operate on an ongoing basis. To mitigate liquidity risk, our strategy is to fund asset growth primarily with low-cost customer deposits. We also operate under a liquidity policy and contingent liquidity plan that require us to monitor indicators of potential liquidity risk, utilize cash flow projection models to forecast liquidity needs, identify alternative back-up sources of liquidity and maintain a predetermined cushion of cash and liquid securities at 15% of total assets.
Our liquidity needs are met primarily by our cash position, growth in core deposits, cash flow from our amortizing investment and loan portfolios (including scheduled payments, prepayments, and maturities from portfolios of loans and investment securities) and reimbursements under the loss sharing agreements with the FDIC. Our ability to borrow funds from nondeposit sources provides additional flexibility in meeting our liquidity needs. Short-term borrowings include federal funds purchased, securities sold under repurchase agreements, short-term FHLB borrowings and brokered deposits. We also utilize longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost effective options for funding asset growth and satisfying capital needs. Our long-term borrowings include long-term FHLB advances, structured repurchase agreements and subordinated notes underlying our trust preferred securities.
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As of June 30, 2012 and December 31, 2011, cash and liquid securities totaled 22.1% and 23.3% of assets, respectively, providing us with excess liquidity relative to our planning target, and the ratio of wholesale to total funding was 8.1% and 11.6%, respectively, below our planning target. In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. We hold investments in FHLB stock for the purpose of maintaining credit lines with the FHLB. The credit availability is based on a percentage of the subsidiary banks’ total assets as reported in their most recent quarterly financial information submitted to the FHLB and subject to the pledging of sufficient collateral. At June 30, 2012, December 31, 2011 and December 31, 2010, there were $64.0 million, $206.5 million and $230.8 million in advances outstanding, with carrying amounts of $67.5 million, $221.0 million and $243.1 million, respectively. In addition, we had $$25.2 million in letters of credit outstanding as of June 30, 2012, December 31, 2011 and December 31, 2010. As of June 30, 2012, December 31, 2011 and December 31, 2010, collateral available under our agreements with the FHLB provided for incremental borrowing availability of up to approximately $232.6 million, $106.6 million and $53.6 million, respectively.
We believe that we have adequate funding sources through unused borrowing capacity from the FHLB, unpledged investment securities, cash on hand and on deposit in other financial institutions, loan principal repayment and potential asset maturities and sales to meet our foreseeable liquidity requirements and contractual obligations.
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and the weighted average rates paid for each of the categories of short-term borrowings and short-term and long-term FHLB advances:
(Dollars in thousands) | Year ended December 31, 2011 | Year ended December 31, 2010 | ||||||
Securities sold to customers under agreements to repurchase: | ||||||||
Balance: | ||||||||
Average daily outstanding | $ | 51,127 | $ | 13,584 | ||||
Outstanding at year-end | 54,533 | 50,226 | ||||||
Maximum month-end outstanding | 67,286 | 51,221 | ||||||
Rate: | ||||||||
Weighted average | 0.1 | % | 0.1 | % | ||||
Weighted average interest rate | 0.1 | % | 0.1 | % | ||||
Treasury, tax and loan note option: | ||||||||
Balance: | ||||||||
Average daily outstanding | $ | 1,190 | $ | 238 | ||||
Outstanding at year-end | – | 1,728 | ||||||
Maximum month-end outstanding | 1,700 | 1,728 | ||||||
Rate: | ||||||||
Weighted average | 0.0 | % | 0.0 | % | ||||
Weighted average interest rate | NA | 0.0 | % | |||||
Securities sold to financial institution under agreements to repurchase: | ||||||||
Balance: | ||||||||
Average daily outstanding | $ | 658 | $ | 6,411 | ||||
Outstanding at year-end | – | 10,015 | ||||||
Maximum month-end outstanding | – | 20,031 | ||||||
Rate: | ||||||||
Weighted average | 2.5 | % | 2.7 | % | ||||
Weighted average interest rate | NA | 2.1 | % |
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Advances from the Federal Home Loan Bank: | Six Months ended June 30, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | |||||||||
Balance: | ||||||||||||
Average daily outstanding | $ | 114,161 | $ | 259,807 | $ | 90,061 | ||||||
Outstanding at period-end | 67,520 | 221,018 | 243,067 | |||||||||
Maximum month-end outstanding | 215,581 | 280,151 | 256,069 | |||||||||
Rate: | ||||||||||||
Weighted average | 1.4 | % | 1.0 | % | 1.0 | % | ||||||
Weighted average interest rate | 1.7 | % | 1.0 | % | 1.0 | % |
As of June 30, 2012, December 31, 2011 and December 31, 2010, our holding company had cash of approximately $137.9 million, $142.0 million and $547.0 million, respectively. This cash is available for providing capital support to our subsidiary banks and for other general corporate purposes, including potential future acquisitions.
Our bank holding company subsidiaries have issued $149.0 million in trust preferred securities, which we acquired in connection with our investments in TIB Financial, Capital Bank Corp. and Green Bankshares, and which are carried on the balance sheet at $81.3 million as of December 31, 2011. We regard these securities as a low-cost substitute for equity capital. Trust preferred securities will be phased out as regulatory capital for certain institutions under the Dodd-Frank Act. Under current rules, we believe we will be able to count trust preferred securities as Tier 1 for their remaining life because our instruments were issued before May 19, 2010 and because CBF had total consolidated assets of less than $15 billion at December 31, 2009. If Basel III is finalized as proposed in the U.S., we believe our trust preferred securities would be phased out as Tier 1 capital over 10 years starting in 2013. The following table sets forth the notional amount and carrying value of our outstanding trust preferred securities as of December 31, 2011 as well as the rate paid thereon and maturities:
(Dollars in thousands) Issuer | Notional Amount | Carrying Value | Rate | Maturity | ||||||||||||
TIBFL Statutory Trust I | $ | 8,000 | $ | 8,813 | 10.60 | % | 9/7/2030 | |||||||||
TIBFL Statutory Trust II | 5,000 | 3,734 | 3m Libor + 3.58 | % | 7/31/2031 | |||||||||||
TIBFL Statutory Trust III | 20,000 | 10,629 | 3m Libor + 1.55 | % | 7/7/2036 | |||||||||||
|
|
|
| |||||||||||||
Total TIB Trust Preferred | $ | 33,000 | $ | 23,176 | ||||||||||||
|
|
|
| |||||||||||||
Capital Bank Statutory Trust I | 10,000 | 5,754 | 3m Libor + 3.10 | % | 6/26/2033 | |||||||||||
Capital Bank Statutory Trust II | 10,000 | 5,534 | 3m Libor + 2.85 | % | 12/30/2033 | |||||||||||
Capital Bank Statutory Trust III | 10,000 | 4,286 | 3m Libor + 1.40 | % | 3/15/2036 | |||||||||||
|
|
|
| |||||||||||||
Total CBKN Trust Preferred | $ | 30,000 | $ | 15,574 | ||||||||||||
|
|
|
| |||||||||||||
Greene County Capital Trust I | 10,000 | 6,081 | 3m Libor + 2.85 | % | 9/25/2033 | |||||||||||
Greene County Capital Trust II | 3,000 | 1,451 | 3m Libor + 1.68 | % | 6/28/2035 | |||||||||||
GreenBank Capital Trust I | 56,000 | 26,415 | 3m Libor + 1.65 | % | 5/16/2037 | |||||||||||
Civitas Statutory Trust I | 13,000 | 6,058 | 3m Libor + 1.54 | % | 3/15/2036 | |||||||||||
Cumberland Capital Statutory Trust II | 4,000 | 2,513 | 3m Libor + 3.58 | % | 7/31/2031 | |||||||||||
|
|
|
| |||||||||||||
Total GBKN Trust Preferred | $ | 86,000 | $ | 42,518 | ||||||||||||
|
|
|
| |||||||||||||
Total Trust Preferred | $ | 149,000 | $ | 81,268 | ||||||||||||
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We calculate tangible book value, which is a non-GAAP measure but which we believe is helpful to investors in understanding our business. Tangible book value is equal to book value less goodwill and core deposit intangibles, net of related deferred tax liabilities. The following table sets forth a reconciliation of tangible book value to book value, which is the most directly comparable GAAP measure:
(Dollars in thousands, except per share amounts) | As of June 30, 2012 | As of December 31, 2011 | As of December 31, 2010 | |||||||||
Total shareholders’ equity | $ | 1,017,683 | $ | 990,910 | $ | 881,236 | ||||||
Less: Noncontrolling interest | (76,610 | ) | (74,505 | ) | (5,933 | ) | ||||||
Less: CBF Corp. proportional share of goodwill(1) | (105,526 | ) | (105,526 | ) | (36,226 | ) | ||||||
Less: CBF Corp. proportional share of core deposit intangibles, net of taxes(1) | (13,571 | ) | (14,841 | ) | (9,217 | ) | ||||||
|
|
|
|
|
| |||||||
Tangible Book Value | $ | 821,976 | $ | 796,038 | $ | 829,860 | ||||||
Book Value Per Share | $ | 20.26 | $ | 19.86 | $ | 19.40 | ||||||
Tangible Book Value Per Share | $ | 17.69 | $ | 17.25 | $ | 18.39 |
(1) | Proportional share is calculated based upon 94.5% ownership of TIB Financial, 82.7% ownership of Capital Bank Corp., 90.0% ownership of Green Bankshares and 19.1% ownership of Capital Bank as of June 30, 2012 and December 31, 2011. Proportional shares are calculated based upon 98.7% ownership of TIB Financial as of December 31, 2010. |
Background on Our Acquisition of the Failed Banks
The following discussion of assets acquired and liabilities assumed in connection with our acquisition of the Failed Banks is presented below based on estimated fair values as of July 16, 2010. The fair values of the assets acquired and liabilities assumed were determined as described in Note 2 to the Audited Statements of Assets Acquired and Liabilities Assumed by Capital Bank of Metro Bank, Turnberry Bank and First National Bank, each dated as of July 16, 2010, and the accompanying notes thereto.
Assets Acquired and Liabilities Assumed
The fair values of the assets acquired and liabilities assumed in conjunction with our acquisition of the Failed Banks as of July 16, 2010 are detailed in the following table:
(Dollars in thousands) | July 16, 2010 | Average Maturity (years) | Effective Yield/ Cost | |||||||||
Assets acquired: | ||||||||||||
Cash | $ | 184,348 | ||||||||||
Securities | 74,392 | 7.71 | 3.48 | % | ||||||||
Loans | 768,554 | 5.63 | 6.91 | % | ||||||||
Other real estate owned | 33,818 | |||||||||||
FDIC indemnification asset | 137,316 | |||||||||||
Core deposit and other intangibles | 4,214 | |||||||||||
Goodwill | 6,725 | |||||||||||
Other assets | 14,519 | |||||||||||
|
| |||||||||||
Fair value of assets acquired | $ | 1,223,886 | ||||||||||
Liabilities assumed: | ||||||||||||
Non time deposits | 278,903 | |||||||||||
Time deposits | 681,211 | 0.64 | 0.63 | % | ||||||||
Borrowings | 148,584 | 3.14 | 3.08 | % | ||||||||
Other liabilities | 18,269 | |||||||||||
|
| |||||||||||
Fair value of liabilities assumed | $ | 1,126,967 | ||||||||||
Net assets acquired | $ | 96,919 | ||||||||||
Consideration paid | 81,744 | |||||||||||
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| |||||||||||
Gain on acquisitions | $ | 15,175 | ||||||||||
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Capital Bank also entered into loss sharing agreements with the FDIC, which cover approximately $796.1 million of assets, consisting of $762.2 million of loans (residential and commercial) and $33.8 million of other real estate owned. The loss sharing agreements are described in more detail under “Information about CBF—Our Acquisitions—Loss Sharing Agreements.”
The following table summarizes the fair value of assets covered by the loss sharing agreements:
(Dollars in thousands) | Estimated Fair Value as of July 16, 2010 | |||
Assets subject to loss-sharing: | ||||
Loans | $ | 762,242 | ||
Other real estate owned | 33,818 | |||
|
| |||
Total | $ | 796,060 | ||
|
|
As set forth above, on July 16, 2010, Capital Bank acquired a majority of all assets and liabilities of the Failed Banks pursuant to the loss sharing agreements. A narrative description of the anticipated effects of our acquisition of the Failed Banks on Capital Bank’s financial condition, liquidity, capital resources and operating results is presented below. This discussion should be read in conjunction with the financial statements and the accompanying notes of Capital Bank.
Capital Bank estimated the acquisition-date fair value of the acquired assets and assumed liabilities in accordance with the acquisition method of accounting. However, the amount realized on these assets could differ materially from the carrying value reflected in Capital Bank’s financial statements as a result of changes in the timing and amount of collections on the acquired loans in future periods, among other reasons.
Financial Condition
In connection with our acquisition of the Failed Banks, Capital Bank purchased loans with an estimated fair value of $768.6 million. The fair value of the loans acquired represented 100% of Capital Bank’s outstanding loans as of the date of acquisition.
Short-term Assets
Initially, our acquisition of the Failed Banks increased Capital Bank’s levels of liquidity by a net amount of $102.6 million. Capital Bank acquired $184.3 million in total cash and due from banks before making net payments of $81.7 million to settle the transactions with the FDIC.
Investment Securities
The following table reflects the acquired investment securities available for sale as of July 16, 2010:
(Dollars in thousands) | Fair Value | Average Yield | Average Maturity (Years) | |||||||||
Security Type | ||||||||||||
Agency | $ | 7,042 | 0.65 | % | 0.32 | |||||||
MBS/CMO | 57,063 | 3.61 | % | 7.98 | ||||||||
Taxable municipal | 7,239 | 5.11 | % | 11.53 | ||||||||
Tax free municipal | 2,798 | 3.58 | % | 11.57 | ||||||||
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| |||||||||||
Total | $ | 74,142 | 3.48 | % | 7.71 | |||||||
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Held to maturity securities were $250,000 at July 16, 2010.
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The acquired portfolio comprised Capital Bank’s entire investment portfolio at July 16, 2010.
Loans
Loans acquired represented all of Capital Bank’s loans at July 16, 2010. The following table presents information regarding the loan portfolio acquired on July 16, 2010 at fair value:
(Dollars in thousands) | Loans with deterioration of credit quality | Loans without a deterioration of credit quality | Total loans at fair value | |||||||||
Loan Type | ||||||||||||
Non-owner occupied commercial real estate | $ | 185,024 | $ | – | $ | 185,024 | ||||||
Other commercial C&D | 85,048 | – | 85,048 | |||||||||
Multifamily commercial real estate | 27,752 | – | 27,752 | |||||||||
1-4 family residential C&D | 6,902 | – | 6,902 | |||||||||
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| |||||||
Total commercial real estate | $ | 304,726 | $ | – | $ | 304,726 | ||||||
Owner occupied commercial real estate | 154,175 | – | 154,175 | |||||||||
Commercial and industrial | 36,666 | 2,445 | 39,111 | |||||||||
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| |||||||
Total commercial | $ | 190,841 | $ | 2,445 | $ | 193,286 | ||||||
1-4 family residential | 170,464 | – | 170,464 | |||||||||
Home equity | 11,173 | 72,786 | 83,959 | |||||||||
Consumer | 4,012 | 2,288 | 6,300 | |||||||||
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|
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| |||||||
Total consumer | $ | 185,649 | $ | 75,074 | $ | 260,723 | ||||||
Other | 9,819 | – | 9,819 | |||||||||
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|
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| |||||||
Total loans | $ | 691,035 | $ | 77,519 | $ | 768,554 | ||||||
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|
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|
|
The acquired loan portfolio contained both fixed and variable rate loans. The following table provides information about the acquired portfolio according to loan rate type and fair value at July 16, 2010:
(Dollars in thousands) | Fair value amounts with: | |||||||||||
Loan Type | Total fair value | Fixed rates | Variable rates | |||||||||
Non-owner occupied commercial real estate | $ | 185,024 | $ | 69,798 | $ | 115,226 | ||||||
Other commercial C&D | 85,048 | 26,431 | 58,617 | |||||||||
Multifamily commercial real estate | 27,752 | 9,878 | 17,874 | |||||||||
1-4 family residential C&D | 6,902 | 2,430 | 4,472 | |||||||||
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|
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| |||||||
Total commercial real estate | $ | 304,726 | $ | 108,537 | $ | 196,189 | ||||||
Owner occupied commercial real estate | 154,175 | 57,177 | 96,998 | |||||||||
Commercial and industrial | 39,111 | 7,281 | 31,830 | |||||||||
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|
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| |||||||
Total commercial | $ | 193,286 | $ | 64,458 | $ | 128,828 | ||||||
1-4 family residential | 170,464 | 49,990 | 120,474 | |||||||||
Home Equity | 83,959 | 19,836 | 64,123 | |||||||||
Consumer | 6,300 | 5,030 | 1,270 | |||||||||
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|
|
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| |||||||
Total consumer | $ | 260,723 | $ | 74,856 | $ | 185,867 | ||||||
Other | 9,819 | 1,802 | 8,017 | |||||||||
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|
|
|
|
| |||||||
Total | $ | 768,554 | $ | 249,653 | $ | 518,901 | ||||||
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The contractual maturity distribution of the acquired loan portfolio at July 16, 2010 is indicated in the table below:
(Dollars in thousands) Loan Type | Loans Maturing | |||||||||||||||
Within 1 Year | 1 to 5 Years | After 5 Years | Total | |||||||||||||
Non-owner occupied commercial real estate | $ | 41,106 | $ | 116,922 | $ | 26,996 | $ | 185,024 | ||||||||
Other commercial C&D | 55,820 | 28,388 | 840 | 85,048 | ||||||||||||
Multifamily commercial real estate | 4,853 | 15,954 | 6,945 | 27,752 | ||||||||||||
1-4 family residential C&D | 5,893 | 1,009 | – | 6,902 | ||||||||||||
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|
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|
|
|
|
| |||||||||
Total commercial real estate | $ | 107,672 | $ | 162,273 | $ | 34,781 | $ | 304,726 | ||||||||
Owner occupied commercial real estate | 40,568 | 78,346 | 35,261 | 154,175 | ||||||||||||
Commercial and industrial | 9,389 | 18,258 | 11,464 | 39,111 | ||||||||||||
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|
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| |||||||||
Total commercial | $ | 49,957 | $ | 96,604 | $ | 46,725 | $ | 193,286 | ||||||||
1-4 family residential | 32,193 | 50,534 | 87,737 | 170,464 | ||||||||||||
Home Equity | 10,661 | 29,760 | 43,538 | 83,959 | ||||||||||||
Consumer | 2,736 | 3,294 | 270 | 6,300 | ||||||||||||
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|
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|
|
|
| |||||||||
Total consumer | $ | 45,590 | $ | 83,588 | $ | 131,545 | $ | 260,723 | ||||||||
Other | 4,608 | 2,021 | 3,190 | 9,819 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 207,827 | $ | 344,486 | $ | 216,241 | $ | 768,554 | ||||||||
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|
Foreclosed Property
Capital Bank acquired $33.8 million of foreclosed property in connection with our acquisition of the Failed Banks. This represented 100% of Capital Bank’s balance of foreclosed property at the time of acquisition. Capital Bank was able to determine the fair value of the property acquired through the use of appraisals and/or review of the comparable sales data available at the time of acquisition. Up to 80% of losses on foreclosed property are covered by Capital Bank’s loss sharing.
Deposits
Capital Bank assumed approximately $960.1 million in deposits based on estimated fair values. This amount represented 100% of Capital Bank’s total deposits at the time of acquisition.
The various types of deposit accounts assumed as of July 16, 2010 are summarized below (dollars in thousands):
(Dollars in thousands) | Amount as of July 16, 2010 | |||
Demand deposits | $ | 126,181 | ||
Interest-bearing demand deposits | 137,923 | |||
Savings deposits | 14,799 | |||
Time deposits | 681,211 | |||
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| |||
Total | $ | 960,114 | ||
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As of July 16, 2010, the scheduled maturities of time deposits with balances $100,000 or greater were as follows:
(Dollars in thousands) | Amount as of July 16, 2010 | |||
Months to maturity: | ||||
Three or less | $ | 78,631 | ||
Four to Nine | 25,430 | |||
Seven through Twelve | 141,558 | |||
Over Twelve | 59,860 | |||
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| |||
Total | $ | 305,479 | ||
|
|
In its assumption of the deposit liabilities, Capital Bank determined that some of the customer relationships associated with these deposits have intangible value, in accordance with the accounting for goodwill and other intangible assets in a business combination. Capital Bank determined the estimated fair value of the core deposit intangible asset to be $4.1 million, which will be amortized over a four-year period which is its estimated life.
Future amortization of the core deposit intangible asset over the estimated economic life will decrease results of operations. Since amortization is a non-cash item, it will have no effect upon future liquidity and cash flows. For the calculation of regulatory capital, the core deposit intangible asset is disallowed and is a reduction of equity capital. As such, Capital Bank expects no material impact on regulatory capital.
The core deposit intangible asset is subject to significant estimates by management of Capital Bank related to the value and the life of the asset. These estimates could change over time. Capital Bank will review the valuation of this asset periodically to ensure that no impairment has occurred. If any impairment is subsequently determined, Capital Bank will record the impairment as an expense in its consolidated statement of operations.
Borrowings
Borrowings include securities sold under agreements to repurchase, advances from the FHLB, and a treasury, tax and loan note option.
Capital Bank also acquired securities sold under agreements to repurchase with commercial account holders whereby Capital Bank sweeps the customers’ accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by Capital Bank.
Capital Bank also assumed an agreement with another financial institution in which securities had been sold which would be repurchased at a future date. The interest rates on these repurchase agreements are fixed for the remaining term of the agreement. The outstanding fair value amount at July 16, 2010 was $10,188 and had a fixed interest rate of 5.16%. As of July 16, 2010, $11,856 of securities of the U.S. government or its agencies were pledged to collateralize these borrowings.
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Through our acquisition of the Failed Banks, Capital Bank assumed FHLB advances outstanding with a carrying value of $134,684, a face value of $127,776 and a weighted average interest rate of 3.08%. The advances consist of the following:
Fair Value | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Rate at July 16, 2010 | ||||||||||||
$ | 4,059 | $ | 4,052 | August 2010 | Fixed | 3.36 | % | |||||||||
5,004 | 5,000 | September 2010 | Fixed | 0.69 | % | |||||||||||
6,005 | 6,000 | December 2010 | Fixed | 0.68 | % | |||||||||||
5,003 | 5,000 | February 2011 | Fixed | 0.51 | % | |||||||||||
3,034 | 3,000 | March 2011 | Fixed | 2.12 | % | |||||||||||
3,028 | 3,000 | May 2011 | Fixed | 1.65 | % | |||||||||||
5,212 | 5,000 | September 2011(1) | Fixed | 5.04 | % | |||||||||||
5,203 | 5,000 | June 2011(1) | Fixed | 4.95 | % | |||||||||||
5,000 | 5,000 | June 2011 | Daily | 0.49 | % | |||||||||||
5,107 | 5,000 | July 2011(1) | Fixed | 2.81 | % | |||||||||||
1,969 | 1,944 | September 2011 | Fixed | 2.99 | % | |||||||||||
2,119 | 2,083 | September 2011 | Fixed | 3.58 | % | |||||||||||
583 | 572 | October 2011 | Fixed | 3.91 | % | |||||||||||
5,292 | 5,000 | January 2012(1) | Fixed | 4.56 | % | |||||||||||
646 | 625 | April 2012 | Fixed | 4.70 | % | |||||||||||
5,353 | 5,000 | May 2012(1) | Fixed | 4.59 | % | |||||||||||
7,736 | 7,500 | March 2013 | Fixed | 2.29 | % | |||||||||||
4,372 | 4,000 | March 2013(1) | Fixed | 4.58 | % | |||||||||||
5,185 | 5,000 | May 2013(1) | Fixed | 2.27 | % | |||||||||||
5,600 | 5,000 | May 2014(1) | Fixed | 4.60 | % | |||||||||||
5,625 | 5,000 | June 2014(1) | Fixed | 4.67 | % | |||||||||||
5,239 | 5,000 | February 2015(1) | Fixed | 2.83 | % | |||||||||||
5,431 | 5,000 | June 2015(1) | Fixed | 3.71 | % | |||||||||||
5,469 | 5,000 | July 2015(1) | Fixed | 3.57 | % | |||||||||||
5,558 | 5,000 | November 2017 | Fixed | 3.93 | % | |||||||||||
5,786 | 5,000 | June 2017(1) | Fixed | 4.58 | % | |||||||||||
5,210 | 5,000 | July 2018(1) | Fixed | 2.14 | % | |||||||||||
5,206 | 5,000 | July 2018(1) | Fixed | 2.12 | % | |||||||||||
5,650 | 5,000 | July 2018(1) | Fixed | 3.94 | % | |||||||||||
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$ | 134,684 | $ | 127,776 | |||||||||||||
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(1) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, Capital Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
Other Liabilities
Capital Bank acquired approximately $18.3 million of other liabilities. The book value of these liabilities approximated their fair value.
Operating Results and Cash Flows
Capital Bank was formed to pursue acquisition opportunities and management performed various types of reviews and analyses to determine their impact on Capital Bank’s operating results, cash flows and risk profile. The acquisition of the Failed Banks was attractive to Capital Bank for a variety of reasons, including the following:
• | enabling the startup of Capital Bank’s banking operations in several of our target markets (Miami, which we targeted because of its size and concentrated business activity, and South Carolina, which we targeted because of its attractive demographic growth trends) with a baseline level of trained staff in place; |
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• | attractiveness in the pricing of the acquired loan portfolios considering the protective nature of the loss sharing agreements; |
• | the ability to utilize acquired excess liquidity to allow a planned run-off of out-of-market and unprofitable deposits; and |
• | the ability to quickly reduce redundancies and gain additional efficiencies related to Capital Bank’s corporate functions. |
The acquisition of the Failed Banks had an immediate accretive impact on Capital Bank’s financial results as it recognized a gain of approximately $15.2 million in connection with our acquisition of the Failed Banks. The gain resulted from Capital Bank’s determination that the fair value of the net assets acquired exceeded the fair value of the consideration transferred in connection with our acquisition of the Failed Banks.
The extent to which Capital Bank’s operating results may be adversely affected by the acquired loans is offset to a significant extent by the loss sharing agreements and the related discounts reflected in the fair value of these assets at July 16, 2010. The fair values of the acquired loans and other real estate owned reflect an estimate of lifetime expected losses related to these assets as of July 16, 2010. As a result, Capital Bank’s operating results would only be adversely affected by loan losses to the extent that such losses exceed the expected losses reflected in the estimates of fair value of these assets at July 16, 2010. In addition, to the extent that the stated interest rate on acquired loans was not considered a market rate of interest at the acquisition date, appropriate adjustments to the acquisition-date fair value were recorded. These adjustments mitigate the risk associated with the acquisition of loans earning a below-market rate of return.
On July 16, 2010, the estimated fair value for all non-PCI loans acquired in the acquisition totaled $77.5 million. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of the shared-loss 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.
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit impaired (which we refer to as “PCI”) loans. On the acquisition date, the estimated fair value of PCI loans was $691.0 million. The preliminary estimate of the cash flows expected to be collected for PCI loans was $737.6 million, net of an accretable yield of $46.6 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments, expected credit losses and market liquidity and interest rates.
The accretable yield is the amount by which the undiscounted expected cash flows exceed the estimated fair value. The accretable yield includes the future interest expected to be collected over the remaining life of the acquired loans.
The loss sharing agreements will likely have a material impact on the cash flows and operating results of Capital Bank in both the short-term and the long-term. In the short-term, as stated above, it is likely there will be a significant amount of the covered assets that will experience deterioration in payment performance or will be determined to have inadequate collateral values to repay the loans. In such instances, Capital Bank will likely no longer receive payments from the borrowers, which will impact cash flows. The loss sharing agreements will not fully offset the financial effects of such a situation. However, if a loan is subsequently charged off or charged down after Capital Bank completes its best efforts at collection, the loss sharing agreements will cover a substantial portion of the loss associated with the covered assets.
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The effects of the loss sharing agreements on cash flows and operating results in the long-term will be similar to the short-term effects described above. The long-term effects Capital Bank may experience will depend primarily on the ability of the borrowers under the various loans covered by the loss sharing agreements to make payments over time. As the loss sharing agreements cover up to a 10-year period (five years for commercial loans and other assets), changing economic conditions will likely impact the timing of future charge-offs and the resulting reimbursements from the FDIC. Capital Bank believes that any recapture of interest income and recognition of cash flows from the borrowers or received from the FDIC (as part of the FDIC indemnification asset) may be recognized unevenly over this period, as Capital Bank exhausts its collection efforts under its normal practices. In addition, Capital Bank recorded substantial discounts related to the purchase of these covered assets. A portion of these discounts will be accretable to income over the economic life of the loans and will be dependent upon the timing and success of Capital Bank’s collection efforts on the covered assets.
Liquidity
Initially, the acquisition of the Failed Banks increased Capital Bank’s liquidity reserves by $102.6 million due to the acquisition of $184.3 million cash and due from banks in the deal before making net payments of $81.7 million to settle the transactions with the FDIC.
Capital Resources
To be categorized as well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, Capital Bank must maintain minimum Tier I leverage, Tier I risk-based and total risk-based ratios. These minimum ratios along with capital ratios for Capital Bank as of July 16, 2010 are as follows:
Well Capitalized Requirement | Adequately Capitalized Requirement | Estimated As of July 16, 2010 | ||||||||||
Tier 1 Capital (to Average Assets) | ³5.0 | % | ³4.0 | % | 11.7 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) | ³6.0 | % | ³4.0 | % | 14.3 | % | ||||||
Total Capital (to Risk Weighted Assets) | ³10.0 | % | ³8.0 | % | 14.3 | % |
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk Management
Interest rate risk management is carried out through our Asset Liability Committee, which consists of our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Treasurer, business unit heads and certain other officers. To manage interest rate risk, our Board of Directors has established quantitative and qualitative guidelines with respect to our net interest income exposure and how interest rate shocks affect our financial performance. Consistent with industry practice, we measure interest rate risk by utilizing the concept of economic value of equity, which is the intrinsic value of assets, less the intrinsic value of liabilities. Economic value of equity does not take into account management intervention and assumes the new rate environment is constant and the change is instantaneous. Further, economic value of equity only evaluates risk to the current balance sheet. Therefore, in addition to this measurement, we also evaluate and consider the impact of interest rate shocks on other business factors, such as forecasted net interest income for subsequent years.
Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, our model projects minus 300, minus 200, minus 100, 0, plus 100, plus 200 and plus 300 basis point changes to evaluate our interest rate sensitivity and to determine whether specific action is needed to improve the current structure, either through economic hedges and matching strategies or by utilizing derivative instruments. In the current interest rate environment, management believes the minus 200 and minus 300 basis point scenarios are highly unlikely.
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Based upon the current interest rate environment, as of June 30, 2012, our sensitivity to interest rate risk was as follows:
(Dollars in millions) | ||||||||||||||||
Interest Rate | Next 12 Months | |||||||||||||||
Change in | Net Interest Income | Economic Value of Equity | ||||||||||||||
Basis Points | $ Change | % Change | $ Change | % Change | ||||||||||||
300 | $ | 18.4 | 7.54 | % | $ | 54.1 | 4.43 | % | ||||||||
200 | 12.2 | 5.00 | % | 42.3 | 3.48 | % | ||||||||||
100 | 6.0 | 2.45 | % | 26.2 | 2.14 | % | ||||||||||
0 | – | 0.00 | % | – | 0.00 | % | ||||||||||
-100 | (9.3 | ) | (3.81 | )% | (49.7 | ) | (4.07 | )% | ||||||||
-200 | (10.7 | ) | (4.39 | )% | (72.4 | ) | (5.92 | )% | ||||||||
-300 | (10.7 | ) | (4.40 | )% | (64.0 | ) | (5.23 | )% |
We used many assumptions to calculate the impact of changes in interest rates on our portfolio, and actual results may not be similar to projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. Actual results may also differ due to our actions, if any, in response to the changing rates.
In the event the model indicates an unacceptable level of risk, we may take a number of actions to reduce this risk, including the sale of a portion of our available for sale investment portfolio or the use of risk management strategies such as interest rate swaps and caps. As of June 30, 2012, we were in compliance with all of the limits and policies established by management.
Inflation Risk Management
Inflation has an important impact on the growth of total assets in the banking industry and creates a need to increase equity capital to higher than normal levels in order to maintain an appropriate equity-to-assets ratio. We cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.
Off-Balance Sheet Arrangements and Contractual Obligations
Our off-balance sheet arrangements and contractual obligations at December 31, 2011 are summarized in the table that follows.
Amount of Commitment Expiration Per Period | ||||||||||||||||||||
(Dollars in thousands) | Total Amounts Committed | One Year or Less | Over One Year Through Three Years | Over Three Years Through Five Years | Over Five Years | |||||||||||||||
Off-balance sheet arrangements | ||||||||||||||||||||
Commitments to extend credit | $ | 541,186 | $ | 247,542 | $ | 46,537 | $ | 46,898 | $ | 200,209 | ||||||||||
Standby letters of credit | 29,142 | 28,255 | 887 | – | – | |||||||||||||||
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Total | $ | 570,328 | $ | 275,797 | $ | 47,424 | $ | 46,898 | $ | 200,209 | ||||||||||
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Contractual obligations | ||||||||||||||||||||
Time deposits | $ | 2,189,436 | $ | 1,450,846 | $ | 496,367 | $ | 238,634 | $ | 3,589 | ||||||||||
Operating lease obligations | 58,417 | 7,437 | 13,188 | 10,861 | 26,931 | |||||||||||||||
Capital lease obligations | 19,754 | 614 | 1,273 | 1,335 | 16,532 | |||||||||||||||
Purchase obligations | 51,561 | 9,237 | 19,085 | 21,775 | 1,464 | |||||||||||||||
Long-term debt | 140,101 | – | – | – | 140,101 | |||||||||||||||
FHLB advances | 221,018 | 25,380 | 85,822 | 37,116 | 72,700 | |||||||||||||||
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Total | $ | 2,680,287 | $ | 1,493,514 | $ | 615,735 | $ | 309,721 | $ | 261,317 | ||||||||||
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Total | $ | 3,250,615 | $ | 1,769,311 | $ | 663,159 | $ | 356,619 | $ | 461,526 | ||||||||||
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We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Total amount committed under these financial instruments was $570.3 million and $182.0 million as of December 31, 2011 and December 31, 2010, respectively. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
Our exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We use the same credit policies in making commitments to extend credit and generally use the same credit policies for letters of credit as for on-balance sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Unused commercial lines of credit, which comprise a substantial portion of these commitments, generally expire within a year from their date of origination. Other loan commitments generally expire in 30 days. The amount of collateral obtained, if any, by us upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with Capital Bank, N.A. or other financial institutions, and securities.
We had unfunded loan commitments and unfunded letters of credit totaling $570.3 million and $182.0 million at December 31, 2011 and December 31, 2010, respectively. We believe the likelihood of these commitments either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, we have liquid assets including cash and investment securities along with available borrowing capacity from various sources as discussed below.
Standby and performance letters of credit are conditional commitments issued by us to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing such letters of credit is essentially the same as that involved in extending loans to customers. We generally hold collateral and/or obtain personal guarantees supporting these commitments.
We are obligated under operating leases for office and banking premises which expire in periods varying from one to 21 years. Future minimum lease payments, before considering renewal options that we have in many cases, total $58.4 million and $24.8 million at December 31, 2011 and December 31, 2010, respectively.
Purchase obligations consist of computer and item processing services, and debit and ATM card processing and support services contracted by us under long-term contractual relationships and based upon estimated utilization.
Long-term debt includes subordinated debentures with notional amounts of $152.4 million and $33.0 million and carrying values totaling $84.9 million and $22.9 million at December 31, 2011 and December 31, 2010, respectively. Structured repurchase agreements with notional amounts of $50.0 million and carrying values of $55.2 million are included at December 31, 2011.
The Bank has invested in FHLB stock for the purpose of maintaining credit lines with the FHLB. The credit availability to the Bank is based on the amount of collateral pledged. FHLB advances totaled $221.0 million at December 31, 2011.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances.
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These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve additional management judgment due to the complexity and sensitivity of the methods and assumptions used.
Pursuant to the JOBS Act, as an emerging growth company, we can elect to opt out of the extended transition period for any new or revised accounting standards that may be issued by the Public Company Accounting Overview Board or the SEC. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the standard for the private company. This may make comparison of our financial statements with any other public company that is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Although we are still evaluating the JOBS Act, we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Business Combinations
We account for transactions that meet the definition of a purchase business combination by recording the assets acquired and liabilities assumed at their fair value upon acquisition. Intangible assets, indemnification contracts and contingent consideration are identified and recognized individually. If the fair value of the assets acquired exceeds the purchase price plus the fair value of the liabilities assumed, a bargain purchase gain is recognized. Conversely, if the purchase price plus the fair value of the liabilities assumed exceeds the fair value of the assets acquired, goodwill is recognized.
Fair Value Measurement
We use estimates of fair value in applying various accounting standards for our consolidated financial statements. Fair value measurements are used in one of four ways: (1) in the consolidated balance sheet with changes in fair value recorded in the consolidated statements of operations and other comprehensive income (loss); (2) in the consolidated balance sheets with changes in fair value recorded in the accumulated other comprehensive income (loss) section of the consolidated statements of changes in shareholders’ equity; (3) in the consolidated balance sheet for instruments carried at the lower of cost or fair value with impairment charges recorded in the consolidated statements of operations and other comprehensive income (loss); and (4) in the notes to our consolidated financial statements.
Fair value is defined as the price at which an asset may be sold or a liability may be transferred in an orderly transaction between willing and able market participants. In general, our policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for our liabilities), relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
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Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable loan losses inherent in our loan portfolio and the difference between the recorded investment and the present values of our most recent estimates of expected cash flows for purchased impaired loans where we have identified additional impairment subsequent to the date of acquisition. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses based on risk characteristics of loans and consideration of other qualitative factors, all of which may be susceptible to significant change.
Accounting for Acquired Loans
We account for our acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value as of their respective acquisition dates. No allowance for loan losses related to the acquired loans is recorded on the acquisition date, as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of the impact of guarantees under any applicable loss sharing 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.
Loans acquired in a transfer, including business combinations, with respect to which there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for PCI loans. We have applied this guidance to each of our acquisitions, including our FDIC-assisted acquisitions of the Failed Banks and our open market acquisitions of TIB Financial, Capital Bank Corp. and Green Bankshares, Inc. For each acquisition, we have aggregated the PCI loans into pools of loans with common risk characteristics. Over the life of these acquired loans, we continue to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. For each pool of loans, we estimate cash flows expected to be collected over the remaining life of the pool’s loans, based on assumptions about yields, prepayments and magnitude and timing of credit losses, and discount those cash flows to present value using effective interest rates to calculate the carrying value. The difference between our recorded investment, or carrying value, in the loans and our estimates of cumulative lifetime undiscounted expected cash flows represents the accretable yield. The accretable yield represents the amount we expect to recognize as interest income over the remaining life of the loans. The difference between the cash flows that our customers legally owe us under the contractual terms of their loan agreements and our cumulative lifetime expected cash flows represents the non-accretable difference. The non-accretable difference of a pool is a measure of the expected credit loss, prepayments and other factors affecting expected cash flows for that pool.
Each quarter, we estimate the expected cash flows for each pool and evaluate whether the present value of future expected cash flows for each pool has decreased below its recorded investment and, if so, we recognize a provision for loan loss in our consolidated statement of income for that pool and appropriately adjust the amount of accretable yield. The expected cash flows are estimated based on factors which include loan grades established in our ongoing credit review program, likelihood of default based on observations of specific loans during the credit review process as well as applicable industry data, loss severity based on updated evaluation of cash flow from available collateral, and the contractual terms of the underlying loan agreement. For any pool where the present value of our most recent estimate of future cumulative lifetime cash flows has increased above its recorded investment, we transfer appropriate estimated cash flows from non-accretable difference to accretable yield, which is then recognized in income on a prospective basis through an increase in the pool’s yield over its remaining life. For further discussion of our acquisitions and loan accounting, see Notes 2 and 4 to our consolidated financial statements.
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Accounting for Covered Loans
A significant portion of our loans acquired on July 16, 2010 and covered by the loss sharing agreements with the FDIC have demonstrated evidence of deterioration of credit quality since origination. The accounting for these loans and the related FDIC indemnification asset requires us to estimate the timing and amount of cash flow to be collected from these loans and to continually update estimates of the cash flows expected to be collected over the life of the loans. These estimates are considered to be critical accounting estimates because they involve significant judgment and assumptions as to the amount and timing of cash flows to be collected. Covered loans were placed into homogenous pools at acquisition, and the ongoing credit quality and performance of these loans are analyzed quarterly on a pool basis as described above in “—Accounting for Acquired Loans.”
FDIC Indemnification Asset
Because the FDIC will reimburse us for certain amounts related to certain acquired loans and other real estate owned should we experience a loss, an indemnification asset was also recorded at fair value at the acquisition date of such assets. The indemnification asset is recognized at the same time as the indemnified loans are acquired and measured on the same basis, subject to collectability or contractual limitations. The indemnification asset on the acquisition date reflects the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk.
Subsequent to initial recognition, the FDIC indemnification asset continues to be measured on the same basis as the related indemnified loans, and the FDIC indemnification asset is impacted by changes in estimated cash flows associated with these loans. Deterioration in the credit quality on expected cash flows of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the FDIC indemnification asset, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the FDIC indemnification asset, with such decrease being amortized into income over (i) the life of the loan or (ii) the life of the shared loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the FDIC indemnification asset. Fair value accounting incorporates into the fair value of the FDIC indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared loss agreements.
Upon the determination of an incurred loss, the FDIC indemnification asset will be reduced by the amount owed by the FDIC and a corresponding loss share receivable will be recorded until cash is received from the FDIC. As noted above, the legacy loan portfolios of First National Bank, Metro Bank and Turnberry are covered by loss sharing agreements with the FDIC. Following the acquisition, we assigned responsibility for managing these loan portfolios to our special assets division and implemented policies and systems to ensure compliance with the terms of the loss sharing agreements. During 2011, we collected $77.4 million in reimbursements from the FDIC, representing all of our requests for reimbursement of covered losses from July 16, 2010 through December 31, 2011.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the collateral at the date of foreclosure based on estimates, including some obtained from third parties, less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of cost or fair value, less estimated costs to sell. Significant property improvements that enhance the salability of the property are capitalized to the extent that the carrying value does not exceed estimated realizable value. Legal fees, maintenance and other direct costs of foreclosed properties are expensed as incurred. Given the number of properties included in OREO, and the judgment involved in estimating fair value of the properties, accounting for OREO is regarded as a critical accounting policy.
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Deferred Tax Asset
Deferred income tax assets and liabilities result from temporary differences between assets and liabilities measured for financial reporting purposes and for income tax return purposes. Realization of tax benefits for deductible temporary differences depends on having sufficient taxable income of an appropriate character within the carryforward periods. Management must evaluate the probability of realizing the deferred tax asset and determine the need for a valuation reserve as of the date of the consolidated financial statements. Given the judgment involved and the amount of our deferred tax asset, this is considered a critical accounting policy. As of June 30, 2012, there was no valuation adjustment relating to our $140.7 million deferred tax asset.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on our consolidated financial condition or results of operations but did alter disclosures.
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities” (“ASU 2011-11”). This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). However, as the FASB and the International Accounting Standards Board (collectively, the “Boards”) were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, we expect that the adoption of ASU 2011-11 will not have an impact on our consolidated financial condition or results of operations.
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by us. Under the amended guidance, we will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If we believe the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and
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interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 did not have an impact on our consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 did not have an impact on our consolidated financial condition or results of operations but did alter disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity’s valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-02, Receivables. The new guidance amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of ASU 2011-02 did not have a material impact on our consolidated financial condition or results of operations.
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The U.S. banking industry is highly regulated under federal and state law. These regulations affect the operations of the Company and its subsidiaries. Investors should understand that the primary objectives of the U.S. bank regulatory regime is the protection of depositors and consumers and maintaining the stability of the U.S. financial system, and not the protection of stockholders.
As a bank holding company, we are subject to supervision and regulation by the Federal Reserve. Our national bank subsidiary (which will be our sole bank subsidiary following the reorganization) is subject to supervision and regulation by the OCC, the Consumer Financial Protection Bureau (which we refer to as the “CFPB”) and the FDIC. In addition, we expect that the additional businesses that we may invest in or acquire will be regulated by various state and/or federal regulators, including the OCC, the Federal Reserve, the CFPB and the FDIC.
The description below summarizes certain elements of the applicable bank regulatory framework. This description is not intended to describe all laws and regulations applicable to us and our subsidiaries. Banking statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and changes in them, including changes in how they are interpreted or implemented, could have material effects on our business. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us and our subsidiaries. These issuances also may affect the conduct of our business or impose additional regulatory obligations. The description is qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described.
Capital Bank Financial Corp. as a Bank Holding Company
Any entity that acquires direct or indirect control of a bank must obtain prior approval of the Federal Reserve to become a bank holding company pursuant to the BHCA. We became a bank holding company in connection with the acquisition of the assets and assumption of certain liabilities of the Failed Banks from the FDIC by our newly chartered bank subsidiary, Capital Bank. As a bank holding company, we are subject to regulation under the BHCA and to examination, supervision and enforcement by the Federal Reserve. While subjecting us to supervision and regulation, we believe that being a bank holding company (as opposed to a non-controlling investor) broadens the investment opportunities available to us among public and private financial institutions, failing and distressed financial institutions, seized assets and deposits and FDIC auctions. Federal Reserve jurisdiction also extends to any company that is directly or indirectly controlled by a bank holding company, such as subsidiaries and other companies in which the bank holding company makes a controlling investment.
Statutes, regulations and policies could restrict our ability to diversify into other areas of financial services, acquire depository institutions and make distributions or pay dividends on our equity securities. They may also require us to provide financial support to any bank that we control, maintain capital balances in excess of those desired by management and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of Capital Bank or other depository institutions we control. They may also limit the fees and prices we charge for our consumer services.
Capital Bank, N.A. as a National Bank
Capital Bank is a national bank and is subject to supervision (including regular examination) by its primary banking regulator, the OCC. Retail operations of the bank are also subject to supervision and regulation by the CFPB. Capital Bank’s deposits are insured by the FDIC through the DIF up to applicable limits in the manner and extent provided by law. Capital Bank is subject to the Federal Deposit Insurance Act, as amended (which we refer to as the “FDI Act”), and FDIC regulations relating to deposit insurance and may also be subject to supervision by the FDIC under certain circumstances.
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Recent Developments
Capital Bank was originally formed as NAFH National Bank for the purpose of completing the acquisition of the Failed Banks. On April 29, 2011, we combined TIB Financial’s banking subsidiary, TIB Bank, with NAFH National Bank in an all-stock transaction. On June 30, 2011, we combined Capital Bank Corp.’s banking subsidiary, Capital Bank, with NAFH National Bank in an all-stock transaction and, simultaneously with the consummation of the transaction, changed the name of NAFH National Bank to Capital Bank, National Association. On September 7, 2011, we combined Green Bankshares’ banking subsidiary, GreenBank, with Capital Bank in an all stock transaction.
OCC Operating Agreement and FDIC Order
Capital Bank is subject to specific requirements pursuant to the OCC Operating Agreement, which it entered into with the OCC in connection with our acquisition of the Failed Banks. The OCC Operating Agreement requires, among other things, that Capital Bank maintain various financial and capital ratios and provide notice to, and obtain consent from, the OCC with respect to any additional failed bank acquisitions from the FDIC or the appointment of any new director or senior executive officer of Capital Bank.
Capital Bank (and, with respect to certain provisions, the Company) is also subject to the FDIC Order issued in connection with the FDIC’s approval of our applications for deposit insurance for the Failed Banks. The FDIC Order requires, among other things, that during the first three years following our acquisition of the Failed Banks, Capital Bank must obtain the FDIC’s approval before implementing certain compensation plans and submit updated business plans and reports of material deviations from those plans to the FDIC. (Until it was amended on December 21, 2011, the FDIC Order also required Capital Bank and certain of our shareholders to comply with the applicable requirements of the FDIC Statement of Policy on Qualifications for Failed Bank Acquisitions.)
A failure by us or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could subject us to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent us from executing our business strategy and negatively impact our business, financial condition, liquidity and results of operations. As of June 30, 2012, Capital Bank was in compliance with all of the material terms of the OCC Operating Agreement and FDIC Order.
Regulatory Notice and Approval Requirements for Acquisitions of Control
We must generally receive federal regulatory approval before we can acquire an institution or business. Specifically, a bank holding company must obtain prior approval of the Federal Reserve in connection with any acquisition that results in the bank holding company owning or controlling more than 5% of any class of voting securities of a bank or another bank holding company. In acting on such applications of approval, the Federal Reserve considers, among other factors: the effect of the acquisition on competition; the financial condition and future prospects of the applicant and the banks involved; the managerial resources of the applicant and the banks involved; the convenience and needs of the community, including the record of performance under the CRA; the effect of the acquisition on the stability of the United States banking or financial system; and the effectiveness of the applicant in combating money laundering activities. Our ability to make investments in depository institutions will depend on our ability to obtain approval of the Federal Reserve. The Federal Reserve could deny our application based on the above criteria or other considerations. We may also be required to sell branches as a condition to receiving regulatory approval, which may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
Federal and state laws impose additional notice, approval and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. These laws include the BHCA and the Change in Bank Control Act. Among other things, these
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laws require regulatory filings by an investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. The determination whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of voting securities.
Subject to rebuttal, an investor is generally presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting securities. If an investor’s ownership of our voting securities were to exceed certain thresholds, the investor could be deemed to “control” us for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
Broad Supervision and Enforcement Powers
A principal objective of the U.S. bank regulatory regime is to protect depositors by ensuring the financial safety and soundness of banks and other insured depository institutions. To that end, the Federal Reserve, the OCC and the FDIC have broad supervisory and enforcement authority with regard to bank holding companies and banks, including the power to conduct examinations and investigations, issue cease and desist orders, impose fines and other civil and criminal penalties, terminate deposit insurance and appoint a conservator or receiver. The CFPB similarly has broad regulatory supervision and enforcement authority with regard to consumer protection matters affecting us or our subsidiaries. Bank regulators regularly examine the operations of banks and bank holding companies. In addition, banks and bank holding companies are subject to periodic reporting and filing requirements.
Bank regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization’s operations are unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things: enjoin “unsafe or unsound” practices, require affirmative actions to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors and terminate deposit insurance.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject the Company, its subsidiaries and their respective officers, directors and institution-affiliated parties to the remedies described above and other sanctions. In addition, the FDIC may terminate a bank’s depository insurance upon a finding that the bank’s financial condition is unsafe or unsound or that the bank has engaged in unsafe or unsound practices or has violated an applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency.
Interstate Banking
Interstate Banking for State and National Banks
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (which we refer to as the “Riegle-Neal Act”), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. The Dodd-Frank Act permits a national or state bank, with the approval of its regulator, to open a branch in any state if the law of the state in which the branch is located would permit the establishment of the branch if the bank were a bank chartered in that state. National banks may provide trust services in any state to the same extent as a trust company chartered by that state.
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Limits on Transactions with Affiliates
Federal law restricts the amount and the terms of both credit and non-credit transactions between a bank and its nonbank affiliates. Transactions with any single affiliate may not exceed 10% of the capital stock and surplus of the bank. For a bank, capital stock and surplus refers to Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for credit losses excluded from Tier 2 capital. The bank’s transactions with any one affiliate, and with all of its affiliates in the aggregate, are limited to 10% and 20%, respectively, of the foregoing capital. Transactions that are extensions of credit may require collateral to be held to provide added security to the bank and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates, including an expansion of what types of transactions are covered to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.
Bank Holding Companies as a Source of Strength
Federal Reserve law requires that a bank holding company serve as a source of financial and managerial strength to each bank that it controls and, under appropriate circumstances, to commit resources to support each such controlled bank. This support may be required at times when the bank holding company may not have the resources to provide the support.
Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders. Because we are a bank holding company, we (and our consolidated assets) are viewed as a source of financial and managerial strength for any controlled depository institutions, like Capital Bank.
The Dodd-Frank Act also directs federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as sources of financial strength for the institution. The term “source of financial strength” is defined under the Dodd-Frank Act as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress. The appropriate federal banking agency for such a depository institution may require reports from companies that control the insured depository institution to assess their abilities to serve as sources of strength and to enforce compliance with the source-of-strength requirements. The appropriate federal banking agency may also require a holding company to provide financial assistance to a bank with impaired capital. Under this requirement, in the future we could be required to provide financial assistance to Capital Bank should it experience financial distress. Based on our ownership of a national bank subsidiary, the OCC could assess us if the capital of Capital Bank were to become impaired. If we failed to pay the assessment within three months, the OCC could order the sale of our stock in Capital Bank to cover the deficiency.
In addition, capital loans by us to Capital Bank will be subordinate in right of payment to deposits and certain other indebtedness of Capital Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of Capital Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Depositor Preference
The FDI Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other
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general unsecured claims against the institution. If our insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company and for any assistance provided by the FDIC to an FDIC-insured depository institution that is in danger of default and that is controlled by the same bank holding company. “Default” means generally the appointment of a conservator or receiver for the institution. “In danger of default” means generally the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The cross-guarantee liability for a loss at a commonly controlled institution would be subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors or general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions).
Dividend Restrictions
The Company is a legal entity separate and distinct from each of its subsidiaries. Our ability to pay dividends and make other distributions may depend upon the receipt of dividends from our bank subsidiary and is limited by federal and state law. The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and regulatory status. The regulators are authorized, and under certain circumstances are required, to determine that the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment. For example, the FDI Act generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized.
Dividends that may be paid by a national bank without the express approval of the OCC are limited to that bank’s retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the OCC, consist of net income less dividends declared during the period. State-chartered subsidiary banks are also subject to state regulations that limit dividends. Nonbank subsidiaries are also limited by certain federal and state statutory provisions and regulations covering the amount of dividends that may be paid in any given year.
Currently, the OCC Operating Agreement prohibits Capital Bank from paying a dividend to us for three years following our acquisition of the Failed Banks and, once the three-year period has elapsed, imposes other restrictions on Capital Bank’s ability to pay dividends, including requiring prior approval from the OCC before any distribution is made.
The ability of a bank holding company to pay dividends and make other distributions can also be limited. The Federal Reserve has authority to prohibit a bank holding company from paying dividends or making other distributions. The Federal Reserve has issued a policy statement that a bank holding company should not pay cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act imposes, and Basel III (described below) once in effect will impose, additional restrictions on the ability of banking institutions to pay dividends.
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Regulatory Capital Requirements
In General
Bank regulators view capital levels as important indicators of an institution’s financial soundness. FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The final supervisory judgment on an institution’s capital adequacy is based on the regulator’s individualized assessment of numerous factors.
As a bank holding company, we are subject to various regulatory capital adequacy requirements administered by the Federal Reserve. In addition, the OCC imposes capital adequacy requirements on our subsidiary bank. The FDIC also may impose these requirements on Capital Bank and other depository institution subsidiaries that we may acquire or control in the future. The FDI Act requires that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition.
Quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. There are three categories of capital under the guidelines. With the implementation of the Dodd-Frank Act, certain changes have been made as to the type of capital that falls under each of these categories. For us, as a bank holding company, Tier 1 capital includes common shareholders’ equity, qualifying preferred stock and trust preferred securities issued before May 19, 2010, less goodwill and certain other deductions (including a portion of servicing assets and the unrealized net gains and losses, after taxes, on securities available for sale). Tier 2 capital includes preferred stock and trust preferred securities not qualifying as Tier 1 capital, subordinated debt, the allowance for credit losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Tier 3 capital includes certain qualifying unsecured subordinated debt. See “—Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”
Under the guidelines, capital is compared with the relative risk related to the balance sheet. To derive the risk included in the balance sheet, a risk weighting is applied to each balance sheet asset and off-balance sheet item, primarily based on the relative credit risk of the asset or counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0% and certain real estate-related loans risk-weighted at 50%. Off-balance sheet items, such as loan commitments and derivatives, are also applied a risk weight after calculating balance sheet equivalent amounts. A credit conversion factor is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivatives are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. For certain recourse obligations, direct credit substitutes, residual interests in asset securitization and other securitized transactions that expose institutions primarily to credit risk, the capital amounts and classification under the guidelines are subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Banks and bank holding companies currently are required to maintain Tier 1 capital and the sum of Tier 1 and Tier 2 capital equal to at least 6% and 10%, respectively, of their total risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) to be deemed “well capitalized.” The federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or when a bank’s particular circumstances warrant. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements in order to meet well-capitalized standards, and future regulatory change could impose higher capital standards as a routine matter.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to
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maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Also, the Federal Reserve considers a “tangible Tier 1 leverage ratio” (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or engaging in new activities. In addition, the federal bank regulatory agencies have established minimum leverage (Tier 1 capital to adjusted average total assets) guidelines for banks within their regulatory jurisdictions. These guidelines provide for a minimum leverage ratio of 5% for banks to be deemed “well capitalized.” Our regulatory capital ratios and those of Capital Bank are in excess of the levels established for “well-capitalized” institutions.
As an additional means to identify problems in the financial management of depository institutions, the FDI Act requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an institution pose to the institution and the public and private stakeholders, including risks arising from certain enumerated activities. The federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future pursuant to the Dodd-Frank Act, the implementation of Basel III (described below) or other regulatory or supervisory changes. We cannot be certain what the impact of changes to existing capital guidelines will have on us or Capital Bank.
Basel I, Basel II and Basel III Accords
The current risk-based capital guidelines that apply to us and our subsidiary bank are based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the “Basel Committee”), a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies began to phase in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or “core” international banks and bank holding companies (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or “core” international bank in the foreseeable future, Basel II will not apply to us.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase in arrangements for a strengthened set of capital requirements, known as Basel III. While the timing and scope of any U.S. implementation of Basel III remains uncertain, the following items provide a brief description of the relevant provisions of Basel III and their potential impact on our capital levels if applied to us and Capital Bank.
New Minimum Capital Requirements.Subject to implementation by the U.S. federal banking agencies, Basel III would be expected, among other things, to increase required capital ratios of banking institutions to which it applies, as follows:
• | Minimum Common Equity.The minimum requirement for common equity, the highest form of loss absorbing capital, would be raised from the current 2.0% level, before the application of regulatory adjustments, to 3.5% as of January 11, 2013 and 4.5% by January 1, 2015 after the application of stricter adjustments. The “capital conversion buffer,” discussed below, would cause required total common equity to rise to 7.0% by January 1, 2019 (4.5% attributable to the minimum required common equity plus 2.5% attributable to the “capital conservation buffer”). |
• | Minimum Tier 1 Capital.The minimum Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, would increase from 4.0% to 4.5% by January 1, 2013, and 6.0% by January 1, 2015. Total Tier 1 capital would rise to 8.5% by January 1, 2019 (6.0% attributable to the minimum required Tier 1 capital ratio plus 2.5% attributable to the capital conservation buffer, as discussed below). |
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• | Minimum Total Capital.The minimum Total Capital (Tier 1 and Tier 2 capital) requirement would increase to 8.0% (10.5% by January 1, 2019, including the capital conservation buffer). |
• | Capital Conservation Buffer.The capital conservation buffer would add 2.5% to the regulatory minimum common equity requirement (adding 0.625% during each of the three years beginning in January 1, 2016 through January 1, 2019). The buffer would be added to common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. It is expected that, while banks would be allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints that would be applied to earnings distributions. |
• | Countercyclical Buffer.Basel III expects regulators to require, as appropriate to national circumstances, a “countercyclical buffer” within a range of 0% to 2.5% of common equity or other fully loss-absorbing capital. The purpose of the countercyclical buffer is to achieve the broader goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, it is expected that this buffer would only be applied when there is excess credit growth that is resulting in a perceived system-wide buildup of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the capital conservation buffer range. |
• | Regulatory Deductions from Common Equity.The regulatory adjustments (i.e., deductions and prudential filters), including minority interests in financial institutions, mortgage-servicing rights, and deferred tax assets from timing differences, would be deducted in increasing percentages beginning January 1, 2014, and would be fully deducted from common equity by January 1, 2018. Certain instruments that no longer qualify as Tier 1 capital, such as trust preferred securities, also would be subject to phaseout over a 10-year period beginning January 1, 2013. |
• | Non-Risk-Based Leverage Ratios.These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described above. In July 2010, the Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3.0% during the parallel run period. Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to adopting the 3.0% leverage ratio on January 1, 2018, based on appropriate review and calibration. |
Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on a measure of total exposure that includes balance sheet assets, net of provisions and valuation adjustments, as well as potential future exposure to off-balance sheet items, such as derivatives. Basel III also includes both short- and long-term liquidity standards. The phase-in of the new rules is to commence on January 1, 2013, with the phase-in of the capital conservation buffer commencing on January 1, 2016 and the rules to be fully phased in by January 1, 2019.
In November 2010, Basel III was endorsed by the Group of Twenty (G-20) Finance Ministers and Central Bank Governors and will be subject to individual adoption by member nations, including the United States. On December 16, 2010, the Basel Committee issued the text of the Basel III rules, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Basel Committee and endorsed by the G-20 leaders. In June 2012, federal banking agencies released proposed changes to the current capital adequacy standards in light of Basel III and capital changes required by the Dodd-Frank Act. If finalized as proposed in the U.S., Basel III would lead to higher capital requirements and more restrictive leverage and liquidity ratios. The ultimate impact of the new capital and liquidity standards on us and our bank subsidiary is currently being reviewed and will depend on a number of factors, including the rulemaking and implementation by the U.S. banking regulators.
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Prompt Corrective Action
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various capital measures and certain other factors, as established by regulation.
Under this system, the federal banking regulators have established five capital categories, well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The federal banking regulators have also specified by regulation the relevant capital levels for each of the other categories. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
Federal Reserve Board regulations require that each bank maintain reserve balances on deposits with the Federal Reserve Bank.
Reserve Requirements
Pursuant to regulations of the Federal Reserve, all banks are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank.
Deposit Insurance Assessments
FDIC-insured banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. The FDIC recently raised assessment rates to increase funding for the DIF, which is currently underfunded.
The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. In addition, federal deposit insurance for the full net amount of deposits in non-interest-bearing transaction accounts was extended to January 1, 2013 for all insured banks.
The Dodd-Frank Act changes the deposit insurance assessment framework, primarily by basing assessments on an institution’s total assets less tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than domestic deposits, which is expected to shift a greater portion of the aggregate assessments to large banks, as described in detail below. The Dodd-Frank Act also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.
The Dodd-Frank Act requires the DIF to reach a reserve ratio of 1.35% of insured deposits by September 30, 2020. On December 20, 2010, the FDIC raised the minimum designated reserve ratio of DIF to 2%. The ratio is higher than the minimum reserve ratio of 1.35% as set by the Dodd-Frank Act. Under the Dodd-Frank Act, the FDIC is required to offset the effect of the higher reserve ratio on insured depository institutions with consolidated assets of less than $10 billion.
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On February 7, 2011, the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The final rule, mandated by the Dodd-Frank Act, changes the deposit insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity. Because the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the final rule’s assessment rates are lower than the current rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. In addition, the final rule adopts a “scorecard” assessment scheme for larger banks and suspends dividend payments if the DIF reserve ratio exceeds 1.5% but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. The final rule also determines how the effect of the higher reserve ratio will be offset for institutions with less than $10 billion of consolidated assets.
Continued action by the FDIC to replenish the DIF as well as changes contained in the Dodd-Frank Act may result in higher assessment rates. Capital Bank may be able to pass part or all of this cost on to its customers, including in the form of lower interest rates on deposits, or fees to some depositors, depending on market conditions.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking business we invest in or acquire were to be terminated, that would have a material adverse effect on that banking business and potentially on the Company as a whole.
Permitted Activities and Investments by Bank Holding Companies
The BHCA generally prohibits a bank holding company from engaging in activities other than banking or managing or controlling banks except for activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (which we refer to as the “GLB Act”) expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities activities. We have not yet determined whether it would be appropriate or advisable in the future to become a financial holding company.
Privacy Provisions of the GLB Act and Restrictions on Cross-Selling
Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act, which have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different companies that we own or may come to own for the purpose of cross-selling products and services among companies we own. A number of states have adopted their own statutes concerning financial privacy and requiring notification of security breaches.
Anti-Money Laundering Requirements
Under federal law, including the Bank Secrecy Act, the PATRIOT Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act, certain types of financial institutions, including insured
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depository institutions, must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Among other things, these laws are intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
The OFAC is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If we or Capital Bank find a name on any transaction, account or wire transfer that is on an OFAC list, we or Capital Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.
Consumer Laws and Regulations
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLB Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement Procedures Act.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
The Dodd-Frank Act creates the CFPB, a new independent bureau that will have broad authority to regulate, supervise and enforce retail financial services activities of banks and various non-bank providers. The CFPB will have authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, banks with assets of $10 billion or less, such as Capital Bank, will be subject to regulation of the CFPB but will continue to be examined for consumer compliance by their bank regulator. However, given our growth and bank acquisition strategy, if our total assets were to exceed $10 billion, then we will become subject to the CFPB’s exclusive examination authority and primary enforcement authority.
The Community Reinvestment Act
The CRA is intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine banks and assign each bank a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report. The CRA then requires bank regulators to take into account the bank’s record in
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meeting the needs of its service area when considering an application by a bank to establish a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.
When we apply for regulatory approval to make certain investments, the regulators will consider the CRA record of the target institution and our depository institution subsidiary. An unsatisfactory CRA record could substantially delay approval or result in denial of an application.
Changes in Laws, Regulations or Policies and the Dodd-Frank Act
Various federal, state and local legislators introduce from time to time measures or take actions that would modify the regulatory requirements or the examination or supervision of banks or bank holding companies. Such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and other financial institutions, all of which could affect our investment opportunities and our assessment of how attractive such opportunities may be. We cannot predict whether potential legislation will be enacted and, if enacted, the effect that it or any implementing regulations would have on our business, results of operations or financial condition.
The Dodd-Frank Act, which was signed into law on July 21, 2010, will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, increased capital, leverage and liquidity requirements and numerous other provisions designed to improve supervision and oversight of the financial services sector. The following items briefly describe some of the key provisions of the Dodd-Frank Act:
• | Source of Strength. The Dodd-Frank Act requires all companies that directly or indirectly control a depository institution to serve as a source of strength for the institution. |
• | Limitation on Federal Preemption. The Dodd-Frank Act may limit the ability of national banks to rely upon federal preemption of state consumer financial laws. Under the Dodd-Frank Act, the OCC will have the ability to make preemption determinations only if certain conditions are met and on a case-by-case basis. The Dodd-Frank Act also eliminates the extension of preemption to operating subsidiaries of national banks. However, the Dodd-Frank Act preserves certain preemption standards articulated by the U.S. Supreme Court and existing interpretations thereunder, as well as express preemption provisions in other federal laws (such as the Equal Credit Opportunity Act and the Truth in Lending Act) that specifically address the application of state law in relation to that federal law. The Dodd-Frank Act authorizes state enforcement authorities to bring lawsuits under state law against national banks and authorizes suits by state attorney generals against national banks to enforce rules issued by the CFPB. With this broad grant of enforcement authority to states, institutions, including national banks, could be subject to varying and potentially conflicting interpretations of federal law by various state attorney generals, state regulators and the courts. |
• | Mortgage Loan Origination and Risk Retention. The Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks, in an effort to require steps to verify a borrower’s ability to repay. The Dodd-Frank Act also generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgages and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation. |
• | Consumer Financial Protection Bureau. The Dodd-Frank Act creates the CFPB within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank customers. For banking organizations with assets of more than $10 billion, the CFPB has exclusive rulemaking and examination and primary enforcement authority |
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under federal consumer financial laws. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB. |
• | Deposit Insurance. The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act also provides unlimited deposit coverage for noninterest-bearing transaction accounts until January 1, 2013. Amendments to the FDI Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under these amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. |
• | Transactions with Affiliates and Insiders. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors. |
• | Corporate Governance. The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials. |
• | Interchange Fees. Under the so-called Durbin Amendment of the Dodd-Frank Act, interchange transaction fees that a card issuer receives or charges for an electronic debit transaction must be “reasonable and proportional” to the cost incurred by the card issuer in processing the transaction. Banks that have less than $10 billion in assets are exempt from the interchange transaction fee limitation. On June 29, 2011, the Federal Reserve issued a final rule establishing standards for determining whether the amount of any interchange transaction fee is reasonable and proportional, taking into consideration fraud prevention costs, and prescribing regulations to ensure that network fees are not used, directly or indirectly, to compensate card issuers with respect to electronic debit transactions or to circumvent or evade the restrictions that interchange transaction fees be reasonable and proportional. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit will be the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction. The Federal Board also approved on June 29, 2011 an interim final rule that allows for an upward adjustment of no more than $0.01 to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards set out in the interim final rule. The Dodd-Frank Act also bans card issuers and payment card networks from entering into exclusivity arrangements for debit card processing and prohibits card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over networks of their choice. Finally, merchants will be able to set |
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minimum dollar amounts for the use of a credit card and provide discounts to consumers who pay with various payment methods, such as cash. |
Many of the requirements of the Dodd-Frank Act will be implemented over time, and most will be subject to regulations implemented over the course of several years. Given the uncertainty surrounding the manner in which many of the Dodd-Frank Act’s provisions will be implemented by the various regulatory agencies and through regulations, the full extent of the impact on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.
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INFORMATION ABOUT CAPITAL BANK CORP.
Capital Bank Corp. is a bank holding company headquartered in Raleigh, North Carolina. Prior to June 30, 2011, Capital Bank Corp. conducted its business primarily through its wholly-owned subsidiary, Capital Bank (which we refer to as “Old Capital Bank”).
Effective June 30, 2011, Old Capital Bank merged with and into NAFH National Bank, a national banking association and subsidiary of CBF and TIB Financial, itself a majority-owned subsidiary of CBF, with NAFH National Bank as the surviving entity in an all-stock transaction. In connection with the merger, NAFH National Bank changed its name to Capital Bank, N.A. CBF is the owner of approximately 83% of the common stock of Capital Bank Corp. In addition, five of the seven directors of Capital Bank Corp., and Capital Bank Corp.’s Chief Executive Officer, Chief Financial Officer and Chief Risk Officer are affiliated with CBF.
Capital Bank Corp.’s assets consist primarily of approximately 26% of the capital stock of Capital Bank (formerly known as NAFH National Bank). Accordingly, CBF and Capital Bank Corp. own different percentage interests in substantially the same business. The business of Capital Bank is described in this document under the heading “Information About CBF.”
Prior to the merger of Old Capital Bank with NAFH National Bank, Capital Bank Corp. had a total of 32 full service banking offices in North Carolina.
Capital Bank Corp.’s properties are controlled directly or indirectly by CBF and are described in this document under the heading “Information About CBF.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations for Capital Bank Corp. with respect to the year ended December 31, 2011 and related periods is attached to this document as Appendix D.
Management’s discussion and analysis of financial condition and results of operations for Capital Bank Corp. with respect to the six months ended June 30, 2012 and related periods is attached as Appendix E.
There are no material pending legal proceedings to which Capital Bank Corp. or its subsidiaries is a party or to which any of Capital Bank Corp. or its subsidiaries’ property is subject. In addition, Capital Bank Corp. is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on Capital Bank Corp.’s business, operating results or condition.
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THE CAPITAL BANK CORP. SPECIAL MEETING
The special meeting of Capital Bank Corp. shareholders is scheduled to be held at 8:30 a.m., local time, on September 24, 2012 at Capital Bank Financial Corp., located at 4725 Piedmont Row Drive, Suite 110, Charlotte, NC 28210.
Purpose of the Capital Bank Corp. Special Meeting
The special meeting of Capital Bank Corp. shareholders is being held:
• | to consider and vote upon a proposal to approve the plan of merger contained in the merger agreement, a copy of which is attached as Appendix A to this document (which we refer to as the “merger proposal”); |
• | to approve, on a (non-binding) advisory basis, the compensation to be paid to Capital Bank Corp.’s named executive officers that is based on or otherwise relates to the merger, discussed under the section entitled “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger—Potential Payments Upon a Termination of Employment in Connection with a Change of Control” beginning on page 54 (which we refer to as the “named executive officer merger-related compensation proposal”); and |
• | to transact any other business that may properly be brought before the Capital Bank Corp. special meeting or any adjournments or postponements thereof. |
Recommendation of the Board of Directors of Capital Bank Corp.
The Capital Bank Corp. Board of Directors has determined that entering into the merger agreement was in the best interests of, and advisable for, Capital Bank Corp. and its shareholders.
The Capital Bank Corp. Board of Directors unanimously recommends that you vote “FOR” the merger proposal and “FOR” the named executive officer merger-related compensation proposal.
The approval of the merger proposal requires the affirmative vote of holders of a majority of the outstanding shares of Capital Bank Corp. common stock entitled to vote on the proposal. The named executive officer merger-related compensation proposal requires the affirmative vote of holders of a majority of the outstanding shares of Capital Bank Corp. common stock entitled to vote on the proposal present or represented by proxy at the special meeting.
You may vote shares by proxy or in person using one of the following methods:
• | Voting by Telephone. You may vote using the directions on your proxy card by calling the toll-free telephone number printed on the card. The deadline for voting by telephone is September 24, 2012, at 12:01 a.m., Eastern Time. If you received a proxy card and vote by telephone, you need not return your proxy card; |
• | Voting by Internet. You may vote over the Internet using the directions on your proxy card by accessing the website address printed on the card. The deadline for voting over the Internet is September 24, 2012, at 12:01 a.m., Eastern Time. If you received a proxy card and vote over the Internet, you need not return your proxy card. |
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• | Voting by Proxy Card. You may vote by completing and returning your signed proxy card. To vote using your proxy card, please mark, date and sign the card and return it by mail in the accompanying postage-paid envelope. You should mail your signed proxy card sufficiently in advance for it to be received by September 21, 2012. |
• | Voting in Person. You may vote in person at the special meeting if you are the record owner of the shares to be voted. You can also vote in person at the special meeting if you present a properly signed proxy that authorizes you to vote shares on behalf of the record owner. |
The Capital Bank Corp. Board of Directors has fixed the close of business on August 28, 2012, as the record date for the determination of shareholders entitled to receive notice of and to vote at the special meeting and all adjournments or postponements of the special meeting. As of the close of business on August 28, 2012, Capital Bank Corp. had outstanding 85,802,164 shares of its common stock, the holders of which, or their proxies, are entitled to one vote per share. The presence at the special meeting, in person or by proxy, of the holders of a majority of the shares entitled to vote at the special meeting will constitute a quorum.
CBF beneficially owns Capital Bank Corp. common stock entitling it to approximately 83% of the voting rights of Capital Bank Corp. CBF has indicated that it will vote in favor of the merger proposal and in favor of the named executive officer merger-related compensation proposal.
As of the record date for the Capital Bank Corp. special meeting, the directors and executive officers of Capital Bank Corp. as a group owned and were entitled to vote 71,767,129 shares of the common stock of Capital Bank Corp., or approximately 83.65% of the outstanding shares of the common stock of Capital Bank Corp. on that date. Capital Bank Corp. currently expects that its directors and executive officers will vote their shares in favor of the merger proposal and in favor of the named executive officer merger-related compensation proposal.
A quorum is necessary to hold a valid special meeting of Capital Bank Corp. shareholders. A quorum will be present at the Capital Bank Corp. special meeting if the holders of a majority of the outstanding shares of the common stock of Capital Bank Corp. entitled to vote on the record date are present, in person or by proxy. If a quorum is not present at the Capital Bank Corp. special meeting, Capital Bank Corp. expects the presiding officer to adjourn the special meeting in order to solicit additional proxies.
How You Can Vote Shares Held by a Broker, Bank or Other Nominee
If your shares are held in the name of a broker, bank or other nominee, you will receive instructions from the holder of record. You must follow the instructions of the holder of record in order for your shares to be voted. If your shares are not registered in your own name and you plan to vote your shares in person at the special meeting, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the special meeting in order to vote.
For shares held in “street name” through a broker, bank or other nominee, the broker, bank or nominee may not be permitted to exercise voting discretion with respect to the matters to be acted upon. Thus, if shareholders do not give their broker, bank or nominee specific instructions, their shares may not be voted on those matters and will not be counted in determining the number of shares necessary for approval.
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If you vote by proxy, the proxy holders will vote your shares in the manner you indicate. You may specify whether your shares should be voted:
• | for or against the proposal to adopt the merger agreement; and |
• | for or against the named executive officer merger-related compensation proposal. |
If the proxy card is signed and returned, but voting directions are not made, the proxy will be voted in favor of the proposals set forth in the accompanying “Notice of Special Meeting of Shareholders” and in such manner as the proxy holders named on the enclosed proxy card in their discretion determine upon such other business as may properly come before the special meeting or any adjournment or postponement thereof.
How You Can Revoke Your Proxy and Change Your Vote
Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted by:
• | attending the special meeting and voting in person; |
• | delivering a written revocation to Capital Bank Corp.’s Corporate Secretary; |
• | timely submitting another signed proxy card bearing a later date; or |
• | timely voting by telephone or over the Internet as described above. |
Your most current proxy card or telephone or Internet proxy is the one that will be counted.
Capital Bank Corp. will pay all expenses incurred in connection with this solicitation, including postage, printing, handling and the actual expenses incurred by custodians, nominees and fiduciaries in forwarding proxy materials to beneficial owners. In addition to solicitation by mail, certain of Capital Bank Corp.’s officers, directors and regular employees, who will receive no additional compensation for their services, may solicit proxies by telephone, personal communication or other means. Capital Bank Corp. has also retained Registrar and Transfer Company to aid in the search for shareholders and the delivery of proxy materials, maintain the Internet website where Capital Bank Corp. will make its proxy card available for voting in accordance with SEC e-proxy rules, establish and operate an online and telephonic voting platform and process and tabulate all votes. Capital Bank Corp. estimates that the aggregate fees, excluding costs for postage and envelopes, to be paid to Registrar and Transfer Company will be $8,000. In addition, as part of the services provided to Capital Bank Corp. as its transfer agent, Registrar and Transfer Company will assist Capital Bank Corp. in identifying recordholders. Capital Bank Corp. will also reimburse brokerage firms and other persons representing beneficial owners of shares for reasonable expenses incurred in forwarding proxy soliciting materials to the beneficial owners.
Directions to the Capital Bank Corp. Special Meeting at Capital Bank Headquarters
Requests for directions to Capital Bank Plaza should be directed to Nancy A. Snow, 333 Fayetteville Street, Suite 700, Raleigh, North Carolina 27601 (telephone number: 919-645-6312).
ALL SHAREHOLDERS ARE ENCOURAGED TO SIGN, DATE AND RETURN THEIR PROXY SUBMITTED WITH THIS PROXY STATEMENT AS SOON AS POSSIBLE IN THE ENVELOPE PROVIDED. IF A SHAREHOLDER ATTENDS THE SPECIAL MEETING, HE OR SHE MAY REVOKE HIS OR HER PROXY AND VOTE IN PERSON.
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PROPOSALS SUBMITTED TO CAPITAL BANK CORP. SHAREHOLDERS
(Item 1 on the Capital Bank Corp. Proxy Card)
As discussed throughout this document, Capital Bank Corp. is asking its shareholders to consider and vote on a proposal to approve the plan of merger contained in the merger agreement and thereby approve, among other things, the merger. Holders of Capital Bank Corp. common stock should read this document carefully in its entirety, including the appendices, for more detailed information concerning the merger agreement and the merger. In particular, holders of Capital Bank Corp. common stock are directed to the merger agreement, a copy of which is attached as Appendix A to this document.
The affirmative vote of the holders of at least a majority of outstanding shares of Capital Bank Corp. common stock entitled to vote is required for Capital Bank Corp. to complete the merger.
THE CAPITAL BANK CORP. BOARD OF DIRECTORS RECOMMENDS A VOTE“FOR” THE MERGER PROPOSAL (ITEM 1). SEE “THE MERGER—BACKGROUND AND REASONS FOR THE MERGER” BEGINNING ON PAGE 50. For a discussion of interests of Capital Bank Corp.’s directors and executive officers in the merger that may be different from, or in addition to, the interests of Capital Bank Corp.’s shareholders generally, see “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger,” beginning on page 54.
Named Executive Officer Merger-Related Compensation Proposal
(Item 2 on the Capital Bank Corp. Proxy Card)
As required by Section 14A of the Exchange Act and the applicable SEC rules issued thereunder, which were enacted pursuant to the Dodd-Frank Act, Capital Bank Corp. is required to submit a proposal to Capital Bank Corp. shareholders for a (non-binding) advisory vote to approve the payment of certain compensation to the named executive officers of Capital Bank Corp. that is based on or otherwise relates to the merger. This proposal, commonly known as “say-on-golden parachute,” and which we refer to as the named executive officer merger-related compensation proposal, gives Capital Bank Corp. shareholders the opportunity to express their views on the compensation that Capital Bank Corp.’s named executive officers may be entitled to receive that is based on or otherwise relates to the merger.
The compensation that Capital Bank Corp.’s named executive officers may be entitled to receive in the event of a qualifying termination of employment following the merger is summarized in the table entitled “Golden Parachute Compensation,” which is included in “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger—Potential Payments upon a Termination In Connection with a Change in Control,” beginning on page 54. This summary includes all compensation and benefits that may be paid or provided following the merger.
The Capital Bank Corp. board of directors unanimously recommends that the shareholders of Capital Bank Corp. approve the following resolution:
“RESOLVED, that the shareholders of Capital Bank Corporation approve, on an advisory basis, the compensation to be paid to its named executive officers that is based on or otherwise relates to the merger as disclosed in the Golden Parachute Compensation Table and the related narrative disclosures.”
Approval of this proposal is not a condition to completion of the merger, and as an advisory vote, the result will not be binding on Capital Bank Corp. or on CBF, or the board of directors or the compensation committees of Capital Bank Corp. or CBF. Therefore, if the merger is approved by the shareholders of Capital Bank Corp.
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and completed, the compensation based on or otherwise relating to the merger, if any, will be paid to the Capital Bank Corp. named executive officers regardless of whether the shareholders of Capital Bank Corp. approve this proposal. Proxies submitted without direction pursuant to this solicitation will be voted “FOR” the approval of the compensation to be paid to the Capital Bank Corp.’s named executive officers that is based on or otherwise relates to the merger, as disclosed in this document.
THE CAPITAL BANK CORP. BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL, ON AN ADVISORY BASIS, OF THE NAMED EXECUTIVE OFFICER MERGER-RELATED COMPENSATION PROPOSAL (ITEM 2). For a discussion of interests of Capital Bank Corp.’s directors and executive officers in the merger that may be different from, or in addition to, the interests of Capital Bank Corp.’s shareholders generally, see “The Merger—Interests of Capital Bank Corp.’s Directors and Executive Officers in the Merger,” beginning on page 54.
Other Business and Discretionary Authority to Vote
As of the date hereof, Capital Bank Corp. knows of no other business that will be presented for consideration at the special meeting. If any other business is presented before the meeting, the proxy agents named in the accompanying proxy card will vote in accordance with their judgment.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of June 30, 2012 and the unaudited pro forma condensed combined statement of income for the six months ended June 30, 2012 and for the year ended December 31, 2011 have been presented to give effect to and show the pro forma impact on our historical financial statements of (1) the completion of our acquisition of Southern Community Financial, and (2) the issuance of approximately 3,709,832 shares of Class A common stock to the minority stockholders of TIB Financial, Capital Bank Corp. and Green Bankshares, each of which will be merged with us in the reorganization.
On January 28, 2011 and September 7, 2011 we consummated controlling investments in Capital Bank Corp. and Green Bankshares, respectively. The results of operations of Capital Bank Corp. and Green Bankshares have been reflected in our consolidated financial statements from their respective dates of consummation and, under the acquisition method of accounting, the assets and liabilities of each of them have been reflected in our consolidated financial statements at their respective estimated fair values as of their respective dates of consummation.
On March 26, 2012, we agreed to acquire all of the common equity interest in Southern Community Financial. Our acquisition of Southern Community Financial is subject to Southern Community Financial stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the second half of 2012.
Our unaudited pro forma condensed combined balance sheet as of June 30, 2012 presents our consolidated financial position giving pro forma effect to the following transactions as if they had occurred as of June 30, 2012:
• | the completion of our acquisition of Southern Community Financial, and the related repurchase of its TARP preferred stock that is expected to occur at the time of the acquisition; and |
• | the issuance of approximately 3,709,832 shares of Class A common stock to the minority stockholders of our majority-held bank holding company subsidiaries, which will be merged with us in the reorganization. |
Our unaudited pro forma condensed combined statement of income for the six months ended June 30, 2012 presents our consolidated results of operations giving pro forma effect to the following transactions as if they had occurred as of January 1, 2011:
• | the completion of our acquisition of Southern Community Financial, and the related repurchase of its TARP preferred stock that is expected to occur at the time of the acquisition; and |
• | the issuance of approximately 3,709,832 shares of Class A common stock to the minority stockholders of our majority-held bank holding company subsidiaries, which will be merged with us in the reorganization. |
Our unaudited pro forma condensed combined statement of income for the year ended December 31, 2011 presents our consolidated results of operations giving pro forma effect to the following transactions as if they had occurred as of January 1, 2011:
• | the completion of our acquisition of Southern Community Financial, and the related repurchase of its TARP preferred stock that is expected to occur at the time of the acquisition; |
• | the completion of our investments in Capital Bank Corp. and Green Bankshares and the related repurchase of their TARP preferred stock that occurred at the time of each investment; and |
• | the issuance of approximately 3,709,832 shares of Class A common stock to the minority stockholders of our majority-held bank holding company subsidiaries, which will be merged with us in the reorganization. |
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The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with:
• | our historical unaudited financial statements as of and for the six months ended June 30, 2012. |
• | our historical audited financial statements as of and for the year ended December 31, 2011; |
• | Capital Bank Corp.’s historical audited financial statements as of January 28, 2011 and for the period January 1, 2011 to January 28, 2011; |
• | Capital Bank Corp.’s historical audited financial statements as of December 31, 2011 and for the period January 29, 2011 to December 31, 2011; |
• | Green Bankshares’ historical audited financial statements for the period January 1, 2011 to September 7, 2011; |
• | Green Bankshares’ historical audited financial statements as of December 31, 2011 and for the period September 8, 2011 to December 31, 2011; |
• | Southern Community Financial’s historical unaudited financial statements as of and for the six months ended June 30, 2012; and |
• | Southern Community Financial’s historical audited financial statements as of and for the year ended December 31, 2011. |
The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on our historical financial information. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of each period presented. The adjustments included in these unaudited pro forma condensed financial statements are preliminary and may be revised. The unaudited pro forma condensed combined financial information also does not consider any potential impacts of current market conditions on revenues, potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Further, the preliminary allocation of purchase price reflected in the unaudited pro forma condensed combined financial information from the Southern Community Financial acquisition is subject to adjustment and may vary from the final purchase price allocation that will be recorded prior to the end of the measurement period. Certain reclassifications have been made to the historical financial statements of TIB Financial, Capital Bank Corp., Green Bankshares, and Southern Community Financial to conform to the presentation in CBF’s financial statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of June 30, 2012
Capital Bank Financial Corp. | Southern Community Financial Corporation | Capital Bank Financial Corp. | ||||||||||||||||||
(Dollars and shares in thousands, except per share | June 30, 2012 (As Reported) | June 30, 2012 (As Reported) | Adjustments for Investment and TARP Repurchase(2) | Adjustments for the Reorganization (Pro Forma) | June 30, 2012 (Pro Forma) | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 229,020 | $ | 126,928 | $ | (99,068 | )(1)(3) | $ | – | $ | 256,880 | |||||||||
Investment securities | 1,162,729 | 312,953 | 2,049 | (4) | – | 1,477,731 | ||||||||||||||
Loans held for sale | 12,451 | 4,032 | – | – | 16,483 | |||||||||||||||
Loans, net of deferred costs and fees | 4,178,564 | 913,591 | (66,420 | )(5) | – | 5,025,735 | ||||||||||||||
Less: Allowance for loan losses | 45,472 | 22,954 | (22,954 | )(5) | – | 45,472 | ||||||||||||||
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| |||||||||||
Loans, net | 4,133,092 | 890,637 | (43,466 | )(5) | – | 4,980,263 | ||||||||||||||
Other real estate owned | 158,235 | 19,873 | (4,000 | )(6) | – | 174,108 | ||||||||||||||
FDIC indemnification asset | 60,750 | – | – | – | 60,750 | |||||||||||||||
Receivable from FDIC | 9,699 | – | – | – | 9,699 | |||||||||||||||
Goodwill and other intangible assets, net | 115,960 | – | 26,201 | (7) | – | 142,161 | ||||||||||||||
Other intangible assets, net | 24,407 | 344 | 4,656 | (7) | – | 29,407 | ||||||||||||||
Other assets | 397,541 | 92,194 | 25,789 | (8) | – | 515,524 | ||||||||||||||
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| |||||||||||
Total assets | $ | 6,303,884 | $ | 1,446,961 | $ | (87,839 | ) | $ | – | $ | 7,663,006 | |||||||||
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| |||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Deposits | $ | 4,980,228 | $ | 1,126,701 | $ | 8,000 | (9) | $ | – | $ | 6,114,929 | |||||||||
Advances from FHLB | 67,520 | 76,549 | 1,400 | (10) | – | 145,469 | ||||||||||||||
Borrowings | 190,254 | 130,145 | 3,100 | (11) | – | 323,499 | ||||||||||||||
Other liabilities | 48,199 | 13,227 | – | (12) | – | 61,426 | ||||||||||||||
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| |||||||||||
Total liabilities | 5,286,201 | 1,346,622 | 12,500 | – | 6,645,323 | |||||||||||||||
Preferred stock | – | 42,091 | (42,091 | ) | – | – | ||||||||||||||
Common stock—Class A | 203 | – | – | 37 | (14) | 240 | ||||||||||||||
Common stock—Class B | 261 | – | – | – | 261 | |||||||||||||||
Common stock—Southern Community Financial | – | 119,534 | (119,534 | )(13) | – | – | ||||||||||||||
Additional paid-in capital | 901,296 | – | – | (13) | 76,573 | (14) | 977,869 | |||||||||||||
Retained earnings (accumulated deficit) | 28,914 | (62,740) | 62,740 | (13) | – | 28,914 | ||||||||||||||
Accumulated other comprehensive income | 10,399 | 1,454 | (1,454 | )(13) | – | 10,399 | ||||||||||||||
Noncontrolling interest | 76,610 | – | – | (76,610 | )(14) | – | ||||||||||||||
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Total shareholders’ equity | $ | 1,017,683 | $ | 100,339 | $ | (100,339 | ) | $ | – | $ | 1,017,683 | |||||||||
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| |||||||||||
Total liabilities and shareholders’ equity | $ | 6,303,884 | $ | 1,446,961 | $ | (87,839 | ) | $ | – | $ | 7,663,006 | |||||||||
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(1) | Adjustments in this column reflect payment to Southern Community Financial common shareholders of the $52.4 million purchase price and the total liquidation value of the Series A Preferred Stock plus deferred dividends of $46.7 million. Subsequent to closing we will own 100% of Southern Community Financial’s common stock. |
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(2) | Adjustments in this column reflect acquisition method accounting and estimated fair value adjustments expected to result from our acquisition of Southern Community Financial as well as the related repurchase of its TARP preferred stock. The following table summarizes the preliminary purchase price allocation to the estimated fair value of assets and liabilities of Southern Community Financial as of June 30, 2012: |
(In Thousands) | ||||
Fair value of assets acquired: | ||||
Cash and cash equivalents | $ | 126,928 | ||
Investment securities | 315,002 | |||
Loans held for sale | 4,032 | |||
Loans | 847,171 | |||
Other real estate owned | 15,873 | |||
Goodwill and other intangible assets | 31,201 | |||
Other assets | 117,983 | |||
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| |||
Total assets acquired | $ | 1,458,190 | ||
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| |||
Fair value of liabilities assumed: | ||||
Deposits | 1,134,701 | |||
Advances from FHLB | 77,949 | |||
Borrowings | 133,245 | |||
Other liabilities | 13,227 | |||
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Total liabilities assumed | $ | 1,359,122 | ||
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Net assets acquired | $ | 99,068 | ||
Less: Non-controlling interest | — | |||
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Purchase price | $ | 99,068 | ||
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In determining the purchase price, we utilized the negotiated investment price of $3.11 per share and multiplied this stock price by the 16,854,775 outstanding common shares as of June 30, 2012 and added the total liquidation value of the Series A Preferred stock including deferred dividends of $46.7 million.
We plan to perform our valuation of the balance sheet as of the closing date of the Southern Community Financial investment and expect to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the closing date of the Southern Community Financial investment. The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to us as of June 30, 2012 and may differ significantly from the fair value adjustment that will be recorded as of the closing date of the Southern Community Financial investment.
(3) | Cash and cash equivalents approximated fair value and did not require a fair value adjustment. |
(4) | Available for sale investment securities were reported at fair value at June 30, 2012. Held to maturity investment securities were reported at amortized cost. The fair values of investment securities are primarily based on values obtained from third parties’ pricing models which are based on recent trading activity for the same or similar securities. Thus, we determined a fair value adjustment of approximately $2.0 million was necessary for held to maturity securities as of June 30, 2012. |
(5) | Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates as of June 30, 2012, we estimated a total loan fair value discount of $66.4 million. Additionally, since all loans were adjusted to estimated fair value, the historical allowance for loan losses of $23.0 million was eliminated, resulting in a net loan adjustment of $43.5 million. |
We expect a significant portion of these acquired loans to be classified as purchased credit-impaired at acquisition, which means there is evidence of credit deterioration since origination and it is probable that we will not collect all contractually required principal and interest payments. The following table reconciles the estimated contractual receivable to the estimated carrying amount of loans acquired in the Southern Community transaction.
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(In thousands) | ||||
Contractually required payments | $ | 1,059,295 | ||
Nonaccretable difference | 93,520 | |||
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| |||
Cash flows expected to be collected at acquisition | 965,775 | |||
Accretable yield | 118,604 | |||
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| |||
Fair value of acquired loans at acquisition | $ | 847,171 | ||
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(6) | Other real estate owned was reduced by $4.0 million based on our estimate of property values given current market conditions and additional discounts necessary to liquidate these properties. |
(7) | Adjustment includes goodwill of $26.2 million and a core deposit intangible (which we refer to as “CDI”) of $5.0 million, less elimination of historical CDI and other intangibles of $0.3 million. Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition is expected to be nontaxable and, as a result, there will be no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition will be deductible for tax purposes. The CDI represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on the straight line method over that period. Deposit accounts that will be evaluated for the CDI include demand deposit accounts, money market accounts and savings accounts. |
(8) | The most significant other asset impacted by the application of the acquisition method of accounting is expected to be the recognition of a net deferred tax asset of $29.8 million. The net deferred tax asset is primarily related to the recognition of anticipated differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company expects to be realizable as of the acquisition date. |
(9) | Time deposits were not included in the CDI evaluation. Instead, a separate valuation of term deposit liabilities will be conducted due to the contractual time frame associated with these liabilities. The fair value of these time deposits will be estimated by first stratifying the deposit pool by maturity and determining the contractual interest rate for each maturity period. Then cash flows will be projected by period and discounted to present value using current market interest rates. The adjustment of $8.0 million reflects an estimated time deposit premium, which means that in aggregate, current market rates are expected to be lower than contractual rates as of June 30, 2012. |
(10) | Fair values for FHLB advances were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt as of June 30, 2012 was used to discount the cash flows to the present value. The estimated fair value premium totaled $1.4 million. |
(11) | Adjustment represents an estimated $3.1 million fair value premium to borrowings, which primarily consist of subordinated debt and repurchase agreements. Fair values for other borrowings will be estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and contractual interest rates. Once the cash flows are determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. |
(12) | In connection with the acquisition of Southern Community Financial, each shareholder of Southern Community Financial as of the date immediately preceding the investment agreement will be issued one contingent value right (“CVR”) per share that entitles the holder to receive up to $1.30 in cash per CVR at the end of a five-year period provided that the credit losses from Southern Community Financial’s loan portfolio do not exceed $87.0 million. Although the Company could become obligated to make payments with respect to the CVRs issued in connection with the acquisition, the Company estimates that the CVRs to be issued in connection with the acquisition of Southern Community Financial will not have a material fair value and, accordingly, no adjustment has been recorded herein. |
(13) | Adjustments hereon represent the elimination of the historical shareholders’ equity accounts of Southern Community Financial due to the application of the acquisition method of accounting and subsequent merger with and into the Company. |
(14) | The proposed reorganization will not affect total shareholders’ equity, but it does result in the elimination of the $76.6 million non-controlling interest as of June 30, 2012, which will be reclassified to additional paid in capital at the reorganization date. |
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Six Months Ended June 30, 2012
Capital Bank Financial Corp. | Southern Community Financial Corporation | Capital Bank Financial Corp. | ||||||||||||||||||
(dollars in thousands except per share data) | Six Months Ended June 30, 2012 (As Reported) | Six Months Ended June 30, 2012 (As Reported) | Adjustments | Adjustments for the Reorganization | Six Months Ended June 30, 2012 (Pro Forma) | |||||||||||||||
Interest income: | ||||||||||||||||||||
Loans, including fees | $ | 134,610 | $ | 26,040 | $ | (8,076 | )(1) | $ | – | $ | 152,574 | |||||||||
Investment securities and other | 12,424 | 5,247 | – | – | 17,671 | |||||||||||||||
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| |||||||||||
Total interest income | 147,034 | 31,287 | (8,076 | ) | – | 170,245 | ||||||||||||||
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Interest expense: | ||||||||||||||||||||
Deposits | 15,158 | 5,189 | (2,000 | )(2) | – | 18,347 | ||||||||||||||
Borrowings and other debt | 4,679 | 4,510 | (1,018 | )(3) | – | 8,171 | ||||||||||||||
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Total interest expense | 19,837 | 9,699 | (3,018 | ) | – | 26,518 | ||||||||||||||
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| |||||||||||
Net interest income | 127,197 | 21,588 | (5,058 | ) | – | 143,727 | ||||||||||||||
Provision for loan losses | 11,984 | 5,200 | – | (4) | – | 17,184 | ||||||||||||||
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| |||||||||||
Net interest income after provision for loan losses | 115,213 | 16,388 | (5,058 | ) | – | 126,543 | ||||||||||||||
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Non-interest income: | ||||||||||||||||||||
Service charges on deposit accounts | 12,323 | 2,725 | – | – | 15,048 | |||||||||||||||
Fees on mortgage loans originated and sold | 2,308 | 629 | – | – | 2,937 | |||||||||||||||
Investment advisory and trust fees | 294 | 586 | – | – | 880 | |||||||||||||||
Accretion on FDIC indemnification asset | 158 | – | – | – | 158 | |||||||||||||||
Investment securities gains, net | 3,648 | 1,127 | – | – | 4,775 | |||||||||||||||
Loss on extinguishment of debt | (321 | ) | – | – | (321 | ) | ||||||||||||||
Other income | 8,271 | 2,263 | – | – | 10,534 | |||||||||||||||
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| |||||||||||
Total non-interest income | 26,681 | 7,330 | – | – | 34,011 | |||||||||||||||
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Non-interest expense: | ||||||||||||||||||||
Salaries and employee benefits | 55,679 | 9,333 | – | – | 65,012 | |||||||||||||||
Net occupancy and equipment expense | 21,452 | 3,302 | – | – | 24,754 | |||||||||||||||
Professional fees | 11,194 | 950 | – | – | 12,144 | |||||||||||||||
Foreclosed asset related expense | 9,357 | 1,563 | – | (5) | – | 10,920 | ||||||||||||||
Conversion expenses | 3,045 | 673 | – | – | 3,718 | |||||||||||||||
Impairment of intangible asset | – | – | – | – | – | |||||||||||||||
Other expense | 20,819 | 5,991 | 203 | (6) | – | 27,013 | ||||||||||||||
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Total non-interest expense | 121,546 | 21,812 | 203 | – | 143,561 | |||||||||||||||
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Income (loss) before income taxes | 20,348 | 1,906 | (5,261 | ) | – | 16,993 | ||||||||||||||
Income tax expense | 7,812 | – | (1,274 | )(7) | – | 6,538 | ||||||||||||||
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Net income (loss) | 12,536 | 1,906 | (3,987 | ) | – | 10,455 | ||||||||||||||
Dividends and accretion on preferred stock | – | 1,290 | (1,290 | )(8) | – | – | ||||||||||||||
Gain on retirement of preferred stock | – | – | – | – | – | |||||||||||||||
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Net income (loss) attributable to common shareholders | 12,536 | 616 | (2,697 | ) | – | 10,455 | ||||||||||||||
Net income (loss) attributable to noncontrolling interests | 1,772 | – | – | (1,772 | )(9) | – | ||||||||||||||
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Net income (loss) attributable to North American Financial Holdings, Inc. | $ | 10,764 | $ | 616 | $ | (2,697 | ) | $ | 1,772 | $ | 10,455 | |||||||||
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Earnings per share—basic | $ | 0.24 | $ | 0.21 | ||||||||||||||||
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Earnings per share—diluted | $ | 0.24 | $ | 0.21 | ||||||||||||||||
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Weighted average share—basic | 45,182,675 | 48,892,832 | (9) | |||||||||||||||||
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Weighted average share—diluted | 45,553,675 | 49,263,832 | (9) | |||||||||||||||||
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(1) | Adjustments reflect the change in loan interest income for the six months ended June 30, 2012 that would have resulted had the loans been acquired as of January 1, 2011. The change in loan interest income is due to estimated discount (premium) accretion associated with fair value adjustments to acquired loans. The discount (premium) accretion was calculated on the level yield method over the estimated lives of the acquired loan portfolios. |
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(2) | Adjustments reflect the change in interest expense for the six months ended June 30, 2012 that would have resulted had the time deposits been acquired as of January 1, 2011. The change in deposit interest expense is due to estimated premium amortization associated with fair value adjustments to acquired time deposits. The premium amortization was calculated on the level yield method over the estimated lives of the acquired time deposits. |
(3) | Adjustments reflect the change in interest expense for the six months ended June 30, 2012 that would have resulted had the borrowings and other debt been acquired as of January 1, 2011. The change in interest expense is due to estimated premium amortization/discount accretion associated with fair value adjustments to acquired borrowings and other debt, which include FHLB advances, borrowings and subordinated debt. The premium amortization/discount accretion was calculated on the level yield method over the estimated lives of the acquired borrowings and other debt instruments. |
(4) | While the recording of acquired loans at their fair value would have significantly impacted the determination of the provision for loan losses, we assumed no adjustments to the historic amount of Southern Community Financial’s provision for loan losses. If such adjustments were estimated, there could be a reduction in the historic amounts of Southern Community Financial’s provision for loan losses presented. |
(5) | A significant portion of Southern Community Financial’s foreclosed asset expense was related to write downs and realized losses on other real estate owned. While the recording of acquired other real estate owned at their fair value may have significantly impacted foreclosed asset expense as the one-year measurement period following acquisition date would have improved the underlying assumptions used in valuing these assets at acquisition, we assumed no adjustments to the historic amount of Southern Community Financial’s foreclosed asset expense. If such adjustments were estimated, there could be a reduction in the historic amounts of Southern Community Financial’s foreclosed asset expense presented. |
(6) | Adjustment reflects the difference between the estimated impact of amortization on other intangible assets recorded in acquisition accounting and actual amortization recorded during the six months ended June 30, 2012. Subsequent to the date of acquisition, any changes in the fair value of the contingent value rights (“CVRs”) issued in connection with the acquisition of Southern Community Financial will be recorded as other non-interest expense. As the Company does not expect that the CVRs will have a material value as of the acquisition date, no adjustments for changes in the fair value of the CVRs has been included herein. |
(7) | Adjustments reflect reversal of valuation allowances recorded against deferred tax assets in the six months ended June 30, 2012, as well as recognition of tax expense associated with the adjusted net income (loss) before taxes assuming an effective rate of 38%. |
(8) | Adjustments reflect elimination of dividends and accretion on preferred stock as TARP preferred stock will be repurchased concurrent with the Southern Community Financial investment. |
(9) | Adjustments reflect issuance of an estimated 3,709,832 shares of Class A common stock to existing noncontrolling stockholders and elimination of the net income (loss) attributable to noncontrolling interests due to the reorganization. |
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year Ended December 31, 2011
Capital Bank Financial Corp. | Capital Bank Corp. | Green Bankshares, Inc. | Southern Community Financial Corporation | Capital Bank Financial Corp. | ||||||||||||||||||||||||||||||||
(Dollars in thousands except per share data) | Year Ended December 31, 2011 (As Reported) | Period From January 1 to January 28, 2011 (As Reported) | Adjustments | Period from January 1 to September 7, 2011 (As Reported) | Adjustments | Year Ended December 31, 2011 (As Reported) | Adjustments | Adjustments for the Reorganization | Year Ended December 31, 2011 (Pro Forma) | |||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||||||
Loans, including fees | $ | 205,185 | $ | 5,479 | $ | 291 | (1) | $ | 65,258 | $ | (13,843 | )(1) | $ | 58,373 | $ | (16,761 | )(1) | $ | – | $ | 303,982 | |||||||||||||||
Investment securities and other | 22,727 | 476 | – | 5,922 | – | 12,363 | – | – | 41,488 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
Total interest income | 227,912 | 5,955 | 291 | 71,180 | (13,843 | ) | 70,736 | (16,761 | ) | – | 345,470 | |||||||||||||||||||||||||
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Interest expense: | ||||||||||||||||||||||||||||||||||||
Deposits | 28,704 | 1,551 | (429 | )(2) | 12,764 | (3,162 | )(2) | 12,849 | (4,000 | )(2) | – | 48,277 | ||||||||||||||||||||||||
Borrowings and other debt | 7,888 | 445 | (68 | )(3) | 5,640 | (490 | )(3) | 9,043 | (2,037 | )(3) | – | 20,421 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Total interest expense | 36,592 | 1,996 | (497 | ) | 18,404 | (3,653 | ) | 21,892 | (6,037 | ) | – | 68,697 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Net interest income | 191,320 | 3,959 | 788 | 52,776 | (10,190 | ) | 48,844 | (10,724 | ) | – | 276,773 | |||||||||||||||||||||||||
Provision for loan losses | 38,396 | 40 | – | (4) | 43,742 | – | (4) | 15,150 | – | (4) | – | 97,328 | ||||||||||||||||||||||||
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Net interest income after provision for loan losses | 152,924 | 3,919 | 788 | 9,034 | �� | (10,190 | ) | 33,694 | (10,724 | ) | – | 179,445 | ||||||||||||||||||||||||
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Non-interest income: | ||||||||||||||||||||||||||||||||||||
Service charges on deposit accounts | 13,385 | 291 | – | 16,346 | – | 5,939 | – | – | 35,961 | |||||||||||||||||||||||||||
Fees on mortgage loans originated and sold | 2,791 | 210 | – | 271 | – | 1,274 | – | – | 4,546 | |||||||||||||||||||||||||||
Investment advisory and trust fees | 1,438 | – | – | 1,457 | – | 1,008 | – | – | 3,903 | |||||||||||||||||||||||||||
Accretion on FDIC indemnification asset | 7,627 | – | – | – | – |
| – – |
| – | – | 7,627 | |||||||||||||||||||||||||
Investment securities gains, net | 5,354 | – | – | 6,324 | (6,324 | )(5) | 3,989 | (3,989 | )(5) | – | 5,354 | |||||||||||||||||||||||||
Gain on extinguishment of debt | 416 | – | – | – | – | – | – | 416 | ||||||||||||||||||||||||||||
Other income | 10,216 | 331 | – | 3,405 | – | 1,830 | – | – | 15,782 | |||||||||||||||||||||||||||
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Total non-interest income | 41,227 | 832 | – | 27,803 | (6,324 | ) | 14,040 | (3,989 | ) | – | 73,589 | |||||||||||||||||||||||||
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Non-interest expense: | ||||||||||||||||||||||||||||||||||||
Salaries and employee benefits | 81,405 | 1,977 | – | 24,018 | – | 18,308 | – | – | 125,708 | |||||||||||||||||||||||||||
Occupancy and equipment expense | 29,493 | 823 | – | 9,992 | – | 7,168 | – | – | 47,476 | |||||||||||||||||||||||||||
Professional fees | 12,382 | 190 | – | 3,099 | – | 2,959 | – | – | 18,630 | |||||||||||||||||||||||||||
Foreclosed asset related expense | 12,776 | 176 | – | (6) | 24,804 | – | (6) | 3,143 | – | (6) | – | 40,899 | ||||||||||||||||||||||||
Conversion expense | 7,620 | – | – | – | – | – | – | – | 7,620 | |||||||||||||||||||||||||||
Impairment of intangible asset | 2,872 | – | – | 2,872 | ||||||||||||||||||||||||||||||||
Other expense | 35,647 | 989 | (191 | )(7) | 15,469 | (715 | )(8) | 13,082 | 407 | (6) | – | 64,688 | ||||||||||||||||||||||||
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Total non-interest expense | 182,195 | 4,155 | (191 | ) | 77,382 | (715 | ) | 44,660 | 407 | – | 307,893 | |||||||||||||||||||||||||
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Income (loss) before income taxes | 11,956 | 596 | 979 | (40,545 | ) | (15,799 | ) | 3,074 | (15,120 | ) | – | (54,859 | ) | |||||||||||||||||||||||
Income tax expense | 4,434 | – | 599 | (10) | 974 | (22,385 | )(10) | – | (4,577 | )(10) | – | (20,955 | ) | |||||||||||||||||||||||
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Net income (loss) | 7,522 | 596 | 380 | (41,519 | ) | 6,586 | 3,074 | (10,543 | ) | – | (33,904 | ) | ||||||||||||||||||||||||
Dividends and accretion on preferred stock | – | 861 | (861 | )(11) | 3,409 | (3,409 | )(10) | 2,554 | (2,554 | )(10) | – | – | ||||||||||||||||||||||||
Gain on retirement of preferred stock | – | – | – | 11,188 | (11,188 | ) | – | – | – | – | ||||||||||||||||||||||||||
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Net income (loss) attributable to common shareholders | 7,522 | (265 | ) | 1,241 | (33,740 | ) | (1,193 | ) | 520 | (7,989 | ) | – | (33,904 | ) | ||||||||||||||||||||||
Net income (loss) attributable to noncontrolling interests | 1,310 | – | 168 | (12) | – | (3,479 | )(12) | – | – | (12) | 2,001 | (13) | – | |||||||||||||||||||||||
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Net income (loss) attributable to North American Financial Holdings, Inc. | $ | 6,212 | $ | (265 | ) | $ | 1,073 | $ | (33,740 | ) | $ | 2,286 | $ | 520 | $ | (7,989 | ) | $ | (2,001 | ) | $ | (33,904 | ) | |||||||||||||
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Earnings per share—basic | $ | 0.14 | $ | (0.69 | ) | |||||||||||||||||||||||||||||||
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Earnings per share—diluted | $ | 0.14 | $ | (0.69 | ) | |||||||||||||||||||||||||||||||
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Weighted average share—basic | 45,121,716 | 48,831,832 | (13) | |||||||||||||||||||||||||||||||||
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Weighted average share—diluted | 45,383,716 | 49,093,832 | (13) | |||||||||||||||||||||||||||||||||
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(1) | Adjustments reflect the change in loan interest income for the year ended December 31, 2011 that would have resulted had the loans been acquired as of January 1, 2011. The change in loan interest income is due to estimated discount (premium) accretion associated with fair value adjustments to acquired loans. The discount (premium) accretion was calculated on the level yield method over the estimated lives of the acquired loan portfolios. |
(2) | Adjustments reflect the change in interest expense for the year ended December 31, 2011 that would have resulted had the time deposits been acquired as of January 1, 2011. The change in deposit interest expense is due to estimated premium amortization associated with fair value adjustments to acquired time deposits. The premium amortization was calculated on the level yield method over the estimated lives of the acquired time deposits. |
(3) | Adjustments reflect the change in interest expense for the year ended December 31, 2011 that would have resulted had the borrowings and other debt been acquired as of January 1, 2011. The change in interest expense is due to estimated premium amortization/discount accretion associated with fair value adjustments to acquired borrowings and other debt, which include FHLB advances, borrowings and subordinated debt. The premium amortization/discount accretion was calculated on the level yield method over the estimated lives of the acquired borrowings and other debt instruments. |
(4) | While the recording of acquired loans at their fair value would have significantly impacted the determination of the provision for loan losses, we assumed no adjustments to the historic amount of Capital Bank Corp.’s, Green Bankshares’s or Southern Community Financial’s provision for loan losses. If such adjustments were estimated, there could be a reduction in the historic amounts of Capital Bank Corp.’s, Green Bankshares’s or Southern Community Financial’s provision for loan losses presented. |
(5) | Adjustments reflect the impact to investment securities gains, net from the elimination of unrealized gains/losses assumed to have existed as of January 1, 2011 due to the application of acquisition accounting. |
(6) | A significant portion of Capital Bank Corp.’s, Green Bankshares’s and Southern Community Financial’s foreclosed asset expense was related to write downs and realized losses on other real estate owned. While the recording of acquired other real estate owned at their fair value may have significantly impacted foreclosed asset expense as the one-year measurement period following acquisition date would have improved the underlying assumptions used in valuing these assets at acquisition, we assumed no adjustments to the historic amount of Capital Bank Corp.’s, Green Bankshares’s or Southern Community Financial’s foreclosed asset expense. If such adjustments were estimated, there could be a reduction in the historic amounts of Capital Bank Corp.’s, Green Bankshares’s or Southern Community Financial’s foreclosed asset expense presented. |
(7) | For Capital Bank Corp., adjustments reflect the difference between estimated impact of amortization on other intangible assets recorded in acquisition accounting and actual amortization recorded in the period from January 1 to January 28, 2011. Subsequent to the date of acquisition, any changes in the fair value of the contingent value rights (“CVRs”) issued in connection with the acquisition of Capital Bank Corp. will be recorded as other non-interest expense. As the CVRs did not have a material value as of the acquisition date, no adjustments for changes in the fair value of the CVRs has been included herein. |
(8) | For Green Bankshares, the estimated impact of amortization on core deposit intangible to be recorded in acquisition accounting was not materially different from actual amortization recorded in the period from January 1 to September 7, 2011. Subsequent to the date of acquisition, any changes in the fair value of the CVRs issued in connection with the acquisition of Green Bankshares will be recorded as other non-interest expense. As the CVRs did not have a material value as of the acquisition date, no adjustments for changes in the fair value of the CVRs has been included herein. |
(9) | For Southern Community Financial, adjustment reflects the difference between the estimated impact of amortization on other intangible assets recorded in acquisition accounting and actual amortization recorded during 2011. Subsequent to the date of acquisition, any changes in the fair value of the CVRs issued in connection with the acquisition of Southern Community Financial will be recorded as other non-interest expense. As the Company does not expect that the CVRs will have a material value as of the acquisition date, no adjustments for changes in the fair value of the CVRs has been included herein. |
(10) | Adjustments reflect reversal of valuation allowances recorded against deferred tax assets during the period as well as recognition of tax expense associated with the adjusted net income (loss) before taxes assuming an effective rate of 38%. |
(11) | Adjustments reflect elimination of dividends and accretion on preferred stock as TARP preferred stock was repurchased concurrent with the Capital Bank Corp. investment and the Green Bankshares investment and is assumed to be repurchased concurrent with the Southern Community Financial investment. |
(12) | Adjustments for income attributable to noncontrolling interests were calculated based on noncontrolling stockholder ownership subsequent to each respective transaction. For TIB Financial, Capital Bank Corp. and Green Bankshares, the noncontrolling stockholder ownership was based on ownership levels immediately following its rights offering (5.53% noncontrolling ownership for TIB Financial, 17.25% noncontrolling ownership for Capital Bank Corp. and 9.96% noncontrolling ownership for Green Bankshares). |
(13) | Adjustments reflect issuance of an estimated 3,709,879 shares of Class A common stock to existing noncontrolling stockholders and elimination of the net income (loss) attributable to noncontrolling interests due to the reorganization. |
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Executive Officers and Directors
The following table sets forth information regarding our executive officers and directors as of September 7, 2012. In connection with the Capital Bank Corp. and Green Bankshares investments, we agreed to appoint two Capital Bank Corp. board members and Green Bankshares board members, respectively, to our Board of Directors. The following table also sets forth information regarding the legacy directors of the Capital Bank Corp. and Green Bankshares boards that we intend to appoint to these positions in the future. See “Information about CBF—Our Acquisitions.”
Name | Age | Position | ||||
Current Executive Officers: | ||||||
R. Eugene Taylor | 64 | Chairman and Chief Executive Officer | ||||
Christopher G. Marshall | 53 | Chief Financial Officer | ||||
R. Bruce Singletary | 61 | Chief Risk Officer | ||||
Kenneth A. Posner | 49 | Chief of Investment Analytics and Research | ||||
Current Directors: | ||||||
R. Eugene Taylor | 64 | Chairman and Chief Executive Officer | ||||
Richard M. DeMartini | 59 | Director | ||||
Peter N. Foss | 68 | Director | ||||
William A. Hodges | 63 | Director | ||||
Jeffrey E. Kirt | 39 | Director | ||||
Marc D. Oken | 65 | Director | ||||
Prospective Directors: | ||||||
Oscar A. Keller III | 67 | Capital Bank Corp. Director | ||||
Charles F. Atkins | 63 | Capital Bank Corp. Director | ||||
Martha M. Bachman | 57 | Green Bankshares Director | ||||
Samuel E. Lynch | 53 | Green Bankshares Director |
Executive Officers
R. Eugene Taylor, Chairman and Chief Executive Officer
Gene Taylor has served as Chairman of our Board of Directors and as our Chief Executive Officer since our founding in 2009. Mr. Taylor spent 38 years at Bank of America Corp. and its predecessor companies, most recently as the Vice Chairman of the firm and President of Global Corporate & Investment Banking. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He originally joined Bank of America in 1969 as a credit analyst. He served in branch offices, marketing and management positions across North Carolina and Florida. In 1990, Mr. Taylor was named President of the Florida Bank and, in 1993, President of NationsBank Corp. in Maryland, Virginia and the District of Columbia. In 1998, Mr. Taylor was appointed to lead Consumer and Commercial Banking operations in the legacy Bank of America Western U.S. footprint. He subsequently returned to Charlotte, North Carolina to create a national banking unit and, in 2001, was named President of Bank of America Consumer & Commercial Banking. In 2004, Mr. Taylor assumed responsibility for the organization’s combined commercial banking businesses known as Global Business & Financial Services, before being named Vice Chairman of Bank of America and President of Global Corporate & Investment Banking in 2005. Most recently, Mr. Taylor served as a Senior Advisor at Fortress Investment Group LLC. Mr. Taylor serves as a director of Capital Bank Corp., TIB Financial and Green Bankshares, our three subsidiary bank holding companies in which we have a controlling interest. Mr. Taylor is a Florida native and received his Bachelor of Science in Finance from Florida State University. Mr. Taylor brings to our Board of Directors valuable and extensive experience from managing and overseeing a broad range of operations during his tenure at Bank of America. His experience in leadership roles and activities in the Southeast qualifies him to serve as the Chairman of our Board of Directors.
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Christopher G. Marshall, Chief Financial Officer
Chris Marshall has served as our Chief Financial Officer since our founding in 2009. From May to October 2009, Mr. Marshall served as a Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Inc. From July 2008 through March 2009, he also served as an advisor to The Blackstone Group L.P., providing advice and analysis for potential investments in the banking sector. From 2006 through 2008 Mr. Marshall served as the Chief Financial Officer of Fifth Third Bancorp. Mr. Marshall served as Chief Operations Executive of Bank of America’s Global Consumer and Small Business Bank from 2004 to 2006. Mr. Marshall also served as Bank of America’s Chief Financial Officer of the Consumer Products Group from 2003 to 2004, Chief Operating Officer of Technology and Operations from 2002 to 2003 and Chief Financial Officer of Technology and Operations from 2001 to 2002. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services from 1999 to 2001, where he was a key member of the integration team for the merger with AlliedSignal Inc., overseeing the integration of all finance, information technology and corporate and administrative functions. From 1995 to 1999, he served as Chief Financial Officer of AlliedSignal Technical Services Corporation. Prior to that, from 1987 to 1995, Mr. Marshall held several managerial positions at TRW, Inc. Mr. Marshall serves as a director of Capital Bank Corp., TIB Financial and Green Bankshares, our three subsidiary bank holding companies in which we have a controlling interest. Mr. Marshall earned a Bachelor of Science degree in Business Administration from the University of Florida and obtained a Master of Business Administration degree from Pepperdine University.
R. Bruce Singletary, Chief Risk Officer
Bruce Singletary has served as our Chief Risk Officer since our founding in 2009. Mr. Singletary spent 32 years at Bank of America and its predecessor companies with the last 19 years in various credit risk roles. Mr. Singletary originally joined C&S National Bank as a credit analyst in Atlanta, Georgia in 1974. He served in various middle market line and credit functions. In 1991, Mr. Singletary was named Senior Credit Policy Executive of C&S Sovran, which was renamed NationsBank Corp. in January 1992 after its acquisition by North Carolina National Bank, for the geographic areas of Maryland, Virginia and the District of Columbia. Mr. Singletary led the credit function of NationsBank Corp. from 1992 to 1998 alongside Mr. Taylor, who served as President of this region from 1993 to 1998. In 1998, Mr. Singletary relocated to Florida to establish a centralized underwriting function to serve middle market commercial clients in the southeastern region of the United States. In 2000, Mr. Singletary assumed credit responsibility for Bank of America’s middle market leveraged finance portfolio for the eastern half of the United States. In 2004, Mr. Singletary served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Mr. Singletary serves as a director of Capital Bank Corp., TIB Financial and Green Bankshares, our three subsidiary bank holding companies in which we have a controlling interest. Mr. Singletary earned a Bachelor of Science degree in Industrial Management from Clemson University and obtained a Master of Business Administration degree from Georgia State University.
Kenneth A. Posner, Chief of Investment Analytics and Research
Ken Posner has served as our Chief of Investment Analytics since our founding in 2009. Mr. Posner served as a consultant to Fortress Investment Group LLC from 2008 through most of 2009, where he developed acquisition strategies for distressed banks and thrifts, conducted due diligence of specific targets and prepared business plans for bank acquisition targets. Prior to Fortress, Mr. Posner was a Managing Director of Morgan Stanley, where from 1995 through 2008, he was an equity research analyst conducting research and recommending equity, debt and derivative investment strategies for a wide range of financial services firms. From 1985 to 1989, he served in the United States Army rising to the rank of Captain. Mr. Posner earned a Bachelor of Arts degree in English from Yale College, a Master of Business Administration with honors from the University of Chicago and previously received the Certified Public Accountant, Chartered Financial Analyst and Financial Risk Management designations.
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Board of Directors
Our Board of Directors currently consists of six members, Messrs. Taylor, DeMartini, Foss, Hodges, Kirt and Oken. All of the directors other than Mr. Taylor qualify as independent directors under the corporate governance standards of Nasdaq. Beginning at our next annual meeting, each member of our Board of Directors will serve a one-year term or until their successor has been elected and qualified.
Richard M. DeMartini
Richard DeMartini has been a member of our Board of Directors since our founding in 2009. Mr. DeMartini joined Crestview Partners in 2005 and became a Managing Director of Crestview in 2006. Mr. DeMartini currently serves as a director of Munder Capital Management, a registered investment adviser, and is on the Board of Directors of Martin Currie Ltd., a UK registered investment advisory firm, which are Crestview Partners portfolio companies. Mr. DeMartini also serves as a director of Partners Capital. Mr. DeMartini retired as President of Bank of America’s Asset Management Group in December 2004. He was also a member of the Risk and Capital Committee and the Operating Committee at Bank of America, which he joined in 2001. Prior to joining Bank of America in 2001, Mr. DeMartini served as Chairman and Chief Executive Officer of the International Private Client Group at Morgan Stanley Dean Witter. He also was a member of the Morgan Stanley Dean Witter Management Committee. Mr. DeMartini’s career at Morgan Stanley Dean Witter spanned more than 26 years and included roles as President of Individual Asset Management, Co-President of Dean Witter & Company, Inc. and Chairman of Discover Card. He has been a member of the investment community since joining Dean Witter in 1975. He has served as Chairman of the Board of Directors of The NASDAQ Stock Market, Inc. and Vice Chairman of the Board of Directors of the National Association of Securities Dealers, Inc. Mr. DeMartini earned a Bachelor of Science degree in Marketing from San Diego State University.
Mr. DeMartini’s extensive experience as both an investor in and executive of financial institutions qualifies him to serve on our Board of Directors. His experience helps us to identify investment opportunities and manage both growth and risk in our existing business. Mr. DeMartini serves as the representative of Crestview-NAFH, LLC (who we refer to as “Crestview-NAFH”) on our Board of Directors. See “Certain Relationships and Related Party Transactions—Arrangements with Crestview-NAFH, LLC and Affiliates of Oak Hill Advisors, L.P.”
Peter N. Foss
Peter Foss has been a member of our Board of Directors since our founding in 2009. Mr. Foss has been President of the General Electric Company’s Olympic Sponsorship and Corporate Accounts since 2003. In addition, Mr. Foss is General Manager for Enterprise Selling, with additional responsibilities for Sales Force Effectiveness and Corporate Sales Programs. He has been with GE for 32 years and, prior to his current position, served for six years as the President of GE Polymerland, a commercial organization representing GE Plastics in the global marketplace. Prior to GE Polymerland, Mr. Foss served in various commercial roles in the company, including introducing LEXAN® film in the 1970s and was the Market Development Manager on the ULTEM® introduction team in 1982. He has also served as the Regional General Manager for four of the GE Plastics regions, including leading the GE Plastics effort in Mexico in the mid-1990s. Mr. Foss serves as a director of Capital Bank Corp., TIB Financial and Green Bankshares, our three subsidiary bank holding companies in which we have a controlling interest. Mr. Foss earned a Bachelor of Science degree in Chemistry from Massachusetts College of Pharmacy, Boston.
Mr. Foss’s extensive managerial and sales experience qualifies him to serve on our Board of Directors. His experience assists us in developing plans to expand and energize our sales and marketing activities.
William A. Hodges
Bill Hodges has been a member of our Board of Directors since our founding in 2009. Mr. Hodges has been President and Owner of LKW Properties LLC, a Charlotte-based residential land developer and homebuilder, since 2005. Prior to that, Mr. Hodges worked for over 30 years in various functions at Bank of America and its predecessors. From 2004 to 2005, he served as Chairman of Bank of America’s Capital Commitment Committee.
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Mr. Hodges served as Managing Director and Head of Debt Capital Markets from 1998 to 2004 and as Managing Director and Head of the Real Estate Finance Group from 1996 to 1998. Prior to Bank of America’s merger with NationsBank Corp., he served as Washington, D.C. Market President and Head of MidAtlantic Commercial Banking for NationsBank Corp. from 1992 to 1996. Mr. Hodges began his career at North Carolina National Bank, where he worked for 20 years in various roles, including Chief Credit Officer of Florida operations and as manager of the Real Estate Banking and Special Assets Groups. Mr. Hodges serves as a director of Capital Bank Corp., TIB Financial and Green Bankshares, our three subsidiary bank holding companies in which we have a controlling interest. Mr. Hodges earned a Bachelor of Arts degree in History from the University of North Carolina at Chapel Hill and a Master of Business Administration degree in finance from Georgia State University.
Mr. Hodges’s substantial experience in the banking and real estate sectors qualifies him to serve on our Board of Directors.
Jeffrey E. Kirt
Jeffrey Kirt has been a member of our Board of Directors since 2010. Mr. Kirt is a Partner at Oak Hill Advisors, L.P. where he has responsibility for investment research and analysis in several sectors including financials, aerospace, autos, defense and transportation. In addition, he has responsibility for the origination and execution of distressed debt and equity transactions. Mr. Kirt previously worked in the Leveraged Finance and High Yield Capital Markets groups at UBS Securities, LLC and the High Yield Capital Markets group at USBancorp Libra. He earned a B.A., with distinction, from Yale University. Mr. Kirt currently serves on the Boards of Directors of Avolon Aerospace Ltd. and Cooper-Standard Holdings, Inc.
Mr. Kirt’s finance and investment experience assists us in identifying future investment opportunities and qualifies him to serve on our Board of Directors. Mr. Kirt serves as the representative of certain affiliates of Oak Hill Advisors, L.P. (who we collectively refer to as “Oak Hill”) on our Board of Directors. See “Certain Relationships and Related Party Transactions—Arrangements with Crestview-NAFH, LLC and Affiliates of Oak Hill Advisors, L.P.”
Marc D. Oken
Marc Oken has been a member of our Board of Directors since our founding in 2009. Mr. Oken is the Co-Founder and Managing Partner of Falfurrias Capital Partners and he currently oversees the operations of the firm. Mr. Oken is the former Chief Financial Officer of Bank of America. Also, during his tenure with Bank of America as a senior financial executive, Mr. Oken had significant involvement in all of Bank of America’s acquisition activities. In the Fleet Boston Financial Corporation acquisition, he held the additional role of Transition Executive and was responsible for integration of the companies. Prior to his career with Bank of America, Mr. Oken was a Partner with Price Waterhouse and served as a Professional Accounting Fellow at the SEC. Mr. Oken is the past Chairman of the Board of Directors of Bojangles’, a private company that until August 2011 was controlled by a Falfurrias Capital-led investor group. He serves on the Board of Directors of Dorsey Wright & Associates, a registered investment adviser and private company controlled by Falfurrias Capital. He also serves on the Board of Directors of Marsh & McLennan Companies, Sonoco Products Company and is a former director of Star Scientific, Inc. Mr. Oken earned a Bachelor of Science degree in Business Administration from Loyola College and obtained a Master of Business Administration degree from the University of West Florida.
Mr. Oken’s qualifications to serve on our Board of Directors include his extensive experience integrating acquisitions as well as his expertise in financial and accounting matters for complex organizations.
In connection with the Capital Bank Corp. and Green Bankshares investments, we agreed to appoint two Capital Bank Corp. board members and Green Bankshares board members, respectively, to our Board of Directors. Below is a description of these legacy directors of the Capital Bank Corp. and Green Bankshares boards that we intend to appoint to these positions in the future. See “Information about CBF—Our Acquisitions.”
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Oscar A. Keller III
Oscar A. Keller III, has served as a director of Old Capital Bank since its inception in 1997 and as a director of Capital Bank Corp. since its inception, and as Chairman of the board of directors of Capital Bank Corp. from Capital Bank Corp.’s inception through the closing of our investment in Capital Bank Corp. He also serves as a director of Capital Bank Foundation, Inc. Mr. Keller was also a founding director of Triangle Bank from 1988 to 1998, and served on its executive committee and audit committee. Furthermore, he served as a director of Triangle Leasing Corp. from 1989 to 1992. He is currently, and has been for the past 15 years, Chief Executive Officer of Earthtec of NC, Inc., an environmental treatment facility founded in 1991 in Chicago, Illinois and in Sanford, North Carolina. Mr. Keller attended the University of North Carolina School of Public Health and continues to develop and construct healthcare and retirement homes and apartments across North Carolina. Mr. Keller is also currently the Chairman of the Sanford Lee County Regional Airport Authority (Raleigh Executive Jet Port), Vice Chairman of Lee County Economic Development Corp. and a member of Triangle Regional Partnership Staying on Top 2 committee.
During his term as Chairman of the board of directors of Capital Bank Corp., Mr. Keller has had the opportunity to develop extensive knowledge of Capital Bank Corp.’s business, history and organization which, along with his personal experience in markets that we serve, has supplemented his ability to effectively contribute as a director. Mr. Keller is a founder of the Old Capital Bank and a well regarded community leader in Sanford, North Carolina.
Charles F. Atkins
Charles F. Atkins, has served as a director of Old Capital Bank since its inception in 1997 and was elected to serve as a director of Capital Bank Corp. in 2003. He is currently, and has been for the past 21 years, President of Cam-L Properties, Inc., a commercial real estate development company located in Sanford, North Carolina.
Mr. Atkins has substantial experience with community banking, as he was an organizer of Old Capital Bank, and in his position with a real estate development company has developed an extensive understanding of certain real estate markets in which we make loans. During his tenure with Capital Bank Corp., he has obtained knowledge of Capital Bank Corp.’s business, history and organization, which has enhanced his ability to serve as director.
Martha M. Bachman
Martha M. Bachman began her professional career in 1980 as an owner/co-owner of a successful retail, non-public company in Northeast Tennessee which was sold in 2007. She currently provides financial consulting to her family’s other personal enterprises including rental properties, investments and other holdings. Ms. Bachman’s family has been closely affiliated with Green Bankshares for over two generations which provides a strong historical connection between the local community and Capital Bank. Ms. Bachman has extensive experience as a successful business owner and also provides expertise in matters relating to the retail industry.
Samuel E. Lynch
Samuel E. Lynch has served as a director of Green Bankshares since 2008. Dr. Lynch is founder of BioMimetic Therapeutics, Inc. and has been its President, CEO and a director since inception in 1999. BioMimetic is a public biotechnology company utilizing purified recombinant human platelet-derived growth factor (rhPDGF-BB) in combination with tissue specific matrices as its primary technology platform for promotion of tissue healing and regeneration. He also served as chairman of the board of BioMimetic from inception until August 2005. Dr. Lynch has spent his career in health care management, product development, and earlier in academic medicine/dentistry, including research and patient care. He received his Doctorate of Medical Sciences and Specialty in Periodontology from the Harvard Medical and Dental Schools, respectively,
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as well as a Doctorate of Dental Medicine from Southern Illinois University School of Dental Medicine. He has published and lectured extensively worldwide and is a co-inventor of BioMimetic’s technologies. Dr. Lynch’s experience as the president and chief executive officer of a registered public company offers management experience, leadership capabilities, financial knowledge and business acumen.
Committees of Our Board of Directors
Audit Committee
The members of the Audit Committee are Messrs. Foss, Hodges and Kirt, each of whom is an “independent” member of our Board of Directors as defined under the Nasdaq rules and Rule 10A-3 of the Exchange Act. Mr. Foss is the chairperson of our Audit Committee. Mr. Kirt serves as our Audit Committee “financial expert,” as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002 and has experience that results in his financial sophistication as defined under the Nasdaq rules.
Our Audit Committee is responsible for, among other things:
• | reviewing our financial statements, significant accounting policies changes, material weaknesses identified by outside auditors and risk management issues; |
• | serving as an independent and objective body to monitor and assess our compliance with legal and regulatory requirements, our financial reporting processes and related internal control systems and the performance of our internal audit function; |
• | overseeing the audit and other services of our outside auditors and being directly responsible for the appointment, independence, qualifications, compensation and oversight of the outside auditors; |
• | discussing any disagreements between our management and the outside auditors regarding our financial reporting; and |
• | preparing the Audit Committee report for inclusion in our proxy statement for our annual meeting. |
Risk Committee
The members of the Risk Committee are Messrs. Hodges, Kirt and Taylor. Mr. Hodges is the chairperson of our Risk Committee. Among other things, our Risk Committee is responsible for:
• | overseeing our enterprise-wide risk management practices; |
• | monitoring and reviewing with management our risk tolerance, ways in which risk is measured and major risk exposures, including any risk concentrations and risk interrelationships, as well as the likelihood of occurrence, the potential impact of those risks and mitigating measures; and |
• | meeting periodically with management to discuss our risk policies and the steps taken to ensure appropriate processes are in place to identify, manage and control risks associated with our business objectives. |
Compensation Committee
The members of the Compensation Committee are Messrs. DeMartini, Foss and Oken, each of whom qualifies as an “independent” director as defined under the applicable rules and regulations of the SEC, Nasdaq and the Internal Revenue Service. Mr. Oken is the chairperson of our Compensation Committee.
Among other things, our Compensation Committee is responsible for:
• | determining the compensation of our executive officers and board; |
• | reviewing our executive compensation policies and plans, including performance goals; |
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• | administering and implementing our equity compensation plans; and |
• | preparing a report on executive compensation for inclusion in our proxy statement for our annual meeting. |
During 2011, our Compensation Committee consisted of Messrs. DeMartini, Foss and Oken. None of them has at any time been an officer or employee of the Company or had any relationship with us of the type that is required to be disclosed under Item 404 of Regulation S-K. Except as set forth in the following sentence, none of our executive officers serves or has served as a member of a board of directors, compensation committee or other board committee performing equivalent functions of another entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee. Mr. Taylor serves as a member of our Board of Directors and also serves on the Compensation Committee for TIB Financial and the Executive Committees (which oversee compensation) of both Capital Bank Corp. and Green Bankshares.
Nominating and Governance Committee
The members of the Nominating and Governance Committee are Messrs. DeMartini, Kirt and Oken, each of whom qualifies as an “independent” director as defined under the applicable rules and regulations of the SEC, Nasdaq and the Internal Revenue Service. Mr. Kirt is the chairperson of our Nominating and Governance Committee.
Among other things, the Nominating and Governance Committee is responsible for:
• | identifying individuals qualified to become members of our Board of Directors and recommending director candidates for election or re-election to our Board of Directors; |
• | assessing the performance of the Board of Directors; and |
• | monitoring our corporate governance principles and practices. |
Code of Business Conduct and Ethics
Our Board of Directors has adopted a code of business conduct and ethics (which we refer to as the “Code of Ethics”) that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The Code of Ethics is available free of charge upon written request to Nancy A. Snow, Capital Bank Corp., 333 Fayetteville Street, Suite 700, Raleigh, NC 27601. If we amend or grant any waiver from a provision of our Code of Ethics that applies to our executive officers, we will publicly disclose such amendment or waiver on our website and as required by applicable law, including by filing a Current Report on Form 8-K.
Compensation Discussion and Analysis
Executive Compensation
The following Compensation Discussion and Analysis provides information regarding the objectives and elements of our compensation philosophy, policies and practices with respect to the compensation of our executive officers who appear in the “—Summary Compensation Table” below (who we refer to collectively throughout this section as our “named executive officers”). Our named executive officers for the fiscal year ended December 31, 2011 were:
• | R. Eugene Taylor, President and Chief Executive Officer; |
• | Christopher G. Marshall, Chief Financial Officer; |
• | R. Bruce Singletary, Chief Risk Officer; and |
• | Kenneth A. Posner, Chief of Investment Analytics and Research. |
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Executive management and the Compensation Committee of our Board of Directors work together to establish, review and evaluate our compensation plans, policies and programs. The Compensation Committee is comprised entirely of independent directors and administers the executive compensation program in a manner consistent with our compensation philosophy. The Compensation Committee, which is generally responsible for the design and administration of our executive compensation program, acts independently, yet in conjunction with the Board of Directors and executive management, and maintains a philosophy that encompasses both long-term and short-term objectives while discouraging excessive risk taking.
Objectives of Our Executive Compensation Program
The primary objective of our compensation program is the same objective that we have for our overall operations: to create long-term value for our stockholders. The primary components of compensation that support this philosophy are:
• | Align executive compensation with stockholder value. Within our overall compensation strategy, we utilize equity compensation tools to align the financial interests and objectives of our named executive officers with those of our stockholders. |
• | Attract, retain and motivate high-performing executive talent. We operate in a competitive employment environment and our employees, led by our named executive officers, are essential to our success. The compensation of our named executive officers, while designed to be competitive within the marketplace for similar positions with bank holding companies of comparable size, is also designed to motivate the named executive officers to maximize our performance. |
• | Link pay to performance. Our compensation program is designed to provide a strong correlation between the performance of the named executive officers and the compensation they receive. We do this by utilizing a compensation program designed to reward our executives based on our overall performance and the executives’ abilities to achieve the performance priorities set forth by the Compensation Committee. |
Setting Executive Compensation
Determination of Executive Compensation
The compensation of our named executive officers is largely based on arrangements that were negotiated at the time of our private placements. The founding members of the executive management team directly negotiated the terms of their compensation with the investors at that time. The foundation for the total compensation packages offered to our named executive officers is based on an assessment of each named executive officer’s individual responsibilities, a determination of the executives’ contributions to our performance and to our success in reaching our strategic goals. Compensation paid in the financial sector generally and in bank holding companies in particular, is discussed by the Compensation Committee in determining compensation for our named executive officers.
Executive management provides input as to our strategic goals for future performance periods, which could affect their annual compensation. However, the Compensation Committee carefully reviews the recommended levels before giving its final approval to such strategic goals. The combination of the proposal from executive management and the Compensation Committee’s review is essential in order to ensure that the goals are set accurately to provide our named executive officers with goals that are set at a high level and are motivating, but are also obtainable.
Compensation Mix
The compensation arrangements offered to our named executive officers are meant to be balanced packages that provide adequate and competitive compensation for the individual named executive officer’s position in the
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Company. The mix of compensation elements is intended to provide the named executive officers with a steady source of income, encourage and reward achievement of short-term and long-term performance objectives, align executives’ interests with those of stockholders and promote retention.
Role of Compensation Committee
The Compensation Committee is responsible for setting compensation for our named executive officers. While some of the key terms of each named executive officer’s compensation were determined at the time of our private placements, the Compensation Committee sets performance goals for our named executive officers and reviews all other compensation and benefits for the named executive officers on an annual basis. None of the members of the Compensation Committee in 2011 has at any time been an officer or employee of the Company.
Role of Compensation Consultant
We did not engage a compensation consultant in 2011. However, we may revisit the use of a compensation consultant following completion of the merger.
Benchmarking
Our Board of Directors does not currently use benchmarking or peer group analysis in making compensation decisions. However, we may revisit the use of benchmarking and peer group analysis following the completion of the merger.
Compensation Risk Oversight
While our Compensation Committee is responsible for the oversight of our compensation of employees and directors, our Audit Committee is responsible for our risk management, including risk as it relates to compensation. Additionally, Mr. Singletary, our Chief Risk Officer, is responsible for developing a risk management framework to identify, manage and mitigate our risks, including compensation practices. In addition, we are subject to regulatory oversight and reviews, whereby our compensation practices are subject to the review of our regulators and any restrictions or requirements that may be imposed upon us. Based on a review by the Audit Committee and our Board of Directors, we do not believe that our overall compensation policies and practices create risks that are reasonably likely to have a material adverse effect on us.
Principal Components of Compensation
The principal components of our executive compensation program applicable to our named executive officers for the fiscal year ended December 31, 2011 were as follows:
Base Salary
Base salaries for our named executive officers are designed to compensate the executive for their scope of responsibilities and consideration is given to the experience, education, personal qualities and other qualifications of that individual that are essential for the specific role the executive serves, while remaining generally competitive with the base salary ranges at other banking organizations.
Annual Bonus Program
Our named executive officers currently participate in a discretionary annual bonus program. In awarding discretionary bonus payments, the Compensation Committee considers a variety of factors, including a review of the performance of our named executive officers during the applicable performance year in achieving certain performance targets and the past, present and expected future contributions of an employee to our overall success
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and the safety and soundness of the organization. The specific factors considered by the Compensation Committee in evaluating those contributions may include, among other things: overall individual performance, organizational performance, achievement of specific milestones, individual contribution to organizational performance and level of individual responsibilities. At the beginning of 2011, we were still very active building our banking operations through acquisitions and integrating prior acquisitions, and we anticipated becoming a substantially larger banking entity during the year through additional transactions. As a result, no specific milestones were established for or communicated to our named executive officers in 2011. It is anticipated that in the future the Compensation Committee will consider whether to set specific operating milestones (including, but not limited to, successful acquisition of target companies, generating organic loan and deposit growth) when establishing its annual bonus program for named executive officers. Once established, the relevant factors that the Compensation Committee will consider in a performance year will be communicated to the named executive officers prior to, or at, the beginning of the applicable performance period, at which time the achievement of such performance levels is substantially uncertain. In making its annual bonus determination for named executive officers, the Compensation Committee considers individual and company performance but does not predetermine the applicable considerations, quantify the weight given to any specific performance goal or otherwise follow a formulaic calculation. Rather, the Compensation Committee engages in an overall assessment of appropriate bonus levels based on a subjective interpretation of all the relevant criteria.
Long-Term Incentive Program
Our named executive officers may be awarded equity awards at the discretion of the Compensation Committee under the 2010 Equity Incentive Plan, which was adopted in connection with our private placements and is more fully described below. Stock options and shares of restricted stock were granted in March 2011 under the 2010 Equity Incentive Plan in order to provide the Chief Executive Officer and other named executive officers with long-term incentives for profitable growth and to further align the interests of our named executive officers with the interests of our stockholders. These equity awards are structured to be long-term rewards, thereby increasing the performance and retention of our named executive officers and such equity awards were initially contemplated at the time of the private placements.
The stock options granted to our named executive officers in March 2011 will, subject to continuous employment through the applicable vesting date, vest in two equal installments. One half of the stock options granted in March 2011 vested on December 22, 2011 and the other half of the stock options granted in March 2011 will vest on December 22, 2012. Our named executive officers were also granted shares of restricted stock in March 2011 that are subject to performance vesting. The performance vesting is based on our reaching specified incremental share prices in order for the shares of restricted stock to vest. The vesting of all of our equity awards was contingent upon obtaining a shelf charter or acquiring an inflatable charter and achieving a qualified investment transaction, which were achieved on September 30, 2010.
Benefits
Our named executive officers are not entitled to any perquisites. Named executive officers are provided with benefits, including participation in our 401(k) defined contribution program and insurance benefit programs, that are offered to other eligible employees.
2011 Compensation for Our Named Executive Officers
Base Salary
Base salaries for our named executive officers for 2011 were as follows: Mr. Taylor—$650,000; Mr. Marshall—$438,000; Mr. Singletary—$300,000; and Mr. Posner—$225,000.
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Annual Cash Bonuses
Our named executive officers each received annual cash bonuses at target level based on performance in 2011. Based on an assessment of the performance of the named executive officer in relation to our performance, the achievement of certain milestones and individual performance of each of the named executive officers, the Compensation Committee approved the following discretionary annual bonus payments for 2011: Mr. Taylor—$650,000; Mr. Marshall—$438,000; Mr. Singletary—$300,000; and Mr. Posner—$225,000.
In making its annual bonus determination for named executive officers, the Compensation Committee considers individual and company performance but does not predetermine the applicable considerations, quantify the weight given to any specific performance goal or otherwise follow a formulaic calculation. Rather, the Compensation Committee engages in an overall assessment of appropriate bonus levels based on a subjective interpretation of all the relevant criteria.
Long-Term Incentive-Based Compensation
All of the equity awards that have been granted to our named executive officers were granted under the 2010 Equity Incentive Plan adopted in connection with our private placements as set forth below. We granted equity awards to our named executive officers in accordance with the terms of the private placements in order to further align their interests and objectives with those of our stockholders.
In March 2011, we granted stock options and performance-based restricted stock to each of the named executive officers in the following amounts:
• | Mr. Taylor—stock option to acquire 1,251,112 shares and 536,191 shares of restricted stock; |
• | Mr. Marshall—stock option to acquire 469,167 shares and 201,072 shares of restricted stock; |
• | Mr. Singletary—stock option to acquire 312,778 shares and 134,048 shares of restricted stock; and |
• | Mr. Posner—stock option to acquire 78,194 shares and 33,512 shares of restricted stock. |
The vesting terms of the equity awards granted in 2011 are more fully described in the footnotes to “—Outstanding Equity Awards at 2011 Fiscal Year-End” below.
In addition, in January 2012, we granted performance-based restricted stock and stock options to each of the named executive officers. In the aggregate, our named executive officers were granted 306,563 shares of restricted stock and stock options to acquire 627,849 shares of our common stock. One-half of the stock options were vested on the date of grant and the remaining portion of the stock options will vest, subject to continued employment, on the first anniversary of the date of grant. The material terms of the performance-based restricted stock, including vesting are substantially the same as the performance-based restricted stock granted in March 2011 as fully described in the footnotes to “—Outstanding Equity Awards at 2011 Fiscal Year-End” below.
Employment Agreements
Effective December 22, 2009, we entered into an employment agreement with Mr. Taylor. The employment agreement, which is more fully described in “—Employment Agreements with Named Executive Officers” below, provides for an annual base salary, annual bonus opportunity (subject to the limitations of the registration rights agreement described in “Certain Relationships and Related Party Transactions—Registration Rights Agreement”), terms relating to his initial equity grants and severance. Upon a termination of employment without “cause” (as defined below), resignation for “good reason” (as defined below) or termination of employment due to death or disability, Mr. Taylor is entitled to two times the sum of his annual base salary and the greater of his target annual incentive award and the annual incentive award paid in the prior year. Mr. Taylor’s severance provisions are more fully described in “—Potential Payments upon Termination or Change-in-Control” below.
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In August 2012, Messrs. Marshall, Singletary and Posner each entered into employment agreements that, among other things, provide for cash severance benefits equal to 1.5 times the executive’s base salary and target bonus and 18 months of welfare benefits continuation upon a qualifying termination of employment and contain a golden parachute excise tax gross-up provision and restrictive covenants, including non-competition and solicitation restrictions with respect to customers, employees and certain other parties with business relationships with us, similar to those under Mr. Taylor’s agreement.
Stock Ownership Guidelines
In connection with our private placements, each of the named executive officers purchased shares of our common stock. Because the common stock is not publicly traded and is subject to certain transfer limitations pursuant to a subscription agreement, the named executive officers are limited in their ability to divest themselves of the equity and, as a result, are essentially subject to equity ownership requirements. See “Certain Relationships and Related Party Transactions—Agreements with our Founders.” Once the provisions of the subscription agreement are satisfied, the named executive officer will no longer have any transfer limitation on the common stock acquired in our private placements. Our directors and executive officers do not have any other stock ownership guidelines.
Section 162(m)
From and after the time that our compensation programs become subject to Section 162(m) of the Internal Revenue Code, we intend to consider the structure of base salary and bonus compensation in order to maintain the deductibility of compensation under Section 162(m) of the Internal Revenue Code. However, the Compensation Committee will take into consideration other factors, together with Section 162(m) considerations, in making executive compensation decisions and could, in certain circumstances, approve and authorize compensation that is not fully tax deductible. Transition provisions under Section 162(m) may apply for a transition period following the completion of the merger to certain compensation arrangements that were entered into by a corporation before it was publicly held.
Compensation Program Following this Merger
The design of our compensation program following the merger is an ongoing process, however, we expect that our compensation program will continue to be based on the same general principles. We believe that, following the merger, we will have more flexibility in designing compensation programs to attract, motivate and retain our executives, including permitting us to regularly compensate executives with non-cash compensation reflective of our stock performance in relation to a comparative group in the form of publicly traded equity.
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Summary Compensation Table
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the total compensation paid or accrued during the fiscal years ending on December 31, 2010 and 2011, for our named executive officers.
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
R. Eugene Taylor | 2011 | 650,000 | 650,000 | 6,972,270 | 5,517,404 | – | – | – | 13,789,674 | |||||||||||||||||||||
Chairman and Chief Executive Officer | 2010 | 650,000 | 650,000 | – | – | – | – | – | 1,300,000 | |||||||||||||||||||||
Christopher G. Marshall | 2011 | 438,000 | 438,000 | 2,614,606 | 2,069,026 | – | – | – | 5,559,632 | |||||||||||||||||||||
Chief Financial Officer | 2010 | 438,000 | 438,000 | – | – | – | – | – | 876,000 | |||||||||||||||||||||
R. Bruce Singletary | 2011 | 300,000 | 300,000 | 1,743,071 | 1,379,351 | – | – | – | 3,722,422 | |||||||||||||||||||||
Chief Risk Officer | 2010 | 300,000 | 300,000 | – | – | – | – | – | 600,000 | |||||||||||||||||||||
Kenneth A. Posner | 2011 | 225,000 | 225,000 | 435,768 | 344,836 | – | – | – | 1,230,60 | |||||||||||||||||||||
Chief of Investment Analytics and Research | 2010 | 225,000 | 225,000 | – | – | – | – | – | 4 450,000 |
(1) | The amounts in this column reflect the grant date fair value of the restricted stock awarded to our named executive officers in 2011 calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation (“FASB ASC Topic 718”). The amounts included in this column for the restricted stock awards subject to performance-based vesting conditions are calculated based on the probable satisfaction of the performance conditions for such awards. If the highest level of performance is achieved for these restricted stock awards, the maximum value of these awards at the grant date would be as follows: Mr. Taylor—$9,115,247, Mr. Marshall—$3,418,224, Mr. Singletary—$2,278,816 and Mr. Posner—$569,704. See note 17 of the audited consolidated financial statements for an explanation of the assumptions made in valuing these awards. |
(2) | The amounts included in this column reflect the grant date fair value of stock option awards granted to our named executive officers in 2011. The grant date fair value was determined in accordance with FASB ASC Topic 718. The grant date fair value of the stock options is estimated using the Black-Scholes option pricing model. See note 17 of the audited consolidated financial statements for an explanation of the assumptions made in valuing these awards. |
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2011 Grants of Plan-Based Awards
The following table sets forth certain information with respect to awards granted to each of our named executive officers under the 2010 Equity Incentive Plan during 2011:
Estimated Future Payouts Under Equity Incentive Plan Awards(1) | All Other Stock Awards Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#)(2) | Exercise or Base Price of Option Awards ($/Sh)(3) | Grant Date Fair Value of Stock and Option Awards ($)(4) | ||||||||||||||||||||||||||
Name | Grant Date | Threshold (#) | Target (#) | Maximum (#) | ||||||||||||||||||||||||||
R. Eugene Taylor | 03/16/11 | 178,730 | 357,460 | 536,191 | 6,972,270 | |||||||||||||||||||||||||
03/16/11 | 1,251,112 | 20.00 | 5,517,404 | |||||||||||||||||||||||||||
Christopher Marshall | 03/16/11 | 67,024 | 134,048 | 201,072 | 2,614,606 | |||||||||||||||||||||||||
03/16/11 | 469,137 | 20.00 | 2,069,026 | |||||||||||||||||||||||||||
R. Bruce Singletary | 03/16/11 | 44,683 | 89,365 | 134,048 | 1,743,071 | |||||||||||||||||||||||||
03/16/11 | 312,778 | 20.00 | 1,379,351 | |||||||||||||||||||||||||||
Kenneth A. Posner | 03/16/11 | 11,171 | 22,342 | 33,512 | 435,768 | |||||||||||||||||||||||||
03/16/11 | 78,194 | 20.00 | 344,836 |
(1) | The grants of performance-based restricted stock to each of our named executive officers vest according to the following parameters (subject to the named executive officer’s continued service through the date that the performance goals are achieved): |
– 1/3 | vest after the per share stock price equals or exceeds $25.00 for 30 days; |
– 1/3 | vest after the per share stock price equals or exceeds $28.00 for 30 days; and |
– 1/3 | vest after the per share stock price equals or exceeds $32.00 for 30 days. |
(2) | 50% of the stock options vested on December 22, 2011 and the remaining 50% vest on December 22, 2012, subject to the named executive officer’s continued service through the applicable date. |
(3) | The per share exercise price is equal to the price of a share of our common stock in the private offerings. The Compensation Committee reviewed all relevant factors, including the most recent arm’s-length transaction involving our common stock in determining the per share exercise price. |
(4) | The amounts in this column reflect the grant date fair value of the restricted stock and stock options granted to the named executive officers in 2011 in accordance with FASB ASC Topic 718 and, in the case of the restricted stock awards that are subject to performance-based vesting conditions, are calculated based on the probable satisfaction of the performance conditions for such awards. |
In addition, in January 2012, we granted performance-based restricted stock and stock options to each of the named executive officers. In the aggregate, the named executive officers were granted 306,563 shares of restricted stock and stock options to acquire 627,849 shares of our common stock. One-half of the stock options were vested on the date of grant and the remaining portion of the stock options will vest, subject to continued employment, on the first anniversary of the date of grant. The material terms of the performance-based restricted stock, including vesting, are substantially the same as the performance-based restricted stock granted in March 2011 and described above.
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Employment Agreements with Named Executive Officers
Mr. Taylor’s Employment Agreement
Effective December 22, 2009, we entered into a three-year employment agreement with Mr. Taylor, our Chief Executive Officer, that will automatically renew for a one-year period following the expiration of the initial three-year term and for additional one-year periods after each subsequent anniversary, unless either party provides a notice of non-renewal 90 days prior to the expiration of the initial term or any subsequent term. The employment agreement provides that Mr. Taylor will receive an annual base salary of $650,000, an annual bonus with a target opportunity of 100% of his annual base salary, the actual amount of which is to be determined by the Compensation Committee and Mr. Taylor will participate in the same benefit programs as our other employees. Pursuant to the terms of his employment agreement, Mr. Taylor was granted 1,251,112 stock options, 50% of which vested on December 22, 2011 and the remaining 50% of which will vest on December 22, 2012. Additionally, Mr. Taylor received 536,191 shares of restricted common stock, which vest based on the achievement of performance goals relating to increases in the price of a share of common stock (with 33.3% (178,730) of the performance shares vesting when our stock price equals or exceeds $25 per share, 33.3% (178,730) of the performance shares vesting when our stock price equals or exceeds $28 per share and 33.3% (178,731) of the performance shares vesting when our stock price equals or exceeds $32 per share). The vesting of Mr. Taylor’s restricted shares is also subject to his continued employment with us and the occurrence of a qualified investment transaction, which occurred on September 30, 2010. In the event of the termination of Mr. Taylor’s employment by us without “cause”, by Mr. Taylor for “good reason” or due to death or disability, Mr. Taylor would be entitled to severance and accelerated vesting of certain equity awards. Mr. Taylor’s employment agreement also provides that Mr. Taylor will be subject to restrictive covenants, including non-competition and non-solicitation of employees, customers and certain other parties with business relationships with us, while employed by us and for the one-year period following his termination of employment with us. The severance provisions of Mr. Taylor’s employment agreement are more fully described in “—Potential Payments upon Termination or Change-in-Control” below.
Employment Agreements with Other Named Executive Officers
In August 2012, Messrs. Marshall, Singletary and Posner each entered into employment agreements that, among other things, provide for cash severance benefits equal to 1.5 times the executive’s base salary and target bonus and 18 months of welfare benefits continuation upon a qualifying termination of employment and contain a golden parachute excise tax gross-up provision and restrictive covenants, including non-competition and solicitation restrictions with respect to customers, employees and certain other parties with business relationships with us, similar to those under Mr. Taylor’s agreement.
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Outstanding Equity Awards at 2011 Fiscal Year-End
The following table provides information regarding outstanding equity awards held by each of our named executive officers on December 31, 2011:
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable1 | Number of Securities Underlying Unexercised Options Unexercisable (#)(1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(3) | |||||||||||||||||||||||||||
R. Eugene Taylor | 625,556 | 625,556 | — | 20.00 | 12/22/19 | — | — | 536,191 | 11,104,516 | |||||||||||||||||||||||||||
Christopher Marshall | 234,583 | 234,584 | — | 20.00 | 12/22/19 | — | — | 201,072 | 4,164,201 | |||||||||||||||||||||||||||
R. Bruce Singletary | 156,389 | 156,389 | — | 20.00 | 12/22/19 | — | — | 134,048 | 2,776,134 | |||||||||||||||||||||||||||
Kenneth A. Posner | 39,097 | 39,097 | — | 20.00 | 12/22/19 | — | — | 33,512 | 694,034 |
(1) | Represents stock options, 50% of which vested on December 22, 2011 and the remaining 50% of which vest on December 22, 2012. |
(2) | Represents shares of performance-based restricted stock which vest according to the following parameters (subject to the named executive officer’s continued service through the date that the performance goals are achieved: |
• | 1/3 vest after the per share stock price equals or exceeds $25.00 for 30 days; |
• | 1/3 vest after the per share stock price equals or exceeds $28.00 for 30 days; and |
• | 1/3 vest after the per share stock price equals or exceeds $32.00 for 30 days. |
(3) | Share price based on an estimate of share value derived by equally weighting and averaging the price of a private trade of our shares occurring near December 31, 2011, an estimate of share value derived from interpolation of ratios of peer companies public stock prices to reported tangible book values and by discounting estimated cash flows from our projected future operating results assuming operations were static as of December 31, 2011. |
In addition, in January 2012, we granted performance-based restricted stock and stock options to each of the named executive officers. In the aggregate, the named executive officers were granted 306,563 shares of restricted stock and stock options to acquire 627,849 shares of our common stock. One-half of the stock options were vested on the date of grant and the remaining portions of the stock options will vest, subject to continued employment, on the first anniversary of the date of grant. The material terms of the performance-based restricted stock, including vesting, are substantially the same as the performance-based restricted stock granted in March 2011 and described above.
Potential Payments upon Termination or Change-in-Control
Termination of Employment
Severance Under Mr. Taylor’s Employment Agreement. If Mr. Taylor’s employment is terminated (1) by us without “cause” or due to “disability” (as defined below), (2) by Mr. Taylor for “good reason” or (3) upon Mr. Taylor’s death during the employment period, subject to his execution (other than upon his death) and nonrevocation of a release of claims against us and our affiliated entities, Mr. Taylor will be entitled to be paid any earned but unpaid base salary and bonuses and a lump sum cash amount equal to the sum of (a) two times his
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annual base salary immediately prior to the date of the qualifying termination and (b) two times the higher of his target annual bonus for the year of termination and the annual bonus paid or payable to Mr. Taylor in respect of the year prior to the year of the qualifying termination. In addition, upon a qualifying termination, all of Mr. Taylor’s unvested outstanding stock options granted under his employment agreement will immediately vest and 50% of each tranche of unvested performance shares granted under his employment agreement will immediately vest. The remaining portion of the unvested performance shares granted under Mr. Taylor’s employment agreement will remain outstanding and continue to be eligible to vest based on the achievement of the performance goals pursuant to the current vesting schedule.
Mr. Taylor is subject to non-competition and non-solicitation restrictions while employed by us and for one year following a termination of his employment and is subject to a standard, ongoing confidentiality obligation.
In addition, Mr. Taylor may be entitled to a golden parachute excise tax gross-up payment in certain cases. However, in the event that the total parachute payments made to Mr. Taylor do not exceed a certain threshold (110% of his base amount (as defined in Section 280G of the Internal Revenue Code)), payment to him will be cut back so that no excise tax is imposed.
Severance for Other Named Executive Officers. As of December 31, 2011, our named executive officers other than Mr. Taylor were not eligible for severance upon any termination of employment. In August 2012, each of Messrs. Marshall, Singletary and Posner entered into employment agreements that, among other things, provide for cash severance benefits equal to 1.5 times the executive’s base salary and target bonus and 18 months of welfare benefits continuation upon a qualifying termination of employment and contain a golden parachute excise tax gross-up provision and restrictive covenants, including non-competition and solicitation restrictions with respect to customers, employees and certain other parties with business relationships with us, similar to those under Mr. Taylor’s agreement.
Vesting of Equity Awards Held by Named Executive Officers under the 2010 Equity Incentive Plan. The employment agreement with Mr. Taylor provides that upon a termination of employment by us without “cause,” a resignation of employment by him for “good reason” or termination of employment due to death or disability, all of the unvested outstanding stock options granted to Mr. Taylor will immediately vest and 50% of each tranche of unvested performance shares granted under his employment agreement will immediately vest. The remaining portion of the unvested performance shares granted to Mr. Taylor will remain outstanding and continue to be eligible to vest based on the achievement of the performance goals pursuant to the current vesting schedule. Pursuant to the terms of the equity award agreements with Messrs. Marshall, Singletary and Posner, upon a termination of employment for any reason, equity awards that have not vested prior to the date of termination will be forfeited.
For the purposes of Mr. Taylor’s employment agreement, “good reason” generally means (1) material diminution of annual base salary or target incentive payment, (2) material diminution in position, authority, duties or responsibilities, (3) any material failure by us to comply with the compensation related provisions of the employment agreement, (4) any relocation of the executive’s principal place of business to a location more than 30 miles from the executive’s principal place of business immediately prior to the move other than the initial relocation in connection with the establishment of our headquarters or (5) any material breach of the employment agreement.
For the purposes of Mr. Taylor’s employment agreement, “cause” generally means the executive’s (1) willful misconduct or willful neglect in the performance of his duties, (2) willful failure to adhere materially to the clear directions of the Board of Directors, (3) conviction of or formal admission to or plea of guilty ornolo contendere to a charge of commission or a felony or (4) willful breach of any material term of the employment agreement.
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For the purposes of Mr. Taylor’s employment agreement, “disability” generally means the inability of the executive to perform his duties with us on a full-time basis as a result of incapacity due to mental or physical illness, which inability exists for 180 days during any rolling 12-month period, as determined by a physician selected by us or our insurers and acceptable to the executive or the executive’s legal representative.
Change in Control
We have not entered into individual agreements or arrangement with our named executive officers that provide for enhanced severance or benefits upon a change in control of the Company, other than the golden parachute excise tax gross-up payment that each of Messrs. Taylor, Marshall, Singletary and Posner are entitled to under certain circumstances pursuant to the terms of their employment agreement.
Upon a “change in control” (as defined below) of the Company, the unvested stock options held by the named executive officers immediately vest and become exercisable and unvested performance shares held by the named executive officers will vest based on performance, as determined by the Compensation Committee.
A change in control is generally deemed to occur under the 2010 Equity Incentive Plan upon:
• | the acquisition by any individual, entity or group of “beneficial ownership” (pursuant to the meaning given in Rule 13d-3 under the Exchange Act) of 51% or more (on a fully diluted basis) of either (a) the outstanding shares of our common stock, taking into account as outstanding for this purpose each common stock issuable upon the exercise of options or warrants, the conversion of convertible stock or debt and the exercise or settlement of any similar right to acquire such common stock, or (b) combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors, with each of clauses (a) and (b) subject to certain customary exceptions; |
• | a majority of the directors who constituted the Board of Directors at the time the 2010 Equity Incentive Plan was adopted (or any person becoming a director subsequent to that date, whose election or nomination for election was approved by a vote of at least two-thirds of the incumbent directors then on the Board of Directors) cease for any reason to constitute at least a majority of the Board of Directors; |
• | approval by our shareholders of our complete dissolution or liquidation; or |
• | the consummation of a merger, consolidation, statutory share exchange, a sale or other disposition of all or substantially all of our assets or similar form of corporate transaction involving us that requires the approval of our shareholders (each, a “Business Combination”), whether for such transaction or the issuance of securities in the transaction, in each case, unless immediately following the Business Combination: (a) more than 50% of the total voting power of the entity resulting from such Business Combination or, if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of sufficient voting securities eligible to elect a majority of the directors of the surviving company is represented by the outstanding company voting securities that were outstanding immediately prior to such Business Combination, and such voting power among the holders thereof is in substantially the same proportion as the voting power of the outstanding company voting securities among the holders thereof immediately prior to the Business Combination, (b) no person (other than any employee benefit plan sponsored or maintained by the surviving company) is or becomes the “beneficial owner”, directly or indirectly, of 51% or more of the total voting power of the outstanding voting securities eligible to elect directors of the parent company (or, if there is no parent company, the surviving company) and (c) at least two-thirds of the members of the board of directors of the parent company (or, if there is no parent company, the surviving company) following the consummation of the Business Combination were members of the Board of Directors at the time of the Board of Director’s approval of the execution of the initial agreement providing for the Business Combination. |
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The following table reflects the estimated payments to our named executive officers that may be made upon a termination of employment, a termination of employment in connection with a change in control or a change in control without the termination of a named executive officer’s employment. The estimated payments in the table are calculated based on the assumption that the hypothetical termination of employment and/or the hypothetical change in control each occurred on December 31, 2011.
Name | Scenario | Cash Severance ($)(1) | Stock Option Vesting ($) | Restricted Stock Vesting ($) | Benefits ($) | Gross-up ($) | Total ($) | |||||||
R. Eugene Taylor | Resignation | – | – | – | – | – | – | |||||||
Involuntary Termination not for Cause | 2,600,000 | 444,145 | 5,552,258 | 33,846 | – | 8,630,249 | ||||||||
Involuntary Termination for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination Following Change of Control | 2,600,000 | 444,145 | 5,552,258 | 33,846 | 3,484,773 | 12,115,022 | ||||||||
Change of Control (No Termination of Employment) | – | 444,145 | – | – | – | 444,145 | ||||||||
Christopher G. Marshall | Resignation | – | – | – | – | – | – | |||||||
Involuntary Termination not for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination Following Change of Control | – | 166,554 | – | – | – | 166,554 | ||||||||
Change of Control (No Termination of Employment) | – | 166,554 | – | – | – | 166,554 | ||||||||
R. Bruce Singletary | Resignation | – | – | – | – | – | – | |||||||
Involuntary Termination not for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination Following Change of Control | – | 111,036 | – | – | – | 111,036 | ||||||||
Change of Control (No Termination of Employment) | – | 111,036 | – | – | – | 111,036 | ||||||||
Kenneth A. Posner | Resignation | – | – | – | – | – | – | |||||||
Involuntary Termination not for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination for Cause | – | – | – | – | – | – | ||||||||
Involuntary Termination Following Change of Control | – | 27,759 | – | – | – | 27,759 | ||||||||
Change of Control (No Termination of Employment) | – | 27,759 | – | – | – | 27,759 |
(1) | Cash severance payments based on severance terms provided in the applicable employment agreement. |
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Director Compensation
Each director receives an annual cash retainer of $50,000 as compensation for his services as a member of the Board of Directors. The chair of the Audit Committee of the Board of Directors, the chair of the Compensation Committee of the Board of Directors, the chair of the Nominating and Governance Committee of the Board of Directors and the chair of the Risk Committee of the Board of Directors each receive an additional cash retainer of $10,000. In connection with our private placements, the members of our Board of Directors were also provided with 25,000 shares of restricted stock and stock options to acquire 25,000 shares of our common stock. These equity awards to non-employee directors were granted in March 2011.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Option Awards ($)(2) | All Other Compensation ($) | Total ($) | |||||||||||||||
Richard M. DeMartini(3) | 50,000 | 425,000 | 110,250 | – | 585,250 | |||||||||||||||
Peter N. Foss | 60,000 | 425,000 | 110,250 | – | 595,250 | |||||||||||||||
William A. Hodges | 50,000 | 425,000 | 110,250 | – | 585,250 | |||||||||||||||
Jeffrey E. Kirt(3) | 50,000 | 425,000 | 110,250 | – | 585,250 | |||||||||||||||
Marc D. Oken(3) | 50,000 | 425,000 | 110,250 | – | 585,250 |
(1) | The amounts in this column reflect the grant date fair value of the restricted stock awarded to our directors in 2011 calculated in accordance with FASB ASC Topic 718. See note 17 of the audited consolidated financial statements for an explanation of the assumptions made in valuing these awards. |
(2) | The amounts included in this column reflect the grant date fair value of stock option awards granted to our directors in 2011. The grant date fair value was determined in accordance with FASB ASC Topic 718. The grant date fair value of the stock options is estimated using the Black-Scholes option pricing model. See note 17 of the audited consolidated financial statements for an explanation of the assumptions made in valuing these awards. |
(3) | Cash retainers relating to services as a director provided by (a) Mr. DeMartini, are paid by us to an affiliate Crestview-NAFH, (b) Mr. Kirt, are paid by us to Oak Hill and (c) Mr. Oken, are paid by us to investment funds affiliated with Falfurrias Capital Partners. |
The table below shows the aggregate number of stock options (and the exercise price thereof) and restricted stock held by each director (or the entity that appoints the director for the fiscal year ended December 31, 2011, which is included in parentheses beside the applicable director’s name).
Name | Stock Options (in Shares) | Exercise Price | Expiration Date | Restricted Stock (in Shares) | ||||||||||||
Richard M. DeMartini | 25,000 | (1) | $ | 20.00 | 12/22/19 | 12,500 | (2) | |||||||||
Peter N. Foss | 25,000 | (1) | $ | 20.00 | 12/22/19 | 12,500 | (2) | |||||||||
William A. Hodges | 25,000 | (1) | $ | 20.00 | 12/22/19 | 12,500 | (2) | |||||||||
Jeffrey E. Kirt (Oak Hill) | 25,000 | (1) | $ | 20.00 | 12/22/19 | 12,500 | (2) | |||||||||
Marc D. Oken | 25,000 | (1) | $ | 20.00 | 12/22/19 | 12,500 | (2) |
(1) | Stock options disclosed in this column were granted in March 2011 and vest in two equal installments, the first half vested on December 22, 2011 and the remaining half of the stock options vest on December 22, 2012. |
(2) | The shares of restricted stock disclosed in this column were granted in March 2011 and vest on December 22, 2012. |
In addition to the compensation described above, non-employee directors are reimbursed for reasonable business expenses relating to their attendance at meetings of our Board of Directors, including expenses relating to lodging, meals and transportation to and from the meetings.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information about the beneficial ownership of our common stock as of September 7, 2012 for (i) each person known to us to be the beneficial owner of more than 5% of our common stock, (ii) each named executive officer, (iii) each of our directors and (iv) all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Capital Bank Financial Corp., 121 Alhambra Plaza, Suite 1601, Coral Gables, Florida 33134. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws. We have based our calculation of the percentage of beneficial ownership on 46,456,561 shares of common stock outstanding as of September 7, 2012, (including 20,334,441 shares of Class A common stock and 26,122,120 shares of Class B non-voting common stock).
In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 7, 2012. We, however, did not deem these shares outstanding for the purpose of computing the percentage ownership of any other person.
Shares of Class A Common Stock Beneficially Owned | Shares of Class B Common Stock Beneficially Owned | Total Shares of Common Stock Beneficially Owned | ||||||||||||||
Name of beneficial owner | Number | Number | Number | % | ||||||||||||
Executive Officers and Directors: | ||||||||||||||||
R. Eugene Taylor | 1,593,576 | (1) | – | 1,593,576 | 3.38 | % | ||||||||||
Christopher G. Marshall | 623,541 | (2) | – | 623,541 | 1.33 | % | ||||||||||
R. Bruce Singletary | 463,323 | (3) | – | 463,323 | * | |||||||||||
Kenneth A. Posner | 245,495 | (4) | – | 245,495 | * | |||||||||||
Richard M. DeMartini(5) | 37,500 | (6) | – | 37,500 | * | |||||||||||
Peter N. Foss | 37,500 | (6) | – | 37,500 | * | |||||||||||
William A. Hodges | 37,500 | (6) | – | 37,500 | * | |||||||||||
Jeffrey E. Kirt(7) | 37,500 | (6) | – | 37,500 | * | |||||||||||
Marc D. Oken(8) | 287,500 | (6) | – | 287,500 | * | |||||||||||
All executive officers and directors as a group (9 persons) | 3,363,435 | – | 3,363,435 | 7.02 | % | |||||||||||
Greater than 5% Stockholders: | ||||||||||||||||
Crestview-NAFH, LLC(9) | 2,009,735 | (6) | 9,262,688 | 11,272,423 | 24.26 | % | ||||||||||
Oak Hill Advisors, L.P.(10) | 999,870 | 3,504,528 | 4,504,398 | 9.69 | % | |||||||||||
NAFH Holdings LLC(11) | 987,370 | 3,479,528 | 4,466,898 | 9.62 | % | |||||||||||
Franklin Mutual Advisers, LLC(12) | 987,620 | 3,403,387 | 4,391,007 | 9.45 | % | |||||||||||
Taconic Capital Advisors L.P.(13) | 1,002,085 | 3,351,025 | 4,353,110 | 9.37 | % |
(1) | Includes 638,379 shares of restricted stock subject to performance vesting. Includes 730,197 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012. |
(2) | Includes 269,197 shares of restricted stock subject to performance vesting. Includes 304,344 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012. |
(3) | Includes 202,173 shares of restricted stock subject to performance vesting. Includes 226,150 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012. |
(4) | Includes 101,637 shares of restricted stock subject to performance vesting. Includes 108,858 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012. |
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(5) | Consists of shares owned by Crestview Advisors, L.L.C. which were issued in connection with Mr. DeMartini’s service on our Board of Directors. Mr. DeMartini disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein, if any. |
(6) | Includes 12,500 shares of restricted stock. Includes 12,500 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012. |
(7) | Consists of shares owned by Oak Hill Advisors, L.P. and certain of its affiliated funds which were issued in connection with Mr. Kirt’s service on our Board of Directors. Mr. Kirt disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein, if any. |
(8) | Includes (i) 250,000 shares owned by Falfurrias Capital Partners, L.P. and (ii) 12,500 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012 and 12,500 shares of restricted stock owned by Falfurrias Management Partners, LLC. Mr. Oken disclaims beneficial ownership of the securities owned directly or indirectly by Falfurrias Capital Partners, L.P. and Falfurrias Management Partners, LLC, except to the extent of his pecuniary interest therein, if any. |
(9) | Consists of shares owned directly by Crestview-NAFH, LLC. The amount also includes 12,500 shares, 12,500 restricted shares and 12,500 options that are currently exercisable or are exercisable within 60 days of September 7, 2012 owned by Crestview Advisors, L.L.C. Each of Crestview Partners II, L.P., Crestview Partners II (FF), L.P., Crestview Partners II (TE), L.P., Crestview Partners II (Cayman), L.P., Crestview Partners II (FF Cayman), L.P., Crestview Partners II (892 Cayman), L.P., Crestview Offshore Holdings II (Cayman), L.P., Crestview Offshore Holdings II (FF Cayman), L.P., Crestview Offshore Holdings II (892 Cayman), L.P., Crestview Partners II GP, L.P. and Crestview, L.L.C. may be deemed to be beneficial owners of such shares. The address of each of these stockholders is c/o Crestview Partners, 667 Madison Avenue, 10th Floor, New York, New York 10021. |
(10) | Includes (i) 41,449 shares of Class A common stock and 150,940 shares of Class B non-voting common stock directly owned by Future Fund Board of Guardians, (ii) 5,224 shares of Class A common stock and 19,029 shares of Class B non-voting common stock directly owned by Lerner Enterprises, LLC, (iii) 59,639 shares of Class A common stock and 139,308 shares of Class B non-voting common stock directly owned by Oak Hill Credit Opportunities Master Fund, Ltd., (iv) 105,488 shares of Class A common stock and 246,407 shares of Class B non-voting common stock directly owned by Oak Hill Credit Alpha Master Fund, L.P., (v) 79,067 shares of Class A common stock and 287,928 shares of Class B non-voting common stock directly owned by OHA Structured Products Master Fund B, L.P., (vi) 499,461 shares of Class A common stock and 1,818,813 shares of Class B non-voting common stock directly owned by OHA Strategic Credit Master Fund, L.P., (vii) 27,865 shares of Class A common stock and 101,473 shares of Class B non-voting common stock directly owned by OHA Structured Products Master Fund, L.P., (viii) 142,461 shares of Class A common stock and 518,780 shares of Class B non-voting common stock directly owned by OHA Strategic Credit Master Fund II, L.P., (ix) 620 shares of Class A common stock and 80,126 shares of Class B non-voting common stock directly owned by Oak Hill Credit Opportunities Financing, Ltd., (x) 1,096 shares of Class A common stock and 141,724 shares of Class B non-voting common stock directly owned by OHSF II Financing, Ltd. and (xi) 12,500 stock options that are currently exercisable or are exercisable within 60 days of September 7, 2012 and 12,500 shares of restricted Class A common stock owned by Oak Hill Advisors, L.P. Oak Hill Advisors, L.P. (“OHA”) is the investment manager for Future Fund Board of Guardians, Lerner Enterprises, LLC, Oak Hill Credit Alpha Master Fund, L.P., Oak Hill Credit Opportunities Master Fund, Ltd., Oak Hill Credit Opportunities Financing, Ltd., OHA Strategic Credit Master Fund, L.P., OHA Strategic Credit Master Fund II, L.P., OHA Structured Products Master Fund, L.P., OHA Structured Products Master Fund B, L.P., and OHSF II Financing Ltd. (the “Oak Hill Funds”). Oak Hill Advisors GenPar, L.P. (“GenPar”) is the general partner of OHA. GenPar is controlled by Glenn R. August, William H. Bohnsack, Jr., Scott D. Krase, Robert B. Okun, Alan Schrager and Carl Wernicke. OHA, GenPar and Messrs. August, Bohnsack, Krase, Okun, Schrager and Wernicke may be deemed to beneficially own the securities held by the Oak Hill Funds. OHA, GenPar and Messrs. August, Bohnsack, Krase, Okun, Schrager and Wernicke each disclaim beneficial ownership of such securities except to the extent of their pecuniary interests therein. The address of each of these stockholders is c/o Oak Hill Advisors, L.P., 1114 Avenue of the Americas, 27th Floor, New York, New York 10036. |
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(11) | Morton Holdings, Inc. has the sole voting and dispositive power over the shares of the Company’s common stock owned by NAFH Holdings LLC. Philip Korsant is the sole shareholder of Morton Holdings, Inc. and disclaims beneficial ownership of the securities held by NAFH Holdings LLC. The address of this stockholder is 350 Park Avenue, 11th Floor, New York, New York 10022. |
(12) | Includes (i) 866,477 shares of Class A common stock and 2,980,444 shares of Class B non-voting common stock directly owned by Mutual Global Discovery Fund, (ii) 42,649 shares of Class A common stock and 153,021 shares of Class B non-voting common stock directly owned by Mutual Financial Services Fund and (iii) 78,494 shares of Class A common stock and 269,922 shares of Class B non-voting common stock directly owned by Mutual Global Discovery Securities Fund. Mutual Global Discovery Fund, Mutual Financial Services Fund and Mutual Global Discovery Securities Fund (the “FMA Funds”) are investment companies managed by Franklin Mutual Advisers, LLC (“FMA”). Pursuant to investment advisory agreements with each of the FMA Funds, FMA has sole voting and investment power over all the securities owned by the FMA Funds, including the shares of the Company’s common stock. For purposes of the SEC’s reporting requirements, FMA is deemed to be beneficial owner of the Company’s shares; however, FMA expressly disclaims beneficial ownership of these shares as FMA has no right to any economic benefits in, nor any interest in, dividends or proceeds from the sale of the shares. The address for the FMA Funds is c/o Franklin Mutual Advisers, LLC, 101 John F. Kennedy Parkway, Short Hills, New Jersey 07078. |
(13) | Includes (i) 325,445 shares of Class A common stock and 1,171,851 shares of Class B non-voting common stock directly owned by Taconic Opportunity Fund L.P., (ii) 88,205 shares of Class A common stock and 254,517 shares of Class B non-voting common stock directly owned by Taconic Opportunity Fund II L.P., (iii) 455,809 shares of Class A common stock and 1,316,071 shares of Class B non-voting common stock directly owned by Taconic Opportunity Master Fund L.P., (iv) 45,359 shares of Class A common stock and 125,725 shares of Class B non-voting common stock directly owned by Taconic Market Dislocation Fund II L.P., (v) 10,551 shares of Class A common stock and 29,242 shares of Class B non-voting common stock directly owned by Taconic Market Dislocation Master Fund II L.P. and (vi) 76,716 shares of Class A common stock and 453,619 shares of Class B non-voting common stock directly owned by Taconic Capital Partners 1.5 L.P. Kenneth D. Brody and Frank P. Brosens have ultimate decision-making authority over the voting and investment decisions of each of the funds. Taconic Capital Advisors L.P. disclaims beneficial ownership of those shares in which it does not have a pecuniary interest. Each of Messrs. Brody and Brosens disclaims beneficial ownership of those shares in which he does not have a pecuniary interest. Each of these funds is managed by Taconic Capital Advisors L.P. The address of each of these stockholders is 450 Park Avenue, 9th Floor, New York, New York 10022. |
The following table sets forth certain information as of September 7, 2012 regarding shares of Capital Bank Corp. common stock owned of record or known by Capital Bank Corp. to be owned beneficially by (i) each director, (ii) each director nominee, (iii) each executive officer named in the Summary Compensation Table in the Amendment No. 1 to Capital Bank Corp.’s Form 10-K, filed with the SEC on April 30, 2012, and each executive officer who served Capital Bank Corp. during the fiscal year ended December 31, 2011 (iv) all those known by Capital Bank Corp. to beneficially own more than 5% of the Capital Bank Corp. common stock, and (v) all directors and executive officers as a group. The persons listed below have sole voting and investment power with respect to all shares of Capital Bank Corp. common stock owned by them, except to the extent that such power may be shared with a spouse or as otherwise set forth in the footnotes. The mailing address of Mr. Atkins and Mr. Keller and each of the named executive officers is in care of Capital Bank Corp.’s address, which is 333 Fayetteville Street, Suite 700, Raleigh, NC 27601. The mailing address of the remaining directors is in care of Capital Bank Financial Corp.’s address, which is 121 Alhambra Plaza, Suite 1601, Coral Gables, Florida 33134.
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The percentages shown below have been calculated based on 85,802,164 total shares of Capital Bank Corp. common stock outstanding as of September 7, 2012.
Name of Beneficial Owner | Aggregate Number of Shares Beneficially Owned(1) | Number of Shares Acquirable within 60 Days(2) | Percent of Class | |||||||||
5% Shareholders | ||||||||||||
Capital Bank Financial Corp. | 71,000,000 | – | 82.75 | % | ||||||||
Directors | ||||||||||||
Charles F. Atkins(3) | 196,992 | 2,000 | * | |||||||||
Peter N. Foss(4) | 1,000 | – | * | |||||||||
William A. Hodges(4) | 1,000 | – | * | |||||||||
O. A. Keller, III(5) | 531,062 | 3,500 | * | |||||||||
Christopher G. Marshall(6) | 71,000,400 | – | 82.75 | % | ||||||||
R. Bruce Singletary(6) | 71,000,400 | – | 82.75 | % | ||||||||
R. Eugene Taylor(6) | 71,000,000 | – | 82.75 | % | ||||||||
Named executive officers | ||||||||||||
Christopher G. Marshall(6) | 71,000,400 | – | 82.75 | % | ||||||||
R. Bruce Singletary(6) | 71,000,400 | – | 82.75 | % | ||||||||
R. Eugene Taylor(6) | 71,000,000 | – | 82.75 | % | ||||||||
David C. Morgan(7) | 6,432 | – | * | |||||||||
Mark J. Redmond(8) | 8,825 | 14,000 | * | |||||||||
B. Grant Yarber(9) | 21,018 | – | * | |||||||||
All directors and executive officers as a group (10 persons)(10) | 71,767,129 | 19,500 | 83.65 | % |
* | Less than one percent |
(1) | The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC. Accordingly, they may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power. Beneficial ownership may be disclaimed as to certain of the securities. |
(2) | Any shares that a person has the right to acquire within 60 days are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. This column reflects the number of shares of Capital Bank Corp. common stock that could be purchased by exercise of warrants or options to purchase Capital Bank Corp. common stock on September 7, 2012 or within 60 days thereafter. |
(3) | Includes 50,100 shares held by AGA Corporation, of which Mr. Atkins owns 19.8% of the outstanding stock; 12,999 shares held by AK&K Corporation, of which Mr. Atkins owns 25.0% of the outstanding stock; and 1,000 shares held by Taboys Corporation, a company wholly owned by Mr. Atkins. From time to time, the shares held by AGA Corporation and AK&K Corporation may be pledged in the ordinary course of business. |
(4) | Excludes securities owned directly or indirectly by CBF, beneficial ownership of which is hereby disclaimed by each of Messrs. Foss and Hodges, except to the extent of his pecuniary interest therein, if any. |
(5) | Includes 21,633 shares held jointly with Mr. Keller’s wife; 25,950 shares held by Mr. Keller’s wife; 39,205 shares held in IRAs; 4,800 shares held as custodian by Mr. Keller for his children and grandchildren; and 60,042 shares held by Amos Properties, LLC, a company of which Mr. Keller owns 25.0% and Mr. Keller’s wife owns 25.0%. |
(6) | Each of Messrs. Marshall, Singletary and Taylor hereby disclaims beneficial ownership of the securities owned directly or indirectly by CBF, except to the extent of his pecuniary interest therein, if any. |
(7) | Includes 1,730 shares held jointly with Mr. Morgan’s wife. |
(8) | Includes 3,623 shares held in an IRA. |
(9) | Includes 2,470 shares held in an IRA, and 5,754 shares held in the Capital Bank 401(k) Retirement Plan. |
(10) | Includes all shares reflected in this table as beneficially owned by each director of Capital Bank Corp., and by Messrs. Morgan, Redmond and Yarber, each of whom is a named executive officer of Capital Bank Corp. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the director and executive officer compensation arrangements discussed above under “Management—Compensation Discussion and Analysis,” the following is a summary of material provisions of various transactions we have entered into with our executive officers, directors (including nominees), 5% or greater stockholders and any of their immediate family members or entities affiliated with them since November 30, 2009, the date of our incorporation. We believe the terms and conditions set forth in such agreements are reasonable and customary for transactions of this type.
Arrangements with Crestview-NAFH, LLC and Affiliates of Oak Hill Advisors, L.P.
Crestview-NAFH purchased for aggregate consideration of $224.7 million approximately 10% of our shares of Class A common stock and 36.0% of our shares of Class B non-voting common stock, both of which were purchased in or concurrently with our private placements. Crestview-NAFH has the right to designate one nominee to our Board of Directors and, if elected, to have such director serve on the Nominating and Governance and Compensation Committees of our Board of Directors. Crestview-NAFH’s nominating right will terminate at such time as it and its affiliates collectively own less than 33% of the original number of shares of common stock purchased by Crestview-NAFH in our private placements. As of September 7, 2012, Crestview-NAFH owns approximately 100% of these shares of common stock, consisting of approximately 10% of our Class A common stock and 35% of our Class B non-voting common stock. Mr. DeMartini currently serves as the Crestview-NAFH’s representative on our Board of Directors. See “Management—Executive Officers and Directors—Board of Directors—Richard M. DeMartini” for Mr. DeMartini’s biography.
On March 26, 2010, we paid approximately $2,100,000 to Crestview Advisors, LLC, an affiliate of the general partner of Crestview-NAFH, as reimbursement for expenses in association with our original private offerings. In addition, Crestview Advisors, LLC receives $12,500 each quarter as a director’s fee related to Mr. DeMartini’s service on our Board of Directors.
Oak Hill purchased for aggregate consideration of $89.3 million approximately 5% of our shares of Class A common stock and 13% of our shares of Class B non-voting common stock, both of which were purchased in or concurrently with our private placements. Oak Hill also has the right to designate one nominee to our Board of Directors and, if elected, to have such director serve on the Nominating and Governance and Compensation Committees of our Board of Directors. Oak Hill’s nominating right will terminate at such time as Oak Hill affiliates own less than 33% of the original number of shares of common stock purchased by Oak Hill in our private placements. As of September 7, 2012, Oak Hill owns approximately 100% of these shares of common stock, consisting of approximately 5% of our Class A common stock and 13% of our Class B non-voting common stock. Mr. Kirt currently serves as Oak Hill’s representative on our Board of Directors. See “Management—Executive Officers and Directors—Board of Directors—Jeffrey E. Kirt” for Mr. Kirt’s biography.
Agreements with our Founders
Prior to the issuance and sale of our common stock in our private placements, we sold 200,000 shares of our common stock to our four founders, who are also the four members of our executive management team, Messrs. Taylor, Marshall, Posner and Singletary (who we refer to collectively as “our founders”), for an aggregate purchase price of $2,000. These shares are subject to certain transfer restrictions. Until we complete Investment Transactions (as defined below) that, together with any other Investment Transactions (including any follow-on investments in, or contributions to, the capital of any businesses in which we previously invested in connection with an Investment Transaction), represent total capital deployed (measured in each case as of the time of the relevant Investment Transaction) of at least (1) 50% of the net proceeds from our private placements, 50% of the common stock held by our founders will not be transferable and (2) 75% of the net proceeds from our private placements, the remaining 50% of the common stock held by our founders will not be transferable, in each case in the hands of the holder to a third party (other than in connection with certain intra-family or estate planning transfers). As of September 7, 2012, we have completed Investment Transactions representing 82.0% of the net proceeds from our private placements. Upon consummation of our acquisition of Southern Community Financial, we will have completed Investment Transactions representing 93.0% of the net proceeds from our private placements.
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An “Investment Transaction” means a transaction in which we acquire control of, or make a non-control investment in, a banking institution (including any savings association or similar financial institution) within the United States, provided that non-control investments will not qualify as “Investment Transactions” unless we obtain a board seat or other governance rights pursuant to a stockholder rights agreement or similar agreement.
In connection with our private placements, we also entered into a registration rights agreement with our founders and certain other stockholders. See “—Registration Rights Agreement” below.
Registration Rights Agreement
Concurrently with the consummation of our December 2009 private placement, we entered into a registration rights agreement for the benefit of our stockholders, including Crestview-NAFH, FBR Capital Markets & Co. and the four members of our executive management team, with respect to our common stock sold in our private placements. Under the terms of the registration rights agreement, within 180 days of our investing 50% of the net proceeds of our private placements, we agreed to file with the SEC a shelf registration statement on Form S-1 or such other form under the Securities Act as would allow our stockholders to resell their shares of common stock acquired in our private placements. Our TIB Financial investment, completed on September 30, 2010, represented over 50% of the net proceeds of our private placements. Our stockholders have subsequently agreed to extend the deadline for filing a shelf registration statement until June 30, 2012, and we filed the shelf registration statement on Form S-1 with the SEC on June 29, 2012.
If we had not filed a shelf registration statement before June 30, 2012, other than as a result of the SEC being unable to accept such filing, then each of R. Eugene Taylor, Christopher G. Marshall, R. Bruce Singletary and Kenneth A. Posner, if then owed a performance bonus, would have had to immediately forfeit 50%, and thereafter forfeit an additional 10% for each month thereafter that such shelf registration statement had not been filed, of any performance bonus that would otherwise be payable to him during that fiscal year (or to which he became entitled as a result of performance during that fiscal year). In addition, no bonuses, compensation, awards, equity compensation or other amounts could have been paid or granted in lieu of such forfeited bonuses.
If the shelf registration statement has not been declared effective by the SEC within 180 days after June 29, 2012 (which we refer to as the “Trigger Date”), a special meeting of stockholders shall be called in accordance with our amended and restated bylaws solely for the purposes of (1) considering and voting upon proposals to remove each of our then-serving directors and (2) electing such number of directors as there are then vacancies on the Board of Directors. However, stockholders holding two-thirds of the outstanding registrable shares may waive the requirement to hold such special meeting. The special meeting must occur as soon as reasonably practicable following the Trigger Date but in no event more than 45 days after the Trigger Date.
In addition, pursuant to the registration rights agreement, we provided written notice to each stockholder holding registrable shares following our filing of a registration statement that provides for the initial public offering of our common stock (which we refer to as the “IPO Registration Statement”). Such stockholders have “piggy-back” registration rights that permit them to have shares of common stock owned by them included in the IPO Registration Statement upon written notice to us within the prescribed time limit. Each such stockholder’s ability to register shares under the IPO Registration Statement is subject to the terms of the registration rights agreement. The managing underwriter(s) may under certain circumstances limit the number of shares owned by such holders that are included in our initial public offering, but the managing underwriter(s) may not reduce such holders below 25% of the number of shares of common stock to be sold under the IPO Registration Statement. Stockholders holding registrable shares who do not elect, despite their right to do so under the registration rights agreement, to include their shares of our common stock for resale in the initial public offering may not, subject to certain exceptions, to the extent requested by us or an underwriter of our securities, directly or indirectly sell, offer to sell (including without limitation any short sale), grant any option or otherwise transfer or dispose of any such shares of our common stock for a period of 180 days following the effective date of the registration statement filed in connection with the initial public offering of our common stock.
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Statement of Policy Regarding Transactions with Related Persons
Transactions by us with related parties are subject to a formal written policy, as well as regulatory requirements and restrictions. These requirements and restrictions include Sections 23A and 23B of the Federal Reserve Act (which govern certain transactions by us with our affiliates) and the Federal Reserve’s Regulation O (which governs certain loans by us to our executive officers, directors and principal stockholders). We have adopted policies to comply with these regulatory requirements and restrictions.
In connection with the merger, we have adopted a written policy that complies with all applicable requirements of the SEC and Nasdaq concerning related party transactions. Pursuant to this policy, our directors and director nominees, executive officers and holders of more than five percent of our common stock, including their immediate family members, will not be permitted to enter into a related party transaction with us, as discussed below, without the consent of our Audit Committee. Any request for us to enter into a transaction in which the amount involved exceeds $120,000 and any such party has a direct or indirect material interest, subject to certain exceptions, will be required to be presented to our Audit Committee for review, consideration and approval. Management will be required to report to our Audit Committee any such related party transaction and such related party transaction will be reviewed and approved or disapproved by the disinterested members of our Audit Committee.
Other Relationships
Certain of our executive officers and directors and our principal stockholders and affiliates of such persons have, from time to time, engaged in banking transactions with Capital Bank and are expected to continue such relationships in the future. All loans or other extensions of credit made by Capital Bank to such individuals were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated third parties and did not involve more than the normal risk of collectability or present other unfavorable features.
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The following descriptions include summaries of the material terms of our amended and restated certificate of incorporation and amended and restated bylaws. Because it is a summary, it may not contain all the information that is important to you. Reference is made to the more detailed provisions of, and the descriptions are qualified in their entirety by reference to, the amended and restated certificate of incorporation and amended and restated by-laws, copies of which are filed with the SEC as exhibits to the registration statement of which this document is a part, and applicable law.
General
Our certificate of incorporation authorizes us to issue 200,000,000 shares of Class A common stock, $0.01 par value per share, 200,000,000 shares of Class B non-voting common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of June 30, 2012, 20,334,441 shares of Class A common stock and 26,122,120 shares of Class B non-voting common stock were outstanding. No shares of preferred stock are currently outstanding.
Common Stock
Class A Common Stock and Class B Non-voting Common Stock
Our certificate of incorporation provides that, except with respect to voting rights and conversion rights and certain transfer restrictions applicable to the Class B non-voting common stock, the Class A common stock and Class B non-voting common stock will have identical rights, powers, preferences and privileges.
Voting Power
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Class A common stock possess all voting power for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our certificate of incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment and would significantly and adversely affect the rights of the Class B non-voting common stock as described below. Holders of Class A common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of Class B non-voting common stock have no voting power and have no right to participate in any meeting of stockholders or to have notice thereof, except as required by applicable law and except that any action that would significantly and adversely affect the rights of the Class B non-voting common stock with respect to the modification of the terms of the securities or dissolution will require the approval of the Class B non-voting common stock voting separately as a class. Except as otherwise provided by law, our certificate of incorporation or our bylaws or in respect of the election of directors, all matters to be voted on by our stockholders must be approved by a majority of the shares present in person or by proxy at the meeting and entitled to vote on the subject matter. In the case of an election of directors, where a quorum is present a plurality of the votes cast shall be sufficient to elect each director.
Conversion and Transfer of Class B Non-voting Common Stock
Class B non-voting common stock is not convertible in the hands of the initial holder. A transferee unaffiliated with the initial holder that receives Class B non-voting common stock subsequent to one of the permitted transfers mentioned below may elect to convert each share of Class B non-voting common stock into one share of Class A common stock. Class B non-voting common stock is transferable only: (1) to an affiliate of a holder of our common stock or to us; (2) in a widely dispersed public offering; (3) in a private sale in which no purchaser (or group of associated purchasers) would acquire Class A common stock and/or Class B non-voting common stock in an amount that, after the conversion of such Class B non-voting common stock into Class A
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common stock, is (or represents) 2% or more of a class of our voting securities; or (4) to a purchaser that would control a majority of our voting securities notwithstanding such transfer. In the case of shares of Class B non-voting common stock that are intended to be sold by a holder thereof in an offering under an effective registration statement filed by us with the SEC, the participation in the offering by the transferee of such shares will serve as such transferee’s notice to us to elect to convert its Class B non-voting common stock, and the transferee shall receive shares of Class A common stock in such transfer.
Dividends
Holders of Class A common stock and Class B non-voting common stock will be equally entitled to receive such dividends, if any, as may be declared from time to time by our Board of Directors in its discretion out of funds legally available therefor. In no event will any stock dividends or stock splits or combinations of stock be declared or made on Class A common stock or Class B non-voting common stock unless the shares of Class A common stock and Class B non-voting common stock at the time outstanding are treated equally and identically, provided that, in the event of a dividend of common stock, shares of Class B non-voting common stock shall only be entitled to receive shares of Class B non-voting common stock and shares of Class A common stock shall only be entitled to receive shares of Class A common stock.
Liquidation Distribution
In the event of our voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up, the holders of the Class A common stock and Class B non-voting common stock will be entitled to receive an equal amount per share of all of our assets of whatever kind available for distribution to holders of our common stock, after the rights of the holders of the preferred stock have been satisfied.
Preemptive or Other Rights
Our stockholders have no conversion, preemptive or other subscription rights (other than the right of holders of shares of Class B non-voting common stock to convert such shares into shares of Class A common stock as described in Conversion of Class B non-voting common stock above) and there are no sinking fund or redemption provisions applicable to our common stock.
Preferred Stock
Our certificate of incorporation authorizes our Board of Directors to issue and to designate the terms of one or more new classes or series of preferred stock. The rights with respect to a class or series of preferred stock may be greater than the rights attached to our common stock. It is not possible to state the actual effect of the issuance of any shares of our preferred stock on the rights of holders of our common stock until our Board of Directors determines the specific rights attached to that class or series of preferred stock.
Certain Anti-Takeover Provisions of Delaware Law and our Certificate of Incorporation and Bylaws
Special Meeting of Stockholders
Our bylaws provide that special meetings of our stockholders may be called only by the Chairman of the Board of Directors, by our Chief Executive Officer or by a majority vote of our entire Board of Directors.
No Action by Written Consent
The DGCL permits stockholder action by written consent unless otherwise provided by a corporation’s certificate of incorporation. Our certificate of incorporation provides that, subject to the rights of the holders of any series of preferred stock with respect to such series of preferred stock, any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of our stockholders and may not be effected by any consent in writing by such stockholders.
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No Cumulative Voting
The DGCL provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation’s certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for cumulative voting in the election of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder’s notice must be delivered to our principal executive offices not less than 90 days nor more than 120 days prior to the meeting. For the first annual meeting of stockholders after the closing of the merger, a stockholder’s notice shall be timely if delivered to our principal executive offices not later than the 90th day prior to the scheduled date of the annual meeting of stockholders or the tenth day following the day on which a public announcement of the date of our annual meeting of stockholders is first made by us. Our bylaws also specify certain requirements as to the form and content of a stockholder’s notice. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Stockholder-Initiated Bylaw Amendments
Our bylaws may be adopted, amended, altered or repealed by stockholders only upon approval of at least two-thirds of the voting power of all the then outstanding shares of the Class A common stock. Additionally, our certificate of incorporation provides that our bylaws may be amended, altered or repealed by the Board of Directors by a majority vote.
Authorized but Unissued Shares
Our authorized but unissued shares of Class A common stock, Class B non-voting common stock and preferred stock are available for future issuances without stockholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Section 203 of the Delaware General Corporation Law
We have not opted out of Section 203 of the DGCL. Subject to certain exceptions, Section 203 of the DGCL prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless: (1) prior to such time the Board of Directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock of such corporation outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (a) by persons who are directors and also officers of such corporation and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (3) on or subsequent to such time the business combination is approved by the Board of Directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
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Limitation on Liability and Indemnification of Directors and Officers
Our certificate of incorporation provides that our directors and officers will be indemnified by us to the fullest extent authorized by Delaware law as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with their service for or on our behalf. In addition, our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except for breach of their duty of loyalty to us or our stockholders, acts or omissions not in good faith or which include intentional misconduct or knowing violation of law, unlawful payments of dividends, unlawful stock purchases or unlawful redemptions or any transaction from which the director derives an improper personal benefit.
Prior to the completion of the merger, we intend to enter into indemnification agreements with each of our officers and directors pursuant to which each officer and director will be indemnified as described above and will be advanced costs and expenses subject to delivery of an undertaking to repay any advanced amounts if it is ultimately determined such officer or director is not entitled to indemnification for such costs and expenses. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors and officers, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Renunciation of Certain Corporate Opportunities
Our certificate of incorporation provides that we renounce any interest or expectancy in certain acquisition opportunities that our officers or directors become aware of in connection with their service to other entities to which they have a fiduciary or contractual obligation.
Listing
We have applied to list our Class A common stock on Nasdaq under the symbol “CBF.”
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC is the transfer agent and registrar for the common stock.
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HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION
There is currently no established public trading market for shares of CBF’s common stock. Substantially concurrent with the completion of the merger, CBF expects to complete an initial public offering of its Class A common stock. In connection with that initial public offering, CBF has applied to list its Class A common stock on the Nasdaq Global Select Market under the symbol “CBF.” Whether or not we complete an initial public offering prior to or concurrent with the completion of the merger, any shares of our common stock received as merger consideration by Capital Bank Corp. shareholders will be listed on the Nasdaq Global Select Market. CBF has not paid any cash dividends in respect of its Class A common stock since its incorporation. CBF does not expect to declare or pay any cash or other dividends on its common stock in the foreseeable future. As of September 7, 2012, there were approximately 120 holders of CBF Class A common stock and approximately 37 holders of CBF Class B non-voting common stock.
Shares of Capital Bank Corp. common stock are listed and trade on the Nasdaq Global Select Market under the symbol “CBKN.” The following table sets forth, on a per share basis for the periods indicated, cash dividends declared and the high and low sales price of shares of Capital Bank Corp.’s common stock as reported on the Nasdaq Global Select Market. As of September 7, 2012, there were approximately 2,301 holders of Capital Bank Corp. common stock.
Capital Bank Corp. | Common Stock | |||||||||||
High | Low | Dividend | ||||||||||
Fiscal Year Ended December 31, 2012 | ||||||||||||
Third Quarter (through September 7, 2012) | $ | 2.55 | $ | 2.14 | – | |||||||
Second Quarter | $ | 2.49 | $ | 2.00 | – | |||||||
First Quarter | $ | 2.70 | $ | 2.00 | – | |||||||
Fiscal Year Ended December 31, 2011: | ||||||||||||
Fourth Quarter | $ | 2.59 | $ | 1.83 | – | |||||||
Third Quarter | $ | 3.80 | $ | 2.05 | – | |||||||
Second Quarter | $ | 4.60 | $ | 3.05 | – | |||||||
First Quarter | $ | 4.22 | $ | 2.39 | – | |||||||
Fiscal Year Ended December 31, 2010: | ||||||||||||
Fourth Quarter | $ | 3.09 | $ | 1.50 | – | |||||||
Third Quarter | $ | 3.53 | $ | 1.60 | – | |||||||
Second Quarter | $ | 6.95 | $ | 3.01 | – | |||||||
First Quarter | $ | 4.70 | $ | 3.00 | – |
The information in the preceding table is historical only. The market price of Capital Bank Corp. common stock will fluctuate between the date of this document and the completion of the merger. We can give no assurance concerning the market price of CBF Class A common stock upon the completion of its initial public offering or following the merger.
As bank holding companies, any dividends paid to either CBF or Capital Bank Corp. by their subsidiary financial institution are subject to various federal and state regulatory limitations and also subject to the ability of the subsidiary financial institution to pay dividends. Capital Bank Corp. consults with the Federal Reserve Bank of Richmond prior to payment of any dividends or interest on debt. In the future, CBF may enter into credit agreements or other borrowing arrangements that restrict CBF’s ability to declare or pay cash dividends. Any determination to pay cash dividends in the future will be at the discretion of CBF’s Board of Directors and will depend on various factors, including its financial condition, earnings, cash requirements, legal restrictions, regulatory restrictions and other factors deemed relevant by CBF’s Board of Directors. In addition, on August 24, 2010, Capital Bank entered into the OCC Operating Agreement, which in certain circumstances will restrict Capital Bank’s ability to pay dividends to CBF, to make changes to Capital Bank’s capital structure and to make certain other business decisions. For more discussion on restrictions of dividends, see “Risk Factors—Risks Related to CBF’s Common Stock—We do not currently intend to pay dividends on shares of our common stock in the foreseeable future after the merger and our ability to pay dividends will be subject to restrictions under applicable banking laws and regulations” and “Supervision and Regulation.”
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COMPARISON OF RIGHTS OF CBF SHAREHOLDERS AND
CAPITAL BANK CORP. SHAREHOLDERS
If the merger is completed, holders of Capital Bank Corp. common stock will receive shares of CBF Class A common stock for their shares of Capital Bank Corp. common stock. Capital Bank Corp. is organized under the laws of the State of North Carolina, and CBF is organized under the laws of the State of Delaware. The following is a summary of the material differences between (1) the current rights of Capital Bank Corp. shareholders under the NCBCA and Capital Bank Corp.’s articles of incorporation and bylaws and (2) the current rights of CBF stockholders under the General Corporation Law of the State of Delaware (which we refer to as the “DGCL”) and CBF’s amended and restated certificate of incorporation (which we refer to as the “certificate of incorporation”) and bylaws.
While we believe that this summary describes the material differences between the rights of holders of CBF Class A common stock as of the date of this document and the rights of holders of Capital Bank Corp. common stock as of the date of this document, it may not contain all of the information that is important to you. We urge you to read the governing documents of each company and the provisions of the NCBCA and the DGCL that are relevant to a full understanding of the governing instruments, fully and in their entirety. Copies of the respective companies’ governing documents have been filed with the SEC. To find out where copies of these documents can be obtained, see “Additional Information” beginning on page i.
Capital Bank Corp. | CBF | |
CAPITAL STOCK | ||
Authorized Capital Stock: | ||
Capital Bank Corp.’s articles of incorporation authorize Capital Bank Corp. to issue 300,000,000 shares of common stock, no par value per share, and 100,000 shares of preferred stock, of which 41,279 shares have been designated as fixed rate cumulative perpetual preferred stock, Series A (which we refer to as the “Capital Bank Corp. Series A preferred stock”).
As of September 7, 2012, there were 85,802,164 shares of Capital Bank Corp. common stock and no shares of Capital Bank Corp. Series A preferred stock issued and outstanding. | CBF’s certificate of incorporation authorizes CBF to issue 200,000,000 shares of Class A common stock, par value $0.01 per share, 200,000,000 shares of Class B non-voting common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share.
As of September 7, 2012, there were 20,334,441 shares of Class A common stock and 26,122,120 shares of Class B non-voting common stock were outstanding. No shares of preferred stock are currently outstanding.
CBF expects to issue approximately 3.7 million shares of Class A common stock to the minority shareholders of TIB Financial, Capital Bank Corp. and Green Bankshares in the reorganization. | |
Public Market for the Shares: | ||
Capital Bank Corp. common stock is traded on the Nasdaq Global Select Market. | There is currently no public market for the CBF Class A common stock. CBF has applied to have its Class A common stock listed on the Nasdaq Global Select Market and any such shares received as merger consideration by Capital Bank Corp. shareholders will be listed on the Nasdaq Global Select Market. |
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Capital Bank Corp. | CBF | |
BOARD OF DIRECTORS | ||
Size of the Board of Directors: | ||
The NCBCA provides that a corporation’s board of directors must consist of one or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or bylaws. The NCBCA further provides that directors need not be residents of the State of North Carolina nor shareholders of the corporation unless the corporation’s articles of incorporation or by-laws so provide. The articles of incorporation and by-laws may also prescribe other qualifications for directors. Capital Bank Corp.’s bylaws provide that the number constituting the board of directors shall be not less than one (1) nor more than twenty-five (25). The bylaws provide that the number of directors within this variable range may be fixed or changed from time to time by the shareholders or the board of directors. Capital Bank Corp.’s board of directors is currently comprised of seven members. | The DGCL provides that a corporation’s board of directors must consist of one or more individuals, with the number fixed by, the bylaws or the certificate of incorporation, and where the number is fixed by the certificate of incorporation, a change in the number of directors shall be made only by amendment of the certificate. The DGCL permits the certificate of incorporation and bylaws to prescribe qualifications for directors. CBF’s certificate of incorporation and bylaws provide that the board of directors shall consist of that number of members as shall be fixed from time to time by resolution adopted by a majority of the total number of directors that the board would have if there were no vacancies. CBF’s board of directors is currently comprised of six members. | |
Classification of Board of Directors: | ||
The NCBCA permits, but does not require, a classified board of directors and also provides that the board of directors of the corporation may be divided into one, two, three or four classes with as equal in number as may be possible, with the term of office of one class expiring each year.
Capital Bank Corp.’s articles of incorporation provide that, if the number of members of the board of directors is nine (9) or greater, the board of directors is to be divided into three classes as equal in number as may be feasible, with the term of office of one class expiring each year. At each annual meeting of shareholders, successors to the directors whose terms have expired will be elected to hold office for the terms expiring at the second succeeding annual meeting and until his or her successor is elected and qualified.
Capital Bank Corp. does not currently have a classified board. | The DGCL permits, but does not require, a classified board of directors, which can be divided into two or three classes with staggered terms of office, with only one class of directors standing for election each year.
CBF does not have a classified board. | |
Election of the Board of Directors: | ||
The NCBCA provides that, unless otherwise provided in the articles of incorporation or a valid shareholders agreement, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.
| The DGCL provides that unless the certificate of incorporation or bylaws provide otherwise, the directors of a corporation are elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote in the election at a stockholders meeting at which a quorum is present. |
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Capital Bank Corp.’s articles of incorporation and bylaws to not provide for a greater voting requirement for the election of directors. | CBF’s bylaws provide that election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of preferred stock, a plurality of the votes cast by shares of Class A common stock at any meeting for the election of directors at which a quorum is present shall elect directors. | |
Vacancies on the Board of Directors: | ||
The NCBCA provides that unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including, without limitation, a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, the shareholders may fill the vacancy; or the board of directors may fill the vacancy; or if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors, or by the sole director, remaining in office.
Capital Bank Corp.’s bylaws provide that a vacancy on the board of directors, including a vacancy resulting from an increase in the number of directors, will be filled by the shareholders or the board of directors, even where there is not a quorum of directors, and each additional director will hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. | The DGCL provides that, unless otherwise provided in the certificate of incorporation or bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, or by a sole remaining director.
CBF’s certificate of incorporation provides that, subject to applicable law and the rights of any holders of preferred stock, and unless the board of directors otherwise determines, vacancies resulting from any cause, and newly created directorships resulting from any increase in the authorized number of directors may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the board of directors, except as provided in the bylaws. Directors chosen to fill such a vacancy hold office for a term expiring at the annual meeting of the stockholders and until such director’s successor shall have been duly elected and qualified.
CBF’s bylaws do not alter these provisions. | |
Removal of Directors: | ||
The NCBCA provides that unless the articles of incorporation or a bylaw adopted by shareholders provide otherwise, any director or the entire board of directors may be removed, with or without cause, by the affirmative vote of the holders of a majority of the votes entitled to be cast at any election of directors.
Capital Bank Corp.’s bylaws provide that the shareholders may remove one or more directors with or without cause, but only if the number of votes cast to remove such director or directors exceeds the number of votes cast not to remove such director or directors. A director may not be removed by the shareholders at a meeting unless the notice of the meeting specifies such removal as one of its purposes. If any directors are removed, new directors may be elected at the same meeting. | The DGCL provides that, in the absence of cumulative voting, any director or the entire board, of directors may be removed, with or without cause, by the holders of a majority of the shares who are entitled to vote at an election of directors, except in the case of a corporation that has a classified board, where directors may be removed from office only for cause, unless the certificate of incorporation provides otherwise.
CBF’s certificate of incorporation provides that subject to the rights of the holders of any series of preferred stock with respect to such series of preferred stock, any director may be removed from office at any time, with or without cause, by the holders of a majority of the outstanding shares of Class A common stock, at an election of directors duly called in accordance with the bylaws. |
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PROVISIONS AFFECTING CONTROL SHARE ACQUISITIONS AND BUSINESS COMBINATIONS | ||
The North Carolina Shareholder Protection Act and the North Carolina Control Share Acquisition Act restrict business combinations with, and the accumulation of shares of voting stock of, certain North Carolina corporations.
Capital Bank Corp. has elected not to be covered by the restrictions imposed by these statutes. As a result, these statutes do not apply to Capital Bank Corp. or to the merger. | Section 203 of the DGCL is Delaware’s business combination statute. Section 203 is designed to protect publicly-traded Delaware corporations, such as CBF, from hostile takeovers, by prohibiting a Delaware corporation from engaging in a “business combination” with a person beneficially owning 15% or more of the corporation’s voting stock for three years following the time that person becomes a 15% beneficial owner, with certain exceptions. A corporation may elect not to be governed by Section 203 of the DGCL. CBF has not opted out of the protections of Section 203 of the DGCL. | |
NOTICE OF SHAREHOLDERS’ MEETINGS | ||
The NCBCA provides that a corporation must notify shareholders of the date, time, and place of each annual and special shareholders’ meeting no fewer than 10 or more than 60 days before the meeting date.
Capital Bank Corp.’s bylaws provide that written or printed notice stating the time and place of the meeting shall be delivered not less than ten nor more than 60 days before the date of any shareholders’ meeting.
Such notice may be given personally, by mail, by telegraph, by teletype, or by facsimile transmission, by or at the direction of the chief executive officer, the president, the secretary, or other person calling the meeting to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the record of the shareholders of Capital Bank Corp., with postage thereon prepaid. | The DGCL provides that written notice of an annual or special meeting must be served upon or mailed to each stockholder entitled to vote at such meeting at least 10 but not more than 60 days prior to the meeting. Such notice must state the location, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at such meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting. A notice of a special meeting must describe the order of business to be addressed at the meeting.
CBF’s bylaws further require that all notices of stockholder meetings state the purpose or purposes for which the meeting is called and that they must be sent either personally, by electronic transmission or by mail. | |
SUBMISSION OF SHAREHOLDER PROPOSALS AND NOMINATIONS FOR DIRECTORS | ||
Capital Bank Corp.’s articles of incorporation and bylaws do not contain advance notice provisions. Under the SEC rules, to be considered timely, shareholder proposals must be received by the Capital Bank Corp.’s secretary at its principal office on or before the close of business on the 45th day prior to the first anniversary of the date Capital Bank Corp’s annual proxy for the previous year’s meeting was released to shareholders. | CBF’s bylaws provide that in order to make a nomination or bring a proposal before the annual meeting of stockholders, a stockholder (1) must be a stockholder of record at the time of giving of notice of such annual meeting by or at the direction of the board of directors and at the time of the annual meeting, (2) must be entitled to vote at such annual meeting, (3) must comply with the procedures in the bylaws as to such nominations, including by giving timely updates and supplements to the secretary of CBF and (4) such proposal must otherwise be a proper matter for stockholder action. |
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To be timely, a stockholder’s notice must generally be delivered to the secretary at CBF’s principal executive offices not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting.
In the event that the number of directors to be elected to the board of directors is increased by the board of directors, and there is no public announcement by CBF naming all of the nominees for director or specifying the size of the increased board of directors at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice is also considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the secretary at the principal executive offices of CBF not later than the close of business on the 10th day following the day on which such public announcement is first made.
A stockholder’s notice must set forth, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: (A) the name and address of such stockholder, as they appear on CBF’s books, of such beneficial owner, if any, and of their respective affiliates or associates or others acting in concert with them, (B) (i) the class or series and number of shares of CBF which are, directly or indirectly, owned beneficially and of record by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert with them, (ii) certain details about all ownership interests in CBF common stock by the stockholder and any beneficial owner, including any hedging, derivative, short or other economic interests and any rights to vote CBF common stock, (iii) any significant equity interests or any derivative or short interests in any principal competitor of CBF held by such stockholder, (iv) any direct or indirect interest of such stockholder in any contract with CBF, any affiliate of CBF or any principal competitor of CBF and (v) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. |
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As to any proposed nominee, the stockholder’s notice must also set forth: (1) all information relating to such nominee as would be required to be disclosed in a proxy statement or other filing required in connection with a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, (2) a description of all direct and indirect compensation and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand and (3) a questionnaire completed by the proposed nominee containing, among other things, information on the nominee’s background and qualifications and representations concerning such nominee’s compliance with CBF’s corporate governance policies, voting commitments, reimbursement arrangements, and other matters.
If the stockholder’s notice relates to a proposal of business other than a director nomination, such notice shall also set forth: (1) a brief description of the business proposed, (2) the reasons for conducting such business, (3) any material interest of such stockholder and beneficial owner, if any, in such business, (4) the text of the proposal and (5) a description of all agreements, arrangements and understandings between the stockholder, the beneficial owners, if any, and any other person related to such business proposal. | ||
SPECIAL MEETING OF SHAREHOLDERS | ||
The NCBCA provides that a corporation will hold a special meeting of shareholders if called for by its board of directors or the person or persons authorized to do so by the articles of incorporation or the bylaws. Only business within the purpose or purposes described in the meeting notice required by the NCBCA may be conducted at the special meeting of shareholders.
Capital Bank Corp.’s bylaws provide that special meetings of the Capital Bank Corp. shareholders may be called at any time by the chief executive officer, president, secretary or board of directors. In addition, special meetings may be called at any time by the shareholders if the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue | Under the DGCL, special stockholder meetings of a corporation may be called by the corporation’s board of directors, or by any person or persons authorized to do so by the corporation’s certificate of incorporation or bylaws.
CBF’s bylaws provide that special meetings of CBF stockholders may be called only by the Chairman of the board of directors, by the Chief Executive Officer or by a majority vote of the entire board of directors.
CBF’s bylaws provide that only such business shall be conducted or considered, as shall have been properly brought before the meeting pursuant to CBF’s notice of meeting. To be properly brought before a special meeting, proposals of business must |
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proposed to be considered at the proposed special meeting sign, date, and deliver to the secretary a written demand for the meeting describing the purpose or purposes for which it is to be held; provided, however, the shareholders shall not have such right to call a special meeting if the Corporation has a class of shares registered under Section 12 of the Securities Exchange Act of 1934, as amended. Capital Bank Corp.’s shareholders, therefore, do not currently have the right to call a special meeting.
Only business within the purpose or purposes described in the meeting notice may be conducted at a special meeting of shareholders. | be (i) specified in CBF’s notice of meeting (or any supplement thereto) given by or at the direction of the board of directors or (ii) otherwise properly brought before the special meeting, by or at the direction of the board of directors. | |
SHAREHOLDER ACTION WITHOUT A MEETING | ||
The NCBCA provides that any action required to be taken at any annual or special meeting of shareholders of a corporation, or any action permitted to be taken at any annual or special meeting of such shareholders, may be taken without a meeting and without prior notice, if one or more unrevoked consents in writing, describing the action to be taken and delivered to the corporation for inclusion in the minutes or filing with the corporate records, is signed by all shareholders entitled to vote on the action.
Capital Bank Corp.’s articles of incorporation and bylaws do not alter this provision of the NCBCA. | The DGCL provides that unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
CBF’s certificate of incorporation provides that, subject to the rights of the holders of any series of preferred stock with respect to such series of preferred stock, stockholder may not act by written consent. | |
QUORUM FOR MEETINGS OF SHAREHOLDERS | ||
The NCBCA provides that unless the articles of incorporation, a bylaw adopted by the shareholders or the NCBCA provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter.
Capital Bank Corp.’s articles of incorporation and bylaws do not alter this requirement. | The DGCL generally provides that a quorum for a stockholders meeting consists of a majority of shares entitled to vote present in person or represented by proxy at such meeting, unless the certificate of incorporation or bylaws of the corporation provide otherwise.
CBF’s bylaws provide that generally holders of a majority of the outstanding share of Class A common stock shall constitute a quorum. |
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CUMULATIVE VOTING | ||
The NCBCA provides that cumulative voting is generally not permissible in the election of directors unless a corporation’s articles of incorporation provides otherwise.
Capital Bank Corp.’s articles of incorporation do not provide for cumulative voting in the election of directors. | The DGCL provides that cumulative voting is not permissible in the election of directors unless a corporation’s certificate of incorporation provides otherwise.
CBF’s certificate of incorporation does not provide for cumulative voting in the election of directors. | |
VOTING RIGHTS AND REQUIREMENTS (OTHER THAN DIRECTOR ELECTIONS) | ||
The NCBCA provides that, unless the articles of incorporation provide otherwise, each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholders meeting, except that absent special circumstances, the shares of a corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation.
The NCBCA further provides that unless the articles of incorporation, a bylaw adopted by the shareholders or the NCBCA provides otherwise, if a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action.
Capital Bank Corp.’s articles of incorporation do not alter this provision of the NCBCA. | The DGCL provides that unless otherwise provided in a corporation’s certificate of incorporation, each stockholder is entitled to one vote for each share of capital stock held by such stockholder. Except as otherwise required by the DGCL or by the certificate of incorporation or bylaws, under the DGCL, all matters brought before a stockholders meeting require the affirmative vote of the majority of the shares present in person or represented by proxy and entitled to vote at a stockholders meeting at which a quorum is present.
The DGCL generally provides that unless the certificate of incorporation requires a greater vote, a merger, consolidation or sale of all or substantially all of a corporation’s assets must be approved by a majority of the outstanding stock of the corporation entitled to vote.
CBF’s certificate of incorporation provides that holders of Class A common stock shall exclusively possess all voting power, and each share of Class A common stock shall be entitled to one vote. Holders of Class B non-voting common stock have no voting power and have no right to participate in any meeting of stockholders or to have notice thereof, except as required by applicable law and except that any action that would significantly and adversely affect the rights of the Class B non-voting common stock with respect to the modification of the terms of the securities or dissolution will require the approval of the Class B non-voting common stock voting separately as a class.
CBF’s bylaws provide that except as otherwise provided by law, its certificate of incorporation or its bylaws or in respect of the election of directors, all matters to be voted on by its stockholders must be approved by a majority of the shares present in person or by proxy at the meeting and entitled to vote on the subject matter. |
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RIGHTS OF DISSENTING SHAREHOLDERS | ||
The NCBCA provides that a shareholder is entitled to appraisal rights and to obtain payment of the fair value of that shareholder’s shares, in the event of any of the following corporate actions: (1) consummation of a merger to which the corporation is a party if either (i) shareholder approval is required for the merger under the NCBCA and the shareholder is entitled to vote on the merger, except that appraisal rights will not be available to any shareholder of the corporation with respect to shares of any class or series that remain outstanding after consummation of the merger or (ii) the corporation is a 90% subsidiary and the merger is governed by the NCBCA’s rules for merger with a 90% subsidiary, (2) consummation of a share exchange to which the corporation is a party as the corporation whose shares will be acquired if the shareholder is entitled to vote on the exchange, except that appraisal rights shall not be available to any shareholder of the corporation with respect to any class or series of shares of the corporation that is not exchanged, (3) consummation of a disposition of assets other than in the regular course of business if the shareholder is entitled to vote on the disposition, (4) certain amendments of the articles of incorporation, (5) any other amendment to the articles of incorporation, merger, share exchange, or disposition of assets to the extent provided by the articles of incorporation, bylaws, or a resolution of the board of directors, (6) certain conversions to a foreign corporation pursuant to the NCBCA, (7) consummation of a conversion of the corporation to nonprofit status pursuant to the NCBCA. and (8) consummation of a conversion of the corporation to nonprofit status pursuant to the NCBCA. In addition, the NCBCA states that no appraisal rights are available in connection with the circumstances described in clauses 1, 2, 3, 4, 6, and 8 of the preceding paragraph to holders of shares of any class or series of shares that are any of the following: (1) a covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933, as amended, (2) traded in an organized market and has at least 2,000 shareholders and a market value of at least twenty million dollars ($20,000,000) (exclusive of the value of shares held by the corporation’s subsidiaries, senior executives, directors, and beneficial shareholders owning more than ten percent (10%) of such shares), or (3) issued by an open-end management investment company registered with the Securities and Exchange Commission under the | Under the DGCL, a stockholder of a Delaware corporation such as CBF who has not voted in favor of, nor consented in writing to, a merger or consolidation in which the corporation is participating generally has the right to an appraisal of the fair value of the stockholder’s shares of stock, subject to specified procedural requirements. The DGCL does not confer appraisal rights, however, if the corporation’s stock is either listed on a national securities exchange or held of record by more than 2,000 holders. Even if a corporation’s stock meets the foregoing requirements, however, the DGCL provides that appraisal rights generally will be permitted if stockholders of the corporation are required to accept for their stock in any merger, consolidation or similar transaction anything other than (1) shares of the corporation surviving or resulting from the transaction, or depository receipts representing shares of the surviving or resulting corporation, or those shares or depository receipts plus cash in lieu of fractional interests, (2) shares of any other corporation, or depository receipts representing shares of the other corporation, or those shares or depository receipts plus cash in lieu of fractional interests, which shares or depository receipts are listed on a national securities exchange or held of record by more than 2,000 holders, or (3) any combination of the foregoing. |
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Investment Company Act of 1940, as amended, and may be redeemed at the option of the holder at net asset value. However, the above paragraph will not be applicable and appraisal rights will be available for transactions that satisfy the standards set forth in the first paragraph of this section if: (1) the holders of any class or series of shares are required by the terms of the corporate action requiring appraisal rights to accept for such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary interest of any other entity or (2) the corporate action is an interested transaction.
In addition, appraisal rights are unavailable if the corporation’s articles of incorporation, bylaws or resolution of the board of directors of the corporation issuing the shares provides otherwise.
An interested transaction includes a long-form merger with an interested person, which includes any owner of more than 20% of the voting power of the corporation, other than shares acquired pursuant to certain offers made to all shareholders. Because CBF owns more than 20% of Capital Bank Corp.’s voting power and acquired its shares directly from Capital Bank Corp., Capital Bank Corp.’s shareholders are entitled to appraisal rights in connection with the merger. See “The Merger—Dissenters’ or Appraisal Rights.” | ||
LIABILITY OF DIRECTORS AND OFFICERS | ||
The NCBCA provides that a director of a corporation shall not be liable for any action taken as a director or any failure to take any action, if he or she performed the duties of his or her office in compliance with the NCBCA. The NCBCA also provides that a corporation may limit or eliminate a director’s personal liability arising out of an action whether by or in the right of the corporation for monetary damages for breach of duty as a director, except with respect to acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the corporation, any liability for unlawful distributions, any transaction from which the director derived an improper personal benefit, or acts or omissions occurring prior to the date such provisions of the NCBCA became effective.
The certificate of incorporation of Capital Bank Corp. provides that no individual serving as a director shall be personally liable in an action whether by or in the right of the corporation or otherwise for monetary damages | The DGCL provides that a corporation may include in its certificate of incorporation a provision eliminating the liability of a director to the corporation or its stockholders for monetary damages for a breach of the director’s fiduciary duties, except liability for any breach of the director’s duty of loyalty to the corporation’s stockholders, for acts or omissions not in good faith or that involve intentional misconduct or knowing violation of law, for certain unlawful dividends and redemptions and for any transaction from which the director derived an improper personal benefit.
The CBF certificate of incorporation provides that no director shall be personally liable to CBF or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as it now exists or may hereafter be amended to further limit liability.
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for the breach of such person’s duty as a director of the corporation. However, the last sentence does not apply to any liability of a director with respect to (i) acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the corporation, (ii) any liability under the NCBCA for unlawful distributions, or (iii) any transaction from which the director derived an improper personal benefit (which does not include a director’s reasonable compensation or other reasonable incidental benefit for or on account of his service as a director, officer, employee, independent contractor, attorney, or consultant of the corporation). | The CBF certificate of incorporation further provides that any repeal or modification of these provisions of the CBF certificate of incorporation will not adversely affect any right or protection of a director of CBF existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. | |
DUTIES OF DIRECTORS | ||
The NCBCA provides that all corporate powers will be exercised by or under the authority of the board of directors. The NCBCA requires that a director shall discharge his or her duties as a director, including his or her duties as a member of a committee in good faith, with the care an ordinarily prudent person in like position would exercise under the circumstances; and in a manner he or she reasonably believes to be in the best interests of the corporation.
The NCBCA further provides that in discharging his or her duties, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by one or more officers of the corporation that the director reasonably believes to be reliable and competent in the matters presented, legal counsel, public accountants and other experts reasonably believed to be within their professional competence, or a committee of the board of directors of which he is not a member if the director reasonably believes the committee merits confidence. | The DGCL provides that the business and affairs of every corporation organized under Delaware law will be managed by or under a board or directors, except as may be otherwise provided in the certificate of incorporation.
The standards of conduct for directors have developed through Delaware court case law. Generally, directors of Delaware corporations are subject to a duty of loyalty and a duty of care. The duty of loyalty requires directors to refrain from self-dealing and the duty of care requires directors in managing the corporate affairs to use that level of care which ordinarily careful and prudent persons would use in similar circumstances. When directors act consistently with their duties of loyalty and care, their decisions generally are presumed to be valid under the business judgment rule.
Under CBF’s bylaws, the board of directors is also required to manage the business and affairs of the corporation and elect officers of the corporation and ensure records of each meeting are taken. | |
INDEMNIFICATION OF DIRECTORS AND OFFICERS | ||
The NCBCA provides that a corporation may indemnify its directors, officers, employees and agents against liabilities and expenses incurred in a proceeding if the person conducted himself or herself in good faith and in a manner he or she reasonably believed to be, with respect to conduct in his or her official capacity with the corporation, in the best interests of the corporation, with respect to all other conduct, not opposed to the best interests of the corporation and with respect to any criminal proceeding, he or she had no reasonable cause | The DGCL provides that a corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) because the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent |
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to believe his or her conduct was unlawful. The NCBCA further provides that no indemnification is available in respect of a claim in connection with a proceeding by or in the right of the corporation in which the person has been adjudged to be liable to the corporation or in connection with any other proceeding charging impersonal benefit to him or her, whether or not involving action in his or her official capacity, in which he or she was adjudged liable on the basis that personal benefit was improperly received by him or her. Under the NCBCA, unless limited by its articles of incorporation, a corporation must indemnify its present or former directors and officers who were wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because he or she is or was a director or officer of the corporation against any reasonable expenses incurred by him or her in connection with such proceeding.
Capital Bank Corp.’s bylaws provide for indemnification rights similar to foregoing provisions of the NCBCA. | of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
The DGCL further provides that a corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. | |
Under the DGCL, to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any proceeding referred to in the preceding two paragraphs, or in defense of any claim, issue, or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith.
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CBF’s certificate of incorporation provides that its directors, officers and other agents will be indemnified by us to the fullest extent authorized by Delaware law as it now exists or may in the future be amended to provide additional indemnification, against all expenses, liabilities and loss incurred in connection with their service as a director, officer or other agent on behalf of the corporation.
CBF’s certificate of incorporation further provides that directors, officers and other agents shall generally be entitled to be reimbursed by CBF in advance of the final disposition of a proceeding within 20 days after CBF receives a written request for reimbursement. | ||
AMENDMENT OF CHARTER | ||
The NCBCA provides that an amendment to a corporation’s articles of incorporation generally requires that, after adopting an amendment, the board of directors must submit the amendment to the shareholders for their approval and that the amendment must be approved by either a majority of all shares entitled to vote thereon or a majority of the votes cast thereon, depending on the amendment’s nature, unless the articles of incorporation, a bylaw adopted by the shareholders or the board of directors require a greater vote. If the amendment affects the shares of a certain class or series of stock in a particular way, that class or series must approve the amendment separately. In accordance with the NCBCA, the board of directors may condition the proposed amendment’s submission on any basis. | The DGCL provides that an amendment to a corporation’s certificate of incorporation must be adopted by the board of directors through a resolution setting forth the proposed amendment and that the stockholders must approve the amendment by a majority of outstanding shares entitled to vote (and a majority of the outstanding shares of each class entitled to vote, if any). | |
AMENDMENT OF BYLAWS | ||
The NCBCA provides that a corporation’s board of directors may amend or repeal the corporation’s bylaws, except to the extent otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders or the NCBCA, and except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if neither the articles of incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. The NCBCA also provides that a corporation’s shareholders may amend or repeal the corporation’s bylaws even though the bylaws may also be amended or repealed by its board of directors. | The DGCL provides that the stockholders, and, when provided for in the certificate of incorporation, the board of directors of the corporation, have the power to adopt, amend and repeal the bylaws of a corporation.
CBF’s certificate of incorporation provides that its bylaws may be amended, altered or repealed by the board of directors by a majority vote of the full board, except as otherwise provided in the bylaws.
CBF’s certificate of incorporation and bylaws provide that stockholders may only amend, alter or repeal the bylaws by a vote of at least two-thirds of the outstanding shares of Class A common stock. |
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Capital Bank Corp. | CBF | |
Capital Bank Corp.’s bylaws provide that the board of directors has the power to amend or repeal the bylaws, except to the extent otherwise provided in the articles of incorporation, a bylaw adopted by the shareholders, or the NCBCA, and except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if the shareholder adopted provision does not authorize the board to adopt, amend or repeal that particular provision. | ||
SHAREHOLDER RIGHTS PLANS | ||
The NCBCA provides that, in the case of a public corporation, the corporation may issue rights, options or warrants for the purchase of shares of the corporation, the terms and conditions of which may include, without limitation, restrictions or conditions that preclude or limit the exercise, transfer or receipt of such rights, options or warrants by the holder or holders or beneficial owner or owners of a specified number or percentage of the outstanding voting shares of such public corporation or by any transferee of any such holder or owner, or that invalidate or void such rights, options or warrants held by any such holder or owner or by such transferee. The NCBCA further provides that determinations by the board of directors whether to impose, enforce, waive or otherwise render ineffective any such restrictions or conditions may be judicially reviewed in an appropriate proceeding.
Capital Bank Corp. does not have a shareholder rights plan currently in effect. | The DGCL does not include a statutory provision expressly validating stockholder rights plans; however, such plans have generally been upheld by decisions of courts applying Delaware law.
CBF does not have a shareholder rights plan currently in effect. |
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The validity of the Class A common stock to be issued in connection with the merger and certain U.S. federal income tax consequences related to the merger will be passed upon for CBF by Wachtell, Lipton, Rosen & Katz, New York, New York.
SUBMISSION OF SHAREHOLDER PROPOSALS FOR CAPITAL BANK CORP.’S 2012 ANNUAL MEETING OF SHAREHOLDERS
Any proposals which shareholders intend to present for a vote at Capital Bank Corp.’s 2013 annual meeting of shareholders, and which such shareholders desire to have included in Capital Bank Corp.’s proxy materials relating to that meeting, must be received by Capital Bank Corp. on or before April 4, 2013, which is 120 calendar days prior to the anniversary of the date of the proxy statement mailed to shareholders in connection with its 2012 annual meeting of shareholders. Proposals received after that date will not be considered for inclusion in such proxy materials.
In addition, if a shareholder intends to present a matter for a vote at Capital Bank Corp.’s 2013 annual meeting of shareholders, other than by submitting a proposal for inclusion in Capital Bank Corp.’s proxy statement for that meeting, the shareholder must give timely notice in accordance with SEC rules. To be timely, a shareholder’s notice must be received by Capital Bank Corp.’s Corporate Secretary at its principal office, Capital Bank Plaza, 333 Fayetteville Street, Suite 700, Raleigh, North Carolina 27601, on or before June 18, 2013, which is not later than the close of business on the 45th day prior to the first anniversary of the date Capital Bank Corp’s proxy statement for its 2011 annual meeting was released to shareholders. It is requested that such notice set forth (a) as to each matter the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; and (b) the name and record address of the shareholder, the class and number of shares of common stock of Capital Bank Corp. that are beneficially owned by the shareholder and any material interest of the shareholder in such business.
The consolidated financial statements of Capital Bank Financial Corp., formerly known as North American Financial Holdings, Inc., as of and for the fiscal years ending December 31, 2011 and 2010 and for the period from November 30, 2009 (date of inception) through December 31, 2009, included in this registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The Statement of Assets Acquired and Liabilities Assumed by NAFH National Bank of First National Bank of the South, the Statement of Assets Acquired and Liabilities Assumed by NAFH National Bank of Metro Bank and the Statement of Assets Acquired and Liabilities Assumed by NAFH National Bank of Turnberry Bank, each dated July 16, 2010, included in this registration statement, have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of TIB Financial Corp. as of and for the fiscal year ending December 31, 2011, included in this registration statement, have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of TIB Financial Corp. as of and for the fiscal years ended December 31, 2010 and 2009, all included in this registration statement, have been so included in reliance on the report of Crowe Horwath LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in accounting and auditing.
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The consolidated financial statements of Capital Bank Corp. as of and for the fiscal year ending December 31, 2011, included in this registration statement, have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Capital Bank Corp. as of and for the fiscal year ending December 31, 2010, included in this registration statement, have been so included in reliance on the report of Elliott Davis, PLLC, an independent registered certified public accounting firm, given on the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Capital Bank Corp. as of and for the fiscal year ending December 31, 2009, included in this registration statement, have been so included in reliance upon the report of Grant Thornton LLP, independent registered certified public accountants, given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Green Bankshares as of and for the fiscal year ending December 31, 2011, included in this registration statement have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Green Bankshares as of December 31, 2010, and for each of the years in the two-year period ended December 31, 2010, all included in this registration statement, have been so included in reliance on the report of Dixon Hughes Goodman LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Southern Community Financial as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011, all included in this prospectus, have been so included in reliance on the report of Dixon Hughes Goodman LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.
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Page | ||||
Capital Bank Financial Corp. Unaudited Consolidated Financial Statements as of and for the Three and Six Months Ended June 30, 2012 | ||||
Unaudited Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 | F-5 | |||
F-6 | ||||
F-7 | ||||
F-8 | ||||
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 | F-10 | |||
F-11 | ||||
Capital Bank Financial Corp. Consolidated Financial Statements as of and for the Years Ended December 31, 2011 and 2010 and for the Period from November 30, 2009 to December 31, 2009 | ||||
Report of Independent Registered Certified Public Accounting Firm | F-49 | |||
Consolidated Balance Sheets as of December 31, 2011 and 2010 | F-50 | |||
F-51 | ||||
F-52 | ||||
F-53 | ||||
F-54 | ||||
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.) Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South as of July 16, 2010 | ||||
Report of Independent Registered Certified Public Accounting Firm | F-106 | |||
F-107 | ||||
Notes to Statement of Assets Acquired and Liabilities Assumed | F-108 | |||
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.) Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County as of July 16, 2010 | ||||
Report of Independent Registered Certified Public Accounting Firm | F-115 | |||
F-116 | ||||
Notes to Statement of Assets Acquired and Liabilities Assumed | F-117 | |||
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.) Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank as of July 16, 2010 | ||||
Report of Independent Registered Certified Public Accounting Firm | F-125 | |||
Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank as of July 16, 2010 | F-126 | |||
Notes to Statement of Assets Acquired and Liabilities Assumed | F-127 |
Table of Contents
Page | ||||
TIB Financial Corp. Unaudited Consolidated Financial Statements as of and for the Three and Six Months Ended June 30, 2012 | ||||
Unaudited Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011 | F-135 | |||
F-136 | ||||
F-137 | ||||
Unaudited Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2012 and 2011 | F-138 | |||
F-139 | ||||
TIB Financial Corp. Consolidated Financial Statements as of December 31, 2011 and 2010 and for the Years Ended December 31, 2011, 2010 and 2009 | ||||
F-151 | ||||
Consolidated Balance Sheets as of December 31, 2011 and 2010 | F-153 | |||
F-154 | ||||
F-156 | ||||
F-158 | ||||
F-160 | ||||
Capital Bank Corporation Unaudited Consolidated Financial Statements as of and for the Three and Six Months Ended June 30, 2012 | ||||
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 | F-211 | |||
F-212 | ||||
F-213 | ||||
F-214 | ||||
Unaudited Notes to Condensed Consolidated Financial Statements | F-216 | |||
Capital Bank Corporation Consolidated Financial Statements as of December 31, 2011 and 2010 and for the Years Ended December 31, 2011, 2010 and 2009 | ||||
F-230 | ||||
F-234 | ||||
Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009 | F-235 | |||
F-236 | ||||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009 | F-238 | |||
F-240 |
Table of Contents
Table of Contents
Capital Bank Financial Corp.
Unaudited Consolidated Financial Statements as of and for the Three and Six Months Ended June 30, 2012
Table of Contents
Consolidated Balance Sheets
June 30, 2012 and December 31, 2011
(Unaudited)
(dollars and shares in thousands, except per share data) | June 30, 2012 | December 31, 2011 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 103,902 | $ | 87,637 | ||||
Interest-bearing deposits with banks | 125,110 | 611,137 | ||||||
Federal funds sold | 8 | 11,189 | ||||||
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Total cash and cash equivalents | 229,020 | 709,963 | ||||||
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Trading securities | 759 | 637 | ||||||
Investment securities available-for-sale (amortized cost $1,143,617 and $813,617 at June 30, 2012 and December 31, 2011, respectively) | 1,161,970 | 826,274 | ||||||
Loans held for sale | 12,451 | 20,746 | ||||||
Loans, net of deferred loan costs and fees | 4,178,564 | 4,281,717 | ||||||
Less: Allowance for loan losses | 45,472 | 34,749 | ||||||
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Loans, net | 4,133,092 | 4,246,968 | ||||||
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Other real estate owned | 158,235 | 168,781 | ||||||
Receivable from FDIC | 9,699 | 13,315 | ||||||
Indemnification asset | 60,750 | 66,282 | ||||||
Premises and equipment, net | 165,274 | 159,730 | ||||||
Goodwill | 115,960 | 115,960 | ||||||
Intangible assets, net | 24,407 | 26,692 | ||||||
Deferred income tax asset, net | 140,652 | 140,047 | ||||||
Accrued interest receivable and other assets | 91,615 | 90,985 | ||||||
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Total assets | $ | 6,303,884 | $ | 6,586,380 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing demand | $ | 734,605 | $ | 683,258 | ||||
Time deposits | 1,914,990 | 2,189,436 | ||||||
Money market | 890,409 | 868,375 | ||||||
Savings | 378,415 | 296,355 | ||||||
Negotiable order of withdrawal accounts | 1,061,809 | 1,087,760 | ||||||
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Total deposits | 4,980,228 | 5,125,184 | ||||||
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Federal Home Loan Bank advances | 67,520 | 221,018 | ||||||
Short-term borrowings | 49,717 | 54,533 | ||||||
Long-term borrowings | 140,537 | 140,101 | ||||||
Accrued interest payable and other liabilities | 48,199 | 54,634 | ||||||
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Total liabilities | 5,286,201 | 5,595,470 | ||||||
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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, 20,334 and 20,028 shares issued and outstanding | 203 | 200 | ||||||
Common stock-Class B $0.01 par value: 200,000 shares authorized, 26,122 and 26,122 shares issued and outstanding | 261 | 261 | ||||||
Additional paid in capital | 901,296 | 890,627 | ||||||
Retained earnings | 28,914 | 18,150 | ||||||
Accumulated other comprehensive income | 10,399 | 7,167 | ||||||
Noncontrolling interest | 76,610 | 74,505 | ||||||
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Total shareholders’ equity | 1,017,683 | 990,910 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 6,303,884 | $ | 6,586,380 | ||||
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The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
Consolidated Statements of Income
The Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)
(dollars in thousands, except per share amounts) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||||||||
Interest and dividend income | ||||||||||||||||
Loans, including fees | $ | 66,509 | $ | 43,151 | $ | 134,610 | $ | 78,702 | ||||||||
Investment securities | ||||||||||||||||
Taxable interest income | 5,625 | 5,381 | 10,777 | 9,060 | ||||||||||||
Tax-exempt interest income | 187 | 285 | 488 | 491 | ||||||||||||
Dividends | 19 | 21 | 31 | 36 | ||||||||||||
Interest-bearing deposits in other banks | 65 | 588 | 288 | 1,297 | ||||||||||||
Federal Home Loan Bank stock | 488 | 117 | 833 | 262 | ||||||||||||
Federal funds sold | – | – | 7 | – | ||||||||||||
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Total interest and dividend income | 72,893 | 49,543 | 147,034 | 89,848 | ||||||||||||
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Interest expense | ||||||||||||||||
Deposits | 7,303 | 7,051 | 15,158 | 12,977 | ||||||||||||
Long-term borrowings | 1,928 | 1,117 | 3,872 | 1,999 | ||||||||||||
Federal Home Loan Bank advances | 296 | 676 | 769 | 1,299 | ||||||||||||
Borrowings | 21 | 15 | 38 | 50 | ||||||||||||
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Total interest expense | 9,548 | 8,859 | 19,837 | 16,325 | ||||||||||||
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Net interest income | 63,345 | 40,684 | 127,197 | 73,523 | ||||||||||||
Provision for loan losses | 6,608 | 8,215 | 11,984 | 9,760 | ||||||||||||
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Net interest income after provision for loan losses | 56,737 | 32,469 | 115,213 | 63,763 | ||||||||||||
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Noninterest income | ||||||||||||||||
Service charges on deposit accounts | 6,332 | 2,152 | 12,323 | 4,065 | ||||||||||||
Fees on mortgage loans originated and sold | 1,205 | 649 | 2,308 | 1,180 | ||||||||||||
Investment advisory and trust fees | 142 | 413 | 294 | 800 | ||||||||||||
FDIC indemnification asset accretion | (164 | ) | 2,540 | 158 | 2,858 | |||||||||||
Debit card income | 2,589 | 1,036 | 5,350 | 1,811 | ||||||||||||
Other income | 1,180 | 1,034 | 2,921 | 1,668 | ||||||||||||
Loss on extinguishment of debt | – | – | (321 | ) | – | |||||||||||
Investment securities gains, net | 933 | 75 | 3,692 | 18 | ||||||||||||
Other-than-temporary impairment losses on investments: | ||||||||||||||||
Gross impairment loss | (38 | ) | – | (44 | ) | – | ||||||||||
Less: Impairments recognized | – | – | – | – | ||||||||||||
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Net impairment losses recognized in earnings | (38 | ) | – | (44 | ) | – | ||||||||||
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Total noninterest income | 12,179 | 7,899 | 26,681 | 12,400 | ||||||||||||
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Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 25,535 | 19,257 | 55,679 | 34,350 | ||||||||||||
Net occupancy and equipment expense | 10,901 | 6,356 | 21,452 | 11,694 | ||||||||||||
Foreclosed asset related expense | 5,150 | 1,666 | 9,357 | 2,844 | ||||||||||||
Conversion and merger related expense | 1,757 | 1,012 | 3,045 | 4,749 | ||||||||||||
Professional fees | 4,952 | 1,809 | 11,194 | 4,069 | ||||||||||||
Computer Services | 2,190 | 1,386 | 4,544 | 2,323 | ||||||||||||
FDIC and stock assessments | 1,596 | 1,186 | 3,301 | 3,319 | ||||||||||||
Other expense | 6,553 | 4,813 | 12,974 | 9,177 | ||||||||||||
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Total noninterest expense | 58,634 | 37,485 | 121,546 | 72,525 | ||||||||||||
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Income before income taxes | 10,282 | 2,883 | 20,348 | 3,638 | ||||||||||||
Income tax expense | 3,909 | 853 | 7,812 | 1,258 | ||||||||||||
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Net income before attribution of noncontrolling interests | 6,373 | 2,030 | 12,536 | 2,380 | ||||||||||||
Net income attributable to noncontrolling interests | 862 | 444 | 1,772 | 394 | ||||||||||||
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Net income attributable to Capital Bank Financial Corp. | $ | 5,511 | $ | 1,586 | $ | 10,764 | $ | 1,986 | ||||||||
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Basic income per share | $ | 0.12 | $ | 0.04 | $ | 0.24 | $ | 0.04 | ||||||||
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Diluted income per share | $ | 0.12 | $ | 0.03 | $ | 0.24 | $ | 0.04 | ||||||||
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The accompanying notes are an integral part of these financial statements.
F-6
Table of Contents
CAPITAL BANK FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Net income | $ | 6,373 | $ | 2,030 | $ | 12,536 | $ | 2,380 | ||||||||
Other comprehensive income before tax: | ||||||||||||||||
Unrealized holding gains on available for sale securities | 10,498 | 11,979 | 9,306 | 16,618 | ||||||||||||
Less: Reclassification adjustments for gains recognized in income | (794 | ) | (62 | ) | (3,526 | ) | (68 | ) | ||||||||
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Other comprehensive income, before tax | 9,704 | 11,917 | 5,780 | 16,550 | ||||||||||||
Tax effect | (3,741 | ) | (4,529 | ) | (2,228 | ) | (6,289 | ) | ||||||||
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Other comprehensive income, net of tax | 5,963 | 7,388 | 3,552 | 10,261 | ||||||||||||
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Comprehensive income | $ | 12,336 | $ | 9,418 | $ | 16,088 | $ | 12,641 | ||||||||
Less: Comprehensive income attributable to noncontrolling interest | 1,400 | 1,128 | 2,092 | 1,347 | ||||||||||||
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Comprehensive income attributable to Capital Bank Financial Corp. | $ | 10,936 | $ | 8,290 | $ | 13,996 | $ | 11,294 | ||||||||
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The accompanying notes are an integral part of these financial statements.
F-7
Table of Contents
Statements of Changes in Shareholders’ Equity
The Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)
Shares Common Stock Class A | Class A Stock | Shares Common Stock Class B | Class B Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||
Balance, April 1, 2012 | 20,334 | $ | 203 | 26,122 | $ | 261 | $ | 897,093 | $ | 23,403 | $ | 4,974 | $ | 75,201 | $ | 1,001,135 | ||||||||||||||||||||
Net income | 5,511 | 862 | 6,373 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $3,741 | 5,425 | 538 | 5,963 | |||||||||||||||||||||||||||||||||
Stock based compensation | 4,203 | 9 | 4,212 | |||||||||||||||||||||||||||||||||
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Balance, June 30, 2012 | 20,334 | $ | 203 | 26,122 | $ | 261 | $ | 901,296 | $ | 28,914 | $ | 10,399 | $ | 76,610 | $ | 1,017,683 | ||||||||||||||||||||
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Shares Common Stock Class A | Class A Stock | Shares Common Stock Class B | Class B Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||
Balance, April 1, 2011 | 20,889 | $ | 209 | 25,261 | $ | 252 | $ | 878,485 | $ | 12,338 | $ | (97 | ) | $ | 49,117 | $ | 940,304 | |||||||||||||||||||
Net income | 1,586 | 444 | 2,030 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $4,529 | 6,704 | 684 | 7,388 | |||||||||||||||||||||||||||||||||
Conversion of shares | (37 | ) | (1 | ) | 37 | 1 | – | |||||||||||||||||||||||||||||
Stock based compensation | 3,026 | 3,026 | ||||||||||||||||||||||||||||||||||
Merger of TIB Bank and Capital Bank into Capital Bank, NA | 1,397 | (1,397 | ) | – | ||||||||||||||||||||||||||||||||
Rights offerings of subsidiaries | (12 | ) | (2 | ) | (14 | ) | ||||||||||||||||||||||||||||||
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Balance, June 30, 2011 | 20,852 | $ | 208 | 25,298 | $ | 253 | $ | 882,896 | $ | 13,924 | $ | 6,607 | $ | 48,846 | $ | 952,734 | ||||||||||||||||||||
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F-8
Table of Contents
Shares Common Stock Class A | Class A Stock | Shares Common Stock Class B | Class B Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||
Balance, January 1, 2012 | 20,028 | $ | 200 | 26,122 | $ | 261 | $ | 890,627 | $ | 18,150 | $ | 7,167 | $ | 74,505 | $ | 990,910 | ||||||||||||||||||||
Net income | 10,764 | 1,772 | 12,536 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $2,228 | 3,232 | 320 | 3,552 | |||||||||||||||||||||||||||||||||
Restricted stock grants | 306 | 3 | (3 | ) | – | |||||||||||||||||||||||||||||||
Stock based compensation | 10,672 | 13 | 10,685 | |||||||||||||||||||||||||||||||||
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Balance, June 30, 2012 | 20,334 | $ | 203 | 26,122 | $ | 261 | $ | 901,296 | $ | 28,914 | $ | 10,399 | $ | 76,610 | $ | 1,017,683 | ||||||||||||||||||||
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Shares Common Stock Class A | Class A Stock | Shares Common Stock Class B | Class B Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||
Balance, January 1, 2011 | 21,384 | $ | 214 | 23,736 | $ | 237 | $ | 865,673 | $ | 11,938 | $ | (2,759 | ) | $ | 5,933 | $ | 881,236 | |||||||||||||||||||
Net income | 1,986 | 394 | 2,380 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $6,289 | 9,308 | 953 | 10,261 | |||||||||||||||||||||||||||||||||
Conversion of shares | (1,562 | ) | (16 | ) | 1,562 | 16 | – | |||||||||||||||||||||||||||||
Restricted stock grants | 1,030 | 10 | (10 | ) | – | |||||||||||||||||||||||||||||||
Stock based compensation | 3,434 | 3,434 | ||||||||||||||||||||||||||||||||||
Origination of noncontrolling interest | 43,785 | 43,785 | ||||||||||||||||||||||||||||||||||
Merger of TIB Bank and Capital Bank into Capital Bank, NA | 1,397 | (1,397 | ) | – | ||||||||||||||||||||||||||||||||
Rights offerings of subsidiaries | 12,402 | 58 | (822 | ) | 11,638 | |||||||||||||||||||||||||||||||
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Balance, June 30, 2011 | 20,852 | $ | 208 | 25,298 | $ | 253 | $ | 882,896 | $ | 13,924 | $ | 6,607 | $ | 48,846 | $ | 952,734 | ||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-9
Table of Contents
Consolidated Statements of Cash Flow
The Six Months Ended June 30, 2012 and 2011
(Unaudited)
(dollars in thousands) | 2012 | 2011 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 12,536 | $ | 2,380 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities | ||||||||
Accretion of acquired loans | (98,097 | ) | (63,712 | ) | ||||
Depreciation and amortization | 4,921 | 1,184 | ||||||
Provision for loan losses | 11,984 | 9,760 | ||||||
Deferred income tax | (2,832 | ) | (5,077 | ) | ||||
Net amortization of investment securities premium/discount | 6,135 | 3,718 | ||||||
Write down of investment securities | 44 | – | ||||||
Net realized gains on sales of investment securities | (3,692 | ) | (18 | ) | ||||
Stock-based compensation expense | 10,685 | 3,434 | ||||||
Gain on sales of OREO | (3,994 | ) | (362 | ) | ||||
OREO valuation adjustments | 8,467 | 241 | ||||||
Other | (1,227 | ) | (771 | ) | ||||
Loss on extinguishment of debt | 321 | – | ||||||
Mortgage loans originated for sale | (87,896 | ) | (30,406 | ) | ||||
Proceeds from sales of mortgage loans originated for sale | 98,499 | 38,945 | ||||||
Fees on mortgage loans sold | (2,308 | ) | (989 | ) | ||||
Accretion of indemnification asset | (158 | ) | (2,858 | ) | ||||
Loss on sale/disposal of premises and equipment | 85 | – | ||||||
Proceeds from FDIC loss share agreements | 10,695 | 58,244 | ||||||
Change in accrued interest receivable and other assets | 858 | (12,248 | ) | |||||
Change in accrued interest payable and other liabilities | (6,421 | ) | 2,592 | |||||
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| |||||
Net cash (used in) provided by operating activities | (41,395 | ) | 4,057 | |||||
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| |||||
Cash flows from investing activities | ||||||||
Purchases of investment securities available for sale | (540,154 | ) | (270,543 | ) | ||||
Sales of investment securities available for sale | 92,143 | 18,029 | ||||||
Repayments of principal and maturities of investment securities available for sale | 115,487 | 100,658 | ||||||
Net sales (purchase) of FHLB and Federal Reserve stock | (2,877 | ) | 2,931 | |||||
Cash acquired through acquisition of Capital Bank Corp. | – | 27,955 | ||||||
Net (increase) decrease in loans | 155,515 | (94,897 | ) | |||||
Purchases of premises and equipment | (6,010 | ) | (2,297 | ) | ||||
Proceeds from sales of OREO | 48,945 | 39,953 | ||||||
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| |||||
Net cash used in investing activities | (136,951 | ) | (178,211 | ) | ||||
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| |||||
Cash flows from financing activities | ||||||||
Net increase in demand, money market and savings accounts | 129,489 | 170,746 | ||||||
Net decrease in time deposits | (274,445 | ) | (280,887 | ) | ||||
Net decrease in federal funds purchased and securities sold under agreements to repurchase | (4,816 | ) | (25,595 | ) | ||||
Net decrease in short term FHLB advances | – | (30,000 | ) | |||||
Repayments of long term FHLB advances | (152,825 | ) | (32,542 | ) | ||||
Net proceeds from common stock rights offerings of subsidiaries | – | 11,638 | ||||||
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| |||||
Net cash (used in) financing activities | (302,597 | ) | (186,640 | ) | ||||
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| |||||
Net decrease in cash and cash equivalents | (480,943 | ) | (360,794 | ) | ||||
Cash and cash equivalents at beginning of period | 709,963 | 886,925 | ||||||
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| |||||
Cash and cash equivalents at end of period | $ | 229,020 | $ | 526,131 | ||||
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Supplemental disclosures of cash paid: | ||||||||
Interest paid | $ | 23,396 | $ | 13,783 | ||||
Income taxes | 16,779 | 5,333 | ||||||
Supplemental disclosures of noncash transactions | ||||||||
Transfer of loans to OREO | $ | 43,898 | $ | 33,548 | ||||
Transfer of OREO to premises and equipment | 1,026 | – | ||||||
Transfer of financed portion of premises and equipment sold | 930 | – | ||||||
Net acquisition of non-cash assets from Capital Bank Corporation | – | 146,130 | ||||||
Non-cash portion of acquired premises and equipment | (2,717 | ) | – |
The accompanying notes are an integral part of these financial statements.
F-10
Table of Contents
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
1. | Summary of Significant Accounting Policies |
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 its subsidiaries, Capital Bank, National Association (“Capital Bank, NA”), formerly NAFH National Bank (“NAFH Bank”), TIB Financial Corp. (“TIBB”; parent company of Naples Capital Advisors, Inc. and TIB Bank, through April 29, 2011, the date TIB Bank was merged with and into Capital Bank, NA), Capital Bank Corporation (“CBKN”; parent company of Capital Bank, through June 30, 2011, the date Capital Bank was merged with and into Capital Bank, NA) and Green Bankshares Inc. (“GRNB”; parent company of GreenBank, through September 7, 2011, the date GreenBank was merged with and into Capital Bank, NA). Prior to the mergers of TIB Bank, Capital Bank and GreenBank with and into Capital Bank, NA, these entities are collectively referred to as the Company’s subsidiary banks or the “Banks.” All significant inter-company accounts and transactions have been eliminated in consolidation. As of June 30, 2012 CBF had a total of 143 full service banking offices located in Florida, North Carolina, South Carolina, Tennessee and Virginia.
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. For further information and an additional description of the Company’s accounting policies, refer to the Company’s consolidated financial statements for the year ended December 31, 2011.
The accounting and reporting policies conform to U.S. GAAP and conform to general practices within the banking industry. The following is a summary of the more significant of these policies.
Critical Accounting Policies
Purchased Credit-Impaired Loans
The Company accounts for its acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. The fair value of loans includes estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows, exclusive of any loss share agreements with the FDIC. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk and any impairment is netted from the loan balances via the purchase accounting adjustments. Loans acquired in a transfer, including business combinations and transactions similar to the acquisitions of TIBB, CBKN and Green GRNB, where there is evidence of credit deterioration since origination and where it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under Accounting Standards, Codification guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
F-11
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
PCI loans are aggregated into pools of loans with common risk characteristics (loans with similar collateral types and credit risk) which are determined as of the date of acquisition. At each balance sheet date, the Company evaluates whether the estimated cash flows and corresponding present value of its loans, determined using the effective interest rates, has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in present value, the Company adjusts the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.
The impact of changes in market rates on variable interest rate loans is also recognized prospectively as adjustments to accretable yield and should not impact the allowance for loan losses. For further discussion of the Company’s acquisitions and loan accounting, see Notes 2 and 4 to the consolidated financial statements, respectively.
Originated Loans and Acquired Non-PCI Loans
Originated loans that management has the intent and ability to hold are reported at the principal balance outstanding, net of deferred loan fees and costs, and net of any allowance for loan losses. Acquired non-PCI loans are initially reported at their acquisition date fair value. Subsequently, acquired non-PCI loans are reported net of amortization or accretion of any applicable acquisition discount or premium and net of any allowance for loan losses. Interest income on originated and non-PCI acquired loans is reported on an interest method and includes amortization of net deferred loan fees, costs and any applicable acquisition discount or premium over the loan term. If the collectability of interest appears doubtful, the loan is classified as nonaccrual.
Nonaccrual Loans
Loans are generally placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or when principal or interest becomes 90 days past due, whichever occurs first. Certain loans past due 90 days or more may remain on accrual status if management determines that it does not have concern over the collectability of principal and interest. Generally, when loans are placed on nonaccrual status, accrued interest receivable is reversed against interest income in the current period. Any payments received thereafter are generally applied as a reduction to the remaining principal balance and no interest income is recorded as long as concern exists as to the ultimate collection of the principal. Loans are generally removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest. These policies conform to guidelines prescribed by bank regulatory authorities.
FDIC Indemnification Asset
Pursuant to purchase and assumption agreements with the FDIC, the Company has entered into loss-share agreements in which the FDIC will reimburse the Company for certain amounts related to covered loans and other real estate owned should the Company experience a loss. Accordingly, an Indemnification Asset is recorded at fair value at the acquisition date. The Indemnification Asset must be recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The Indemnification Asset on the acquisition date reflects the present value of future cash flows expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk.
Subsequent to initial recognition, the Indemnification Asset will continue to be measured on the same basis as the related indemnified loans and other real estate owned and will be impacted by changes in estimated
F-12
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
cash flows from the FDIC associated with changes in estimates of losses experienced on these loans. Decreases in the present value of the loans generally will result in an immediate increase to the Allowance for Loan Losses; correspondingly, there will be an immediate increase the Indemnification Asset provided that the decrease in present value is due to increased expected covered credit losses or expenses, with the offset to both the increase in the Allowance for Loan Losses and the increase in the Indemnification Asset recorded through the consolidated statement of income. Conversely, increases in the present value of the loans which are reflected as an adjustment to the yield of the loan pool and accreted into income over the remaining life of the loan or loan pool will correspondingly decrease the Indemnification Asset yield (or increase the negative yield, if applicable), and be recognized into income over 1) the life of the loan pool or 2) the life of the loss-share agreements, whichever is shorter. Loss assumptions used as the basis for cash flows or credit losses of the indemnified loans must be consistent with the loss assumptions used to measure the Indemnification Asset.
Upon the determination that an actual claimable loss has been incurred, the Indemnification Asset is reduced and a corresponding receivable due from the FDIC is created or increased by the amount owed by the FDIC. The due from the FDIC asset is held until such time as cash is received from the FDIC and the due from the FDIC asset is reduced or eliminated.
Allowance for Loan Losses
The Company maintains an Allowance for Loan Losses (the “Allowance”) at an amount that management believes will be adequate to absorb estimated losses inherent in the loan portfolio. The Allowance is based on ongoing, quarterly assessments of the probable incurred losses inherent in any loan portfolio.
The Allowance is increased by a charge to the Provision for Loan Losses, which is charged against current period operating results and the Allowance is decreased by the amount of charge offs, net of recoveries (which are added back to the Allowance). Impaired loans should be charged off against the Allowance in whole or in part when they are considered to be uncollectible.
The Allowance calculation consists of the following components: a) loans individually evaluated for impairment, b) loans collectively evaluated for impairment, and c) acquired loans.
Loans Individually Evaluated for Impairment – Management uses a combination of methods for determining which loans are impaired including the evaluation of nonaccrual loans, adversely rated loans, and all modified loans. Troubled debt restructurings are always considered to be impaired. Impairment for loans falling into these categories will be determined based on payment history, liquidity strength, guarantor support, etc.
Loans Collectively Evaluated for Impairment – This calculation is applied to all loans not individually evaluated for impairment, except for purchase credit impaired loans which are discussed below.
This element of the Allowance is calculated by applying loss factors to pools of outstanding loans with similar risk characteristics. The Company has limited historical loss experience on newly originated loans and the historical loss information available relating to the portfolios of acquired loans are considered by management to be irrelevant to newly originated loans due to differences in underwriting criteria and loan type. Accordingly, the Company currently is utilizing FDIC industry loss rates as the Bank begins to develop relevant historical loss information as the basis for determining loss factors to apply to outstanding loans. The loan loss factors are adjusted quarterly primarily based upon the changes in the level of historical net charge offs and parameter updates by management.
F-13
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Purchase Credit Impaired Loans – When loans acquired are considered to be impaired, the initial recording of these loans is at the present value of amounts expected to be received. The Allowance previously associated with these loans does not carry over to the Company and is eliminated in the purchase accounting adjustments. After acquisition, these loans are then included in the quarterly loan portfolio evaluations as described above.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets (including core deposit base premiums, customer relationship intangibles, and mortgage servicing rights) arising from business purchase combinations are initially recorded at fair value. Goodwill and other intangible assets with indefinite useful lives are not amortized and are tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Other intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values and tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Other intangible assets are considered to be impaired if the undiscounted cash flows from its associated asset group are less than their recorded net book value; if impairment is determined to exist, the asset must be written down to its fair value based upon discounted cash flows in the period which impairment is determined to exist. Factors considered in the impairment evaluation include but are not limited to fair market value, general market conditions, and projections of future operating results.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. As of June 30, 2012 and December 31, 2011, management considered the need for a valuation allowance and based upon its assessment of the relative weight of the positive and negative evidence available at the time of the analysis, concluded that a valuation allowance was not necessary.
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.
F-14
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Earnings per share have been computed based on the following periods ended:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 45,183 | 45,120 | 45,183 | 45,120 | ||||||||||||
Dilutive effect of options outstanding | – | – | – | – | ||||||||||||
Dilutive effect of restricted shares | 449 | 259 | 371 | 150 | ||||||||||||
Diluted | 45,632 | 45,379 | 45,554 | 45,270 |
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:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Anti-dilutive stock options | 2,864 | 2,236 | 2,823 | 1,309 | ||||||||||||
Anti-dilutive restricted shares | – | – | – | – |
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”). ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. Reclassifications out of accumulated other comprehensive income are to be presented either on the face of the financial statement in which other comprehensive income is presented or disclosed in the notes to the financial statements. Reclassification adjustments into net income need not be presented during the deferral period. This action does not affect the requirement to present items of net income, other comprehensive income and total comprehensive income in a single continuous or two consecutive statements. ASU 2011-12 and ASU 2011-05 are effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 and ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
F-15
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
In December 2011, the FASB issued ASU No. 2011-11,“Disclosures About Offsetting Assets and Liabilities”(“ASU 2011-11”). This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). However, as the FASB and the International Accounting Standards Board (collectively, the “Boards”) were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, we expect that the adoption of ASU 2011-11 will not have an impact on the Company’s consolidated financial condition or results of operations.
2. | Business Combinations and Acquisitions |
CBF Agreement with Southern Community Financial Corporation
On March 26, 2012, the Company entered into a definitive agreement (the “Agreement”) to acquire 100% of the stock of Southern Community Financial Corporation (“SCMF”) for a combination of cash and stock. SCMF is the parent of Southern Community Bank and Trust, a bank with $1.4 billion in assets and 22 branches in Winston-Salem, the Piedmont Triad, and other North Carolina markets. On June 25, 2012, SCMF and the Company agreed to amend the Agreement. The Agreement, as amended, provides that the consideration to be paid by CBF will consist entirely of cash, in an amount equal to $3.11 per share of SCMF common stock. Each outstanding option to purchase shares of SCMF common stock will be vested prior to the consummation of the transaction and be paid in cash equal to the difference between the exercise price of the option and $3.11.
In addition, SCMF shareholders would receive a contingent value right (“CVR”) which could pay up to $1.30 per share 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, and could receive additional cash consideration representing a portion of the discount in the purchase price, if any, if the Company redeems the securities issued by SCMF to the U.S. Department of the Treasury as part of the Troubled Asset Relief Program.
CBF Investment in Green Bankshares Inc.
On September 7, 2011, Green Bankshares completed the issuance and sale of 119,900 shares of its common stock to the Company for gross consideration of $217,019 less $750 of the Company’s expenses which were reimbursed by Green Bankshares. The total consideration was comprised of $147,600 of cash and the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by Green Bankshares to the U.S. Treasury in connection with the TARP, which were repurchased by the Company and contributed to Green Bankshares at fair value of $68,700 as a component of the Company’s investment consideration. Subsequently, Green Bankshares cancelled the Series A Preferred Stock. In connection with the Company’s Investment, each Green Bankshares shareholder as of September 6, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of GreenBank’s then existing loan portfolio as of May 5, 2011.
F-16
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table summarizes the Company’s Investment and Green Bankshares opening balance sheet as of September 7, 2011 adjusted to fair value:
(Dollars in thousands) | Previously Reported as of Sept. 7, 2011 | Measurement Period Adjustments | Revised as of Sept. 7, 2011 | |||||||||
Fair value of assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 542,725 | $ | – | $ | 542,725 | ||||||
Investment securities | 174,188 | (450 | ) | 173,738 | ||||||||
Loans | 1,342,798 | 1,943 | 1,344,741 | |||||||||
Goodwill | 26,825 | 2,313 | 29,138 | |||||||||
Premises and equipment | 71,654 | (564 | ) | 71,090 | ||||||||
Other intangible assets | 12,118 | 1,500 | 13,618 | |||||||||
Deferred tax asset | 54,642 | (5,423 | ) | 49,219 | ||||||||
Other assets | 140,809 | (121 | ) | 140,688 | ||||||||
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Total assets acquired | 2,365,759 | (802 | ) | 2,364,957 | ||||||||
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Fair value of liabilities assumed: | ||||||||||||
Deposits | 1,872,050 | – | 1,872,050 | |||||||||
Long term debt and other borrowings | 231,152 | – | 231,152 | |||||||||
Other liabilities | 19,474 | (802 | ) | 18,672 | ||||||||
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Total liabilities assumed | 2,122,676 | (802 | ) | 2,121,874 | ||||||||
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Net assets acquired | 243,083 | – | 243,083 | |||||||||
Less: non-controlling interest at fair value | (26,814 | ) | – | (26,814 | ) | |||||||
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216,269 | – | 216,269 | ||||||||||
Underwriting and legal costs | 750 | – | 750 | |||||||||
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Purchase price | $ | 217,019 | $ | – | $ | 217,019 | ||||||
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The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts. Subsequent adjustments, if any, will be retrospectively reflected in future filings. These refinements include: (1) changes in the collectability of certain legacy bank fully charged-off loan balances and fees; (2) changes in the estimated fair value of the core deposit intangible asset; (3) changes in deferred tax assets related to fair value estimates and a reduction of expected realization of items considered to be built in losses; and (4) a change in Goodwill caused by the net effect of these adjustments.
F-17
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Pro Formas
The following table reflects the pro forma total net interest income, non interest income and net loss for periods presented as though the acquisition of CBKN and GRNB had taken place at the beginning of the three and six months ended June 30, 2011. Subsequent to the acquisitions, these operations were merged. 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 periods, nor of future results of operations.
Pro Forma Three Months Ended June 30, | Pro Forma Six Months Ended June 30, | |||||||
2011 | 2011 | |||||||
Net interest income | $ | 58,586 | $ | 114,650 | ||||
Non-interest income | 16,135 | 29,096 | ||||||
Net loss | (10,146 | ) | (19,511 | ) |
3. | Investment Securities |
The amortized cost and estimated fair value of investment securities available for sale at June 30, 2012 and December 31, 2011 are presented below:
June 30, 2012 | ||||||||||||||||
Available for Sale | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
States and political subdivisions—tax exempt | $ | 16,658 | $ | 1,063 | $ | – | $ | 17,721 | ||||||||
States and political subdivisions—taxable | 509 | 50 | – | 559 | ||||||||||||
Marketable equity securities | 1,796 | 9 | – | 1,805 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 1,116,085 | 18,600 | 490 | 1,134,195 | ||||||||||||
Mortgage backed securities – residential private label | 3,028 | 10 | 97 | 2,941 | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Corporate bonds | 752 | – | – | 752 | ||||||||||||
Collateralized debt obligations | 505 | – | 258 | 247 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 1,143,083 | $ | 19,732 | $ | 845 | $ | 1,161,970 | |||||||||
|
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|
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|
|
|
|
F-18
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
December 31, 2011 | ||||||||||||||||
Available for Sale | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
States and political subdivisions—tax exempt | $ | 31,552 | $ | 2,694 | $ | 1 | $ | 34,245 | ||||||||
States and political subdivisions—taxable | 7,216 | 486 | – | 7,702 | ||||||||||||
Marketable equity securities | 1,796 | 11 | – | 1,807 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 759,565 | 11,089 | 749 | 769,905 | ||||||||||||
Mortgage backed securities – residential private label | 5,799 | 57 | 129 | 5,727 | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Corporate bonds | 2,934 | – | 124 | 2,810 | ||||||||||||
Collateralized debt obligations | 555 | 32 | 259 | 328 | ||||||||||||
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|
|
|
|
|
| |||||||||
$ | 813,167 | $ | 14,369 | $ | 1,262 | $ | 826,274 | |||||||||
|
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|
|
|
|
|
|
Proceeds from sales of securities available for sale were $59,661 and $92,143 for the three and six months ended June 30, 2012, respectively. Gross gains of approximately $840 and $3,570 were realized on these sales and calls during the three and six months ended June 30, 2012, respectively.
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. 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. Management engaged an independent third party valuation firm to assist management’s estimation of the fair value and credit loss potential of this security.
Based on this analysis, as of June 30, 2012, the estimated fair value of the CDO declined by $41 during the quarter, however, the credit loss potential of the CDO improved. 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.
The Company owns an investment in 30-year trust preferred securities of a community bank in North Carolina. On June 8, 2012, the North Carolina Commissioner of Banks closed the bank and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Due to the bank’s failure, management determined the bond to have experienced full credit impairment as of June 8, 2012. The resulting $38 impairment was charged through earnings in the second quarter of 2012.
F-19
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The table below presents a rollforward of the OTTI credit losses recognized in earnings for the three and six months ended June 30, 2012.
Three Months Ended | Six Months Ended | |||||||
(Dollars in thousands) | June 30, 2012 | June 30, 2012 | ||||||
Beginning balance | $ | 622 | $ | 616 | ||||
Additions/subtractions | ||||||||
Credit losses recognized during the period | 38 | 44 | ||||||
|
|
|
| |||||
Ending balance | $ | 660 | $ | 660 |
The estimated fair value of investment securities available for sale at June 30, 2012 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Estimated Fair Value | Yield | |||||||
Due in one year or less | $ | 1,312 | 2.41 | % | ||||
Due after one year through five years | 1,927 | 2.78 | % | |||||
Due after five years through ten years | 9,187 | 4.19 | % | |||||
Due after ten years | 10,603 | 3.73 | % | |||||
Mortgage-backed securities—residential | 1,137,136 | 2.05 | % | |||||
|
| |||||||
$ | 1,160,165 | 2.09 | % | |||||
|
| |||||||
Marketable equity securities | 1,805 | |||||||
|
| |||||||
$ | 1,161,970 | |||||||
|
|
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
June 30, 2012 | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||
Mortgage-backed securities—residential | $ | 93,968 | $ | 583 | $ | 214 | $ | 4 | $ | 94,182 | $ | 587 | ||||||||||||
Collateralized debt obligation | – | – | 247 | 258 | 247 | 258 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired | $ | 93,968 | $ | 583 | $ | 461 | $ | 262 | $ | 94,429 | $ | 845 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
December 31, 2011 | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||
States and political subdivisions—tax exempt | $ | 301 | $ | 1 | $ | – | $ | – | $ | 301 | $ | 1 | ||||||||||||
Mortgage-backed securities—residential | 102,057 | 878 | – | – | 102,057 | 878 | ||||||||||||||||||
Corporate bonds | 2,019 | 124 | – | – | 2,019 | 124 | ||||||||||||||||||
Collateralized debt obligation | – | – | 246 | 259 | 246 | 259 | ||||||||||||||||||
|
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|
|
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|
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|
| |||||||||||||
Total temporarily impaired | $ | 104,377 | $ | 1,003 | $ | 246 | $ | 259 | $ | 104,623 | $ | 1,262 | ||||||||||||
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F-20
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
As of June 30, 2012, the Company’s security portfolio consisted of 142 securities, 13 of which were in an unrealized loss position. As of December 31, 2011, the Company’s security portfolio consisted of 159 securities, 18 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 June 30, 2012 and December 31, 2011 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 June 30, 2012 or December 31, 2011. Investment securities having carrying values of approximately $299,573 at June 30, 2012 were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.
4. | Loans |
Major classifications of loans are as follows:
June 30, 2012 | December 31, 2011 | |||||||
Non-owner occupied commercial real estate | $ | 849,820 | $ | 903,914 | ||||
Other commercial construction and land | 365,832 | 423,932 | ||||||
Multifamily commercial real estate | 76,933 | 98,207 | ||||||
1-4 family residential construction and land | 74,533 | 85,978 | ||||||
|
|
|
| |||||
Total commercial real estate | 1,367,118 | 1,512,031 | ||||||
|
|
|
| |||||
Owner occupied commercial real estate | 1,002,448 | 902,816 | ||||||
Commercial and industrial loans | 473,592 | 467,047 | ||||||
|
|
|
| |||||
Total commercial | 1,476,040 | 1,369,863 | ||||||
|
|
|
| |||||
1-4 family residential | 762,886 | 818,547 | ||||||
Home equity loans | 368,557 | 383,768 | ||||||
Other consumer loans | 136,211 | 123,121 | ||||||
|
|
|
| |||||
Total consumer | 1,267,654 | 1,325,436 | ||||||
|
|
|
| |||||
Other (1) | 80,203 | 95,133 | ||||||
|
|
|
| |||||
Total loans | $ | 4,191,015 | $ | 4,302,463 | ||||
|
|
|
|
(1) | Other loans include deposit customer overdrafts of $1,974 and $2,795 as of June 30, 2012 and December 31, 2011, respectively. |
Total loans as of June 30, 2012 includes $12,451 of 1-4 family residential loans held for sale and $702 of deferred loan fees. Total loans as of December 31, 2011 includes $20,746 of 1-4 family residential loans held for sale and $508 of deferred loan fees.
The Company had a non-impaired loan of $2,716 collateralized by a bank branch that we operated under an operating lease. In June 2012, the Company purchased the branch for $2,900. Consideration included $184 of cash and the application of the remaining outstanding loan balance of 2,716.
Covered loans represent loans acquired from the FDIC subject to the loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment (“Purchased Credit Impaired or PCI Loans” as described in Note 1) and (ii) non-PCI loans. Loans originated by the Company
F-21
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
and loans acquired through the purchase of TIBB, CBKN and GRNB are excluded from the loss sharing agreements and are classified as “not covered.” Additionally, certain consumer loans acquired through the acquisition of failed banks from the FDIC are specifically excluded from the loss sharing agreements.
Loans acquired are recorded at fair value in accordance with acquisition accounting, exclusive of the 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. At the time of acquisition, the Company accounted for the impaired purchased 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. |
From these pools, the Company used 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 life 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. For any increases in cash flows expected to be collected such that the present value exceeds the recorded investment in the pool, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
The roll forward of accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Balance, beginning of period | $ | 639,150 | $ | 428,197 | $ | 715,479 | $ | 292,805 | ||||||||
New loans purchased | – | – | – | 163,630 | ||||||||||||
Accretion of income | (47,783 | ) | (35,474 | ) | (98,097 | ) | (63,712 | ) | ||||||||
Reclassifications from nonaccretable difference | 47,838 | 147,218 | 57,564 | 147,218 | ||||||||||||
Disposals | (29,212 | ) | 29,968 | (64,953 | ) | 29,968 | ||||||||||
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|
|
|
|
|
|
| |||||||||
Balance, end of period | $ | 609,993 | $ | 569,909 | $ | 609,993 | $ | 569,909 | ||||||||
|
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|
|
The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to acquisition by CBF. 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, which is their fair value at the time of acquisition by CBF.
F-22
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
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 6 – Other Real Estate Owned, for the covered and non-covered balances of other real estate owned.
Non-covered Loans
The following is a summary of the major categories of non-covered loans outstanding as of June 30, 2012 and December 31, 2011:
June 30, 2012 | PCI Loans | Non-PCI Loans | Total Non-covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 662,706 | $ | 76,393 | $ | 739,099 | ||||||
Other commercial C&D | 272,994 | 58,225 | 331,219 | |||||||||
Multifamily commercial real estate | 61,665 | 575 | 62,240 | |||||||||
1-4 family residential C&D | 28,404 | 41,373 | 69,777 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 1,025,769 | 176,566 | 1,202,335 | |||||||||
Owner occupied commercial real estate | 470,779 | 431,387 | 902,166 | |||||||||
Commercial and industrial | 178,963 | 275,370 | 454,333 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 649,742 | 706,757 | 1,356,499 | |||||||||
1-4 family residential | 504,515 | 151,798 | 656,313 | |||||||||
Home equity | 135,665 | 167,563 | 303,228 | |||||||||
Consumer | 47,359 | 88,672 | 136,031 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 687,539 | 408,033 | 1,095,572 | |||||||||
Other | 63,269 | 11,520 | 74,789 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 2,426,319 | $ | 1,302,876 | $ | 3,729,195 | ||||||
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F-23
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
December 31, 2011 | PCI Loans | Non-PCI Loans | Total Non-covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 722,776 | $ | 55,433 | $ | 778,209 | ||||||
Other commercial C&D | 331,852 | 38,713 | 370,565 | |||||||||
Multifamily commercial real estate | 75,114 | 756 | 75,870 | |||||||||
1-4 family residential C&D | 47,947 | 33,286 | 81,233 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 1,177,689 | 128,188 | 1,305,877 | |||||||||
Owner occupied commercial real estate | 501,821 | 286,385 | 788,206 | |||||||||
Commercial and industrial | 242,401 | 200,629 | 443,030 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 744,222 | 487,014 | 1,231,236 | |||||||||
1-4 family residential | 578,828 | 112,580 | 691,408 | |||||||||
Home equity | 148,252 | 162,915 | 311,167 | |||||||||
Consumer | 63,328 | 59,616 | 122,944 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 790,408 | 335,111 | 1,125,519 | |||||||||
Other | 79,586 | 9,653 | 89,239 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 2,791,905 | $ | 959,966 | $ | 3,751,871 | ||||||
|
|
|
|
|
|
Covered Loans
The following is a summary of the major categories of covered loans outstanding as of June 30, 2012 and December 31, 2011:
June 30, 2012 | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 110,665 | $ | 56 | $ | 110,721 | ||||||
Other commercial C&D | 34,613 | – | 34,613 | |||||||||
Multifamily commercial real estate | 14,693 | – | 14,693 | |||||||||
1-4 family residential C&D | 4,756 | – | 4,756 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 164,727 | 56 | 164,783 | |||||||||
Owner occupied commercial real estate | 100,234 | 48 | 100,282 | |||||||||
Commercial and industrial | 18,591 | 668 | 19,259 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 118,825 | 716 | 119,541 | |||||||||
1-4 family residential | 106,561 | 12 | 106,573 | |||||||||
Home equity | 17,886 | 47,443 | 65,329 | |||||||||
Consumer | 180 | – | 180 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 124,627 | 47,455 | 172,082 | |||||||||
Other | 5,414 | – | 5,414 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 413,593 | $ | 48,227 | $ | 461,820 | ||||||
|
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|
F-24
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
December 31, 2011 | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 125,649 | $ | 56 | $ | 125,705 | ||||||
Other commercial C&D | 53,367 | – | 53,367 | |||||||||
Multifamily commercial real estate | 22,337 | – | 22,337 | |||||||||
1-4 family residential C&D | 4,745 | – | 4,745 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 206,098 | 56 | 206,154 | |||||||||
Owner occupied commercial real estate | 114,610 | – | 114,610 | |||||||||
Commercial and industrial | 23,021 | 996 | 24,017 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 137,631 | 996 | 138,627 | |||||||||
1-4 family residential | 127,139 | – | 127,139 | |||||||||
Home equity | 20,180 | 52,421 | 72,601 | |||||||||
Consumer | 177 | – | 177 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 147,496 | 52,421 | 199,917 | |||||||||
Other | 5,894 | – | 5,894 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 497,119 | $ | 53,473 | $ | 550,592 | ||||||
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due loans, based on contractual terms, as of June 30, 2012 by class of loans:
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 | – | 56 | – | – | – | – | 56 | |||||||||||||||||||||
Multifamily commercial real estate | – | 50 | – | – | – | – | 50 | |||||||||||||||||||||
1-4 family residential C&D | – | 65 | – | – | – | 186 | 251 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | – | 171 | – | – | 56 | 210 | 437 | |||||||||||||||||||||
Owner occupied commercial real estate | – | 459 | – | – | – | 464 | 923 | |||||||||||||||||||||
Commercial and industrial | – | 995 | – | – | 276 | 997 | 2,268 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | – | 1,454 | – | – | 276 | 1,461 | 3,191 | |||||||||||||||||||||
1-4 family residential | – | 163 | – | – | – | 3,249 | 3,412 | |||||||||||||||||||||
Home equity | 1,216 | 1,145 | – | – | 3,678 | 3,071 | 9,110 | |||||||||||||||||||||
Consumer | – | 896 | – | – | – | 543 | 1,439 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 1,216 | 2,204 | – | – | 3,678 | 6,863 | 13,961 | |||||||||||||||||||||
Other | – | – | – | – | – | – | – | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,216 | $ | 3,829 | $ | – | $ | – | $ | 4,010 | $ | 8,534 | $ | 17,589 | ||||||||||||||
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F-25
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares 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 | $ | 4,347 | $ | 7,773 | $ | 22,722 | $ | 36,376 | $ | – | $ | – | $ | 71,218 | ||||||||||||||
Other commercial C&D | 341 | 8,730 | 23,969 | 83,050 | – | – | 116,090 | |||||||||||||||||||||
Multifamily commercial real estate | 1,998 | 139 | 2,906 | 1,954 | – | – | 6,997 | |||||||||||||||||||||
1-4 family residential C&D | – | 714 | 3,403 | 11,582 | – | – | 15,699 | |||||||||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | 6,686 | 17,356 | 53,000 | 132,962 | – | – | 210,004 | |||||||||||||||||||||
Owner occupied commercial real estate | 247 | 3,325 | 8,646 | 47,661 | – | – | 59,879 | |||||||||||||||||||||
Commercial and industrial | 252 | 5,297 | 2,137 | 23,987 | – | – | 31,673 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | 499 | 8,622 | 10,783 | 71,648 | – | – | 91,552 | |||||||||||||||||||||
1-4 family residential | 1,446 | 16,411 | 21,291 | 32,651 | – | – | 71,799 | |||||||||||||||||||||
Home equity | 2,995 | 4,108 | 2,823 | 4,903 | – | – | 14,829 | |||||||||||||||||||||
Consumer | – | 1,018 | – | 1,199 | – | – | 2,217 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 4,441 | 21,537 | 24,114 | 38,753 | – | – | 88,845 | |||||||||||||||||||||
Other | – | 462 | 1,798 | 4,634 | – | – | 6,894 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 11,626 | $ | 47,977 | $ | 89,695 | $ | 247,997 | $ | – | $ | – | $ | 397,295 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2011 by class of loans:
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 | $ | 25 | $ | 81 | ||||||||||||||
Other commercial C&D | – | – | – | – | – | – | – | |||||||||||||||||||||
Multifamily commercial real estate | – | – | – | – | – | – | – | |||||||||||||||||||||
1-4 family residential C&D | – | 174 | – | – | – | 301 | 475 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | – | 174 | – | – | 56 | 326 | 556 | |||||||||||||||||||||
Owner occupied commercial real estate | – | – | – | – | – | 178 | 178 | |||||||||||||||||||||
Commercial and industrial | 21 | 471 | – | – | 378 | 295 | 1,165 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | 21 | 471 | – | – | 378 | 473 | 1,343 | |||||||||||||||||||||
1-4 family residential | – | 29 | – | – | – | – | 29 | |||||||||||||||||||||
Home equity | 1,349 | 1,956 | – | – | 2,155 | 2,480 | 7,940 | |||||||||||||||||||||
Consumer | – | 246 | – | – | – | 7 | 253 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 1,349 | 2,231 | – | – | 2,155 | 2,487 | 8,222 | |||||||||||||||||||||
Other | – | – | – | – | – | – | – | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,370 | $ | 2,876 | $ | – | $ | – | $ | 2,589 | $ | 3,286 | $ | 10,121 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares 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 | $ | 7,462 | $ | 19,687 | $ | 15,226 | $ | 49,520 | $ | – | $ | – | $ | 91,895 | ||||||||||||||
Other commercial C&D | 1,132 | 6,031 | 36,131 | 85,626 | – | – | 128,920 | |||||||||||||||||||||
Multifamily commercial real estate | 1,258 | 443 | 5,153 | 4,283 | – | – | 11,137 | |||||||||||||||||||||
1-4 family residential C&D | – | 17,318 | 3,357 | 9,011 | – | – | 29,686 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | 9,852 | 43,479 | 59,867 | 148,440 | – | – | 261,638 | |||||||||||||||||||||
Owner occupied commercial real estate | 6,779 | 4,706 | 26,437 | 44,799 | – | – | 82,721 | |||||||||||||||||||||
Commercial and industrial | 700 | 12,068 | 2,982 | 22,386 | – | – | 38,136 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | 7,479 | 16,774 | 29,419 | 67,185 | – | – | 120,857 | |||||||||||||||||||||
1-4 family residential | 6,423 | 9,197 | 24,243 | 29,990 | – | – | 69,853 | |||||||||||||||||||||
Home equity | 1,525 | 2,976 | 2,843 | 4,402 | – | – | 11,746 | |||||||||||||||||||||
Consumer | – | 2,291 | – | 1,067 | – | – | 3,358 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 7,948 | 14,464 | 27,086 | 35,459 | – | – | 84,957 | |||||||||||||||||||||
Other | – | 788 | 5,207 | 3,970 | – | – | 9,965 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 25,279 | $ | 75,505 | $ | 121,579 | $ | 255,054 | $ | – | $ | – | $ | 477,417 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit-impaired loans are not classified as nonaccrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments.
As of June 30, 2012 the Company held one relationship with approximately $3.0 million outstanding that meets the criteria for a Troubled Debt Restructuring. This relationship was tested for impairment and deemed to not be impaired and in July of 2012 the total balance was re-paid.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
• | Pass—These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted. |
• | Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
F-27
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
• | Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
• | Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The following table summarizes loans, excluding purchased credit-impaired loans, monitored for credit quality based on internal ratings at June 30, 2012: |
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Non-owner occupied commercial real estate | $ | 75,028 | $ | 76 | $ | 1,345 | $ | – | $ | 76,449 | ||||||||||
Other commercial C&D | 57,949 | 276 | – | – | 58,225 | |||||||||||||||
Multifamily commercial real estate | 575 | – | – | – | 575 | |||||||||||||||
1-4 family residential C&D | 40,448 | – | 925 | – | 41,373 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total commercial real estate | 174,000 | 352 | 2,270 | – | 176,622 | |||||||||||||||
Owner occupied commercial real estate | 427,813 | 210 | 3,412 | – | 431,435 | |||||||||||||||
Commercial and industrial | 269,706 | 938 | 5,394 | – | 276,038 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total commercial | 697,519 | 1,148 | 8,806 | – | 707,473 | |||||||||||||||
1-4 family residential | 148,589 | 31 | 3,190 | – | 151,810 | |||||||||||||||
Home equity | 206,876 | 396 | 7,734 | – | 215,006 | |||||||||||||||
Consumer | 88,429 | 124 | 119 | – | 88,672 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total consumer | 443,894 | 551 | 11,043 | – | 455,488 | |||||||||||||||
Other | 11,480 | 40 | – | – | 11,520 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,326,893 | $ | 2,091 | $ | 22,119 | $ | – | $ | 1,351,103 | ||||||||||
|
|
|
|
|
|
|
|
|
|
5. | Allowance for Loan Losses |
Activity in the allowance for loan losses for the three and six months ended June 30, 2012 and June 30, 2011 is as follows:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Balance, beginning of period | $ | 40,608 | $ | 2,287 | $ | 34,749 | $ | 753 | ||||||||
Provision for loan losses charged to expense | 6,608 | 8,215 | 11,984 | 9,760 | ||||||||||||
Loans charged off | (2,624 | ) | (3,016 | ) | (2,866 | ) | (3,027 | ) | ||||||||
Recoveries of loans previously charged off | 880 | — | 1,605 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance, end of period | $ | 45,472 | $ | 7,486 | $ | 45,472 | $ | 7,486 | ||||||||
|
|
|
|
|
|
|
|
F-28
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table presents the roll forward of the allowance for loan losses for the three months ended June 30, 2012 by the loan portfolio segment against which the allowance is allocated:
March 31, 2012 | Provision | Net Charge- offs | June 30, 2012 | |||||||||||||
Non-owner occupied commercial real estate | $ | 3,830 | $ | (1,713 | ) | $ | 37 | $ | 2,154 | |||||||
Other commercial C&D | 9,706 | 1,271 | (33 | ) | 10,944 | |||||||||||
Multifamily commercial real estate | 136 | 74 | – | 210 | ||||||||||||
1-4 family residential C&D | 1,161 | 104 | – | 1,265 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | 14,833 | (264 | ) | 4 | 14,573 | |||||||||||
Owner occupied commercial real estate | 5,770 | (1,001 | ) | 14 | 4,783 | |||||||||||
Commercial and industrial | 4,836 | (260 | ) | 148 | 4,724 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 10,606 | (1,261 | ) | 162 | 9,507 | |||||||||||
1-4 family residential | 9,578 | 2,424 | 48 | 12,050 | ||||||||||||
Home equity | 2,971 | 4,525 | (498 | ) | 6,998 | |||||||||||
Consumer | 1,807 | 272 | (343 | ) | 1,736 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 14,356 | 7,221 | (793 | ) | 20,784 | |||||||||||
Other | 813 | 912 | (1,117 | ) | 608 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 40,608 | $ | 6,608 | $ | (1,744 | ) | $ | 45,472 | |||||||
|
|
|
|
|
|
|
|
The following table presents the roll forward of the allowance for loan losses for the six months ended June 30, 2012 by the loan portfolio segment against which the allowance is allocated:
December 31, 2011 | Provision | Net Charge- offs | June 30, 2012 | |||||||||||||
Non-owner occupied commercial real estate | $ | 3,854 | $ | (2,462 | ) | $ | 762 | $ | 2,154 | |||||||
Other commercial C&D | 7,627 | 3,350 | (33 | ) | 10,944 | |||||||||||
Multifamily commercial real estate | 398 | (188 | ) | – | 210 | |||||||||||
1-4 family residential C&D | 921 | 344 | – | 1,265 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | 12,800 | 1,044 | 729 | 14,573 | ||||||||||||
Owner occupied commercial real estate | 5,454 | (685 | ) | 14 | 4,783 | |||||||||||
Commercial and industrial | 4,166 | 412 | 146 | 4,724 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 9,620 | (273 | ) | 160 | 9,507 | |||||||||||
1-4 family residential | 7,252 | 4,750 | 48 | 12,050 | ||||||||||||
Home equity | 2,711 | 5,020 | (733 | ) | 6,998 | |||||||||||
Consumer | 1,594 | 490 | (348 | ) | 1,736 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 11,557 | 10,260 | (1,033 | ) | 20,784 | |||||||||||
Other | 772 | 953 | (1,117 | ) | 608 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 34,749 | $ | 11,984 | $ | (1,261 | ) | $ | 45,472 | |||||||
|
|
|
|
|
|
|
|
F-29
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table presents the roll forward of the allowance for loan losses for the three months ended June 30, 2011 by the loan portfolio segment against which the allowance is allocated:
March 31, 2011 | Provision | Net Charge- offs | June 30, 2011 | |||||||||||||
Non-owner occupied commercial real estate | $ | 300 | $ | 157 | $ | – | $ | 457 | ||||||||
Other commercial C&D | 71 | 164 | – | 235 | ||||||||||||
Multifamily commercial real estate | 4 | 10 | – | 14 | ||||||||||||
1-4 family residential C&D | 144 | 120 | – | 264 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | 519 | 451 | – | 970 | ||||||||||||
Owner occupied commercial real estate | 454 | 739 | – | 1,193 | ||||||||||||
Commercial and industrial | 550 | 1,730 | – | 2,280 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 1,004 | 2,469 | – | 3,473 | ||||||||||||
1-4 family residential | 452 | 90 | – | 542 | ||||||||||||
Home equity | 71 | 4,242 | (2,986 | ) | 1,327 | |||||||||||
Consumer | 221 | 733 | (30 | ) | 924 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 744 | 5,065 | (3,016 | ) | 2,793 | |||||||||||
Other | 20 | 230 | – | 250 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,287 | $ | 8,215 | $ | (3,016 | ) | $ | 7,486 | |||||||
|
|
|
|
|
|
|
|
The following table presents the roll forward of the allowance for loan losses for the six months ended June 30, 2011 by the loan portfolio segment against which the allowance is allocated:
December 31, 2010 | Provision | Net Charge- offs | June 30, 2011 | |||||||||||||
Non-owner occupied commercial real estate | $ | 79 | $ | 378 | $ | – | $ | 457 | ||||||||
Other commercial C&D | 6 | 229 | – | 235 | ||||||||||||
Multifamily commercial real estate | – | 14 | – | 14 | ||||||||||||
1-4 family residential C&D | 19 | 245 | – | 264 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | 104 | 866 | – | 970 | ||||||||||||
Owner occupied commercial real estate | 70 | 1,123 | – | 1,193 | ||||||||||||
Commercial and industrial | 133 | 2,147 | – | 2,280 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 203 | 3,270 | – | 3,473 | ||||||||||||
1-4 family residential | 215 | 327 | – | 542 | ||||||||||||
Home equity | 33 | 4,280 | (2,986 | ) | 1,327 | |||||||||||
Consumer | 184 | 781 | (41 | ) | 924 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 432 | 5,388 | (3,027 | ) | 2,793 | |||||||||||
Other | 14 | 236 | – | 250 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 753 | $ | 9,760 | $ | (3,027 | ) | $ | 7,486 | |||||||
|
|
|
|
|
|
|
|
F-30
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and by impairment evaluation method as of June 30, 2012:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Purchased Credit- Impaired | Individually Evaluated for Impairment | Collectively Evaluated for Impairment (1) | Purchased Credit- Impaired | |||||||||||||||||||
Non-owner occupied commercial real estate | $ | – | $ | 727 | $ | 1,427 | $ | – | $ | 76,449 | $ | 773,371 | ||||||||||||
Other commercial C&D | – | 731 | 10,213 | – | 58,225 | 307,607 | ||||||||||||||||||
Multifamily commercial real estate | – | 15 | 195 | – | 575 | 76,358 | ||||||||||||||||||
1-4 family residential C&D | – | 557 | 708 | – | 41,373 | 33,160 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial real estate | – | 2,030 | 12,543 | – | 176,622 | 1,190,496 | ||||||||||||||||||
Owner occupied commercial real estate | – | 3,771 | 1,011 | – | 431,435 | 571,013 | ||||||||||||||||||
Commercial and industrial | – | 3,100 | 1,625 | 3,673 | 272,365 | 197,554 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | – | 6,871 | 2,636 | 3,673 | 703,800 | 768,567 | ||||||||||||||||||
1-4 family residential | – | 1,395 | 10,655 | 4,074 | 147,736 | 611,076 | ||||||||||||||||||
Home equity | – | 303 | 6,695 | – | 215,006 | 153,551 | ||||||||||||||||||
Consumer | – | 1,090 | 646 | – | 88,672 | 47,539 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | – | 2,788 | 17,996 | 4,074 | 451,414 | 812,166 | ||||||||||||||||||
Other | – | 94 | 514 | – | 11,520 | 68,683 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | – | $ | 11,783 | $ | 33,689 | $ | 7,747 | $ | 1,343,356 | $ | 2,839,912 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Loans collectively evaluated for impairment include $202,596 of acquired home equity loans, $7,791 of commercial and agricultural loans and $6,444 of other consumer loans. The acquired home equity loans are presented net of unamortized purchase discounts of $13,267. |
During 2012, three 1-4 family residential loans totaling $4,074 were individually evaluated for impairment, as well as four commercial and industrial loans. No allowance for loan losses was recorded for such loans during the three and six month periods ended June 30, 2012.
F-31
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and by impairment evaluation method as of December 31, 2011:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Purchased Credit- Impaired | Individually Evaluated for Impairment | Collectively Evaluated for Impairment (1) | Purchased Credit- Impaired | |||||||||||||||||||
Non-owner occupied commercial real estate | $ | – | $ | 453 | $ | 3,401 | $ | – | $ | 55,489 | $ | 848,425 | ||||||||||||
Other commercial C&D | – | 509 | 7,118 | – | 38,713 | 385,219 | ||||||||||||||||||
Multifamily commercial real estate | – | 7 | 391 | – | 756 | 97,451 | ||||||||||||||||||
1-4 family residential C&D | – | 444 | 476 | – | 33,286 | 52,692 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial real estate | – | 1,413 | 11,386 | – | 128,244 | 1,383,787 | ||||||||||||||||||
Owner occupied commercial real estate | – | 3,022 | 2,432 | – | 286,385 | 616,431 | ||||||||||||||||||
Commercial and industrial | – | 1,945 | 2,221 | – | 201,625 | 265,422 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | – | 4,967 | 4,653 | – | 488,010 | 881,853 | ||||||||||||||||||
1-4 family residential | – | 866 | 6,386 | 763 | 111,817 | 705,967 | ||||||||||||||||||
Home equity | – | 163 | 2,548 | – | 215,336 | 168,432 | ||||||||||||||||||
Consumer | – | 997 | 598 | – | 59,616 | 63,505 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | – | 2,026 | 9,532 | 763 | 386,769 | 937,904 | ||||||||||||||||||
Other | – | 26 | 746 | – | 9,653 | 85,480 | ||||||||||||||||||
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| |||||||||||||
Total | $ | – | $ | 8,432 | $ | 26,317 | $ | 763 | $ | 1,012,676 | $ | 3,289,024 | ||||||||||||
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(1) | Loans collectively evaluated for impairment include $222,520 of acquired home equity loans, $5,939 of commercial and agricultural loans and $9,360 of other consumer loans which are presented net of unamortized purchase discounts of $16,013, $1,154, and $85, respectively. |
During 2011, two 1-4 family residential loans totaling $763 were individually evaluated for impairment. No allowance for loan losses was recorded for such loans during the year ended December 31, 2011.
6. | Other Real Estate Owned |
The activity within Other Real Estate Owned (“OREO”) for the three and six months ended June 30, 2012 and 2011 was as follows in the table below. Ending balances for OREO covered by loss sharing agreements with the FDIC for these periods were $46,283 and $48,501, respectively. Non-covered ending balances for these periods were $111,952 and $29,386, respectively:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Balance, beginning of period | $ | 169,433 | $ | 84,533 | $ | 168,781 | $ | 70,817 | ||||||||
OREO acquired through acquisitions | – | – | – | 15,118 | ||||||||||||
Real estate acquired from borrowers | 20,613 | 19,835 | 43,898 | 33,548 | ||||||||||||
Valuation adjustments | (5,435 | ) | (1,643 | ) | (8,467 | ) | (1,643 | ) | ||||||||
Property sold | (26,376 | ) | (24,838 | ) | (45,977 | ) | (39,953 | ) | ||||||||
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| |||||||||
Balance, end of period | $ | 158,235 | $ | 77,887 | $ | 158,235 | $ | 77,887 | ||||||||
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F-32
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
7. | Federal Home Loan Bank Advances and Short-Term Borrowings |
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank.
The Bank has securities sold under agreements to repurchase with customers whereby the Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities of the United States Government or its agencies which are chosen by the Bank. The amount outstanding at June 30, 2012 and December 31, 2011 was $49,717 and $54,533, respectively.
The Bank invests in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral.
At June 30, 2012, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida, the Bank had $64,000 in advances outstanding with a carrying value of $67,520. The advances as of June 30, 2012 consisted of the following:
Carrying | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Contractual Rate at June 30, 2012 | ||||||||||||
10,066 | 10,000 | September 2012(a) | Fixed | 4.05 | % | |||||||||||
4,102 | 4,000 | January 2015 | Fixed | 2.92 | % | |||||||||||
5,142 | 5,000 | February 2015 | Fixed | 2.83 | % | |||||||||||
5,271 | 5,000 | June 2015 | Fixed | 3.71 | % | |||||||||||
5,294 | 5,000 | July 2015(a) | Fixed | 3.57 | % | |||||||||||
5,620 | 5,000 | June 2017(a) | Fixed | 4.58 | % | |||||||||||
10,742 | 10,000 | August 2017(a) | Fixed | 3.63 | % | |||||||||||
5,428 | 5,000 | November 2017(b) | Fixed | 3.93 | % | |||||||||||
5,511 | 5,000 | July 2018(a) | Fixed | 3.94 | % | |||||||||||
5,174 | 5,000 | July 2018(a) | Fixed | 2.14 | % | |||||||||||
5,170 | 5,000 | July 2018(a) | Fixed | 2.12 | % | |||||||||||
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$67,520 | $ | 64,000 | ||||||||||||||
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(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
(b) | This advance allows the FHLB a one-time conversion option in November 2012. |
The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s respective residential 1-4 family mortgage, multifamily, HELOC and commercial real estate secured loans. The amount of eligible collateral at June 30, 2012 provided for incremental borrowing availability of up to $232,578.
F-33
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
At December 31, 2011, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida, the Bank had $206,500 in advances outstanding with a carrying value of $221,018. The advances as of December 31, 2011 consisted of the following:
Carrying | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Contractual Rate at December 31, 2011 | ||||||||||||
$5,000 | $ | 5,000 | January 2012 | Fixed | 4.56 | % | ||||||||||
5,047 | 5,000 | March 2012 | Fixed | 4.29 | % | |||||||||||
5,076 | 5,000 | May 2012(a) | Fixed | 4.60 | % | |||||||||||
10,256 | 10,000 | September 2012(a) | Fixed | 4.05 | % | |||||||||||
3,034 | 3,000 | January 2013 | Fixed | 1.86 | % | |||||||||||
7,617 | 7,500 | March 2013 | Fixed | 2.30 | % | |||||||||||
4,167 | 4,000 | March 2013 | Fixed | 4.58 | % | |||||||||||
52,054 | 50,000 | April 2013(a) | Fixed | 3.81 | % | |||||||||||
5,098 | 5,000 | June 2013(a) | Fixed | 2.28 | % | |||||||||||
3,064 | 3,000 | January 2014 | Fixed | 2.43 | % | |||||||||||
5,398 | 5,000 | May 2014(a) | Fixed | 4.60 | % | |||||||||||
5,391 | 5,000 | June 2014(a) | Fixed | 4.66 | % | |||||||||||
4,121 | 4,000 | January 2015 | Fixed | 2.92 | % | |||||||||||
5,164 | 5,000 | February 2015 | Fixed | 2.83 | % | |||||||||||
5,305 | 5,000 | June 2015 | Fixed | 3.71 | % | |||||||||||
5,333 | 5,000 | July 2015(a) | Fixed | 3.57 | % | |||||||||||
17,193 | 15,000 | December 2016 | Fixed | 4.07 | % | |||||||||||
23,184 | 20,000 | January 2017 | Fixed | 4.25 | % | |||||||||||
11,696 | 10,000 | February 2017 | Fixed | 4.45 | % | |||||||||||
5,661 | 5,000 | June 2017(a) | Fixed | 4.58 | % | |||||||||||
10,810 | 10,000 | August 2017(a) | Fixed | 3.63 | % | |||||||||||
5,449 | 5,000 | November 2017(b) | Fixed | 3.93 | % | |||||||||||
5,534 | 5,000 | July 2018(a) | Fixed | 3.94 | % | |||||||||||
5,185 | 5,000 | July 2018(a) | Fixed | 2.14 | % | |||||||||||
5,181 | 5,000 | July 2018(a) | Fixed | 2.12 | % | |||||||||||
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$221,018 | $ | 206,500 | ||||||||||||||
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(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
(b) | This advance allows the FHLB a one-time conversion option in November 2012. |
The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s respective residential 1-4 family mortgage, multifamily, HELOC and commercial real estate secured loans. The amount of eligible collateral at December 31, 2011 provided for incremental borrowing availability of up to $106,606.
F-34
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
8. | Long Term Borrowings |
Structured repurchase agreements
At June 30, 2012, outstanding structured repurchase agreements totaled $50,000 of contractual amounts with carrying values of $54,803. These repurchase agreements have a weighted-average rate of 4.06% as of June 30, 2012 and are collateralized by certain U.S. agency and mortgage-backed securities.
Carrying Amount | Contractual Amount | Maturity Date | Rate at June 30, 2012 | |||||||||
$ | 11,240 | $ | 10,000 | November 6, 2016 | 4.75 | % | ||||||
10,666 | 10,000 | December 18, 2017 | 3.72 | % | ||||||||
11,202 | 10,000 | March 30, 2017 | 4.50 | % | ||||||||
10,705 | 10,000 | December 18, 2017 | 3.79 | % | ||||||||
10,990 | 10,000 | March 22, 2019 | 3.56 | % | ||||||||
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$ | 54,803 | $ | 50,000 | |||||||||
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At December 31, 2011, outstanding structured repurchase agreements totaled $50,000 of contractual amounts with carrying values of $55,243. There were no outstanding structured repurchase agreements at December 31, 2010. These repurchase agreements have a weighted-average rate of 4.06% as of December 31, 2011 and are collateralized by certain U.S. agency and mortgage-backed securities.
Carrying | Contractual Amount | Maturity Date | Rate at December 31, 2011 | |||||||||
$11,376 | $ | 10,000 | November 6, 2016 | 4.75 | % | |||||||
10,722 | 10,000 | December 18, 2017 | 3.72 | % | ||||||||
11,322 | 10,000 | March 30, 2017 | 4.50 | % | ||||||||
10,765 | 10,000 | December 18, 2017 | 3.79 | % | ||||||||
11,058 | 10,000 | March 22, 2019 | 3.56 | % | ||||||||
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$55,243 | $ | 50,000 | ||||||||||
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9. | Shareholders’ Equity and Minimum Regulatory Capital Requirements |
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
F-35
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
To be considered well capitalized or adequately capitalized as defined under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and Total Risk-based ratios. At June 30, 2012 and December 31, 2011 the Bank maintained capital ratios exceeding the requirement to be considered well capitalized. These minimum ratios along with the actual ratios for the Company and the Bank as of June 30, 2012 and December 31, 2011 are presented in the following table.
Well Capitalized Requirement | Adequately Capitalized Requirement | June 30, 2012 Actual | December 31, 2011 Actual | |||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||
Consolidated | N/A | ³ | 4.0 | % | 13.7 | % | 12.6 | % | ||||||||
Capital Bank, NA | ³5.0 | % | ³ | 4.0 | % | 11.4 | % | 10.4 | % | |||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | N/A | ³ | 4.0 | % | 19.9 | % | 19.3 | % | ||||||||
Capital Bank, NA | ³6.0 | % | ³ | 4.0 | % | 16.4 | % | 15.8 | % | |||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | N/A | ³ | 8.0 | % | 21.0 | % | 20.2 | % | ||||||||
Capital Bank, NA | ³10.0 | % | ³ | 8.0 | % | 17.6 | % | 16.7 | % |
At present, the OCC Operating Agreement requires Capital Bank, NA to maintain total capital equal to at least 12% of risk-weighted assets, Tier 1 capital equal to at least 11% of risk-weighted assets and a minimum leverage ratio of 10% (Tier 1 Capital ratio).
Management believes, as of June 30, 2012, that the Company and the Bank meet all capital requirements to which they are subject. Tier 1 Capital for the Company includes trust preferred securities to the extent allowable.
Currently, the OCC Operating Agreement with Capital Bank, NA prohibits the Bank from paying a dividend for three years following the July 16, 2010 initial acquisition date. Once the three-year period has elapsed, the agreement imposes other restrictions on Capital Bank, NA’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made.
Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2012, if not subject to other restrictions, would have been limited to approximately $63,841.
10. | Stock-Based Compensation |
As of June 30, 2012, the Company had one compensation plan under which shares of its common stock are issuable in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and stock bonus awards. This is its 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was effective December 22, 2009 and expires on December 22, 2019, the tenth anniversary of the effective date. The maximum number of shares of common stock of the Company that may be optioned or awarded through the 2019 expiration of the plan is 5,750 shares (limited to 10% of outstanding shares of common stock) of which up to 70% may be granted pursuant to stock options and up to 30% may be granted pursuant to restricted stock and restricted stock units. If any awards granted under the 2010 Plan are forfeited or any option terminates, expires or lapses without being exercised, or any award is settled for cash, the shares of stock shall again be available for awards under the 2010 Plan.
F-36
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The following table summarizes the components and classification of stock-based compensation expense for the three and six months ended June 30, 2012 and 2011.
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Stock options | 1,856 | $ | 1,654 | $ | 6,150 | $ | 2,030 | |||||||||
Restricted stock | 2,356 | 1,375 | 4,535 | 1,544 | ||||||||||||
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| |||||||||
Total stock-based compensation expense | $ | 4,212 | $ | 3,029 | $ | 10,685 | $ | 3,574 | ||||||||
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Salaries and employee benefits | $ | 3,882 | $ | 2,591 | $ | 10,024 | $ | 3,061 | ||||||||
Other expense | 330 | 438 | 661 | 513 | ||||||||||||
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| |||||||||
Total stock-based compensation expense | $ | 4,212 | $ | 3,029 | $ | 10,685 | $ | 3,574 | ||||||||
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The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was approximately $1,639 and $1,168 for the three months ended June 30, 2012 and 2011, respectively and $4,159 and $1,379 for the six months ended June 30, 2012 and 2011, respectively.
Stock Options
Under the 2010 Plan, the exercise price for common stock must equal at least 100% of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10% of the common stock must equal at least 110% of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options granted during the first six months of 2012 and 2011 vest over average service periods of approximately 6 months and 2 years, respectively.
The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.”
The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted during the six months ended June 30, 2012 and 2011.
Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||
Dividend yield | 0.00% | 0.00% | ||||||
Risk-free interest rate | 0.91% | 1.87% | ||||||
Expected option life | 5.25 years | 5 years | ||||||
Volatility | 45% | 33% | ||||||
Weighted average grant-date fair value of options granted | $ | 8.05 | $ | 4.41 |
F-37
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
• | The dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan. An increase in dividend yield will decrease stock compensation expense. |
• | The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense. |
• | The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. An increase in the option life will increase stock compensation expense. |
• | The volatility was estimated using a peer group assessment for periods approximating the expected option life. Appropriate weight is attributed to financial theory, according to which the volatility of an institution’s equity should be related to the volatility of its assets and the entity’s financial leverage. An increase in the volatility will increase stock compensation expense. |
ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During the six months ended June 30, 2012 and 2011, stock based compensation expense was recorded based upon assumptions that the Company would experience no forfeitures. This assumption of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in assumptions will be accounted for prospectively in the period of change.
As of June 30, 2012, unrecognized compensation expense associated with stock options was $3,696 which is expected to be recognized over a weighted average period of approximately six months. A summary of the stock option activity in the 2010 Plan for the six months ended June 30, 2012 and 2011 is follows:
2012 | 2011 | |||||||||||||||
Shares | Weighted Average Exercise Price Per Share | Shares | Weighted Average Exercise Price Per Share | |||||||||||||
Balance, January 1, | 2,236 | $ | 20.00 | – | $ | – | ||||||||||
Granted | 628 | 20.00 | 2,236 | 20.00 | ||||||||||||
Exercised | – | – | – | – | ||||||||||||
Expired or forfeited | – | – | – | – | ||||||||||||
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Balance, June 30, | 2,864 | $ | 20.00 | 2,236 | $ | 20.00 | ||||||||||
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The weighted average remaining term for outstanding stock options was approximately 8 years at June 30, 2012. The aggregate intrinsic value at June 30, 2012 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date. There were 1,432 options exercisable at June 30, 2012.
F-38
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Options outstanding at June 30, 2012 were as follows:
Outstanding Options | Options Exercisable | |||||||||||||||||||
Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price Per Share | Number | Weighted Average Exercise Price | |||||||||||||||
$20.00 | 2,864 | 7.93 years | $ | 20.00 | 1,432 | $ | 20.00 |
Options outstanding at December 31, 2011 were as follows:
Outstanding Options | Options Exercisable | |||||||||||||||||||
Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price Per Share | Number | Weighted Average Exercise Price | |||||||||||||||
$20.00 | 2,236 | 8.00 years | $ | 20.00 | 1,118 | $ | 20.00 |
Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares granted to employees is based upon the performance of the Company’s common stock. The terms of the restricted stock awards granted to employees during 2011 and 2012 provide for vesting upon the achievement of stock price goals as follows: 1) 33% at $25.00 per share; 2) 33% at $28.00 per share; and 3) 33% at $32.00 per share. Achievement of stock price goals is generally defined as the average closing price of the shares for any consecutive 30-day trading period exceeding the applicable price target.
The terms of the restricted stock awards granted to directors during 2011 provide for vesting of one-half of the restricted stock on December 22, 2011, and vesting of one-half on December 22, 2012. The fair value of each restricted stock award granted to directors was based on the most recent trade.
The fair value of each restricted stock award granted to employees during the first six months of 2012 was estimated as of the date of grant using a Monte Carlo approach based on Geometric Brownian Motion that simulated daily stock prices and the related consecutive 30 day average of the simulated stock price over a period of 10 years .The model projected the Company’s fair value of each vesting tranche of the restricted stock award from the mean or expected value from the 100,000 scenarios used.
The fair value of each restricted stock award granted to employees in 2011 was estimated as of the date of grant using a risk-neutral Monte Carlo simulation model that projected the Company’s stock price over 10,000 random scenarios in order to assess the stock price along those paths where vesting conditions are met. The value of the restricted stock award is equal to the weighted average present value of the terminal projected stock price of all 10,000 paths, where paths are set to $0 when vesting conditions are not met or the awards are forfeited.
F-39
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Both models described above require the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The following table summarizes the weighted average assumptions used to compute the grant-date fair value of restricted stock awards granted during the six months ended June 30, 2012 and 2011.
Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||
Grant date fair value of shares | $19.84 | $17.00 | ||||||
Risk-free interest rate | Forward Treasury Curve | Forward Treasury Curve | ||||||
Market risk premium | 0.00% | 0.00% | ||||||
Volatility (for 2011 year 1, year 2, year 3 and after 3 years, respectively) | 45% | 21% /24% /31% /32.5% | ||||||
Annual forfeiture estimate | 0.00% | 0.00% | ||||||
Weighted average grant-date fair value of restricted stock awards granted | $18.01 | $13.49 |
• | An increase in the risk-free interest rate will increase stock compensation expense. |
• | The volatility was estimated using a peer group assessment for periods approximating the expected option life. Appropriate weight is attributed to financial theory, according to which the volatility of an institution’s equity should be related to the volatility of its assets and the entity’s financial leverage. An increase in the volatility will increase stock compensation expense. |
• | An increase in the annual forfeiture estimate will decrease stock compensation expense. |
The value of the restricted stock is being amortized on a straight-line basis over the implied service periods. During the six months ended June 30, 2012 and 2011, no restricted stock awards vested.
A summary of the restricted stock activity in the plan is as follows:
2012 | 2011 | |||||||||||||||
Shares | Weighted Average Grant-Date Fair Value Per Share | Shares | Weighted Average Grant-Date Fair Value Per Share | |||||||||||||
Balance, January 1, | 967 | $ | 13.26 | – | $ | – | ||||||||||
Granted | 307 | 18.01 | 1,030 | 13.49 | ||||||||||||
Vested | – | – | – | – | ||||||||||||
Expired or forfeited | – | – | – | – | ||||||||||||
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Balance, June 30, | 1,274 | $ | 14.40 | 1,030 | $ | 13.49 | ||||||||||
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11. | Fair Value |
FASB guidance on fair value measurements defines fair value, establishes a framework for measuring fair value, and requires fair value disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis.
This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
F-40
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Cash & cash equivalents
For cash & cash, equivalents the carrying value is primarily utilized as a reasonable estimate of fair value.
Valuation of Investment Securities
The fair values of securities available for sale are determined by: 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs); 2) matrix pricing, which is a mathematical technique widely used in the financial markets to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs); and 3) for collateralized debt obligations, certain corporate debt securities that are not actively traded and certain other assets and liabilities recorded at fair value in connection with the application of the acquisition method of accounting, custom discounted cash flow modeling (Level 3 inputs).
As of June 30, 2012, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies and certain corporate debt securities which are not actively traded. The inputs used in determining the estimated fair value of these securities are Level 3 inputs. In determining their estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Additionally, cash flows utilized in the modeling of the collateralized debt obligation security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustment for mortgage loans held for sale is classified as nonrecurring Level 2.
F-41
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals and other available observable market information. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The Company’s policy is to update appraisals, at a minimum, annually for all classified assets, which include collateral dependent loans and OREO. We consider appraisals dated within the past 12 months to be current and do not typically make adjustments to such appraisals. In the Company’s process for reviewing third-party prepared appraisals, any differences of opinion on values, assumptions or adjustments to comparable sales data are typically reconciled directly with the independent appraiser prior to acceptance of the final appraisal.
Sensitivity to Changes in Significant Unobservable Inputs
For recurring fair value estimates categorized within Level 3 of the fair value hierarchy, as of June 30, 2011, the Company owned a collateralized debt security, corporate bonds, and an Industrial Revenue bond. The significant unobservable inputs used in the fair value measurement of these securities are incorporated in the discounted cash flow modeling valuation and consensus pricing used. Rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of the collateralized debt security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers. Significant changes in any inputs in isolation would result in a significantly different fair value estimate.
F-42
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2012:
Fair Value Measurements Using | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Trading securities | $ | 759 | $ | 759 | $ | – | $ | – | ||||||||
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| |||||||||
Available for sale securities | ||||||||||||||||
States and political subdivisions—tax exempt | $ | 17,721 | $ | – | $ | 17,721 | $ | – | ||||||||
States and political subdivisions—taxable | 559 | – | 559 | – | ||||||||||||
Mortgage-backed securities—residential | 1,134,195 | – | 1,134,195 | – | ||||||||||||
Mortgage-backed securities—residential private label | 2,941 | – | 2,941 | – | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Marketable equity securities | 1,805 | 1,805 | – | – | ||||||||||||
Corporate bonds | 752 | – | – | 752 | ||||||||||||
Collateralized debt obligations | 247 | – | – | 247 | ||||||||||||
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| |||||||||
Available for sale securities | $ | 1,161,970 | $ | 1,805 | $ | 1,155,416 | $ | 4,749 | ||||||||
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|
Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2011:
Fair Value Measurements Using | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Trading securities | $ | 637 | $ | 637 | $ | – | $ | – | ||||||||
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| |||||||||
Available for sale securities | ||||||||||||||||
States and political subdivisions—tax exempt | $ | 34,245 | $ | – | $ | 34,245 | $ | – | ||||||||
States and political subdivisions—taxable | 7,702 | – | 7,702 | – | ||||||||||||
Mortgage-backed securities—residential | 769,905 | – | 769,905 | – | ||||||||||||
Mortgage-backed securities—residential private label | 5,727 | – | 5,727 | – | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Marketable equity securities | 1,807 | 1,807 | – | – | ||||||||||||
Corporate bonds | 2,810 | – | 2,020 | 790 | ||||||||||||
Collateralized debt obligations | 328 | – | – | 328 | ||||||||||||
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| |||||||||
Available for sale securities | $ | 826,274 | $ | 1,807 | $ | 819,599 | $ | 4,868 | ||||||||
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F-43
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
The table below presents reconciliations and income statement classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2012 and held at June 30, 2012.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||
Corporate Bonds | Industrial Revenue Bond | Collateralized Debt Obligations | ||||||||||
Beginning balance, March 31, 2012 | $ | 790 | $ | 3,750 | $ | 288 | ||||||
Included in earnings—other than temporary impairment | (38 | ) | – | – | ||||||||
Included in other comprehensive income | – | – | (41 | ) | ||||||||
Purchases, sales, amortization of premium/discount, net | – | – | – | |||||||||
Transfer in to Level 3 | – | – | – | |||||||||
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| |||||||
Ending balance June 30, 2012 | $ | 752 | $ | 3,750 | $ | 247 | ||||||
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|
The table below presents reconciliations and income statement classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2012 and held at June 30, 2012.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||
Corporate Bonds | Industrial Revenue Bond | Collateralized Debt Obligations | ||||||||||
Beginning balance, January 1, 2012 | $ | 790 | $ | 3,750 | $ | 328 | ||||||
Included in earnings—other than temporary impairment | (38 | ) | – | – | ||||||||
Included in other comprehensive income | – | – | 1 | |||||||||
Purchases, sales, amortization of premium/discount, net | – | – | (82 | ) | ||||||||
Transfer in to Level 3 | – | – | – | |||||||||
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| |||||||
Ending balance June 30, 2012 | $ | 752 | $ | 3,750 | $ | 247 | ||||||
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|
Quantitative Information about Recurring Level 3 Fair Value Measurements | ||||||||
(Dollars in thousands) | Fair Value at June 30, 2012 | Valuation Technique(s) | Significant Unobservable | Range | ||||
Corporate bonds | $752 | Consensus pricing Discounted cash flow | Offered quotes Discount Rate | 75 - 83 6%-20% | ||||
Discounted cash flow Discounted cash flow Discounted cash flow | Illiquidity factor Contractual rate Default Probability | 3% 5% 95% | ||||||
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| ||||
Industrial revenue bond | $3,750 | Discounted cash flow | Current yield/Discount rate | 2% | ||||
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Collateralized debt obligations | $247 | Discounted cash flow | Discount rate | Libor +10.75% and 13% | ||||
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F-44
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Assets and Liabilities Measured on a Nonrecurring Basis
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of June 30, 2012:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Assets | ||||||||||||
Other real estate owned | $ | – | $ | – | $ | 34,300 | ||||||
Other repossessed assets | – | 265 | – |
Other real estate owned had a carrying amount of $46,385, less a valuation allowance of $12,085 as of June 30, 2012. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession.
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of December 31, 2011:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Assets | ||||||||||||
Other real estate owned | $ | – | $ | – | $ | 87,867 | ||||||
Other repossessed assets | – | 261 | – |
Other real estate owned had a carrying amount of $95,557, less a valuation allowance of $7,690 as of December 31, 2011. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession.
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements | ||||||||
(Dollars in thousands) | Fair Value at June 30, 2012 | Valuation Technique(s) | Significant Unobservable | Range | ||||
OREO | 34,300 | Fair value of property | Appraised value less costs to sell | 8% -10% |
F-45
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
Carrying amount and estimated fair values of financial instruments were as follows:
Fair Value Measurement | ||||||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
June 30, 2012 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 229,020 | $ | 229,020 | $ | 229,020 | $ | – | $ | – | ||||||||||
Trading securities | 759 | 759 | 759 | – | – | |||||||||||||||
Investment securities available for sale | 1,161,970 | 1,161,970 | 1,805 | 1,155,416 | 4,749 | |||||||||||||||
Loans, net | 4,145,543 | 4,376,258 | – | 12,451 | 4,363,807 | |||||||||||||||
Receivable from FDIC | 9,699 | 9,699 | – | 9,699 | – | |||||||||||||||
Indemnification asset | 60,750 | 60,750 | – | – | 60,750 | |||||||||||||||
Federal reserve, federal home loan bank and independent bankers’ bank stock | 41,375 | 41,375 | – | – | 41,375 | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Noncontractual deposits | $ | 3,065,238 | $ | 3,065,238 | $ | – | $ | – | $ | 3,065,238 | ||||||||||
Contractual deposits | 1,914,990 | 1,912,349 | – | – | 1,912,349 | |||||||||||||||
Federal home loan bank advances | 67,520 | 69,717 | – | 69,717 | – | |||||||||||||||
Short-term borrowings | 49,717 | 49,715 | – | 49,715 | – | |||||||||||||||
Long-term borrowings | 54,803 | 58,763 | – | – | 58,763 | |||||||||||||||
Subordinated debentures | 85,734 | 93,296 | – | – | 93,296 | |||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 709,963 | $ | 709,963 | $ | 709,963 | $ | – | $ | – | ||||||||||
Trading securities | 637 | 637 | 637 | – | – | |||||||||||||||
Investment securities available for sale | 826,274 | 826,274 | 1,807 | 819,599 | 4,868 | |||||||||||||||
Loans, net | 4,267,714 | 4,329,776 | – | 20,746 | 4,309,030 | |||||||||||||||
Receivable from FDIC | 13,315 | 13,315 | – | 13,315 | – | |||||||||||||||
Indemnification asset | 66,282 | 66,282 | – | – | 66,282 | |||||||||||||||
Federal reserve, federal home loan bank and independent bankers’ bank stock | 38,498 | 38,498 | – | – | 38,498 | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Noncontractual deposits | $ | 2,935,748 | $ | 2,935,748 | $ | – | $ | – | $ | 2,935,748 | ||||||||||
Contractual deposits | 2,189,436 | 2,186,869 | – | – | 2,186,869 | |||||||||||||||
Federal home loan bank advances | 221,018 | 236,919 | – | 236,919 | – | |||||||||||||||
Short-term borrowings | 54,533 | 54,531 | – | 54,531 | – | |||||||||||||||
Long-term borrowings | 55,243 | 58,419 | – | – | 58,419 | |||||||||||||||
Subordinated debentures | 84,858 | 93,845 | – | – | 93,845 |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, receivable from FDIC, accrued interest receivable and payable, noncontractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Reserve, Federal Home Loan Bank stock, indemnification asset and other bankers’ bank stock due to restrictions placed on its transferability, the estimated fair value is equal to their carrying amount. Security fair values are based on market prices or
F-46
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
June 30, 2012 and December 31, 2011
(dollars and shares in thousands)
dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life, adjusted for the allowance for loan losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of long-term debt is based on current rates for similar financing.
The fair value of off-balance sheet items that includes commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.
F-47
Table of Contents
Capital Bank Financial Corp.
Consolidated Financial Statements as of and for the Years Ended
December 31, 2011 and December 31, 2010, and for the Period from Inception through December 31, 2009
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders of Capital Bank Financial Corp.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholder’s equity, and of cash flows present fairly, in all material respects, the financial position of Capital Bank Financial Corp. at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for the years ending December 31, 2011 and 2010, and the period from November 30, 2009 (date of inception) through December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of TIB Financial Corp., a 98.7% owned subsidiary, as of and for the three months ending December 31, 2010, which statement reflects total assets (in thousands) of $1,756,866 as of December 31, 2010 and total net interest income after provision for loan losses (in thousands) of $12,030 for the three months then ended. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Company, is based solely on the report of the other auditors. We conducted our audit of the financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of other auditors provide a reasonable basis for our opinions.
/s/PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 10, 2012
F-49
Table of Contents
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(dollars and shares in thousands, except per share data) | 2011 | 2010 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 87,637 | $ | 35,538 | ||||
Interest-bearing deposits with banks | 611,137 | 851,387 | ||||||
Federal funds sold | 11,189 | – | ||||||
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Total cash and cash equivalents | 709,963 | 886,925 | ||||||
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Trading securities | 637 | – | ||||||
Investment securities available-for-sale (amortized cost $813,617 and $483,929 at December 31, 2011 and December 31, 2010, respectively) | 826,724 | 479,466 | ||||||
Investment securities held-to-maturity (estimated fair value $250 at December 31, 2010) | – | 250 | ||||||
Loans held for sale | 20,746 | 9,690 | ||||||
Loans, net of deferred loan costs and fees | 4,279,774 | 1,742,747 | ||||||
Less: Allowance for loan losses | 34,749 | 753 | ||||||
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| |||||
Loans, net | 4,245,025 | 1,741,994 | ||||||
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Other real estate owned | 168,781 | 70,817 | ||||||
Receivable from FDIC | 13,315 | 46,585 | ||||||
Indemnification asset | 66,282 | 91,467 | ||||||
Premises and equipment, net | 160,294 | 44,078 | ||||||
Goodwill | 113,644 | 36,724 | ||||||
Intangible assets, net | 25,192 | 15,154 | ||||||
Deferred income tax asset, net | 145,470 | 16,789 | ||||||
Accrued interest receivable and other assets | 91,108 | 57,052 | ||||||
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Total assets | $ | 6,587,181 | $ | 3,496,991 | ||||
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| |||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing demand | $ | 683,258 | $ | 295,713 | ||||
Time deposits | 2,189,436 | 1,353,510 | ||||||
Money market | 868,375 | 272,780 | ||||||
Savings | 296,355 | 94,422 | ||||||
Negotiable order of withdrawal accounts | 1,087,760 | 243,672 | ||||||
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Total deposits | 5,125,184 | 2,260,097 | ||||||
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Federal Home Loan Bank advances | 221,018 | 243,067 | ||||||
Short-term borrowings | 54,533 | 61,969 | ||||||
Long-term borrowings | 140,101 | 22,887 | ||||||
Accrued interest payable and other liabilities | 55,435 | 27,735 | ||||||
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| |||||
Total liabilities | 5,596,271 | 2,615,755 | ||||||
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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, 20,028 and 21,384 shares issued and outstanding | 200 | 214 | ||||||
Common stock-Class B $0.01 par value: 200,000 shares authorized, 26,122 and 23,736 shares issued and outstanding | 261 | 237 | ||||||
Additional paid in capital | 890,628 | 865,673 | ||||||
Retained earnings | 18,150 | 11,938 | ||||||
Accumulated other comprehensive income (loss) | 7,167 | (2,759 | ) | |||||
Noncontrolling interest | 74,504 | 5,933 | ||||||
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| |||||
Total shareholders’ equity | 990,910 | 881,236 | ||||||
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| |||||
Total Liabilities and Shareholders’ Equity | $ | 6,587,181 | $ | 3,496,991 | ||||
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The accompanying notes are an integral part of these financial statements.
F-50
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2011, Year Ended December 31, 2010 and Period from November 30, 2009 (Inception) to December 31, 2009
(dollars in thousands, except per share amounts) | 2011 | 2010 | 2009 | |||||||||
Interest and dividend income | ||||||||||||
Loans, including fees | $ | 205,185 | $ | 36,429 | $ | – | ||||||
Investment securities | ||||||||||||
Taxable interest income | 18,203 | 2,640 | – | |||||||||
Tax-exempt interest income | 1,311 | 73 | – | |||||||||
Dividends | 126 | – | – | |||||||||
Interest-bearing deposits in other banks | 2,320 | 3,462 | 72 | |||||||||
Federal Home Loan Bank stock | 758 | 141 | – | |||||||||
Federal funds sold | 9 | – | – | |||||||||
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| |||||||
Total interest and dividend income | 227,912 | 42,745 | 72 | |||||||||
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Interest expense | ||||||||||||
Deposits | 28,704 | 4,656 | – | |||||||||
Long-term borrowings | 5,236 | 458 | – | |||||||||
Federal Home Loan Bank advances | 2,562 | 931 | – | |||||||||
Borrowings | 90 | 189 | – | |||||||||
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Total interest expense | 36,592 | 6,234 | – | |||||||||
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Net interest income | 191,320 | 36,511 | 72 | |||||||||
Provision for loan losses | 38,396 | 753 | – | |||||||||
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| |||||||
Net interest income after provision for loan losses | 152,924 | 35,758 | 72 | |||||||||
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Noninterest income | ||||||||||||
Service charges on deposit accounts | 13,385 | 1,992 | – | |||||||||
Fees on mortgage loans originated and sold | 2,791 | 449 | – | |||||||||
Investment advisory and trust fees | 1,438 | 354 | ||||||||||
FDIC indemnification asset accretion | 7,627 | 736 | – | |||||||||
Debit card income | 6,281 | 382 | – | |||||||||
Other income | 4,551 | 527 | – | |||||||||
Bargain purchase gain | – | 15,175 | – | |||||||||
Gain on extinguishment of debt | 416 | – | – | |||||||||
Investment securities gains, net | 5,354 | – | – | |||||||||
Other-than-temporary impairment losses on investments: | ||||||||||||
Gross impairment loss | (953 | ) | – | – | ||||||||
Less: Impairments recognized in other comprehensive income | 337 | – | – | |||||||||
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Net impairment losses recognized in earnings | (616 | ) | – | – | ||||||||
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| |||||||
Total noninterest income | 41,227 | 19,615 | – | |||||||||
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Noninterest expense | ||||||||||||
Salaries and employee benefits | 81,405 | 17,229 | 40 | |||||||||
Net occupancy and equipment expense | 29,493 | 4,629 | – | |||||||||
Foreclosed asset related expense | 12,776 | 701 | – | |||||||||
Conversion expense | 7,620 | 1,991 | – | |||||||||
Professional fees | 12,382 | 11,721 | – | |||||||||
Impairment of intangible asset | 2,872 | – | – | |||||||||
Other expense | 35,647 | 8,106 | 174 | |||||||||
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| |||||||
Total noninterest expense | 182,195 | 44,377 | 214 | |||||||||
|
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| |||||||
Income (loss) before income taxes | 11,956 | 10,996 | (142 | ) | ||||||||
Income tax expense (benefit) | 4,434 | (1,041 | ) | (50 | ) | |||||||
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| |||||||
Net income before attribution of noncontrolling interests | 7,522 | 12,037 | (92 | ) | ||||||||
Net income attributable to noncontrolling interests | 1,310 | 7 | – | |||||||||
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Net income attributable to Capital Bank Financial Corp. | $ | 6,212 | $ | 12,030 | $ | (92 | ) | |||||
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| |||||||
Basic and diluted income (loss) per share | $ | 0.14 | $ | 0.31 | $ | (0.01 | ) | |||||
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The accompanying notes are an integral part of these financial statements.
F-51
Table of Contents
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2011 and 2010 and Period From November 30, 2009 (Inception) to December 31, 2009
(dollars and shares in thousands) | Shares Common | Class A Stock | Shares Common Stock Class B | Class B Stock | Additional Paid in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||
Balance, November 30, 2009 (Inception) | – | $ | – | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||||||||
Issuance of common stock | 19,181 | 192 | 8,726 | 87 | 526,133 | 526,412 | ||||||||||||||||||||||||||||||
Net loss | (92 | ) | (92 | ) | ||||||||||||||||||||||||||||||||
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Balance, December 31, 2009 | 19,181 | 192 | 8,726 | 87 | 526,133 | (92 | ) | – | – | 526,320 | ||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||
Net income | 12,030 | 7 | 12,037 | |||||||||||||||||||||||||||||||||
Other comprehensive loss | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale, net of $1,327 tax benefit | ||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (2,759 | ) | (29 | ) | (2,788 | ) | ||||||||||||||||||||||||||||||
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Comprehensive income | 9,249 | |||||||||||||||||||||||||||||||||||
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Issuance of common stock | 2,203 | 22 | 15,010 | 150 | 339,540 | – | 339,712 | |||||||||||||||||||||||||||||
Origination of noncontrolling interest | 5,955 | 5,955 | ||||||||||||||||||||||||||||||||||
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Balance, December 31, 2010 | 21,384 | $ | 214 | 23,736 | $ | 237 | $ | 865,673 | $ | 11,938 | $ | (2,759 | ) | $ | 5,933 | $ | 881,236 | |||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||
Net income | 6,212 | 1,310 | 7,522 | |||||||||||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale | 12,625 | 1,238 | 13,863 | |||||||||||||||||||||||||||||||||
Less: reclassification adjustment for gains included in income | (2,699 | ) | (260 | ) | (2,959 | ) | ||||||||||||||||||||||||||||||
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Other comprehensive income, net of tax expense of $6,729 | 9,926 | 978 | 10,904 | |||||||||||||||||||||||||||||||||
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Comprehensive income | 18,426 | |||||||||||||||||||||||||||||||||||
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Conversion of shares | (2,386 | ) | (24 | ) | 2,386 | 24 | – | |||||||||||||||||||||||||||||
Restricted stock grants | 1,030 | 10 | (10 | ) | – | – | ||||||||||||||||||||||||||||||
Stock based compensation | 9,090 | – | 9,090 | |||||||||||||||||||||||||||||||||
Origination of noncontrolling interest | 70,599 | 70,599 | ||||||||||||||||||||||||||||||||||
Merger of TIB Bank, Capital Bank and GreenBank into Capital Bank,NA | 1,577 | (1,577 | ) | – | ||||||||||||||||||||||||||||||||
Rights offering of subsidiaries and other stock issued | 14,298 | (2,739 | ) | 11,559 | ||||||||||||||||||||||||||||||||
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Balance, December 31, 2011 | 20,028 | $ | 200 | 26,122 | $ | 261 | $ | 890,628 | $ | 18,150 | $ | 7,167 | $ | 74,504 | $ | 990,910 | ||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-52
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended December 31, 2011, Year Ended December 31, 2010 and Period from November 30, 2009 (Inception) to December 31, 2009
(dollars in thousands) | 2011 | 2010 | 2009 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 7,522 | $ | 12,037 | $ | (92 | ) | |||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities | ||||||||||||
Accretion of acquired loans | (167,268 | ) | (30,480 | ) | – | |||||||
Depreciation and amortization | 4,226 | (244 | ) | – | ||||||||
Provision for loan losses | 38,396 | 752 | – | |||||||||
Deferred income tax (loss) | (14,973 | ) | (159 | ) | – | |||||||
Net amortization of investment securities premium/discount | 7,756 | 1,931 | – | |||||||||
Write-down of investment securities | 616 | – | – | |||||||||
Net deferred loan costs | 724 | (216 | ) | – | ||||||||
Net realized gains on sales of investment securities | (5,354 | ) | – | – | ||||||||
Stock-based compensation expense | 9,090 | – | – | |||||||||
Gain on sales of OREO | (1,704 | ) | – | – | ||||||||
OREO valuation adjustments | 7,781 | – | – | |||||||||
Other | 163 | – | – | |||||||||
Gain on extinguishment of debt | (416 | ) | – | – | ||||||||
Gain on acquisition of banks | – | (15,175 | ) | – | ||||||||
Mortgage loans originated for sale | (134,575 | ) | (22,194 | ) | – | |||||||
Proceeds from sales of mortgage loans originated for sale | 128,926 | 18,493 | – | |||||||||
Fees on mortgage loans sold | (2,791 | ) | – | – | ||||||||
Customer relationship impairment | 2,872 | – | – | |||||||||
Accretion of indemnification asset | (7,627 | ) | (736 | ) | – | |||||||
Gain on sale of premises and equipment | (30 | ) | – | – | ||||||||
Change in receivable from the FDIC | 77,372 | – | – | |||||||||
Change in accrued interest receivable and other assets | 43,473 | 1,336 | (50 | ) | ||||||||
Change in accrued interest payable and other liabilities | (3,857 | ) | (7,090 | ) | 441 | |||||||
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Net cash (used in) operating activities | (9,678 | ) | (41,745 | ) | 299 | |||||||
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Cash flows from investing activities | ||||||||||||
Purchases of investment securities available for sale | (656,598 | ) | (211,775 | ) | – | |||||||
Sales of investment securities available for sale | 325,555 | 22,204 | – | |||||||||
Repayments of principal and maturities of investment securities available for sale | 389,868 | 87,173 | – | |||||||||
Net cash acquired through acquisition of TIB Financial Corp. | – | 54,665 | – | |||||||||
Net cash acquired through acquisition of FNB | – | (29,751 | ) | – | ||||||||
Net cash acquired through acquisition of Metro Bank | – | 75,076 | – | |||||||||
Net cash acquired through acquisition of Turnberry | – | 57,279 | – | |||||||||
Net cash acquired through acquisition of Capital Bank Corporation | 27,955 | – | – | |||||||||
Net cash acquired through acquisition of Green Bankshares Inc. | 326,456 | – | – | |||||||||
Net sales (purchase) of FHLB and Federal Reserve stock | 4,759 | (2,849 | ) | – | ||||||||
Net (increase) decrease in loans | (21,340 | ) | 54,338 | – | ||||||||
Purchases of premises and equipment | (25,244 | ) | (1,277 | ) | – | |||||||
Proceeds from the sale of premises and equipment | 110 | – | – | |||||||||
Proceeds from sales of OREO | 83,361 | 12,253 | – | |||||||||
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Net cash provided by investing activities | 454,882 | 117,336 | – | |||||||||
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Cash flows from financing activities | ||||||||||||
Net increase in demand, money market and savings accounts | 253,402 | 31,062 | – | |||||||||
Net decrease in time deposits | (611,832 | ) | (58,741 | ) | – | |||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | (23,322 | ) | 4,430 | – | ||||||||
Net decrease in long-term repurchase agreements | – | (10,000 | ) | – | ||||||||
Net decrease short-term FHLB advances | (30,000 | ) | – | – | ||||||||
Repayments of long-term FHLB advances | (221,973 | ) | (21,840 | ) | – | |||||||
Net proceeds from issuance of common shares | – | 339,712 | 526,412 | |||||||||
Net proceeds from common stock rights offerings, of subsidiaries | 11,559 | – | – | |||||||||
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Net cash (used in) provided by financing activities | (622,166 | ) | 284,623 | 526,412 | ||||||||
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Net (decrease) increase in cash and cash equivalents | (176,962 | ) | 360,214 | 526,711 | ||||||||
Cash and cash equivalents at beginning of period | 886,925 | 526,711 | – | |||||||||
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Cash and cash equivalents at end of period | $ | 709,963 | $ | 886,925 | 526,711 | |||||||
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Supplemental disclosures of cash paid: | ||||||||||||
Interest paid | $ | 56,537 | $ | 7,387 | – | |||||||
Income taxes | $ | 10,086 | $ | 500 | – | |||||||
Supplemental disclosures of noncash transactions | ||||||||||||
Transfer of loans to OREO | $ | 104,279 | $ | 20,009 | – |
The accompanying notes are an integral part of these financial statements.
F-53
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
1. | Summary of Significant Accounting Policies |
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 our subsidiaries, Capital Bank, National Association (the “Bank” or “Capital Bank, N.A.”), formerly NAFH National Bank (“NAFH Bank”), TIB Financial Corp. (“TIBB”; parent company of Naples Capital Advisors, Inc. and TIB Bank, through April 29, 2011, the date TIB Bank was merged with and into Capital Bank, N.A.), Capital Bank Corporation (“CBKN”; parent company of Capital Bank, through June 30, 2011, the date Capital Bank was merged with and into Capital Bank, N.A.) and Green Bankshares Inc. (“GRNB”; parent company of GreenBank, through September 7, 2011, the date GreenBank was merged with and into Capital Bank, N.A.). Prior to the mergers of TIB Bank, Capital Bank and GreenBank with and into Capital Bank, N.A., these entities are collectively referred to as the Company’s subsidiary banks or the “Banks.” All significant inter-company accounts and transactions have been eliminated in consolidation. As of December 31, 2011 CBF had a total of one hundred forty-three full service banking offices located in Florida, North Carolina, South Carolina, Tennessee and Virginia.
The accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“US GAAP”). The following is a summary of the more significant of these policies.
Operating Segments
While the chief operating decision-makers monitor the revenue streams of the various products and services, the financial service operations are considered by management to be one reportable operating segment. Operations are managed and financial performance is evaluated on a Company-wide basis.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as presented in the financial statements. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, including estimates of expected cash flows for impaired loans, determination of fair value, determination of impairment of financial instruments, goodwill and intangible assets and the determination of deferred income tax assets and liabilities. Changes in assumptions or in market conditions could significantly affect the fair value estimates. Due to the acquisitions discussed in more detail in Note 2—Acquisitions, the measurement of assets acquired and liabilities assumed at their estimated fair values represent material estimates which may be subject to change during the measurement period.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand and highly-liquid items with an original maturity of three months or less, including amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta
F-54
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
(“FHLB”) and the Federal Reserve Bank of Atlanta (“FRB”). Within the investing activities section of the consolidated statement of cash flows, customer loan and deposit transactions and short term borrowings are reported on a net basis.
Marketable Equity Trading Securities
Marketable equity securities are recorded on a trade-date basis and are accounted for based on the securities’ quoted market prices from a national securities exchange. Those purchased with the intention of recognizing short-term profits are classified as trading and included in trading securities on our balance sheet. Both realized and unrealized gains and losses on trading securities are included in noninterest income.
Investment Securities and Other than Temporary Impairment
Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets. Investment securities where the Company has both the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are realized on the trade date and determined using the specific identification method based on the amortized cost of the security sold.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI under accounting guidance, management considers many factors, including but not limited to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the impairment recognized in earnings depends on whether management intends to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If management intends to sell or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If management does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the impairment is separated into the amount representing the credit loss and the amount related to all other factors (i.e., changes in market interest rates, liquidity premiums, etc.). The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable
F-55
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. Future declines in the fair value of securities may result in impairment charges which may be material to the financial condition and results of operations of the Company.
Purchased Credit-Impaired Loans
The Company accounts for its acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. The fair value of loan includes estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows, exclusive of any loss share agreements with the FDIC. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired in a transfer, including business combinations and transactions similar to the acquisitions of TIBB, CBKN and GRNB, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable.
Accordingly, such loans are not classified as non-accrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
CBF has generally aggregated its PCI loans into pools of loans with common risk characteristics. Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on each pool of loans. The Company periodically evaluates the relationship of any material changes in estimated future cash flows in contrast to changes in the recorded investment in the PCI loans, to determine the need to record a provision for loan losses, reverse any previous allowance for loan losses, or increase the accretable yield to be recognized prospectively. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and credit risk. The Company evaluates at each balance sheet date whether the estimated cash flows and corresponding present value of its loans, determined using the effective interest rates, has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life. For further discussion of the Company’s acquisitions and loan accounting, see Notes 2 and 5 to the consolidated financial statements, respectively.
Originated Loans and Acquired Non-PCI Loans
Originated loans that management has the intent and ability to hold are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Acquired non-PCI loans are initially reported at their acquisition date fair value. Subsequently, acquired non-PCI loans are reported
F-56
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
net of amortization or accretion of any applicable acquisition discount or premium and an allowance for loan losses. Interest income on originated and non-PCI acquired loans is reported on the interest method and includes amortization of net deferred loan fees, costs and any applicable acquisition discount or premium over the loan term. If the collectability of interest appears doubtful, the loan is classified as non-accrual.
Non-accrual Loans
The majority of loans are placed on non-accrual status when it is probable that principal or interest is not fully collectible, or generally when principal or interest becomes 90 days past due, whichever occurs first. Certain loans past due 90 days or more may remain on accrual status if management determines that it does not have concern over the collectability of principal and interest. Generally, when loans are placed on non-accrual status, accrued interest receivable is reversed against interest income in the current period. Interest payments received thereafter are generally applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are generally removed from non-accrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest. CBF’s policies related to when loans are placed on non-accrual status conform to guidelines prescribed by bank regulatory authorities.
FDIC Indemnification Asset
Pursuant to purchase and assumption agreements with the FDIC, the Bank has entered into loss share agreements in which the FDIC will reimburse the Company for certain amounts related to certain acquired loans and other real estate owned should the Company experience a loss. An indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The indemnification asset on the acquisition date reflects the present value of future cash flows expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk.
Subsequent to initial recognition, the indemnification asset continues to be measured on the same basis as the related indemnified loans and the loss share receivable is impacted by changes in estimated cash flows associated with these loans. Deterioration in the credit quality on expected cash flows of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the indemnification asset, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the indemnification asset, with such decrease being amortized into income over 1) the life of the loan or 2) the life of the shared loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared loss agreements.
Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding claim receivable is recorded until cash is received from the FDIC.
Loans Held for Sale
Certain residential fixed rate mortgage loans originated by the Company are sold servicing released to third parties immediately. Certain of these sales are subject to temporary recourse provisions. The recourse provisions may require the repurchase of the outstanding balance of loans which default within a limited
F-57
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
period of time subsequent to the sale of the loan. The recourse periods vary by investor and extend up to seven months subsequent to the sale of the loan. All origination fees are recognized as income at the time of the sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses incurred in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated incurred losses inherent in the portfolio of loans held for investment. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. The Company’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formulaic allowance and the specific allowance for impaired loans.
Management develops and documents its systematic methodology for determining the allowance for loan losses by first dividing its portfolio into segments—commercial mortgage, residential mortgage, construction and vacant land, commercial and agricultural, indirect auto, home equity and other consumer loans. The Company further divides the portfolio segments into classes based on initial measurement attributes, risk characteristics or its method of monitoring and assessing credit risk.
The classes for the Company are as follows:
• | Commercial mortgage—owner occupied, office building, hotel or motel, guest houses, retail, multi-family, farmland, and other; |
• | Residential mortgage—primary residence, second residence and investment; |
• | Construction and vacant land; |
• | Commercial and agricultural; |
• | Indirect auto—prime and sub-prime; |
• | Home equity; and |
• | Other consumer. |
Other than for purchased credit-impaired loans (discussed below), the allowance for loan losses is calculated by applying loss factors to outstanding loans. It is the Company’s policy to use loss factors based on historical loss experience which may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The Company has limited historical loss experience on newly originated loans and the historical loss information available relating to the portfolios of acquired loans are considered by management to be irrelevant to newly originated loans due to differences in underwriting criteria and loan type. Accordingly, the Company currently is utilizing FDIC industry loss rates as the Bank begins to develop relevant historical loss information as the basis for determining loss factors to apply to outstanding loans. The Company derives the loss factors for all segments from pooled loan loss factors. Such pooled loan loss factors (for loans not individually graded) are based on expected net charge off ranges. Loan loss factors, which are used in determining the allowance, are adjusted quarterly primarily based upon the changes in the level of historical net charge offs and parameter updates by management. Management estimates probable incurred losses in the portfolio based on a historical loss look-back period. The look-back period is representative of management’s consideration of relevant historical loss experience.
F-58
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Furthermore, based on management’s judgment, the Company’s methodology permits adjustments to any loss factor used in the computation of the allowance for significant factors, which affect the collectability of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates based upon the most recent information that has become available. This includes changing the number of periods that are included in the calculation of the loss factors and adjusting qualitative factors to be representative of the current economic cycle impacting the portfolio. Updates of the loss confirmation period are done when significant events cause management to reexamine data. At December 31, 2011, the majority of the Company’s loans are purchased credit-impaired loans. Estimates of cash flows expected to be collected for purchased credit-impaired loans are updated each reporting period. If the Company has unfavorable changes in its estimates of cash flows expected to be collected for a loan pool (other than due to decreases in interest rate indices) which result in the present value of such cash flows being less than the recorded investment of the pool, the Company records a provision for loan losses, resulting in an increase in the allowance for loan losses for that pool.
The Company individually evaluates for impairment larger commercial and agricultural, construction and vacant land, and commercial mortgage loans. Residential mortgage and consumer loans are not individually evaluated for impairment unless they become delinquent and exceed $500 in recorded investment or represent troubled debt restructurings. Loans are considered impaired when the individual evaluation of current information regarding the borrower’s financial condition, loan collateral, and cash flows indicates that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the present value of expected future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer, indirect auto and residential mortgage loans, which are evaluated on a pool basis. The Company’s policy for recognition of interest income, charge offs of loans, and application of payments on impaired loans is the same as the policy applied to non-accrual loans.
Significant risk characteristics considered in estimating the allowance for credit losses include the following:
• | Commercial and agricultural—industry specific economic trends and individual borrower financial condition; |
• | Construction and vacant land, farmland and commercial mortgage loans—type of property (i.e., residential, commercial, industrial) and geographic concentrations and risks and individual borrower financial condition; and |
• | Residential mortgage, indirect auto and consumer—historical charge-offs and current trends in borrower’s credit, property collateral, and loan characteristics. |
Loans are charged off in whole or in part when they are considered to be uncollectible. For commercial and agricultural, construction and vacant land and commercial mortgage loans, they are generally considered uncollectible based on an evaluation of borrower financial condition as well as the value of any collateral. For residential mortgage and consumer loans, this is generally based on past due status as discussed above, as well as an evaluation of borrower creditworthiness and the value of any collateral. Recoveries of amounts previously charged off are recorded as a recovery to the allowance for loan losses.
F-59
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Premises and Equipment
Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, premises and equipment are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. For Federal income tax reporting purposes, depreciation is computed using primarily accelerated methods.
Operating Leases
Rent expense for the Company’s operating leases is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. It is common for lease agreements to contain various provisions for items such as step rent or other escalation clauses and lease concessions, which may offer a period of no rent payment. These types of items are considered by the Company and are recorded into expense on a straight line basis over the minimum lease terms. Certain leases require the Company to pay property taxes, insurance and routine maintenance.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are initially recorded at the lesser of their recorded investment or fair value less cost to sell when acquired, establishing a new cost basis. If fair value subsequently declines, a valuation allowance is recorded through expense so that the asset is reported at the lower of cost or fair value less cost to sell. Costs incurred after acquisition are generally expensed.
Goodwill and Other Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assets include core deposit base premiums, customer relationship intangibles and mortgage servicing rights arising from acquisitions and are initially measured at fair value. Long-lived intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such an asset is determined to be impaired when comparing undiscounted future cash flows to net book value, the impairment loss is measured by the excess of the carrying amount of the asset over its fair value as determined by an estimate of discounted future cash flows. The primary estimates which would be inherent in the impairment evaluation include fair market value, general market conditions, and projections of future operating results.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Company Owned Life Insurance
The Company owns life insurance policies on certain current and former directors and employees of its subsidiaries. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. As of December 31, 2011, management considered the need for a valuation allowance and based upon its assessment of the relative weight of the positive and negative evidence available at the time of the analysis, concluded that a valuation allowance was not necessary.
Earnings (Loss) 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 for the periods ended:
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Period Ended December 31, 2009 | ||||||||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic | 45,122 | 38,206 | 8,244 | |||||||||
Dilutive effect of options outstanding | – | – | – | |||||||||
Dilutive effect of restricted shares | 262 | – | – | |||||||||
Diluted | 45,384 | 38,206 | 8,244 |
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.
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Weighted average anti-dilutive stock options and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Period Ended December 31, 2009 | ||||||||||
Anti-dilutive stock options | 1,783 | – | – | |||||||||
Anti-dilutive restricted shares | – | – | – |
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized lending and borrowing transactions, respectively, and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is regularly monitored, and additional collateral is obtained, provided or requested to be returned as appropriate.
Loss Contingencies and Loss Share True-up Liabilities
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. Loss share true-up liabilities are recorded at fair value with the change in fair value recorded as other non-interest expense.
Contingent Value Rights
In connection with the Company’s acquisitions of CBKN and GRNB, each existing shareholder as of the date immediately preceding the respective investment agreement was issued one contingent value right (“CVR”) per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of the respective loan portfolios. A single CVR was issued for each of the 12,878 and 13,274 shares of CBKN and GRNB common stock outstanding at such times, respectively, for maximum potential payments of $9,658 and $9,956, to CBKN and GRNB shareholders, respectively. Holders of CVRs will be entitled to payment provided that the credit losses from each respective loan portfolio do not exceed amounts stipulated in the CVR agreements ($103,000 for CBKN and $178,000 for GRNB). As of December 31, 2011, the related credit losses incurred had not exceeded the stipulated amounts.
Although the Company could in the future become obligated to make payments with respect to the CVRs issued in connection with the acquisition of CBKN, as of the acquisition date, the Company estimated that the CVRs issued in connection with the acquisition of CBKN had a fair value of $0 based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments. As of the acquisition date, the Company estimated that the CVRs issued in connection with the acquisition of GRNB had a fair
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
value of approximately $520 based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments. Subsequent to the date of acquisition, any changes in the fair value of the CVRs will be recorded as other non-interest expense. As of December 31, 2011, changes in estimated credit losses have not had an impact on the fair values of the CVRs.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19—Fair Value. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market confirmation could significantly affect these estimates.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
income on the face of the financial statements. Reclassifications out of accumulated other comprehensive income are to be presented either on the face of the financial statement in which other comprehensive income is presented or disclosed in the notes to the financial statements. Reclassification adjustments into net income need not be presented during the deferral period. This action does not affect the requirement to present items of net income, other comprehensive income and total comprehensive income in a single continuous or two consecutive statements. ASU 2011-12 and ASU 2011-05 are effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 and ASU 2011-12 will not have an impact on the Company’s consolidated financial condition or results of operations but will alter disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity’s valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-02, Receivables. The new guidance amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Management is currently evaluating the impact the new guidance will have on the consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses.
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s consolidated financial statements.
2. | Business Combinations and Acquisitions |
FDIC-Assisted Purchase and Assumption of Assets and Liabilities of First National Bank of the South, Metro Bank of Dade County and Turnberry Bank
The Bank entered into three purchase and assumption agreements with loss share arrangements with the FDIC as receiver during 2010. As part of these agreements, the FDIC also granted the Bank an option to purchase at appraised value the premises, furniture, fixtures, and equipment of the acquired institutions and assume the leases associated with these offices.
On July 16, 2010 (the “Transaction Date”), the Bank acquired certain assets, assumed all of the deposits, and assumed certain other liabilities of First National Bank of the South (“FNB”), Metro Bank of Dade County (“Metro”) and Turnberry Bank (“Turnberry”) from the FDIC in whole-bank acquisitions.
Each acquisition was accounted for separately under the purchase method of accounting. Both the purchased assets and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, including goodwill, core deposit intangible assets, customer relationships, trade names and mortgage servicing rights, were recorded at fair value. Because the fair value of assets acquired and intangible assets created as a result of the acquisitions exceeded the fair value of liabilities assumed on the Metro Bank and Turnberry acquisitions, the Company recorded gains resulting from the acquisitions in its consolidated statements of income for the year ended December 31, 2010. These gains totaled $15,175. As the fair value of consideration paid in the FNB acquisition exceeded the estimated fair value of net assets acquired, goodwill of $6,725 was recorded.
Certain loans and other real estate owned acquired in these acquisitions are covered by loss share agreements between the Bank and the FDIC which afford the Bank significant protection against future losses. Under the agreements, the FDIC will cover 80% of losses on the disposition of loans and other real estate owned up to certain thresholds presented in the following table. The term for loss sharing on single-family residential real estate loans is ten years, while the term for loss sharing on nonresidential loans is five years and the Bank reimbursement to the FDIC for a total of eight years for recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loans as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the provisions of the loss share agreements. As part of the acquisition, the Bank has recorded an indemnification asset that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed. The indemnification asset at December 31, 2011 and December 31, 2010 was $66,282 and $91,467, respectively. The following table presents the value of the indemnification asset at the acquisition date.
Loss Threshold | 80% of Loss Threshold | Value of Indemnification Asset | ||||||||||
FNB | $ | 123,000 | $ | 98,400 | $ | 71,386 | ||||||
Metro | 81,000 | 64,800 | 44,191 | |||||||||
Turnberry | 28,000 | 22,400 | 21,739 | |||||||||
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$ | 232,000 | $ | 185,600 | $ | 137,316 | |||||||
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The Bank has agreed to make a true-up payment, also known as clawback liability, to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses fail to reach expected levels, not to exceed ten years from the Transaction Date. The estimated fair value of the true-up payment as of December 31, 2011 and December 31, 2010 was $1,090 and $979, respectively.
The acquired assets and liabilities are presented in the following table at fair value at the acquisition date.
FNB as Originally Reported | Remeasurement Period Adjustments | Revised FNB | Metro | Turnberry | Total | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash | $ | 64,728 | $ | – | $ | 64,728 | $ | 79,267 | $ | 40,353 | $ | 184,348 | ||||||||||||
Investment securities | 40,564 | – | 40,564 | 30,333 | 3,495 | 74,392 | ||||||||||||||||||
Loans | 389,603 | – | 389,603 | 226,826 | 152,125 | 768,554 | ||||||||||||||||||
Other real estate owned | 20,832 | – | 20,832 | 7,547 | 5,439 | 33,818 | ||||||||||||||||||
Goodwill | 6,616 | 109 | 6,725 | – | – | 6,725 | ||||||||||||||||||
Core deposit and other intangible assets | 2,214 | – | 2,214 | 1,400 | 600 | 4,214 | ||||||||||||||||||
Indemnification asset | 71,386 | – | 71,386 | 44,191 | 21,739 | 137,316 | ||||||||||||||||||
Other assets | 6,315 | (109 | ) | 6,206 | 3,921 | 4,392 | 14,519 | |||||||||||||||||
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Total assets | 602,258 | – | 602,258 | 393,485 | 228,143 | 1,223,886 | ||||||||||||||||||
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Liabilities | ||||||||||||||||||||||||
Interest-bearing deposits | 409,614 | – | 409,614 | 263,110 | 161,209 | 833,933 | ||||||||||||||||||
Noninterest-bearing deposits | 38,718 | – | 38,718 | 73,271 | 14,192 | 126,181 | ||||||||||||||||||
Borrowings | 57,579 | – | 57,579 | 31,981 | 59,024 | 148,584 | ||||||||||||||||||
Other liabilities | 1,868 | – | 1,868 | 10,312 | 6,089 | 18,269 | ||||||||||||||||||
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Total liabilities | 507,779 | – | 507,779 | 378,674 | 240,514 | 1,126,967 | ||||||||||||||||||
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Net assets acquired | 94,479 | – | 94,479 | 14,811 | (12,371 | ) | 96,919 | |||||||||||||||||
Consideration paid (received) | 94,479 | – | 94,479 | 4,191 | (16,926 | ) | 81,744 | |||||||||||||||||
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Gains on acquisitions of banks | $ | – | $ | – | $ | – | $ | 10,620 | $ | 4,555 | $ | 15,175 | ||||||||||||
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As these acquisitions are FDIC-assisted purchases and assumptions of assets and liabilities of failed institutions, the presentation of pro forma information of the acquired institutions is impracticable.
CBF Investment in TIBB
On September 30, 2010, the Company acquired a controlling interest in TIBB for aggregate consideration of $175,000. The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of the contribution to TIBB of all 37,000 shares of preferred stock issued by TIBB to the United States Department of the Treasury under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program and the related warrant to purchase shares of TIBB’s Common Stock which the Company purchased directly from the Treasury.
Immediately following the acquisition, the Company controlled 98.7% of the voting securities of TIBB. Identifiable intangible assets, including goodwill, core deposit intangible assets, customer relationships and trade names were recorded at fair value. As the fair value of consideration paid in the TIBB acquisition exceeded the estimated fair value of net assets acquired, nondeductible goodwill of $29,999 was recorded.
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The following table summarizes the acquisition:
September 30, 2010 | ||||
Fair value of assets acquired | ||||
Cash and cash equivalents | $ | 229,665 | ||
Securities available for sale | 309,320 | |||
Loans | 1,017,842 | |||
Goodwill | 29,999 | |||
Core deposit and other intangible assets | 11,770 | |||
Other real estate owned | 29,531 | |||
Bank officer life insurance—cash surrender value | 10,842 | |||
Premises and equipment | 43,632 | |||
Other assets | 54,582 | |||
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Total assets acquired | 1,737,183 | |||
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Fair value of liabilities assumed | ||||
Deposits | 1,327,663 | |||
Long-term debt and other borrowings | 208,783 | |||
Other liabilities | 22,239 | |||
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Total liabilities assumed | 1,558,685 | |||
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Net assets | 178,498 | |||
Less: Noncontrolling interest at fair value | 5,955 | |||
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172,543 | ||||
Underwriting, due diligence and legal costs | 2,457 | |||
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Purchase consideration | $ | 175,000 | ||
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There were no indemnification assets associated with this business combination, nor were there any contingent consideration assets or liabilities to be recognized.
CBF Investment in Capital Bank Corporation
On January 28, 2011, CBKN completed the issuance and sale of 71,000 shares of its common stock to the Company for gross proceeds of $181,050 in cash, less $750 of the Company’s expenses which were reimbursed by CBKN. As a result of this investment and the Rights Offering on March 11, 2011, the Company currently owns approximately 83% of CBKN’s common stock. In connection with the Company’s investment in CBKN, each shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of CBKN’s then existing loan portfolio as of November 3, 2010.
Also in connection with the Company’s investment, the Company repurchased CBKN’s Series A Preferred Stock and warrant to purchase shares of common stock issued by CBKN to the U.S. Treasury in connection with the TARP. Following the repurchase, the Series A Preferred Stock and warrant are no longer outstanding, and accordingly, CBKN is no longer subject to the restrictions imposed by the terms of the Series A Preferred Stock or certain regulatory provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”) that are imposed on TARP recipients.
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Pursuant to the Company’s investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of CBKN’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations.
CBKN issued 1,613 shares of common stock in exchange for $4,113 upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 were recorded as a reduction to the proceeds of the Rights Offering.
Also in connection with the closing of the investment, CBKN amended its Supplemental Executive Retirement Plan (the “Executive Plan” or “SERP”) to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the Company’s investment or any subsequent transaction or series of transactions that result in an affiliate of the Company holding CBKN’s outstanding voting securities or total voting power. On January 28, 2011, CBKN received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested stock options in connection with the transactions contemplated by the Company’s investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1,119. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3,156.
Identifiable intangible assets, including goodwill, core deposit intangible assets, a trade name and mortgage servicing rights were recorded at fair value. As the fair value of consideration paid in the CBKN acquisition exceeded the estimated fair value of net assets acquired, nondeductible goodwill of $50,093 was recorded.
The following table summarizes the CBF Investment and the Company’s opening balance sheet adjusted to fair value:
(Dollars in thousands) | Originally Reported as of Jan. 28, 2011 | Measurement Period Adjustments | Revised as of Jan. 28, 2011 | |||||||||
Fair value of assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 208,255 | $ | – | $ | 208,255 | ||||||
Investment securities | 225,336 | – | 225,336 | |||||||||
Mortgage loans held for sale | 2,569 | – | 2,569 | |||||||||
Loans | 1,135,164 | (30,701 | ) | 1,104,463 | ||||||||
Goodwill | 30,994 | 19,099 | 50,093 | |||||||||
Other intangible assets | 5,004 | – | 5,004 | |||||||||
Deferred tax asset | 55,391 | 11,118 | 66,509 | |||||||||
Other assets | 66,663 | (613 | ) | 66,050 | ||||||||
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Total assets acquired | 1,729,376 | (1,097 | ) | 1,728,279 | ||||||||
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
(Dollars in thousands) | Originally Reported as of Jan. 28, 2011 | Measurement Period Adjustments | Revised as of Jan. 28, 2011 | |||||||||
Fair value of liabilities assumed: | ||||||||||||
Deposits | 1,351,467 | – | 1,351,467 | |||||||||
Borrowings | 123,837 | – | 123,837 | |||||||||
Subordinated debt | 19,392 | 475 | 19,867 | |||||||||
Other liabilities | 10,595 | (1,572 | ) | 9,023 | ||||||||
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Total liabilities assumed | 1,505,291 | (1,097 | ) | 1,504,194 | ||||||||
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Net assets acquired | 224,085 | – | 224,085 | |||||||||
Less: non-controlling interest at fair value | (43,785 | ) | – | (43,785 | ) | |||||||
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180,300 | – | 180,300 | ||||||||||
Underwriting and legal costs | 750 | – | 750 | |||||||||
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Purchase price | $ | 181,050 | $ | – | $ | 181,050 | ||||||
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The above estimated fair values of assets and liabilities assumed are based on the information that was available during the measurement period. The Company believes that information provide a reasonable basis for estimating the fair values.
CBF Investment in Green Bankshares Inc.
On September 7, 2011, GRNB completed the issuance and sale of 119,900 shares of its common stock to the Company for gross consideration of $217,019 less $750 of the Company’s expenses which were reimbursed by GRNB. The total consideration was comprised of $147,600 of cash and the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by Green Bankshares to the U.S. Treasury in connection with the TARP which were repurchased by the Company and contributed to GRNB at fair value of $68,700 as a component of the Company’s investment consideration. Subsequently, GRNB cancelled the Series A Preferred Stock. In connection with the Company’s Investment, each GRNB shareholder as of September 6, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of GreenBank’s then existing loan portfolio as of May 5, 2011.
As a result of the Company’s investment, the Company now owns approximately 90% of the voting securities of the GRNB and followed the business combination guidance and applied “acquisition accounting.” Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets and contingent liabilities were identified and a fair value was determined as required by the accounting guidance for business combinations. Identifiable intangible assets, including goodwill, core deposit intangible assets and mortgage servicing rights were recorded at fair value. As the fair value of consideration paid in the GRNB acquisition exceeded the estimated fair value of net assets acquired, nondeductible goodwill of $26,825 was recorded.
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The following table summarizes the Company’s investment and GRNB’s opening balance sheet as of September 7, 2011 adjusted to fair value:
(Dollars in thousands) | Originally Reported as of Sept. 7, 2011 | Measurement Period Adjustments | Revised as of Sept. 7, 2011 | |||||||||
Fair value of assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 542,725 | $ | – | $ | 542,725 | ||||||
Investment securities | 176,466 | (2,278 | ) | 174,188 | ||||||||
Loans | 1,344,184 | (1,386 | ) | 1,342,798 | ||||||||
Goodwill | 19,032 | 7,793 | 26,825 | |||||||||
Premises and equipment | 72,261 | (607 | ) | 71,654 | ||||||||
Other intangible assets | 12,118 | – | 12,118 | |||||||||
Deferred tax asset | 53,407 | 1,235 | 54,642 | |||||||||
Other assets | 142,836 | (2,027 | ) | 140,809 | ||||||||
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|
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|
|
| |||||||
Total assets acquired | 2,363,029 | 2,730 | 2,365,759 | |||||||||
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| |||||||
Fair value of liabilities assumed: | ||||||||||||
Deposits | 1,872,050 | – | 1,872,050 | |||||||||
Long term debt and other borrowings | 229,345 | 1,807 | 231,152 | |||||||||
Other liabilities | 18,551 | 923 | 19,474 | |||||||||
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| |||||||
Total liabilities assumed | 2,119,946 | 2,730 | 2,122,676 | |||||||||
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|
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| |||||||
Net assets acquired | 243,083 | – | 243,083 | |||||||||
Less: non-controlling interest at fair value | (26,814 | ) | – | (26,814 | ) | |||||||
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| |||||||
216,269 | – | 216,269 | ||||||||||
Underwriting and legal costs | 750 | – | 750 | |||||||||
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| |||||||
Purchase price | $ | 217,019 | $ | – | $ | 217,019 | ||||||
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|
Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the resulting goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes.
Other than goodwill, the only other intangible asset identified as part of the valuation of Green Bankshares was the Core Deposit Intangible (“CDI”) which is amortized as noninterest expense on a straight line basis over its estimated life which is an eight year period.
In connection with the GRNB acquisition, the Company is a party to a number of asserted legal claims. At the present time, management has determined that each is in preliminary stages including awaiting discovery and proceedings. Accordingly, management has concluded that ranges of reasonably estimable possible losses cannot yet be established. The Company intends to vigorously defend itself from the claims.
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts.
Thus, the provisional measurements of fair value reflected are subject to change as other confirming events occur including the receipt and finalization of updated appraisals. Such changes could be significant. The
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.
Bank Mergers
On April 29, 2011, TIB Bank was merged with and into the Bank, with the Bank as the surviving entity. Pursuant to the merger agreement dated April 27, 2011, between the Bank and TIB Bank, TIBB exchanged its 100% ownership interest in TIB Bank for an approximately 53% ownership interest in the surviving combined entity, the Bank.
On June 30, 2011, Capital Bank was merged with and into the Bank, with the Bank as the surviving entity. In connection with the transaction, the Bank also changed its name to Capital Bank, N.A. As a result of the bank merger, Capital Bank Corporation owned approximately 38% of the Bank, with CBF having a direct ownership of 29% and TIBB owning the remaining 33%. On September 7, 2011, GreenBank, a wholly-owned subsidiary of Green Bankshares Inc., an affiliated bank holding company in which CBF has a 90% ownership interest, was merged with and into the Bank. Subsequently, and as a result of those transactions, the Company’s ownership interest in the Bank was reduced to approximately 21%. At December 31, 2011, the Company’s net investment of $200.8 million in the Bank was recorded in the Consolidated Balance Sheet.
Pro Formas
The following table reflects the pro forma total net interest income, non interest income and net loss for periods presented as though the acquisition of CBKN, GRNB, and TIBB had taken place at the beginning of each period. 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 periods, nor of future results of operations.
Pro Forma (unaudited) Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net interest income | $ | 248,055 | $ | 203,949 | $ | 174,866 | ||||||
Non-interest income | $ | 69,862 | $ | 77,078 | 55,205 | |||||||
Net loss | $ | (33,401 | ) | $ | (182,929 | ) | $ | (219,150 | ) |
3. | Cash and Due from Banks |
The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. At December 31, 2011, the reserve requirement balance for the Bank was $39,045 and the clearing balance requirement was $500.
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
4. | Investment Securities |
The amortized cost, estimated fair value and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities held to maturity and available for sale at December 31, 2011 and December 31, 2010 are presented below:
December 31, 2011 | ||||||||||||||||
Available for Sale | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
States and political subdivisions—tax-exempt | $ | 31,552 | $ | 2,694 | $ | 1 | $ | 34,245 | ||||||||
States and political subdivisions—taxable | 7,216 | 486 | – | 7,702 | ||||||||||||
Marketable equity securities | 1,796 | 11 | – | 1,807 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 759,565 | 11,089 | 749 | 769,905 | ||||||||||||
Mortgage-backed securities—residential private label | 5,799 | 57 | 129 | 5,727 | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Corporate bonds | 3,384 | – | 124 | 3,260 | ||||||||||||
Collateralized debt obligations | 555 | 32 | 259 | 328 | ||||||||||||
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| |||||||||
$ | 813,617 | $ | 14,369 | $ | 1,262 | $ | 826,724 | |||||||||
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|
|
December 31, 2010 | ||||||||||||||||
Held to Maturity | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
Foreign government | $ | 250 | $ | – | $ | – | $ | 250 | ||||||||
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| |||||||||
$ | 250 | $ | – | $ | – | $ | 250 | |||||||||
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December 31, 2010 | ||||||||||||||||
Available for Sale | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
U.S. Government agencies and corporations | $ | 49,497 | $ | 18 | $ | 382 | $ | 49,133 | ||||||||
States and political subdivisions—tax-exempt | 5,918 | 2 | 128 | 5,792 | ||||||||||||
States and political subdivisions—taxable | 9,540 | 41 | 227 | 9,354 | ||||||||||||
Marketable equity securities | 102 | – | 28 | 74 | ||||||||||||
Mortgage-backed securities—residential issued by government sponsored entities | 415,961 | 948 | 4,696 | 412,213 | ||||||||||||
Corporate bonds | 2,104 | 1 | – | 2,105 | ||||||||||||
Collateralized debt obligations | 807 | – | 12 | 795 | ||||||||||||
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| |||||||||
$ | 483,929 | $ | 1,010 | $ | 5,473 | $ | 479,466 | |||||||||
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Proceeds from sales and calls of securities available for sale were $402,476 for the year ended December 31, 2011. Gross gains of approximately $5,386 were realized on these sales and calls during the year ended December 31, 2011.
The Company owns a collateralized debt obligation collateralized by trust preferred securities issued primarily by banks and several insurance companies. Valuation and measurement of OTTI of this
F-72
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
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. 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. Management engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Based upon this analysis, as of December 31, 2011, management concluded that $237 of the decline in value met the definition of other than temporary impairment under generally accepted accounting principles because credit losses had been incurred.
The Company owns shares of common stock in a publicly owned real estate financing and asset management holding company. As of December 31, 2011, the fair value of the Company’s investment in such equity securities had not exceeded its cost basis since June 10, 2011 and the average trading volume over the same period would not support liquidation of the investment. Based on the decline in fair value and lack of trading volume, management determined the equity securities to have experienced OTTI as of December 31, 2011. Management recognized the $37 impairment, defined as the difference between the cost basis and fair value, in earnings and reported the security at fair value.
The Company owns an investment in trust preferred securities of a community bank with a par value of $1,000. During the fourth quarter of 2011, the board of directors of the bank authorized the execution of a Prompt Corrective Action Directive issued by the Board of Governors of the Federal Reserve System. The Directive informed the bank it falls within the “critically undercapitalized” capital category for purposes of the prompt corrective action provisions of Section 38 of the Federal Deposit Insurance Act.
Based on the adverse change in the regulatory environment of the issuer and significant concerns with noncompliance with statutory capital requirements, management determined the bond to have OTTI as of December 31, 2011. the Bank engaged three fixed income brokers to provide indicators of value of the fair market value of the bond.
Based on the fair value considerations provided by the Company’s fixed income brokers and factors that raise significant concerns about the issuer’s ability to continue as a going concern, management estimated the fair market value at 3.8% of par value. The resulting $342 impairment was charged through earnings as of December 31, 2011.
The table below presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2011. The Company had no OTTI in the year ended December 31, 2010 and owned no securities in the year ended December 31, 2009:
(Dollars in thousands) | Year Ended Dec. 31, 2011 | |||
Beginning balance | $ | – | ||
Additions/subtractions | ||||
Credit losses recognized during the period | 616 | |||
|
| |||
Ending balance, December 31, 2011 | $ | 616 | ||
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F-73
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The estimated fair value of investment securities available for sale at December 31, 2011 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Estimated Fair Value | Yield | |||||||
Due in one year or less | $ | 698 | 2.72 | % | ||||
Due after one year through five years | 3,222 | 1.65 | % | |||||
Due after five years through ten years | 10,670 | 4.24 | % | |||||
Due after ten years | 34,695 | 4.64 | % | |||||
Mortgage-backed securities—residential | 775,632 | 2.34 | % | |||||
|
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|
| |||||
$ | 824,917 | 2.46 | % | |||||
|
|
|
| |||||
Marketable equity securities | 1,807 | |||||||
|
| |||||||
$ | 826,724 | |||||||
|
|
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
December 31, 2011 | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||
States and political subdivisions—tax-exempt | $ | 301 | $ | 1 | $ | – | $ | – | $ | 301 | $ | 1 | ||||||||||||
Mortgage-backed securities—residential | 102,057 | 878 | – | – | 102,057 | 878 | ||||||||||||||||||
Corporate bonds | 2,019 | 124 | – | – | 2,019 | 124 | ||||||||||||||||||
Collateralized debt obligation | – | – | 246 | 259 | 246 | 259 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired | $ | 104,377 | $ | 1,003 | $ | 246 | $ | 259 | $ | 104,623 | $ | 1,262 | ||||||||||||
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Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
December 31, 2010 | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||
U.S. Government agencies and corporations | $ | 20,725 | $ | 382 | $ | – | $ | – | $ | 20,725 | $ | 382 | ||||||||||||
States and political subdivisions—tax-exempt | 5,191 | 128 | – | – | 5,191 | 128 | ||||||||||||||||||
States and political subdivisions—taxable | 8,198 | 227 | – | – | 8,198 | 227 | ||||||||||||||||||
Marketable equity securities | 74 | 28 | – | – | 74 | 28 | ||||||||||||||||||
Mortgage-backed securities—residential | 255,676 | 4,696 | – | – | 255,676 | 4,696 | ||||||||||||||||||
Collateralized debt obligation | 795 | 12 | – | – | 795 | 12 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired | $ | 290,659 | $ | 5,473 | $ | – | $ | – | $ | 290,659 | $ | 5,473 | ||||||||||||
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F-74
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
As of December 31, 2011, the Company’s security portfolio consisted of 159 securities, 18 of which were in an unrealized loss position. As of December 31, 2010, the Company’s security portfolio consisted of 106 securities, 77 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 December 31, 2011 and all of the mortgage-backed securities at December 31, 2010, 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 December 31, 2011 or December 31, 2010.
Investment securities having carrying values of approximately $343,450 at December 31, 2011 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 are as follows:
December 31, 2011 | December 31, 2010 | |||||||
Non-owner occupied commercial real estate | $ | 903,909 | $ | 500,470 | ||||
Other commercial construction and land | 423,335 | 113,681 | ||||||
Multifamily commercial real estate | 98,197 | 56,105 | ||||||
1-4 family residential construction and land | 85,978 | 16,341 | ||||||
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| |||||
Total commercial real estate | 1,511,419 | 686,597 | ||||||
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| |||||
Owner occupied commercial real estate | 902,811 | 347,741 | ||||||
Commercial and industrial loans | 465,752 | 94,302 | ||||||
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| |||||
Total commercial | 1,368,563 | 442,043 | ||||||
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| |||||
1-4 family residential | 818,547 | 431,747 | ||||||
Home equity loans | 383,766 | 119,039 | ||||||
Other consumer loans | 123,103 | 43,054 | ||||||
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| |||||
Total consumer | �� | 1,325,416 | 593,840 | |||||
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| |||||
Other(1) | 95,122 | 29,957 | ||||||
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| |||||
Total loans | $ | 4,300,520 | $ | 1,752,437 | ||||
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(1) | Other loans include deposit customer overdrafts of $2,795 and $851 as of December 31, 2011 and 2010, respectively. |
Total loans as of December 31, 2011 includes $20,746 of 1-4 family residential loans held for sale and $508 of deferred loan fees. Total loans as of December 31, 2010 includes $215 of deferred loan costs.
Covered loans represent loans acquired from the FDIC subject to the loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment, which we call purchased credit impaired, and (ii) non-PCI loans. Loans originated by the Company and loans acquired
F-75
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
through the purchase of TIBB, CBKN and GRNB are excluded from the loss sharing agreements and are classified as “not covered.” Additionally, certain consumer loans acquired through the acquisition of failed banks from the FDIC are specifically excluded from the loss sharing agreements.
Loans acquired are recorded at fair value in accordance with acquisition accounting, exclusive of the 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. At the time of acquisition, the Company accounted for the impaired purchased 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. |
From these pools, the Company used 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 life 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. For any increases in cash flows expected to be collected such that the present value exceeds the recorded investment in the pool, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
Due to the 2011 acquisitions the purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
Capital Bank Corporation | Green Bankshares, Inc. | |||||||
Contractually required payments of PCI loans acquired | $ | 1,318,702 | $ | 1,873,056 | ||||
Nonaccretable difference | (125,626 | ) | (328,383 | ) | ||||
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Cash flows expected to be collected at acquisition | $ | 1,193,076 | $ | 1,544,673 | ||||
Accretable yield | (163,630 | ) | (247,745 | ) | ||||
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Fair value of acquired loans at acquisition | $ | 1,029,446 | $ | 1,296,928 | ||||
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The roll forward of accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:
Year Ended December 31, 2011 | Year Ended December 31, 2010 | |||||||
Balance, beginning of period | $ | 292,805 | $ | – | ||||
New loans purchased | 411,375 | 323,285 | ||||||
Accretion of income | (167,268 | ) | (30,480 | ) | ||||
Reclassifications from nonaccretable difference | 178,567 | – | ||||||
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Balance, end of period | $ | 715,479 | $ | 292,805 | ||||
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F-76
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to acquisition by CBF. 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, which is their fair value at the time of acquisition by CBF.
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. Accordingly, the Company presents loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreement as “non-covered loans.” Refer to Note 10 – Other Real Estate Owned, for their covered and non-covered balances.
Non-covered Loans
The following is a summary of the major categories of non-covered loans outstanding as of December 31, 2011 and December 31, 2010:
December 31, 2011 | PCI Loans | Non-PCI Loans | Total Non-covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 722,771 | $ | 55,433 | $ | 778,204 | ||||||
Other commercial C&D | 331,255 | 38,713 | 369,968 | |||||||||
Multifamily commercial real estate | 75,104 | 756 | 75,860 | |||||||||
1-4 family residential C&D | 47,947 | 33,286 | 81,233 | |||||||||
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| |||||||
Total commercial real estate | 1,177,077 | 128,188 | 1,305,265 | |||||||||
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| |||||||
Owner occupied commercial real estate | 501,816 | 286,385 | 788,201 | |||||||||
Commercial and industrial | 241,106 | 200,629 | 441,735 | |||||||||
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|
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|
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| |||||||
Total commercial | 742,922 | 487,014 | 1,229,936 | |||||||||
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| |||||||
1-4 family residential | 578,828 | 112,580 | 691,408 | |||||||||
Home equity | 148,250 | 162,915 | 311,165 | |||||||||
Consumer | 63,310 | 59,616 | 122,926 | |||||||||
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|
| |||||||
Total consumer | 790,388 | 335,111 | 1,125,499 | |||||||||
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|
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|
|
| |||||||
Other | 79,575 | 9,653 | 89,228 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 2,789,962 | $ | 959,966 | $ | 3,749,928 | ||||||
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F-77
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
December 31, 2010 | PCI Loans | Non-PCI Loans | Total Non-covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 320,928 | $ | 8,939 | $ | 329,867 | ||||||
Other commercial C&D | 30,741 | 1,098 | 31,839 | |||||||||
Multifamily commercial real estate | 25,664 | – | 25,664 | |||||||||
1-4 family residential C&D | 5,570 | 3,411 | 8,981 | |||||||||
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|
|
| |||||||
Total commercial real estate | 382,903 | 13,448 | 396,351 | |||||||||
Owner occupied commercial real estate | 210,170 | 8,318 | 218,488 | |||||||||
Commercial and industrial | 46,519 | 15,633 | 62,152 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 256,689 | 23,951 | 280,640 | |||||||||
1-4 family residential | 251,348 | 24,780 | 276,128 | |||||||||
Home equity | 12,220 | 27,010 | 39,230 | |||||||||
Consumer | 32,525 | 10,529 | 43,054 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 296,093 | 62,319 | 358,412 | |||||||||
Other | 19,798 | 952 | 20,750 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 955,483 | $ | 100,670 | $ | 1,056,153 | ||||||
|
|
|
|
|
|
Covered Loans
The following is a summary of the major categories of covered loans outstanding as of December 31, 2011 and December 31, 2010:
December 31, 2011 | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 125,649 | $ | 56 | $ | 125,705 | ||||||
Other commercial C&D | 53,367 | – | 53,367 | |||||||||
Multifamily commercial real estate | 22,337 | – | 22,337 | |||||||||
1-4 family residential C&D | 4,745 | – | 4,745 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 206,098 | 56 | 206,154 | |||||||||
Owner occupied commercial real estate | 114,610 | – | 114,610 | |||||||||
Commercial and industrial | 23,021 | 996 | 24,017 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 137,631 | 996 | 138,627 | |||||||||
1-4 family residential | 127,139 | – | 127,139 | |||||||||
Home equity | 20,180 | 52,421 | 72,601 | |||||||||
Consumer | 177 | – | 177 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 147,496 | 52,421 | 199,917 | |||||||||
Other | 5,894 | – | 5,894 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 497,119 | $ | 53,473 | $ | 550,592 | ||||||
|
|
|
|
|
|
F-78
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
December 31, 2010 | PCI Loans | Non-PCI Loans | Total Covered Loans | |||||||||
Non-owner occupied commercial real estate | $ | 170,606 | $ | – | $ | 170,606 | ||||||
Other commercial C&D | 81,842 | – | 81,842 | |||||||||
Multifamily commercial real estate | 30,441 | – | 30,441 | |||||||||
1-4 family residential C&D | 7,357 | – | 7,357 | |||||||||
|
|
|
|
|
| |||||||
Total commercial real estate | 290,246 | – | 290,246 | |||||||||
Owner occupied commercial real estate | 129,253 | – | 129,253 | |||||||||
Commercial and industrial | 29,592 | 2,558 | 32,150 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 158,845 | 2,558 | 161,403 | |||||||||
1-4 family residential | 155,619 | – | 155,619 | |||||||||
Home equity | 6,217 | 73,592 | 79,809 | |||||||||
Consumer | – | – | – | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 161,836 | 73,592 | 235,428 | |||||||||
Other | 9,207 | – | 9,207 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 620,134 | $ | 76,150 | $ | 696,284 | ||||||
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2011 by class of loans:
Non-purchased credit impaired loans | 30-89 Days Past Due | Greater than 90 Days Past Due and Still Accruing/Accreting | Non-accrual | Total | ||||||||||||||||||||||||
Covered | Non-Covered | Covered | Non-Covered | Covered | Non-Covered | |||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | – | $ | – | $ | – | $ | – | $ | 56 | $ | 25 | $ | 81 | ||||||||||||||
Other commercial C&D | – | – | – | – | – | – | – | |||||||||||||||||||||
Multifamily commercial real estate | – | – | – | – | – | – | – | |||||||||||||||||||||
1-4 family residential C&D | – | 174 | – | – | – | 301 | 475 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | – | 174 | – | – | 56 | 326 | 556 | |||||||||||||||||||||
Owner occupied commercial real estate | – | – | – | – | – | 178 | 178 | |||||||||||||||||||||
Commercial and industrial | 21 | 471 | – | – | 378 | 295 | 1,165 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | 21 | 471 | – | – | 378 | 473 | 1,343 | |||||||||||||||||||||
1-4 family residential | – | 29 | – | – | – | – | 29 | |||||||||||||||||||||
Home equity | 1,349 | 1,956 | 2,155 | 2,480 | 7,940 | |||||||||||||||||||||||
Consumer | – | 246 | – | – | – | 7 | 253 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 1,349 | 2,231 | – | – | 2,155 | 2,487 | 8,222 | |||||||||||||||||||||
Other | – | – | – | – | – | – | – | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,370 | $ | 2,876 | $ | – | $ | – | $ | 2,589 | $ | 3,286 | $ | 10,121 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-79
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Purchased credit impaired loans | 30-89 Days Past Due | Greater than 90 Days Past Due and Still Accruing/Accreting | Non-accrual | Total | ||||||||||||||||||||||||
Covered | Non-Covered | Covered | Non-Covered | Covered | Non-Covered | |||||||||||||||||||||||
Non-owner occupied commercial real estate | $ | 7,462 | $ | 19,687 | $ | 15,226 | $ | 49,520 | $ | – | $ | – | $ | 91,895 | ||||||||||||||
Other commercial C&D | 1,132 | 6,031 | 36,131 | 85,626 | – | – | 128,920 | |||||||||||||||||||||
Multifamily commercial real estate | 1,258 | 443 | 5,153 | 4,283 | – | – | 11,137 | |||||||||||||||||||||
1-4 family residential C&D | – | 17,318 | 3,357 | 9,011 | – | – | 29,686 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial real estate | 9,852 | 43,479 | 59,867 | 148,440 | – | – | 261,638 | |||||||||||||||||||||
Owner occupied commercial real estate | 6,779 | 4,706 | 26,437 | 44,799 | – | – | 82,721 | |||||||||||||||||||||
Commercial and industrial | 700 | 12,068 | 2,982 | 22,386 | – | – | 38,136 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total commercial | 7,479 | 16,774 | 29,419 | 67,185 | – | – | 120,857 | |||||||||||||||||||||
1-4 family residential | 6,423 | 9,197 | 24,243 | 29,990 | – | – | 69,853 | |||||||||||||||||||||
Home equity | 1,525 | 2,976 | 2,843 | 4,402 | – | – | 11,746 | |||||||||||||||||||||
Consumer | – | 2,291 | – | 1,067 | – | – | 3,358 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer | 7,948 | 14,464 | 27,086 | 35,459 | – | – | 84,957 | |||||||||||||||||||||
Other | – | 788 | 5,207 | 3,970 | – | – | 9,965 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 25,279 | $ | 75,505 | $ | 121,579 | $ | 255,054 | $ | – | $ | – | $ | 477,417 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit-impaired loans are not classified as non-accrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments.
There were no troubled debt restructurings as of December 31, 2011 and December 31, 2010.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
• | Pass—These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted. |
• | Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
• | Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
• | Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
F-80
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The following table summarizes loans, excluding purchased credit-impaired loans, monitored for credit quality based on internal ratings at December 31, 2011:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Non-owner occupied commercial real estate | $ | 53,969 | $ | 508 | $ | 1,012 | $ | – | $ | 55,489 | ||||||||||
Other commercial C&D | 38,449 | 264 | – | – | 38,713 | |||||||||||||||
Multifamily commercial real estate | 756 | – | – | – | 756 | |||||||||||||||
1-4 family residential C&D | 31,075 | 707 | 1,504 | – | 33,286 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total commercial real estate | 124,249 | 1,479 | 2,516 | – | 128,244 | |||||||||||||||
Owner occupied commercial real estate | 283,365 | – | 3,020 | – | 286,385 | |||||||||||||||
Commercial and industrial | 196,945 | 658 | 4,022 | – | 201,625 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total commercial | 480,310 | 658 | 7,042 | – | 488,010 | |||||||||||||||
1-4 family residential | 111,568 | 788 | 224 | – | 112,580 | |||||||||||||||
Home equity | 209,206 | 636 | 5,494 | – | 215,336 | |||||||||||||||
Consumer | 59,502 | 114 | – | – | 59,616 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total consumer | 380,276 | 1,538 | 5,718 | – | 387,532 | |||||||||||||||
Other | 9,653 | – | – | – | 9,653 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 994,488 | $ | 3,675 | $ | 15,276 | $ | – | $ | 1,013,439 | ||||||||||
|
|
|
|
|
|
|
|
|
|
6. | FDIC Indemnification Asset |
The following is a summary of the 2010 and 2011 activity in the FDIC indemnification asset.
Balance, December 31, 2009 | $ | – | ||
Increase due to acquisitions | 137,316 | |||
Accretion | 736 | |||
Reimbursable losses claimed | (46,585 | ) | ||
|
| |||
Balance, December 31, 2010 | $ | 91,467 | ||
|
| |||
Increase related to unfavorable changes in loss estimates and accretion | 7,627 | |||
Reimbursable losses claimed | (32,812 | ) | ||
|
| |||
Balance, December 31, 2011 | $ | 66,282 | ||
|
|
7. | Allowance for Loan Losses |
Activity in the allowance for loan losses for the years ended December 31, 2011 and 2010 follows:
December 31, 2011 | December 31, 2010 | |||||||
Balance, beginning of period | $ | 753 | $ | – | ||||
Provision for loan losses charged to expense | 38,396 | 753 | ||||||
Loans charged off | (4,426 | ) | – | |||||
Recoveries of loans previously charged off | 26 | – | ||||||
|
|
|
| |||||
Balance, end of period | $ | 34,749 | $ | 753 | ||||
|
|
|
|
F-81
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Activity in the allowance for loan losses for the year ended December 31, 2011 is as follows:
December 31, 2010 | Provision | Net Charge- offs | December 31, 2011 | |||||||||||||
Non-owner occupied commercial real estate | $ | 79 | $ | 3,775 | $ | – | $ | 3,854 | ||||||||
Other commercial C&D | 6 | 7,604 | 17 | 7,627 | ||||||||||||
Multifamily commercial real estate | – | 398 | – | 398 | ||||||||||||
1-4 family residential C&D | 19 | 902 | – | 921 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial real estate | 104 | 12,679 | 17 | 12,800 | ||||||||||||
Owner occupied commercial real estate | 70 | 5,384 | – | 5,454 | ||||||||||||
Commercial and industrial | 133 | 4,029 | 4 | 4,166 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 203 | 9,413 | 4 | 9,620 | ||||||||||||
1-4 family residential | 215 | 7,034 | 3 | 7,252 | ||||||||||||
Home equity | 33 | 7,050 | (4,372 | ) | 2,711 | |||||||||||
Consumer | 184 | 1,462 | (52 | ) | 1,594 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 432 | 15,546 | (4,421 | ) | 11,557 | |||||||||||
Other | 14 | 758 | – | 772 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 753 | 38,396 | $ | (4,400 | ) | 34,749 | |||||||||
|
|
|
|
|
|
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Purchased Credit- Impaired | Individually Evaluated for Impairment | Collectively Evaluated for Impairment(1) | Purchased Credit- Impaired | |||||||||||||||||||
Non-owner occupied commercial real estate | $ | – | $ | 453 | 3,401 | $ | – | $ | 55,489 | $ | 848,425 | |||||||||||||
Other commercial C&D | – | 509 | 7,118 | – | 38,713 | 385,219 | ||||||||||||||||||
Multifamily commercial real estate | – | 7 | 391 | – | 756 | 97,451 | ||||||||||||||||||
1-4 family residential C&D | – | 444 | 476 | – | 33,286 | 52,692 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial real estate | – | 1,413 | 11,386 | – | 128,244 | 1,383,787 | ||||||||||||||||||
Owner occupied commercial real estate | – | 3,022 | 2,432 | – | 286,385 | 616,431 | ||||||||||||||||||
Commercial and industrial | – | 1,945 | 2,221 | – | 201,625 | 265,422 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | – | 4,967 | 4,653 | – | 488,010 | 881,853 | ||||||||||||||||||
1-4 family residential | – | 866 | 6,386 | 763 | 111,817 | 705,967 | ||||||||||||||||||
Home equity | – | 163 | 2,548 | – | 215,336 | 168,432 | ||||||||||||||||||
Consumer | – | 997 | 598 | – | 59,616 | 63,505 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | – | 2,026 | 9,532 | 763 | 386,769 | 937,904 | ||||||||||||||||||
Other | – | 26 | 746 | – | 9,653 | 85,480 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | – | $ | 8,432 | $ | 26,317 | $ | 763 | $ | 1,012,676 | $ | 3,289,024 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Loans collectively evaluated for impairment include $222,520 of acquired home equity loans, $5,939 of commercial and agricultural loans and $9,360 of other consumer loans which are presented net of unamortized purchase discounts of $(16,013), $(1,154), and $(85), respectively. |
F-82
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
During 2011, two 1-4 family residential loans totaling $763 were individually evaluated for impairment. No allowance for loan losses was recorded for such loans during the year ended December 31, 2011.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Purchased Credit- Impaired | Individually Evaluated for Impairment | Collectively Evaluated for Impairment(1) | Purchased Credit- Impaired | |||||||||||||||||||
Real estate mortgage loans: | ||||||||||||||||||||||||
Commercial | $ | – | $ | 149 | $ | – | $ | – | $ | 18,043 | $ | 1,024,169 | ||||||||||||
Residential | – | 215 | – | – | 25,608 | 303,059 | ||||||||||||||||||
Construction and vacant land | – | 25 | – | – | 1,864 | 128,155 | ||||||||||||||||||
Commercial and agricultural | – | 133 | – | – | 18,191 | 85,333 | ||||||||||||||||||
Indirect auto loans | – | 184 | – | – | 6,295 | 21,744 | ||||||||||||||||||
Home equity loans | – | 33 | – | – | 100,602 | 4,353 | ||||||||||||||||||
Other consumer loans | – | 14 | – | – | 6,001 | 8,804 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | – | $ | 753 | $ | – | $ | – | $ | 176,604 | $ | 1,575,617 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Loans collectively evaluated for impairment include $97,987 of acquired home equity loans, $5,827 of commercial and agricultural loans and $4,935 of other consumer loans which are presented net of unamortized purchase discounts of $(25,025), $(279), and $(46), respectively. |
There were no loans individually evaluated for impairment at December 31, 2010 or during the year then ended, due to the fact that substantially all acquired loans are being accounted for as purchased credit-impaired loans as a result of the Company’s recent acquisitions. No allowance for loan losses was recorded for those purchased credit-impaired loans disclosed above during the three months ended December 31, 2010.
8. | Premises and Equipment |
A summary of the cost and accumulated depreciation of premises and equipment follows:
Balance as of December 31, 2011 | Estimated Useful Life | |||||||
Land | $ | 43,078 | ||||||
Buildings and leasehold improvements | 99,798 | 1 to 40 years | ||||||
Furniture, fixtures and equipment | 43,681 | 1 to 40 years | ||||||
Construction in progress | 8,290 | |||||||
|
| |||||||
194,847 | ||||||||
Less: Accumulated depreciation | (34,553 | ) | ||||||
|
| |||||||
Premises and equipment, net | $ | 160,294 | ||||||
|
|
F-83
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The Company is obligated under operating leases for office and banking premises which expire in periods varying from one to twenty-one years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at December 31, 2011:
Years Ending December 31, | ||||
2012 | $ | 7,437 | ||
2013 | 6,819 | |||
2014 | 6,369 | |||
2015 | 5,670 | |||
2016 | 5,191 | |||
Thereafter | 26,931 | |||
|
| |||
$ | 58,417 | |||
|
|
Rental expense for the year ended December 31, 2011 was $7,841.
9. | Goodwill and Intangible Assets |
Changes in goodwill during the years ended December 31, 2010 and 2011 consist of the following:
Balance, December 31, 2009 | $ | – | ||
Goodwill associated with the acquisition of FNB | 6,725 | |||
Goodwill associated with the acquisition of TIBB | 29,999 | |||
|
| |||
Balance December 31, 2010 | $ | 36,724 | ||
|
| |||
Goodwill associated with the acquisition of CBKN | 50,095 | |||
Goodwill associated with the acquisition of GRNB | 26,825 | |||
|
| |||
Balance, December 31, 2011 | $ | 113,644 | ||
|
|
Changes in intangible assets during the years ended December 31, 2010 and 2011 consist of the following:
Core Deposit Intangible | Trade Name | Customer Relationship Intangible | Mortgage Servicing Rights | |||||||||||||
Balance December 31, 2009 | $ | – | $ | – | $ | – | $ | – | ||||||||
Increase associated with acquisition of FDIC failed banks | 4,100 | 114 | ||||||||||||||
Increase associated with acquisition of TIBB | 7,500 | 770 | 3,500 | |||||||||||||
Amortization | (642 | ) | (89 | ) | (87 | ) | (12 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance December 31, 2010 | $ | 10,958 | $ | 681 | $ | 3,413 | $ | 102 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Increase associated with acquisition of CBKN | 4,400 | 604 | 138 | |||||||||||||
Increase associated with acquisition of GRNB | 11,900 | 218 | ||||||||||||||
Impairment | (2,872 | ) | ||||||||||||||
Amortization | (3,109 | ) | (821 | ) | (350 | ) | (70 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance December 31, 2011 | $ | 24,149 | $ | 464 | $ | 191 | $ | 388 | ||||||||
|
|
|
|
|
|
|
|
F-84
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
All of the identified intangible assets are amortized as noninterest expense over their estimated lives which range from four to ten years. Due to the termination of employment of several employees of the Company’s registered investment advisor, Naples Capital Advisors, Inc., and a subsequent decrease of assets under management, an impairment of the related customer relationship intangible asset of $2,872 was recorded in 2011.
Estimated amortization expense for each of the next five years is as follows:
Years ending December 31, | ||||
2012 | $ | 4,386 | ||
2013 | 4,264 | |||
2014 | 3,523 | |||
2015 | 2,807 | |||
2016 | 2,673 | |||
|
| |||
$ | 17,653 | |||
|
|
10. | Other Real Estate Owned |
The activity within Other Real Estate Owned (“OREO”) for the years ended December 31, 2011 and 2010 was as follows in the table below. Ending balances for OREO covered by loss sharing agreements with the FDIC for these periods were $46,550 and $50,619, respectively. Non-covered ending balances for these periods were $122,231 and $20,198, respectively:
Year Ended December 31, | ||||||||
2011 | 2010 | |||||||
Balance, beginning of period | $ | 70,817 | $ | – | ||||
OREO acquired through acquisitions | 84,827 | 63,349 | ||||||
Real estate acquired from borrowers | 104,279 | 19,721 | ||||||
Valuation adjustments | (7,781 | ) | – | |||||
Property sold | (83,361 | ) | (12,253 | ) | ||||
|
|
|
| |||||
Balance, end of period | $ | 168,781 | $ | 70,817 | ||||
|
|
|
|
11. | Time Deposits |
Time deposits of $100 or more were $1,052,319 at December 31, 2011.
At December 31, 2011, the scheduled contractual maturities of time deposits are as follows:
Years Ending December 31, | ||||
2012 | $ | 1,434,658 | ||
2013 | 427,833 | |||
2014 | 68,534 | |||
2015 | 123,334 | |||
2016 and thereafter | 118,889 | |||
|
| |||
$ | 2,173,248 | |||
Unamortized purchase accounting fair value premium | 16,188 | |||
|
| |||
$ | 2,189,436 | |||
|
|
F-85
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
12. | Federal Home Loan Bank Advances and Short Term Borrowings |
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank.
The Bank has securities sold under agreements to repurchase with customers whereby the Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities of the United States Government or its agencies which are chosen by the Bank. The amount outstanding at December 31, 2011 and December 31, 2010 was $54,533 and $50,226, respectively.
The Bank invests in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral.
At December 31, 2011, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida, the Bank had $206,500 in advances outstanding with a carrying value of $221,018. The advances as of December 31, 2011 consisted of the following:
Carrying | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Contractual Rate at December 31, 2011 | ||||||||||||
$ 5,000 | 5,000 | January 2012 | Fixed | 4.56 | % | |||||||||||
5,047 | 5,000 | March 2012 | Fixed | 4.29 | % | |||||||||||
5,076 | 5,000 | May 2012(a) | Fixed | 4.60 | % | |||||||||||
10,256 | 10,000 | September 2012(a) | Fixed | 4.05 | % | |||||||||||
3,034 | 3,000 | January 2013 | Fixed | 1.86 | % | |||||||||||
7,617 | 7,500 | March 2013 | Fixed | 2.30 | % | |||||||||||
4,167 | 4,000 | March 2013 | Fixed | 4.58 | % | |||||||||||
52,054 | 50,000 | April 2013(a) | Fixed | 3.81 | % | |||||||||||
5,098 | 5,000 | June 2013(a) | Fixed | 2.28 | % | |||||||||||
3,064 | 3,000 | January 2014 | Fixed | 2.43 | % | |||||||||||
5,398 | 5,000 | May 2014(a) | Fixed | 4.60 | % | |||||||||||
5,391 | 5,000 | June 2014(a) | Fixed | 4.66 | % | |||||||||||
4,121 | 4,000 | January 2015 | Fixed | 2.92 | % | |||||||||||
5,164 | 5,000 | February 2015 | Fixed | 2.83 | % | |||||||||||
5,305 | 5,000 | June 2015 | Fixed | 3.71 | % | |||||||||||
5,333 | 5,000 | July 2015(a) | Fixed | 3.57 | % | |||||||||||
17,193 | 15,000 | December 2016 | Fixed | 4.07 | % | |||||||||||
23,184 | 20,000 | January 2017 | Fixed | 4.25 | % | |||||||||||
11,696 | 10,000 | February 2017 | Fixed | 4.45 | % | |||||||||||
5,661 | 5,000 | June 2017(a) | Fixed | 4.58 | % | |||||||||||
10,810 | 10,000 | August 2017(a) | Fixed | 3.63 | % | |||||||||||
5,449 | 5,000 | November 2017(b) | Fixed | 3.93 | % | |||||||||||
5,534 | 5,000 | July 2018(a) | Fixed | 3.94 | % | |||||||||||
5,185 | 5,000 | July 2018(a) | Fixed | 2.14 | % | |||||||||||
5,181 | 5,000 | July 2018(a) | Fixed | 2.12 | % | |||||||||||
|
|
|
| |||||||||||||
$221,018 | $ | 206,500 | ||||||||||||||
|
|
|
|
F-86
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
(b) | This advance allows the FHLB a one-time conversion option in November 2012. |
The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s respective residential 1-4 family mortgage, multifamily, HELOC and commercial real estate secured loans. The amount of eligible collateral at December 31, 2011 was $106,606.
At December 31, 2010, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida, TIB Bank had $125,000 in advances outstanding with a carrying value of $131,116. the Bank had FHLB advances outstanding with a face value of $105,833 and a carrying value of $111,951.
The advances as of December 31, 2010 for both Banks consisted of the following:
Carrying | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Contractual Rate at December 31, 2010 | ||||||||||||||
$ 5,001 | $ | 5,000 | February 2011 | Fixed | 0.51 | % | ||||||||||||
3,011 | 3,000 | March 2011 | Fixed | 2.12 | % | |||||||||||||
3,013 | 3,000 | May 2011 | Fixed | 1.65 | % | |||||||||||||
5,102 | 5,000 | June 2011(a) | Fixed | 4.95 | % | |||||||||||||
5,106 | 5,000 | June 2011(a) | Fixed | 5.04 | % | |||||||||||||
5,058 | 5,000 | July 2011(a) | Fixed | 2.81 | % | |||||||||||||
1,547 | 1,250 | September 2011 | Fixed | 2.99 | % | |||||||||||||
1,077 | 1,250 | September 2011 | Fixed | 3.58 | % | |||||||||||||
465 | 357 | October 2011 | Fixed | 3.91 | % | |||||||||||||
5,203 | 5,000 | January 2012(a) | Fixed | 4.56 | % | |||||||||||||
571 | 476 | April 2012 | Fixed | 4.70 | % | |||||||||||||
5,265 | 5,000 | May 2012(a) | Fixed | 4.59 | % | |||||||||||||
7,695 | 7,500 | March 2013 | Fixed | 2.29 | % | |||||||||||||
4,308 | 4,000 | March 2013 | Fixed | 4.58 | % | |||||||||||||
5,155 | 5,000 | June 2013(a) | Fixed | 2.27 | % | |||||||||||||
5,528 | 5,000 | May 2014(a) | Fixed | 4.60 | % | |||||||||||||
5,552 | 5,000 | June 2014(a) | Fixed | 4.66 | % | |||||||||||||
5,215 | 5,000 | February 2015 | Fixed | 2.83 | % | |||||||||||||
5,391 | 5,000 | June 2015 | Fixed | 3.71 | % | |||||||||||||
5,426 | 5,000 | July 2015(a) | Fixed | 3.57 | % | |||||||||||||
5,734 | 5,000 | June 2017(a) | Fixed | 4.58 | % | |||||||||||||
5,523 | 5,000 | November 2017(b) | Fixed | 3.93 | % | |||||||||||||
5,613 | 5,000 | July 2018(a) | Fixed | 3.94 | % | |||||||||||||
5,198 | 5,000 | July 2018(a) | Fixed | 2.14 | % | |||||||||||||
5,194 | 5,000 | July 2018(a) | Fixed | 2.12 | % | |||||||||||||
53,502 | 50,000 | April 2013(a) | Fixed | 3.80 | % | |||||||||||||
51,790 | 50,000 | December 2011(a) | Fixed | 4.18 | % | |||||||||||||
10,586 | 10,000 | September 2012(a) | Fixed | 4.05 | % | |||||||||||||
10,009 | 10,000 | March 2011 | Fixed | 0.61 | % | |||||||||||||
5,229 | 5,000 | March 2012(a) | Fixed | 4.29 | % | |||||||||||||
|
|
|
| |||||||||||||||
$243,067 | $ | 230,833 | ||||||||||||||||
|
|
|
|
F-87
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
(b) | This advance allows the FHLB a one-time conversion option in November 2012. |
The Banks’ collateral with the FHLB consists of a blanket floating lien pledge of the Banks’ respective residential 1-4 family mortgage and commercial real estate secured loans. The amount of eligible collateral at December 31, 2010 was $309,562.
13. | Long Term Borrowings |
Structured repurchase agreements
At December 31, 2011, outstanding structured repurchase agreements totaled $50,000 for contractual amounts with carrying values of $55, 243. There were no outstanding structured repurchase agreements at December 31, 2010. These repurchase agreements have a weighted-average rate of 4.06% as of December 31, 2011 and are collateralized by certain U.S. agency and mortgage-backed securities.
Carrying | Contractual Amount | Maturity Date | Rate at December 31, 2011 | |||||||||
$11,376 | $ | 10,000 | November 6, 2016 | 4.75 | % | |||||||
10,722 | 10,000 | December 18, 2017 | 3.72 | % | ||||||||
11,322 | 10,000 | March 30, 2017 | 4.50 | % | ||||||||
10,765 | 10,000 | December 18, 2017 | 3.79 | % | ||||||||
11,058 | 10,000 | March 22, 2019 | 3.56 | % | ||||||||
|
|
|
| |||||||||
$55,243 | $ | 50,000 | ||||||||||
|
|
|
|
Subordinated Debentures
Through its acquisitions of TIBB, CBKN and GRNB, the Company acquired eleven separate pooled offerings of trust preferred securities. The Company is not considered the primary beneficiary of the trusts (variable interest entities), therefore the trusts are not consolidated in the Company’s consolidated financial statements, but rather the subordinated debentures are presented as a liability.
The Trusts consist of wholly-owned statutory trust subsidiaries for the purpose of issuing the trust preferred securities. The Trusts used the proceeds from the issuance of trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company’s subsidiaries, CBKN, GRNB and TIBB. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend equal to the interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the companies or the Trust, at their respective option after a period of time outlined below, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board (“FRB”), if then required. TIBB and GRNB, prior to their acquisition by the Company, each elected to defer interest payments on the trust preferred securities beginning with the payments due in the fourth quarter of 2009 and the fourth quarter of 2010, respectively. In September 2011, pursuant to approval by the FRB, TIBB and GRNB each made
F-88
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
payments of all amounts due for current and deferred interest through the next payment date for each of its trust preferred securities. Deferral of interest payments on the trust preferred securities is allowed for up to 60 months without being considered an event of default.
Date of Offering | Original Face Amount | Carrying Amount | Interest | Call Date | Maturity | |||||||||
September 7, 2000 | $ | 8,000 | $ | 8,813 | 10.6% Fixed | September 7, 2010 | September 7, 2030 | |||||||
July 31, 2001 | 5,000 | 3,734 | 4.01% (3 Month LIBOR plus 358 basis points) | July 31, 2006 | July 31, 2031 | |||||||||
July 31, 2001 | 4,000 | 2,513 | 4.01% (3 Month LIBOR plus 358 basis points) | July 31, 2006 | July 31, 2031 | |||||||||
June 26, 2003 | 10,000 | 5,754 | 3.67% (3 Month LIBOR plus 310 basis points) | June 26, 2008 | June 26, 2033 | |||||||||
September 25, 2003 | 10,000 | 6,081 | 3.25% (3 Month LIBOR plus 285 basis points) | September 25, 2008 | September 25, 2033 | |||||||||
December 30, 2003 | 10,000 | 5,534 | 3.10% (3 Month LIBOR plus 285 basis points) | December 30, 2008 | December 30, 2033 | |||||||||
June 28, 2005 | 3,000 | 1,451 | 2.23% (3 Month LIBOR plus 168 basis points) | June 28, 2010 | June 28, 2035 | |||||||||
December 22, 2005 | 10,000 | 4,286 | 1.95% (3 Month LIBOR plus 140 basis points) | December 22, 2010 | March 15, 2036 | |||||||||
December 28, 2005 | 13,000 | 6,058 | 2.09% (3 Month LIBOR plus 155 basis points) | December 28, 2010 | March 15, 2036 | |||||||||
June 23, 2006 | 20,000 | 10,629 | 1.95% (3 Month LIBOR plus 155 basis points) | June 23, 2011 | June 23, 2036 | |||||||||
May 16, 2007 | 56,000 | 26,415 | 2.20% (3 Month LIBOR plus 165 basis points) | May 16, 2012 | May 16, 2037 | |||||||||
|
|
|
| |||||||||||
$ | 149,000 | $ | 81,268 | |||||||||||
|
|
|
|
Private Placement Offering of Investment Units
On March 18, 2010, CBKN sold $3,393 in aggregate principal amount of subordinated promissory notes with a fixed interest rate of 10.0% due March 18, 2020. The notes had a carrying value of $3,590 as of December 31, 2011. The Company may prepay the Notes at any time after March 18, 2015 subject to regulatory approval and compliance with applicable law. The Company’s obligation to repay the notes is subordinate to all indebtedness owed by the Company to its current and future secured creditors and general creditors and certain other financial obligations of the Company.
At December 31, 2011, the maturities of long-term borrowings were as follows:
Fixed Rate | Floating Rate | Total | ||||||||||
Due in 2012 | $ | – | $ | – | $ | – | ||||||
Due in 2013 | – | – | – | |||||||||
Due in 2014 | – | – | – | |||||||||
Due in 2015 | – | – | – | |||||||||
Thereafter | 67,646 | 72,455 | 140,101 | |||||||||
|
|
|
|
|
| |||||||
Total long-term debt | $ | 67,646 | $ | 72,455 | $ | 140,101 | ||||||
|
|
|
|
|
|
F-89
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
14. | Income Taxes |
Income tax expense (benefit) from continuing operations was as follows:
2011 | 2010 | 2009 | ||||||||||
Current income tax provision | ||||||||||||
Federal | $ | 15,947 | $ | 4,491 | $ | – | ||||||
State | 3,460 | 550 | – | |||||||||
|
|
|
|
|
| |||||||
19,407 | 5,041 | – | ||||||||||
|
|
|
|
|
| |||||||
Deferred tax benefit | ||||||||||||
Federal | (13,465 | ) | (4,949 | ) | (41 | ) | ||||||
State | (1,508 | ) | (1,133 | ) | (9 | ) | ||||||
|
|
|
|
|
| |||||||
(14,973 | ) | (6,082 | ) | (50 | ) | |||||||
|
|
|
|
|
| |||||||
Total income tax expense (benefit) | $ | 4,434 | $ | (1,041 | ) | $ | (50 | ) | ||||
|
|
|
|
|
|
A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income taxes reported is as follows:
2011 | 2010 | 2009 | ||||||||||
Pretax income from continuing operations | $ | 10,646 | $ | 10,996 | $ | (142 | ) | |||||
|
|
|
|
|
| |||||||
Income taxes computed at Federal statutory tax rate | 3,726 | 3,849 | (50 | ) | ||||||||
Effect of: | ||||||||||||
Purchase accounting gain | – | (5,371 | ) | – | ||||||||
Transaction & Legal Costs | 543 | 860 | – | |||||||||
Tax-exempt income, net | (861 | ) | (77 | ) | – | |||||||
State income taxes, net | 918 | (423 | ) | – | ||||||||
Other, net | 108 | 121 | – | |||||||||
|
|
|
|
|
| |||||||
Total income tax expense (benefit) | $ | 4,434 | $ | (1,041 | ) | $ | (50 | ) | ||||
|
|
|
|
|
|
F-90
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
The details of the net deferred tax asset as of December 31, 2011 and 2010 are as follows:
2011 | 2010 | |||||||
Purchase accounting adjustment | $ | 74,043 | $ | 30,428 | ||||
Net operating loss and AMT carryforward | 41,446 | 5,319 | ||||||
Allowance for loan losses | 29,511 | 290 | ||||||
OREO write down allowance | 13,142 | 7,850 | ||||||
CD premium | 10,564 | 1,207 | ||||||
FHLB borrowing premium | 7,839 | 2,397 | ||||||
Other | 7,741 | – | ||||||
Clawback reserve liability | 424 | 394 | ||||||
Goodwill | – | 7,910 | ||||||
Acquisition related intangibles | – | 2,372 | ||||||
Net unrealized losses on securities available for sale | – | 1,716 | ||||||
|
|
|
| |||||
Total gross deferred tax assets | $ | 184,710 | $ | 59,883 | ||||
|
|
|
| |||||
FDIC indemnification assets | (27,569 | ) | (35,284 | ) | ||||
Net unrealized gains on securities available for sale | (5,099 | ) | – | |||||
Acquisition related intangibles | (4,648 | ) | (1,957 | ) | ||||
Deferred loan costs | (1,924 | ) | (83 | ) | ||||
Other | – | (5,770 | ) | |||||
|
|
|
| |||||
Total gross deferred tax liabilities | $ | (39,240 | ) | $ | (43,094 | ) | ||
|
|
|
| |||||
Net temporary differences | 145,470 | 16,789 | ||||||
Valuation allowance | – | – | ||||||
|
|
|
| |||||
Net deferred tax asset | $ | 145,470 | $ | 16,789 | ||||
|
|
|
|
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including projections of future operating results as well as the significant cumulative losses incurred by the operations acquired from the FDIC in recent years.
These factors represent the most significant positive and negative evidence that management considered in concluding that no valuation allowance was necessary at December 31, 2011.
At December 31, 2011, the Company had Federal and state net operating loss carryforwards resulting from the following acquisitions: (1) TIBB has $13,014, which expire in 2030 if unused and are subject to an annual limitation estimated to be $723; (2) CBKN has $30,349, which expire in 2031 if unused and are subject to an annual limitation estimated to be $3,488; (3) GRNB has $50,311, which expire in 2031 if unused and are subject to an annual limitation estimated to be $3,687.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the states of Florida, South Carolina, North Carolina, Tennessee, and Virginia.
At December 31, 2011, the Company had no amounts recorded for uncertain tax positions.
F-91
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
15. | Employee Benefit Plans |
During 2011 and 2010, the Company made discretionary matching contributions of $288 and $83, respectively, under the provisions of 401(k) plans.
TIB Bank entered into salary continuation agreements, designed to provide supplemental retirement income benefits to participants, with several of its executive officers. In 2010, following the acquisition of TIBB by the Company, the salary continuation agreements were terminated and the executives each received a lump sum distribution of their respective accrued benefit earned under their agreement resulting in a total payout of $1,305.
In May 2005, CBKN established a supplemental retirement plan for certain of its executive officers. The plan was terminated in connection with the closing of the CBF investment. The liability related to the accrual of vested benefits was $387 as of December 31, 2011 and the amount expensed related to the vested benefits was $78 in 2011.
In 2001, TIB Bank established a nonqualified retirement benefit plan for eligible directors. The Company expensed $3 and $9 in 2011 and 2010, respectively, for the accrual of the retirement benefits. In 2011 the director deferred agreements were terminated and the directors participating in the plan each received a lump sum distribution of their respective deferral account balances resulting in a total payout of $431 by the Company.
GRNB allowed certain directors to defer some of their fees for future payment. The amount accrued for deferred compensation under the plan was $1,859 as of December 31, 2011 and the amount expensed under the plan in 2011 was $22. No amounts were deferred in 2011.
The Company owns life insurance policies which were purchased on several employees and directors covered by salary continuation agreements and director deferred agreements. Cash value income (net of related insurance premium expense) related to these policies totaled $609 and $104 during 2011 and 2010, respectively.
16. | Shareholders’ Equity and Minimum Regulatory Capital Requirements |
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
F-92
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Capital Adequacy and Ratios
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At December 31, 2011 the Bank maintained capital ratios exceeding the requirements to be considered well capitalized. These minimum amounts and ratios along with the actual amounts and ratios for the Company and the Bank at December 31, 2011 are presented in the following table:
Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to Average Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | ³ | $255,799 | ³4.0% | $ | 801,209 | 12.5% | ||||||||||||||||
Capital Bank, N.A. | ³ | 312,725 | ³5.0% | ³ | 250,180 | ³4.0% | 649,523 | 10.4% | ||||||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | ³ | 166,266 | ³4.0% | $ | 801,209 | 19.3% | ||||||||||||||||
Capital Bank, N.A. | ³ | 247,651 | ³6.0% | ³ | 165,101 | ³4.0% | 649,523 | 15.7% | ||||||||||||||||
Total Capital (to | ||||||||||||||||||||||||
Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | ³ | $332,533 | ³8.0% | $ | 839,854 | 20.2% | ||||||||||||||||
Capital Bank, N.A. | ³ | 412,752 | ³10.0% | ³ | 330,201 | ³8.0% | 687,971 | 16.7% |
At present, the OCC Operating Agreement requires the Bank to maintain total capital equal to at least 12% of risk-weighted assets, Tier I capital equal to at least 11% of risk-weighted assets and a minimum leverage ratio of 10%.
Management believes, as of December 31, 2011, that the Company and the Bank meet all capital requirements to which they are subject.
Currently, the OCC Operating Agreement with the Bank prohibits the Bank from paying a dividend for three years following the July 16, 2010 initial acquisition date. Once the three-year period has elapsed, the agreement imposes other restrictions on the Bank’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made.
Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2011, if not subject to other restrictions, would have been limited to approximately $40,607.
17. | Stock-Based Compensation |
As of December 31, 2011, the Company had one compensation plan under which shares of its common stock are issuable in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and stock bonus awards. This is its 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was effective December 22, 2009 and expires on December 22, 2019, the tenth anniversary of the effective date. The maximum number of shares of common stock of the Company that may be optioned or
F-93
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
awarded through the 2019 expiration of the plan is 5,750 shares (limited to 10% of outstanding shares of common stock) of which up to 70% may be granted pursuant to stock options and up to 30% may be granted pursuant to restricted stock and restricted stock units. If any awards granted under the 2010 Plan are forfeited or any option terminates, expires or lapses without being exercised, or any award is settled for cash, the shares of stock shall again be available for awards under the 2010 Plan.
The following table summarizes the components and classification of stock-based compensation expense for the year ended December 31, 2011. As there were no outstanding, unvested equity awards prior to the first quarter of 2011, no stock-based compensation expense was recorded in prior periods.
Year Ended December 31, 2011 | ||||
Stock options | $ | 5,161 | ||
Restricted stock | 4,075 | |||
|
| |||
Total stock-based compensation expense | $ | 9,236 | ||
|
| |||
Salaries and employee benefits | $ | 7,856 | ||
Other expense | 1,380 | |||
|
| |||
Total stock-based compensation expense | $ | 9,236 | ||
|
|
The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was approximately $3,593 for the year ended December 31, 2011.
Stock Options
Under the 2010 Plan, the exercise price for common stock must equal at least 100% of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10% of the common stock must equal at least 110% of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options granted during the first quarter of 2011 vest over a service period of approximately 2 years.
The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted during the year ended December 31, 2011.
Year Ended December 31, 2011 | ||||
Dividend yield | 0.00 | % | ||
Risk-free interest rate | 1.87 | % | ||
Expected option life | 5 years | |||
Volatility | 33 | % | ||
Weighted average grant-date fair value of options granted | $ | 4.41 |
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
• | The dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan. An increase in dividend yield will decrease stock compensation expense. |
• | The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense. |
• | The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. An increase in the option life will increase stock compensation expense. |
• | The volatility was estimated using a peer group assessment for periods approximating the expected option life. Appropriate weight is attributed to financial theory, according to which the volatility of an institution’s equity should be related to the volatility of its assets and the entity’s financial leverage. An increase in the volatility will increase stock compensation expense. |
ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During the year ended December 31, 2011, stock based compensation expense was recorded based upon assumptions that the Company would experience no forfeitures. This assumption of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in assumptions will be accounted for prospectively in the period of change.
As of December 31, 2011, unrecognized compensation expense associated with stock options was $4,796 which is expected to be recognized over a weighted average period of approximately 1 year.
A summary of the stock option activity in the 2010 Plan is as follows:
Shares | Weighted Average Exercise Price Per Share | |||||||
Balance, January 1, 2011 | – | $ | – | |||||
Granted | 2,236 | 20.00 | ||||||
Exercised | – | – | ||||||
Expired or forfeited | – | – | ||||||
Balance, December 31, 2011 | 2,236 | $ | 20.00 |
The weighted average remaining term for outstanding stock options was approximately 8 years at December 31, 2011. The aggregate intrinsic value at December 31, 2011 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date. There were 1,118 options exercisable at December 31, 2011 and no options exercisable at December 31, 2010.
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Options outstanding at December 31, 2011 were as follows:
Outstanding Options | Options Exercisable | |||||||||||||||||||
Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price Per Share | Number | Weighted Average Exercise Price | |||||||||||||||
$20.00 | 2,236 | 8.00 years | $ | 20.00 | 1,118 | $ | 20.00 |
Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares granted to employees is based upon the performance of the Company’s common stock. The terms of the restricted stock awards granted to employees during 2011 provide for vesting upon the achievement of stock price goals as follows: (1) 33% at $25.00 per share; (2) 33% at $28.00 per share; and (3) 33% at $32.00 per share. Achievement of stock price goals is generally defined as the average closing price of the shares for any consecutive 30-day trading period exceeding the applicable price target.
The terms of the restricted stock awards granted to directors during 2011 provide for vesting of one-half of the restricted stock on the second anniversary of the effective date, defined as December 22, 2009, and vesting of one-half on the third anniversary of the effective date.
The fair value of each restricted stock award granted to employees is estimated as of the date of grant using a risk-neutral Monte Carlo simulation model that projected the Company’s stock price over 10,000 random scenarios in order to assess the stock price along those paths where vesting conditions are met. The value of the restricted stock award is equal to the weighted average present value of the terminal projected stock price of all 10,000 paths, where paths are set to $0 when vesting conditions are not met or the awards are forfeited. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The fair value of each restricted stock award granted to directors is based on the most recent trade. The following table summarizes the weighted average assumptions used to compute the grant-date fair value of restricted stock awards granted during the year ended December 31, 2011.
Year Ended December 31, 2011 | ||||
Starting share price (based upon most recent trade) | $17.00 | |||
Risk-free interest rate | Forward Treasury Curve | |||
Market risk premium | 0.00% | |||
Volatility (year 1, year 2, year 3 and after 3 years, respectively) | 21% /24% /31% /32.5% | |||
Annual forfeiture estimate | 0.00% | |||
Weighted average grant-date fair value of restricted stock awards granted | $13.49 |
• | An increase in the risk-free interest rate will increase stock compensation expense. |
• | The volatility was estimated using a peer group assessment for periods approximating the expected option life. Appropriate weight is attributed to financial theory, according to which the volatility of an institution’s equity should be related to the volatility of its assets and the entity’s financial leverage. An increase in the volatility will increase stock compensation expense. |
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
• | An increase in the annual forfeiture estimate will decrease stock compensation expense. |
The value of the restricted stock is being amortized on a straight-line basis over the implied service periods. During the year ended December 31, 2011, 63 restricted stock awards vested.
18. | Loan Commitments and Other Related Activities |
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows at December 31, 2011:
Fixed Rate | Variable Rate | |||||||
Commitments to make loans | $ | 50,502 | $ | 4,801 | ||||
Unfunded commitments under lines of credit | 73,107 | 412,776 |
Commitments to make loans are generally made for periods of 30 days. As of December 31, 2011, the fixed rate loan commitments have interest rates ranging from 1.8% to 9.0% and maturities ranging from 1 year to 7 years.
As of December 31, 2011 the Bank was subject to performance letters of credit totaling $16,921 and financial letters of credit totaling $12,221.
19. | Fair Value |
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
Level 2 | Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
Level 3 | Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
The fair values of securities available for sale can be determined by (1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), (2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and (3) custom discounted cash flow or other internal modeling (Level 3 inputs).
F-97
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2011:
Fair Value Measurements Using | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Trading securities | $ | 637 | $ | 637 | $ | – | $ | – | ||||||||
Available for sale securities | ||||||||||||||||
States and political subdivisions—tax-exempt | $ | 34,245 | $ | – | $ | 34,245 | $ | – | ||||||||
States and political subdivisions—taxable | 7,702 | – | 7,702 | – | ||||||||||||
Mortgage-backed securities—residential | 769,905 | – | 769,905 | – | ||||||||||||
Mortgage-backed securities—residential private label | 5,727 | – | 5,727 | – | ||||||||||||
Industrial revenue bond | 3,750 | – | – | 3,750 | ||||||||||||
Marketable equity securities | 1,807 | 1,807 | – | – | ||||||||||||
Corporate bonds | 3,260 | – | 2,019 | 1,241 | ||||||||||||
Collateralized debt obligations | 328 | – | – | 328 | ||||||||||||
|
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|
| |||||||||
Available for sale securities | $ | 826,724 | $ | 1,807 | $ | 819,598 | $ | 5,319 | ||||||||
|
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|
|
|
|
|
|
The table below presents reconciliations and income statement classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2011 and held at December 31, 2011.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
Year Ended December 31, 2011 | ||||||||
Corporate Bonds | Collateralized Debt Obligations | |||||||
Beginning balance, January 1, 2011 | $ | – | $ | 795 | ||||
Acquired through acquisition of Capital Bank Corporation | 1,144 | – | ||||||
Acquired through the acquisition of Green Bankshares, Inc. | 476 | 50 | ||||||
Included in earnings—other than temporary impairment | (379 | ) | (237 | ) | ||||
Included in other comprehensive income | – | (280 | ) | |||||
Transfer in to Level 3 | 3,750 | – | ||||||
|
|
|
| |||||
Ending balance December 31, 2011 | $ | 4,991 | $ | 328 | ||||
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Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2010:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
Assets | ||||||||||||||||
U.S. Government agencies and corporations | $ | 49,133 | $ | – | $ | 49,133 | $ | – | ||||||||
States and political subdivisions—tax-exempt | 5,792 | – | 5,792 | – | ||||||||||||
States and political subdivisions—taxable | 9,354 | – | 9,354 | – | ||||||||||||
Mortgage-backed securities—residential | 412,213 | – | 412,213 | – | ||||||||||||
Marketable equity securities | 74 | – | 74 | – | ||||||||||||
Corporate bonds | 2,105 | – | 2,105 | – | ||||||||||||
Collateralized debt obligations | 795 | – | – | 795 | ||||||||||||
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| |||||||||
Available for sale securities | $ | 479,466 | $ | – | $ | 478,671 | $ | 795 | ||||||||
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|
|
|
|
|
The tables below present reconciliations and income statement classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010 and held at December 31, 2010.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
Year Ended December 31, 2010 | ||||
Collateralized Debt Obligations | ||||
Beginning balance, January 1, 2010 | $ | – | ||
Acquired through the acquisition of TIB Financial Corp. | 807 | |||
Included in earnings—other than temporary impairment | – | |||
Included in other comprehensive income | (12 | ) | ||
Transfer in to Level 3 | – | |||
|
| |||
Ending balance December 31, 2010 | $ | 795 | ||
|
|
Assets and Liabilities Measured on a Nonrecurring Basis
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
F-99
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of December 31, 2011:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Assets | ||||||||||||
Other real estate owned | $ | – | $ | – | $ | 87,867 | ||||||
Other repossessed assets | – | 261 | – |
Other real estate owned had a carrying amount of $95,557, less a valuation allowance of $7,690 as of December 31, 2011. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession.
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of December 31, 2010:
Fair Value Measurements Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Assets | ||||||||||||
Other real estate owned | $ | – | $ | – | $ | 70,817 | ||||||
Other repossessed assets | – | 137 | – |
Other real estate owned had a carrying amount of $70,817 and had no valuation allowance associated with it as of December 31, 2011. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession.
F-100
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Carrying amount and estimated fair values of financial instruments were as follows:
2011 | 2010 | |||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 709,963 | $ | 709,963 | $ | 886,925 | $ | 886,925 | ||||||||
Trading securities | 637 | 637 | – | – | ||||||||||||
Investment securities available for sale | 826,724 | 826,724 | 479,466 | 479,466 | ||||||||||||
Investment securities held to maturity | – | – | 250 | 250 | ||||||||||||
Loans, net | 4,265,771 | 4,327,833 | 1,741,994 | 1,781,181 | ||||||||||||
Receivable from FDIC | 13,315 | 13,315 | 46,585 | 46,585 | ||||||||||||
Federal reserve, federal home loan bank and independent bankers’ bank stock | 66,282 | 66,282 | 91,467 | 91,467 | ||||||||||||
Accrued interest receivable | 38,498 | 38,498 | 23,465 | 23,465 | ||||||||||||
5,172 | 5,172 | 8,286 | 8,286 | |||||||||||||
Financial Liabilities | ||||||||||||||||
Noncontractual deposits | ||||||||||||||||
Contractual deposits | $ | 2,935,748 | $ | 2,935,748 | $ | 906,742 | $ | 906,742 | ||||||||
Federal home loan bank advances | 2,189,436 | 2,186,869 | 1,353,510 | 1,355,099 | ||||||||||||
Short-term borrowings | 221,018 | 236,919 | 243,067 | 242,522 | ||||||||||||
Long-term borrowings | 54,533 | 54,531 | 61,969 | 61,969 | ||||||||||||
Subordinated debentures | 55,243 | 58,419 | – | – | ||||||||||||
Accrued interest payable | 84,858 | 93,845 | 22,887 | 25,267 | ||||||||||||
6,706 | 6,706 | 9,334 | 9,334 |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, receivable from FDIC, accrued interest receivable and payable, noncontractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Reserve, Federal Home Loan Bank stock and other bankers’ bank stock due to restrictions placed on its transferability, the estimated fair value is equal to their carrying amount. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life, adjusted for the allowance for loan losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of long-term debt is based on current rates for similar financing.
The fair value of off-balance sheet items that includes commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.
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Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
20. | Condensed Financial Information of Capital Bank Financial Corp. |
Condensed Balance Sheets
Years Ended December 31, 2011 and 2010
(Parent Only)
2011 | 2010 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 141,976 | $ | 546,995 | ||||
Investment in bank subsidiary | 179,922 | 155,515 | ||||||
Investment in bank holding company subsidiaries | 587,786 | 170,817 | ||||||
Accrued interest receivable and other assets | 8,702 | 3,749 | ||||||
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Total assets | $ | 918,386 | $ | 877,076 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Accrued interest payable and other liabilities | 1,980 | 1,773 | ||||||
Shareholders’ equity | 916,406 | 875,303 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 918,386 | $ | 877,076 | ||||
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Condensed Statements of Income
Years Ended December 31, 2011 and 2010 and Period From November 30, 2009 (Inception) to December 31, 2009
(Parent Only)
2011 | 2010 | 2009 | ||||||||||
Operating income | ||||||||||||
Interest-bearing deposits in other banks | $ | 1,516 | $ | 3,175 | $ | 72 | ||||||
Management fee income | 2,533 | – | – | |||||||||
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Total operating income | 4,049 | 3,175 | 72 | |||||||||
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Operating expense | ||||||||||||
Salaries | 11,426 | 3,635 | 40 | |||||||||
Other expense | 4,796 | 10,757 | 174 | |||||||||
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| |||||||
Total operating expense | 16,222 | 14,392 | 214 | |||||||||
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| |||||||
Loss before income tax benefit and equity in undistributed earnings of subsidiaries | (12,173 | ) | (11,217 | ) | (142 | ) | ||||||
Income tax benefit | 4,074 | 3,699 | 50 | |||||||||
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| |||||||
Loss before equity in undistributed earnings of subsidiaries | (8,099 | ) | (7,518 | ) | (92 | ) | ||||||
Equity in income of subsidiaries | 14,311 | 19,548 | – | |||||||||
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Net income | $ | 6,212 | $ | 12,030 | $ | (92 | ) | |||||
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F-102
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
Condensed Statements of Cash Flows
Years Ended December 31, 2011 and 2010 and Period From November 30, 2009 (Inception) to December 31, 2009
(Parent Only)
2011 | 2010 | 2009 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 6,212 | $ | 12,030 | $ | (92 | ) | |||||
Equity in income of subsidiaries | (14,311 | ) | (19,548 | ) | – | |||||||
Stock-based compensation expense | 9,090 | – | – | |||||||||
Decrease in net income tax obligation | (4,074 | ) | (3,699 | ) | (50 | ) | ||||||
Change in accrued interest receivable and other assets | (880 | ) | 1,332 | – | ||||||||
Change in accrued interest payable and other liabilities | 208 | (1 | ) | 441 | ||||||||
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Net cash (used in) provided by operating activities | (3,755 | ) | (9,886 | ) | 299 | |||||||
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Cash flows from investing activities | ||||||||||||
Investment in bank subsidiary | (4,695 | ) | (137,000 | ) | – | |||||||
Investment in bank holding company subsidiary | (396,569 | ) | (172,543 | ) | – | |||||||
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Net cash used in investing activities | (401,264 | ) | (309,543 | ) | – | |||||||
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Cash flows from financing activities | ||||||||||||
Net proceeds from issuance of common shares | – | 339,713 | 526,412 | |||||||||
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Net cash provided by financing activities | – | 339,713 | 526,412 | |||||||||
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| |||||||
Net (decrease) increase in cash and cash equivalents | (405,019 | ) | 20,284 | 526,711 | ||||||||
Cash and cash equivalents | ||||||||||||
Beginning of period | 546,995 | 526,711 | – | |||||||||
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End of period | $ | 141,976 | $ | 546,995 | $ | 526,711 | ||||||
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21. | Supplemental Financial Data |
Components of other expense in excess of 1 percent of total interest and non-interest income are as follows:
2011 | 2010 | 2009 | ||||||||||
Computer services | $ | 6,525 | $ | 2,098 | $ | – | ||||||
FDIC & state assessments | 5,914 | 2,097 | – | |||||||||
Amortization of intangibles | 4,248 | 818 | – | |||||||||
Marketing expense | 3,224 | – | – | |||||||||
Postage, courier and armored car expense | 2,467 | – | – | |||||||||
Insurance non-building | – | 640 | – | |||||||||
Travel | – | 382 | 35 | |||||||||
Organizational expense | – | – | 91 |
F-103
Table of Contents
Capital Bank Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(dollars and shares in thousands)
22. | Quarterly Financial Data (Unaudited) |
The following is a summary of unaudited quarterly results for 2011 and 2010:
2011 | 2010 | |||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
Condensed income statements: | ||||||||||||||||||||||||||||||||
Interest income | $ | 74,341 | $ | 63,722 | $ | 49,544 | $ | 40,305 | $ | 29,773 | $ | 11,416 | $ | 831 | $ | 725 | ||||||||||||||||
Net interest income | 63,580 | 54,216 | 40,685 | 32,839 | 24,747 | 10,208 | 831 | 725 | ||||||||||||||||||||||||
Provision for loan losses | 16,790 | 11,846 | 8,215 | 1,545 | 753 | – | – | – | ||||||||||||||||||||||||
Purchase accounting gain | – | – | – | – | – | 15,175 | – | – | ||||||||||||||||||||||||
Net Income (loss) | 1,393 | 3,748 | 2,031 | 350 | (167 | ) | 14,607 | (1,022 | ) | (1,381 | ) | |||||||||||||||||||||
Net income (loss) allocated to common shareholders | 1,015 | 3,210 | 1,587 | 400 | (174 | ) | 14,607 | (1,022 | ) | (1,381 | ) | |||||||||||||||||||||
Basic earnings per common share | $ | 0.02 | $ | 0.07 | $ | 0.04 | $ | 0.01 | $ | – | $ | 0.33 | $ | (0.03 | ) | $ | (0.04 | ) | ||||||||||||||
Diluted earnings per common share | $ | 0.02 | $ | 0.07 | $ | 0.03 | $ | 0.01 | $ | – | $ | 0.33 | $ | (0.03 | ) | $ | (0.04 | ) |
23. | Subsequent Event |
On March 26, 2012, the Company entered into a definitive agreement, which was amended as of June 25, 2012 (as amended, the “Agreement”), to acquire 100% of the common equity interest in Southern Community Financial Corporation (“SCMF”). Subject to the terms and conditions set forth in the Agreement, each share of Southern Community Common Stock issued and outstanding at the effective time of the merger (other than shares owned by Southern Community, CBF and certain of their subsidiaries) will be converted into the right to receive $3.11 in cash for aggregate consideration of approximately $52.4 million for all of the common equity interest in Southern Community, subject to adjustment as set forth in the Agreement. In addition, Southern Community shareholders will receive a CVR which may pay up to $1.30 per share 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, and may receive additional cash consideration representing a portion of the discount in the purchase price, if any, if the Company redeems the securities issued by Southern Community to the U.S. Department of the Treasury as part of the Troubled Asset Relief Program. SCMF is the parent of Southern Community Bank and Trust, a bank with $1,500,000 in assets and 22 branches in Winston-Salem, the Piedmont Triad, and other North Carolina markets. The transaction, which is subject to shareholder and regulatory approval, as well as the satisfaction of other customary closing conditions, is expected to be consummated in the third quarter of 2012.
F-104
Table of Contents
NAFH National Bank
(Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities
Assumed of First National Bank of the South as of July 16, 2010
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders of
North American Financial Holdings, Inc.
In our opinion, the accompanying statement of assets acquired and liabilities assumed of NAFH National Bank (subsidiary of North American Financial Holdings, Inc.) presents fairly, in all material respects, the assets acquired and liabilities assumed by NAFH National Bank of First National Bank of the South as of July 16, 2010 in conformity with accounting principles generally accepted in the United States of America. This statement of assets acquired and liabilities assumed is the responsibility of the Company’s management; our responsibility is to express an opinion on this statement of assets acquired and liabilities assumed based on our audit. We conducted our audit of the statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets acquired and liabilities assumed, assessing the accounting principles used and significant estimates made by management, and evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
June 23, 2011
Ft. Lauderdale, Florida
F-106
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
Assets Acquired | ||||
Cash and due from banks | $ | 64,728 | ||
Investment securities available for sale | 40,564 | |||
Loans | 389,603 | |||
Other real estate owned | 20,832 | |||
Indemnification asset | 71,386 | |||
Goodwill | 6,616 | |||
Intangible assets, net | 2,214 | |||
Accrued interest receivable and other assets | 6,315 | |||
|
| |||
Total assets acquired | $ | 602,258 | ||
|
| |||
Liabilities Assumed | ||||
Deposits | ||||
Noninterest-bearing demand | $ | 38,718 | ||
Interest-bearing | 409,614 | |||
|
| |||
Total deposits | 448,332 | |||
|
| |||
Borrowings | 57,579 | |||
Accrued interest payable and other liabilities | 1,868 | |||
|
| |||
Total liabilities assumed | $ | 507,779 | ||
|
| |||
Net assets acquired | $ | 94,479 | ||
|
|
The accompanying notes are an integral part of these financial statements.
F-107
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
1. | Summary of Significant Accounting Policies |
North American Financial Holdings, Inc. (“NAFH” or the “Company”) is a bank holding company incorporated in Delaware and headquartered in Florida whose business is conducted primarily through our subsidiary, NAFH National Bank (“NAFH NB”).
On July 16, 2010, NAFH NB acquired the operations and certain assets and liabilities from the Federal Deposit Insurance Corporation (“FDIC”) as receiver of the former First National Bank of the South (“FNB”).
The accounting and reporting policies conform to accounting principles generally accepted in the United States of America. The following is a summary of the more significant of these policies.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change include the determination of fair value and goodwill and intangible assets. Changes in assumptions or in market conditions could significantly affect the fair value estimates. The measurement of assets acquired and liabilities assumed at their estimated fair values represent material estimates which are subject to change during the measurement period.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and items with an original maturity of three months or less, including amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta.
Investment Securities
Investment securities were acquired at their fair values. Investments which may be sold prior to maturity are classified as available for sale and are reported at fair value. Investment securities where the Company has both the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the statement of assets acquired and liabilities assumed.
Accounting for Acquired Loans
NAFH NB accounts for its acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of the shared-loss 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.
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that NAFH NB will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. NAFH NB has generally aggregated the purchased loans into pools of loans with common risk characteristics. Refer to note 4 for further discussion of risk characteristics.
FDIC Indemnification Asset
As part of a purchase and assumption agreement with the FDIC, NAFH NB has entered into loss share agreements in which the FDIC will reimburse NAFH NB for certain amounts related to certain acquired
F-108
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
loans and other real estate owned should NAFH NB experience a loss, as a result, an indemnification asset has been recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and other assets, and measured on the same basis, subject to collectability or contractual limitations. The indemnification asset on the acquisition date reflects the present value of future cash flows expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are recorded at lesser of their recorded investment or fair value less costs to sell when acquired.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. The amount of goodwill recognized in a business combination results from the excess of the purchase consideration paid over the fair value of net assets acquired and specifically identified.
Intangible Assets
Intangible assets include a core deposit base premium arising from the acquisition and was measured at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Deferred Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
2. | FDIC-Assisted Purchase and Assumption of Assets and Liabilities of First National Bank of the South |
NAFH NB entered into a purchase and assumption agreement to acquire certain assets and assume certain liabilities of FNB from the FDIC as receiver on July 16, 2010 (the “Transaction Date”). As part of this agreement, the FDIC also granted NAFH NB an option to purchase at appraised value the premises, furniture, fixtures, and equipment of the acquired institution and assume the leases associated with these offices. NAFH NB acquired certain assets, assumed all of the deposits, and assumed certain other liabilities from the FDIC in a whole-bank acquisition for consideration paid of $94,479.
F-109
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
The acquisition was accounted for under the purchase method of accounting. Both the purchased assets and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, including goodwill, core deposit intangible assets and mortgage servicing rights, were recorded at fair value. As the fair value of consideration paid in the FNB acquisition exceeded the estimated fair value of net assets acquired, goodwill of $6,616 was recorded.
As part of the purchase and assumption agreement, certain loans and other real estate owned acquired in this acquisition are covered by loss share agreements between NAFH NB and the FDIC which afford NAFH NB significant protection against future losses. Under the agreements, the FDIC will cover 80% of losses on the disposition of loans and other real estate owned up to certain thresholds. The term for loss sharing on single-family residential real estate loans is ten years, while the term for loss sharing on nonresidential loans is five years and NAFH NB reimbursement to the FDIC for a total of eight years for recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loans as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the provisions of the loss share agreements. As part of the acquisition, NAFH NB has recorded an indemnification asset that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed. The value of the indemnification asset at the acquisition date is $71,386 (loss threshold is $123,000 and 80% of the loss threshold is $98,400).
The estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Transaction Date and NAFH NB believes that information provides a reasonable basis for estimating the fair values. However, NAFH NB may obtain additional information and evidence during the measurement period that may impact the estimated fair value amounts. NAFH NB expects to finalize the valuation and complete the purchase price allocation as soon as practicable.
3. | Investment Securities |
As of the acquisition date, the acquired security portfolio consisted of 20 security positions which were recorded at their estimated fair values. The amortized cost and estimated fair value of investment securities at the acquisition date are presented below:
Available for Sale | Estimated Fair Value | |||
States and political subdivisions—tax-exempt | $ | 2,798 | ||
States and political subdivisions—taxable | 7,239 | |||
Mortgage-backed securities—residential | 30,527 | |||
|
| |||
$ | 40,564 | |||
|
|
The estimated fair value of investment securities available for sale at the acquisition date, 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available for Sale | ||||
Due in one year or less | $ | – | ||
Due after one year through five years | – | |||
Due after five years through ten years | 1,427 | |||
Due after ten years | 8,610 | |||
Mortgage-backed securities | 30,527 | |||
|
| |||
$ | 40,564 | |||
|
|
At the acquisition date, no securities were subject to call during 2011.
F-110
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
4. | Loans |
The composition of loans acquired at July 16, 2010 is as follows:
Fair Value | ||||
Covered acquired loans: | ||||
Commercial real estate | $ | 241,247 | ||
Residential | 77,391 | |||
Commercial and agricultural loans | 19,738 | |||
Home equity loans | 47,160 | |||
Other consumer loans | 5 | |||
|
| |||
Total covered loans | 385,541 | |||
Non-covered acquired loans—consumer loans | 4,062 | |||
|
| |||
Total acquired loans | $ | 389,603 | ||
|
|
Covered loans represent loans acquired from the FDIC subject to the loss sharing agreements. Loans are further broken out into (i) loans acquired with evidence of credit impairment, which we call purchased credit impaired, and (ii) non-PCI loans.
Loans acquired are recorded at fair value in accordance with the fair value, exclusive of the shared-loss 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. At the time of acquisition, NAFH NB accounted for the impaired purchased loans by segregating each portfolio into loan pools with similar risk characteristics, which included:
• | Whether the loan was performing according to contractual terms at the time of acquisition; |
• | The loan type based on regulatory reporting guidelines, namely whether the loan was a mortgage, consumer, or commercial loan; and |
• | The nature of collateral. |
From these pools, NAFH NB used 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.
Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
Cash flows expected to be collected at acquisition | $ | 361,162 | ||
Accretable yield | (19,894 | ) | ||
|
| |||
Fair value of acquired loans at acquisition | $ | 341,268 | ||
|
|
The accretable yield represents the excess of estimated cash flows expected to be collected over the initial recorded investment in the PCI loans, which is their fair value at the time of acquisition by NAFH NB. 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; |
F-111
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
• | 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.
The total fair value of non-PCI loans acquired at July 16, 2010 was $48,335.
5. | Operating Leases |
NAFH NB is obligated under operating leases assumed for office and banking premises which expire in periods varying from one to twenty-two years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at July 16, 2010:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 541 | ||
2011 | 1,147 | |||
2012 | 1,007 | |||
2013 | 994 | |||
2014 | 994 | |||
Thereafter | 14,585 | |||
|
| |||
$ | 19,268 | |||
|
|
6. | Goodwill and Intangible Assets |
The acquisition of FNB resulted in tax deductible goodwill of $6,616.
Tax deductible intangible assets acquired consist of the following:
Gross Carrying Amount | ||||
Core deposit intangible due to acquisition of FNB | $ | 2,100 | ||
Mortgage servicing right due to acquisition of FNB | 114 | |||
|
| |||
Balance, July 16, 2010 | $ | 2,214 | ||
|
|
The identified intangible assets are amortized as noninterest expense over their estimated lives.
Estimated amortization expense for each of the next five years is as follows:
Years ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 254 | ||
2011 | 554 | |||
2012 | 554 | |||
2013 | 554 | |||
2014 | 298 | |||
|
| |||
$ | 2,214 | |||
|
|
F-112
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of First National Bank of the South
as of July 16, 2010
(dollars in thousands)
7. | Time Deposits |
Time deposits of $100 or more were $153,148 at the acquisition date.
At July 16, 2010, the scheduled maturities of time deposits are as follows:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 136,988 | ||
2011 | 136,254 | |||
2012 | 30,097 | |||
2013 | 18,444 | |||
2014 | 228 | |||
2015 and beyond | 559 | |||
|
| |||
$ | 322,570 | |||
|
|
8. | Short-Term Borrowings and Federal Home Loan Bank Advances |
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
NAFH NB also acquired securities sold under agreements to repurchase with commercial account holders whereby NAFH NB sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by NAFH NB.
Through the acquisition of FNB, NAFH NB assumed FHLB advances outstanding with a face value of $51,776 and a fair value of $54,655. The advances consist of the following:
Fair Value | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Rate at July 16, 2010 | ||||||||
$ 4,059 | $ | 4,052 | August 2010 | Fixed | 3.36% | |||||||
5,203 | 5,000 | June 2011(a) | Fixed | 4.95% | ||||||||
1,969 | 1,944 | September 2011 | Fixed | 2.99% | ||||||||
2,119 | 2,083 | September 2011 | Fixed | 3.58% | ||||||||
583 | 572 | October 2011 | Fixed | 3.91% | ||||||||
646 | 625 | April 2012 | Fixed | 4.70% | ||||||||
5,353 | 5,000 | May 2012(a) | Fixed | 4.59% | ||||||||
7,736 | 7,500 | March 2013 | Fixed | 2.29% | ||||||||
5,185 | 5,000 | May 2013(a) | Fixed | 2.27% | ||||||||
5,600 | 5,000 | May 2014(a) | Fixed | 4.60% | ||||||||
5,786 | 5,000 | June 2017(a) | Fixed | 4.58% | ||||||||
5,210 | 5,000 | July 2018(a) | Fixed | 2.14% | ||||||||
5,206 | 5,000 | July 2018(a) | Fixed | 2.12% | ||||||||
|
|
|
| |||||||||
$ | 54,655 | $ | 51,776 | |||||||||
|
|
|
|
(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, NAFH NB has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
F-113
Table of Contents
NAFH National Bank
(Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities
Assumed of Metro Bank of Dade County
as of July 16, 2010
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders of
North American Financial Holdings, Inc.
In our opinion, the accompanying statement of assets acquired and liabilities assumed of NAFH National Bank (subsidiary of North American Financial Holdings, Inc.) presents fairly, in all material respects, the assets acquired and liabilities assumed by NAFH National Bank of Metro Bank of Dade County as of July 16, 2010 in conformity with accounting principles generally accepted in the United States of America. This statement of assets acquired and liabilities assumed is the responsibility of the Company’s management; our responsibility is to express an opinion on this statement of assets acquired and liabilities assumed based on our audit. We conducted our audit of the statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets acquired and liabilities assumed, assessing the accounting principles used and significant estimates made by management, and evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
June 23, 2011
Ft. Lauderdale, Florida
F-115
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
Assets Acquired | ||||
Cash and due from banks | $ | 79,267 | ||
Investment securities—held to maturity | 250 | |||
Investment securities—available for sale | 30,083 | |||
Loans | 226,826 | |||
Other real estate owned | 7,547 | |||
Indemnification asset | 44,191 | |||
Intangible assets | 1,400 | |||
Other assets | 3,921 | |||
|
| |||
Total assets acquired | $ | 393,485 | ||
|
| |||
Liabilities Assumed | ||||
Deposits | ||||
Noninterest-bearing demand | $ | 73,271 | ||
Interest-bearing | 263,110 | |||
|
| |||
Total deposits | 336,381 | |||
|
| |||
Borrowings | 31,981 | |||
Accrued interest payable and other liabilities | 10,312 | |||
|
| |||
Total liabilities assumed | $ | 378,674 | ||
|
| |||
Net assets acquired | $ | 14,811 | ||
|
|
The accompanying notes are an integral part of these financial statements.
F-116
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
1. | Summary of Significant Accounting Policies |
North American Financial Holdings, Inc. (“NAFH” or the “Company”) is a bank holding company incorporated in Delaware and headquartered in Florida whose business is conducted primarily through our subsidiary, NAFH National Bank (“NAFH NB”).
On July 16, 2010, NAFH NB acquired the operations and certain assets and liabilities from the Federal Deposit Insurance Corporation (“FDIC”) as receiver of the former MetroBank of Dade County (“Metro”).
The accounting and reporting policies conform to accounting principles generally accepted in the United States of America. The following is a summary of the more significant of these policies.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change include the determination of fair value and goodwill and intangible assets. Changes in assumptions or in market conditions could significantly affect the fair value estimates. The measurement of assets acquired and liabilities assumed at their estimated fair values represent material estimates which are subject to change during the measurement period.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and items with an original maturity of three months or less, including amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta.
Investment Securities
Investment securities were acquired at their fair values. Investments which may be sold prior to maturity are classified as available for sale and reported at fair value. Investment securities where the Company has both the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the statement of assets acquired and liabilities assumed.
Accounting for Acquired Loans
NAFH NB accounts for its acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of the shared-loss 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.
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that NAFH NB will not
F-117
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. NAFH NB has generally aggregated the purchased loans into pools of loans with common risk characteristics. Refer to Note 4 for further discussion of risk characteristics.
FDIC Indemnification Asset
As part of a purchase and assumption agreement with the FDIC, NAFH NB has entered into a loss share agreement in which the FDIC will reimburse NAFH NB for certain amounts related to certain acquired loans and other real estate owned should NAFH NB experience a loss, as a result, an indemnification asset has been recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and other assets, and measured on the same basis, subject to collectability or contractual limitations. The indemnification asset on the acquisition date reflects the present value of future cash flows expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are recorded at the lesser of their recorded investment or fair value less costs to sell when acquired.
Intangible Assets
Intangible assets include a core deposit base premium arising from the acquisition and was measured at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Defered Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
F-118
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
2. | FDIC-Assisted Purchase and Assumption of Assets and Liabilities of MetroBank of Dade County |
NAFH NB entered into a purchase and assumption agreement to acquire certain assets and assume certain liabilities of Metro from the FDIC as receiver on July 16, 2010 (the “Transaction Date”). As part of this agreement, the FDIC also granted NAFH NB an option to purchase at appraised value the premises, furniture, fixtures, and equipment of the acquired institution and assume the leases associated with these offices. NAFH NB acquired certain assets, assumed all of the deposits, and assumed certain other liabilities from the FDIC in a whole-bank acquisition for consideration paid of $4,191.
The acquisition was accounted for under the purchase method of accounting. Both the purchased assets and liabilities assumed were recorded at their respective acquisition date fair values. An identifiable intangible asset, a core deposit intangible, was recorded at fair value. As the fair value of consideration paid in the Metro acquisition was less than the estimated fair value of net assets acquired, a gain on acquisition of $10,620 was recorded by NAFH NB on the acquisition date.
As part of the purchase and assumption agreement, certain loans and other real estate owned acquired in this acquisition are covered by loss share agreements between NAFH NB and the FDIC which afford NAFH NB significant protection against future losses. Under the agreements, the FDIC will cover 80% of losses on the disposition of loans and other real estate owned up to certain thresholds presented in the following table. The term for loss sharing on single-family residential real estate loans is ten years, while the term for loss sharing on nonresidential loans is five years and NAFH NB reimbursement to the FDIC for a total of eight years for recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loans as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the provisions of the loss share agreements. As part of the acquisition, NAFH NB has recorded an indemnification asset that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed. The value of the indemnification asset at the acquisition date is $44,191 (loss threshold is $81,000 and 80% of the loss threshold is $64,800).
The estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Transaction Date and NAFH NB believes that information provides a reasonable basis for estimating the fair values. However, NAFH NB may obtain additional information and evidence during the measurement period that may impact the estimated fair value amounts. NAFH NB expects to finalize the valuation and complete the purchase price allocation as soon as practicable.
3. | Investment Securities |
As of the acquisition date, the acquired security portfolio consisted of 18 security positions which were recorded at their estimated fair values. The amortized cost and estimated fair value of investment securities at the acquisition date are presented below:
Held to Maturity | Estimated Fair Value | |||
Foreign government | $ | 250 | ||
Available for Sale | Estimated Fair Value | |||
U.S. Government agencies and corporations | $ | 5,026 | ||
Mortgage-backed securities—residential | 25,057 | |||
|
| |||
$ | 30,083 | |||
|
|
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Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
The estimated fair value of investment securities available for sale at the acquisition date, 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Held to Maturity | Available for Sale | |||||||
Due in one year or less | $ | 250 | $ | 3,006 | ||||
Due after one year through five years | – | 2,020 | ||||||
Due after five years through ten years | – | – | ||||||
Due after ten years | – | – | ||||||
Mortgage-backed securities | – | 25,057 | ||||||
|
|
|
| |||||
$ | 250 | $ | 30,083 | |||||
|
|
|
|
At the acquisition date, there were no securities subject to call during 2011.
4. | Loans |
The composition of loans acquired at July 16, 2010 is as follows:
Fair Value | ||||
Covered acquired loans: | ||||
Commercial real estate | $ | 182,061 | ||
Residential | 7,168 | |||
Commercial and agricultural loans | 18,976 | |||
Home equity loans | 17,230 | |||
Other consumer loans | 160 | |||
|
| |||
Total covered loans | 225,595 | |||
Non-covered acquired loans | ||||
Commercial and agricultural loans | 98 | |||
Other consumer loans | 1,133 | |||
|
| |||
Total non-covered loans | 1,231 | |||
Total acquired loans | $ | 226,826 | ||
|
|
Covered loans represent loans acquired from the FDIC subject to the loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment, which we call purchased credit impaired, and (ii) non-PCI loans.
Loans acquired are recorded at fair value in accordance with the fair value, exclusive of the shared-loss 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. At the time of acquisition, NAFH NB accounted for the impaired purchased loans by segregating each portfolio into loan pools with similar risk characteristics, which included:
• | Whether the loan was performing according to contractual terms at the time of acquisition; |
• | The loan type based on regulatory reporting guidelines, namely whether the loan was a mortgage, consumer, or commercial loan; and |
• | The nature of collateral. |
F-120
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
From these pools, NAFH NB used 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.
Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
Cash flows expected to be collected at acquisition | $ | 227,871 | ||
Accretable yield | (13,345 | ) | ||
|
| |||
Fair value of acquired loans at acquisition | $ | 214,526 | ||
|
|
The accretable yield represents the excess of estimated cash flows expected to be collected over the initial recorded investment in the PCI loans, which is their fair value at the time of acquisition by NAFH NB. 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.
The total fair value of non-PCI loans acquired at July 16, 2010 was $12,300.
5. | Operating Leases |
NAFH NB is obligated under operating leases assumed for office and banking premises which expire in periods varying from two to four years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at July 16, 2010:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 471 | ||
2011 | 1,027 | |||
2012 | 529 | |||
2013 | 435 | |||
2014 | 405 | |||
Thereafter | – | |||
|
| |||
$ | 2,867 | |||
|
|
F-121
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
6. | Intangible Assets |
Tax deductible intangible assets acquired consist of the following at July 16, 2010:
Gross Carrying Amount | ||||
Core deposit intangible due to acquisition of Metro | $ | 1,400 | ||
|
|
The identified intangible assets are amortized as noninterest expense over their estimated lives.
Estimated amortization expense for each of the next five years is as follows:
Years ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 160 | ||
2011 | 350 | |||
2012 | 350 | |||
2013 | 350 | |||
2014 | 190 | |||
|
| |||
$ | 1,400 | |||
|
|
7. | Time Deposits |
Time deposits of $100 or more were $55,249 at the acquisition date.
At July 16, 2010, the scheduled maturities of time deposits are as follows:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 133,519 | ||
2011 | 98,911 | |||
2012 | 50 | |||
2013 | – | |||
2014 | – | |||
2015 | – | |||
|
| |||
$ | 232,480 | |||
|
|
8. | Short-Term Borrowings and Federal Home Loan Bank Advances |
Short-term borrowings include securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
NAFH NB also acquired securities sold under agreements to repurchase with commercial account holders whereby NAFH NB sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by NAFH NB.
NAFH NB also assumed an agreement with another financial institution in which securities had been sold which would be repurchased at a future date. The interest rates on these repurchase agreements are fixed for the remaining term of the agreement. The outstanding fair value amount at July 16, 2010 was $10,188. As of July 16, 2010, $11,856 of securities of the United States Government or its agencies were pledged to collateralize these borrowings.
F-122
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Metro Bank of Dade County
as of July 16, 2010
(dollars in thousands)
Through the acquisition of Metro, NAFH NB assumed FHLB advances outstanding with a face value of $21,000 and a fair value of $21,012. The advances consist of the following:
Fair Value | Contractual Amount | Maturity Date | Repricing Frequency | Rate at July 16, 2010 | ||||
$ 5,004 | $ 5,000 | September 2010 | Fixed | 0.69% | ||||
6,005 | 6,000 | December 2010 | Fixed | 0.68% | ||||
5,003 | 5,000 | February 2011 | Fixed | 0.51% | ||||
5,000 | 5,000 | June 2011 | Daily | 0.49% | ||||
|
| |||||||
$ 21,012 | $ 21,000 | |||||||
|
|
F-123
Table of Contents
NAFH National Bank
(Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities
Assumed of Turnberry Bank as of July 16, 2010
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders of
North American Financial Holdings, Inc.
In our opinion, the accompanying statement of assets acquired and liabilities assumed of NAFH National Bank (subsidiary of North American Financial Holdings, Inc.) presents fairly, in all material respects, the assets acquired and liabilities assumed by NAFH National Bank of Turnberry Bank as of July 16, 2010 in conformity with accounting principles generally accepted in the United States of America. This statement of assets acquired and liabilities assumed is the responsibility of the Company’s management; our responsibility is to express an opinion on this statement of assets acquired and liabilities assumed based on our audit. We conducted our audit of the statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets acquired and liabilities assumed, assessing the accounting principles used and significant estimates made by management, and evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
June 23, 2011
Ft. Lauderdale, Florida
F-125
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
Assets Acquired | ||||
Cash and due from banks | $ | 40,353 | ||
Investment securities available for sale | 3,495 | |||
Loans | 152,125 | |||
Other real estate owned | 5,439 | |||
Indemnification asset | 21,739 | |||
Intangible assets | 600 | |||
Other assets | 4,392 | |||
|
| |||
Total assets acquired | $ | 228,143 | ||
|
| |||
Liabilities Assumed | ||||
Deposits | ||||
Noninterest-bearing demand | $ | 14,192 | ||
Interest-bearing | 161,209 | |||
|
| |||
Total deposits | 175,401 | |||
|
| |||
Borrowings | 59,024 | |||
Accrued interest payable and other liabilities | 6,089 | |||
|
| |||
Total liabilities assumed | $ | 240,514 | ||
|
| |||
Net liabilities assumed | $ | (12,371 | ) | |
|
|
The accompanying notes are an integral part of these financial statements.
F-126
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
1. | Summary of Significant Accounting Policies |
North American Financial Holdings, Inc. (“NAFH” or the “Company”) is a bank holding company incorporated in Delaware and headquartered in Florida whose business is conducted primarily through our subsidiary, NAFH National Bank (“NAFH NB”).
On July 16, 2010, NAFH NB acquired the operations and certain assets and liabilities from the Federal Deposit Insurance Corporation (“FDIC”) as receiver of the former Turnberry Bank (“Turnberry”).
The accounting and reporting policies conform to accounting principles generally accepted in the United States of America. The following is a summary of the more significant of these policies.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change include the determination of fair value and goodwill and intangible assets. Changes in assumptions or in market conditions could significantly affect the fair value estimates. The measurement of assets acquired and liabilities assumed at their estimated fair values represent material estimates which are subject to change during the measurement period.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and items with an original maturity of three months or less, including amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta.
Investment Securities
Investment securities were acquired at their fair values. Investments which may be sold prior to maturity are classified as available for sale and reported at fair value. Investment securities where NAFH NB has both the intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the statement of assets acquired and liabilities assumed.
Accounting for Acquired Loans
NAFH NB accounts for its acquisitions using the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of the shared-loss 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.
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that NAFH NB will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for
F-127
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
purchased credit-impaired (“PCI”) loans. NAFH NB has generally aggregated the purchased loans into pools of loans with common risk characteristics. Refer to Note 4 for further discussion of risk characteristics.
FDIC Indemnification Asset
As part of a purchase and assumption agreement with the FDIC, NAFH NB has entered into a loss share agreement in which the FDIC will reimburse NAFH NB for certain amounts related to certain acquired loans and other real estate owned should NAFH NB experience a loss, as a result, an indemnification asset has been recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and other assets, and measured on the same basis, subject to collectability or contractual limitations. The indemnification asset on the acquisition date reflects the present value of future cash flows expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are recorded at the lesser of their recorded investment or fair value less costs to sell when acquired.
Intangible Assets
Intangible assets include a core deposit base premium arising from the acquisition and was measured at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Deferred Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
F-128
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
2. | FDIC-Assisted Purchase and Assumption of Assets and Liabilities of Turnberry Bank |
NAFH NB entered into a purchase and assumption agreement to acquire certain assets and assume certain liabilities of Turnberry from the FDIC as receiver on July 16, 2010 (the “Transaction Date”). As part of this agreement, the FDIC also granted NAFH NB an option to purchase at appraised value the premises, furniture, fixtures, and equipment of the acquired institution and assume the leases associated with these offices. NAFH NB acquired certain assets, assumed all of the deposits, and assumed certain other liabilities from the FDIC in a whole-bank acquisition. Net cash consideration received from the FDIC in connection with the acquisition was $16,926.
The acquisition was accounted for under the purchase method of accounting. Both the purchased assets and liabilities assumed were recorded at their respective acquisition date fair values. An Identifiable intangible asset, a core deposit intangible, was recorded at fair value. As the fair value of consideration received in the Turnberry acquisition was greater than the estimated fair value of net liabilities assumed, a gain on acquisition of $4,555 was recorded by NAFH NB on the acquisition date.
As part of the purchase and assumption agreement, certain loans and other real estate owned acquired in this acquisition are covered by loss share agreements between NAFH NB and the FDIC which afford NAFH NB significant protection against future losses. Under the agreements, the FDIC will cover 80% of losses on the disposition of loans and other real estate owned up to certain thresholds presented in the following table. The term for loss sharing on single-family residential real estate loans is ten years, while the term for loss sharing on nonresidential loans is five years and NAFH NB reimbursement to the FDIC for a total of eight years for recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loans as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the provisions of the loss share agreements. As part of the acquisition, NAFH NB has recorded an indemnification asset that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed. The value of the indemnification asset at the acquisition date is $21,739 (loss threshold is $28,000 and 80% of the loss threshold is $22,400).
The estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Transaction Date and NAFH NB believes that information provides a reasonable basis for estimating the fair values. However, NAFH NB may obtain additional information and evidence during the measurement period that may impact the estimated fair value amounts. NAFH NB expects to finalize the valuation and complete the purchase price allocation as soon as practicable.
3. | Investment Securities |
As of the acquisition date, the acquired security portfolio consisted of 8 security positions which were recorded at their estimated fair values. The amortized cost and estimated fair value of investment securities at the acquisition date are presented below:
Available for Sale | Estimated Fair Value | |||
U.S. Government agencies and corporations | $ | 2,015 | ||
Collateralized Mortgage Obligations | 1,480 | |||
|
| |||
$ | 3,495 | |||
|
|
F-129
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
The estimated fair value of investment securities available for sale at the acquisition date, 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available for Sale | ||||
Due in one year or less | $ | – | ||
Due after one year through five years | 206 | |||
Due after five years through ten years | 1,288 | |||
Due after ten years | 2,001 | |||
|
| |||
$ | 3,495 | |||
|
|
At the acquisition date, securities with a fair value of approximately $2,014 are subject to call during 2011.
4. | Loans |
The composition of loans acquired at July 16, 2010 is as follows:
Fair Value | ||||
Covered acquired loans: | ||||
Commercial real estate | $ | 45,412 | ||
Residential | 85,905 | |||
Commercial and agricultural loans | 299 | |||
Home equity loans | 19,490 | |||
Other consumer loans | – | |||
|
| |||
Total covered loans | $ | 151,106 | ||
Non-covered acquired loans—consumer loans | 1,019 | |||
|
| |||
Total acquired loans | $ | 152,125 | ||
|
|
Covered loans represent loans acquired from the FDIC subject to the loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment, which we call purchased credit impaired, and (ii) non-PCI loans.
Loans acquired are recorded at fair value in accordance with the fair value, exclusive of the shared-loss 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. At the time of acquisition, NAFH NB accounted for the impaired purchased loans by segregating each portfolio into loan pools with similar risk characteristics, which included:
• | Whether the loan was performing according to contractual terms at the time of acquisition; |
• | The loan type based on regulatory reporting guidelines, namely whether the loan was a mortgage, consumer, or commercial loan; and |
• | The nature of collateral. |
F-130
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
From these pools, NAFH NB used 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.
Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
Cash flows expected to be collected at acquisition | $ | 148,572 | ||
Accretable yield | (13,331 | ) | ||
|
| |||
Fair value of acquired loans at acquisition | $ | 135,241 | ||
|
|
The accretable yield represents the excess of estimated cash flows expected to be collected over the initial recorded investment in the PCI loans, which is their fair value at the time of acquisition by NAFH NB. 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.
The total fair value of non-PCI loans acquired at July 16, 2010 was $16,884.
5. | Operating Leases |
NAFH NB is obligated under operating leases assumed for office and banking premises which expire in periods varying from 10 months to one year. Future minimum lease payments, before considering renewal options that generally are present, are as follows at July 16, 2010:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 84 | ||
2011 | 97 | |||
2012 | – | |||
2013 | – | |||
2014 | – | |||
Thereafter | – | |||
|
| |||
$ | 181 | |||
|
|
F-131
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
6. | Intangible Assets |
Tax deductible intangible assets acquired consist of the following at July 16, 2010:
Gross Carrying Amount | ||||
Core deposit intangible due to acquisition of Turnberry | $ | 600 | ||
|
|
The identified intangible assets are amortized as noninterest expense over their estimated lives.
Estimated amortization expense for each of the next five years is as follows:
Years ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 69 | ||
2011 | 150 | |||
2012 | 150 | |||
2013 | 150 | |||
2014 | 81 | |||
|
| |||
$ | 600 | |||
|
|
7. | Time Deposits |
Time deposits of $100 or more were $97,082 at the acquisition date.
At July 16, 2010, the scheduled maturities of time deposits are as follows:
Years Ending December 31, | ||||
2010 (Period from July 16, 2010 through December 31, 2010) | $ | 64,772 | ||
2011 | 46,150 | |||
2012 | 10,065 | |||
2013 | 2,036 | |||
2014 | 2,132 | |||
2015 and beyond | 1,006 | |||
|
| |||
$ | 126,161 | |||
|
|
8. | Short-Term Borrowings and Federal Home Loan Bank Advances |
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
NAFH NB also acquired securities sold under agreements to repurchase with commercial account holders whereby NAFH NB sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by NAFH NB.
F-132
Table of Contents
NAFH National Bank (Subsidiary of North American Financial Holdings, Inc.)
Notes to Statement of Assets Acquired and Liabilities Assumed of Turnberry Bank
as of July 16, 2010
(dollars in thousands)
Through the acquisition of Turnberry, NAFH NB assumed FHLB advances outstanding with a face value of $55,000 and a fair value of $59,017. The advances consist of the following:
Fair Value | Contractual Outstanding Amount | Maturity Date | Repricing Frequency | Rate at July 16, 2010 | ||||||||||||
$ | 3,034 | $ | 3,000 | March 2011 | Fixed | 2.12 | % | |||||||||
3,028 | 3,000 | May 2011 | Fixed | 1.65 | % | |||||||||||
5,212 | 5,000 | June 2011(a) | Fixed | 5.04 | % | |||||||||||
5,107 | 5,000 | July 2011(a) | Fixed | 2.81 | % | |||||||||||
5,292 | 5,000 | January 2012(a) | Fixed | 4.56 | % | |||||||||||
4,372 | 4,000 | March 2013(a) | Fixed | 4.58 | % | |||||||||||
5,625 | 5,000 | June 2014(a) | Fixed | 4.67 | % | |||||||||||
5,239 | 5,000 | February 2015(a) | Fixed | 2.83 | % | |||||||||||
5,431 | 5,000 | June 2015(a) | Fixed | 3.71 | % | |||||||||||
5,469 | 5,000 | July 2015(a) | Fixed | 3.57 | % | |||||||||||
5,558 | 5,000 | November 2017(a) | Fixed | 3.93 | % | |||||||||||
5,650 | 5,000 | July 2018(a) | Fixed | 3.94 | % | |||||||||||
|
|
|
| |||||||||||||
$ | 59,017 | $ | 55,000 | |||||||||||||
|
|
|
|
(a) | These advances have quarterly conversion dates. If the FHLB chooses to convert the advance, NAFH NB has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
F-133
Table of Contents
TIB Financial Corp.
Unaudited Consolidated Financial Statements as of and for the
Three and Six Months Ended June 30, 2012
Table of Contents
TIB FINANCIAL CORP.
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
(Dollars and shares in thousands, except per share data) | June 30, 2012 | December 31, 2011 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 621 | $ | 1,159 | ||||
Interest-bearing deposits with banks | 651 | 1,062 | ||||||
Cash and cash equivalents | 1,272 | 2,221 | ||||||
Intangible assets, net | 219 | 235 | ||||||
Accrued interest receivable and other assets | 1,619 | 1,324 | ||||||
Equity method investment in Capital Bank, NA | 206,536 | 200,812 | ||||||
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Total assets | $ | 209,646 | $ | 204,592 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Long-term borrowings | $ | 23,324 | $ | 23,176 | ||||
Deferred income tax liability | 3,589 | 3,641 | ||||||
Other liabilities | 721 | 428 | ||||||
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Total liabilities | 27,634 | 27,245 | ||||||
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Shareholders’ Equity | ||||||||
Preferred stock—$.10 par value: 5,000 shares authorized, 0 shares issued and outstanding | – | – | ||||||
Common stock—$.10 par value: 50,000 shares authorized, 12,350 shares issued and outstanding, respectively | 1,235 | 1,235 | ||||||
Additional paid in capital | 170,770 | 170,770 | ||||||
Retained earnings | 7,266 | 3,360 | ||||||
Accumulated other comprehensive income | 2,741 | 1,982 | ||||||
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Total shareholders’ equity | 182,012 | 177,347 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 209,646 | $ | 204,592 | ||||
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See accompanying notes to consolidated financial statements
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TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||||||||
Interest and dividend income | ||||||||||||||||
Loans, including fees | $ | – | $ | 4,347 | $ | – | $ | 17,745 | ||||||||
Investment securities: | ||||||||||||||||
Taxable | – | 902 | – | 3,238 | ||||||||||||
Tax-exempt | – | 4 | – | 19 | ||||||||||||
Interest-bearing deposits in other banks | 1 | 31 | 3 | 101 | ||||||||||||
Federal Home Loan Bank stock | – | 6 | – | 31 | ||||||||||||
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Total interest and dividend income | 1 | 5,290 | 3 | 21,134 | ||||||||||||
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Interest expense | ||||||||||||||||
Deposits | – | 822 | – | 3,276 | ||||||||||||
Federal Home Loan Bank advances | – | 64 | – | 301 | ||||||||||||
Short-term borrowings | – | 4 | – | 19 | ||||||||||||
Long-term borrowings | 440 | 466 | 902 | 922 | ||||||||||||
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Total interest expense | 440 | 1,356 | 902 | 4,518 | ||||||||||||
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Net interest income (loss) | (439 | ) | 3,934 | (899 | ) | 16,616 | ||||||||||
Provision for loan losses | – | 136 | – | 621 | ||||||||||||
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Net interest income (loss) after provision for loan losses | (439 | ) | 3,798 | (899 | ) | 15,995 | ||||||||||
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Non-interest income | ||||||||||||||||
Equity in income from investment in Capital Bank, NA | 2,420 | 658 | 4,965 | 658 | ||||||||||||
Investment advisory and trust fees | 85 | 379 | 216 | 766 | ||||||||||||
Service charges on deposit accounts | – | 257 | – | 1,070 | ||||||||||||
Fees on mortgage loans originated and sold | – | 144 | – | 498 | ||||||||||||
Other income | – | 464 | – | 1,669 | ||||||||||||
Investment securities gains, net | – | – | – | 12 | ||||||||||||
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Total non-interest income | 2,505 | 1,902 | 5,181 | 4,673 | ||||||||||||
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Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 103 | 2,250 | 209 | 8,751 | ||||||||||||
Net occupancy and equipment expense | 3 | 692 | 9 | 2,740 | ||||||||||||
Foreclosed asset related expense | – | 43 | – | 565 | ||||||||||||
Other expense | 428 | 1,614 | 776 | 5,868 | ||||||||||||
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Total non-interest expense | 534 | 4,599 | 994 | 17,924 | ||||||||||||
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Income before income taxes | 1,532 | 1,101 | 3,288 | 2,744 | ||||||||||||
Income tax expense (benefit) | (369 | ) | 141 | (618 | ) | 716 | ||||||||||
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Net income | $ | 1,901 | $ | 960 | $ | 3,906 | $ | 2,028 | ||||||||
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Basic net income per common share | $ | 0.15 | $ | 0.08 | $ | 0.32 | $ | 0.17 | ||||||||
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Diluted net income per common share | $ | 0.15 | $ | 0.07 | $ | 0.32 | $ | 0.14 | ||||||||
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See accompanying notes to consolidated financial statements
F-136
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TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts) | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | ||||||||||||
Net income | $ | 1,901 | $ | 960 | $ | 3,906 | $ | 2,028 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized holding gains on available for sale securities | – | 2,263 | – | 4,498 | ||||||||||||
Reclassification adjustments for losses recognized in income | – | – | – | (11 | ) | |||||||||||
Unrealized holding gains from investment in Capital Bank, NA, | 2,075 | 2,100 | 1,235 | 2,100 | ||||||||||||
Net unrealized holding gains on available for sale securities | 2,075 | 4,363 | 1,235 | 6,587 | ||||||||||||
Tax effect | 800 | 1,642 | 476 | 2,479 | ||||||||||||
Other comprehensive income, net of tax | 1,275 | 2,721 | 759 | 4,108 | ||||||||||||
Comprehensive income | $ | 3,176 | $ | 3,681 | $ | 4,665 | $ | 6,136 |
See accompanying notes to consolidated financial statements
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Table of Contents
TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,906 | $ | 2,028 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Equity in income from investment in Capital Bank, NA | (4,965 | ) | (658 | ) | ||||
Accretion of acquired loans | – | (17,059 | ) | |||||
Depreciation and amortization | 164 | 337 | ||||||
Provision for loan losses | – | 621 | ||||||
Deferred income tax expense | (52 | ) | 287 | |||||
Investment securities net realized gains | – | (12 | ) | |||||
Net amortization of investment premium/discount | – | 1,967 | ||||||
Loss on sales of OREO | – | (121 | ) | |||||
Other | – | (656 | ) | |||||
Mortgage loans originated for sale | – | (17,154 | ) | |||||
Proceeds from sales of mortgage loans originated for sale | – | 24,854 | ||||||
Fees on mortgage loans sold | – | (498 | ) | |||||
Change in accrued interest receivable and other assets | (295 | ) | (2,641 | ) | ||||
Change in accrued interest payable and other liabilities | 293 | 5,063 | ||||||
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Net cash used in operating activities | (949 | ) | (3,642 | ) | ||||
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Cash flows from investing activities: | ||||||||
Net change in cash due to merger of TIB Bank with and into Capital Bank, NA | – | (103,654 | ) | |||||
Investment in Capital Bank, NA | – | (5,241 | ) | |||||
Purchases of investment securities available for sale | – | (15,474 | ) | |||||
Sales of investment securities available for sale | – | 2,319 | ||||||
Repayments of principal and maturities of investment securities available for sale | – | 43,101 | ||||||
Sales of FHLB Stock | – | 244 | ||||||
Principal repayments on loans, net of loans originated or acquired | – | (7,069 | ) | |||||
Purchases of premises and equipment | – | (405 | ) | |||||
Proceeds from sale of OREO | – | 8,844 | ||||||
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Net cash provided by investing activities | – | (77,335 | ) | |||||
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Cash flows from financing activities: | ||||||||
Net increase in demand, money market and savings accounts | – | 78,957 | ||||||
Net decrease in time deposits | – | (138,414 | ) | |||||
Net decrease in federal funds purchased and securities sold under agreements to repurchase | – | (4,979 | ) | |||||
Repayment of long term FHLB advances | – | (10,000 | ) | |||||
Net proceeds from common stock rights offering | – | 7,764 | ||||||
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Net cash used in financing activities | – | (66,672 | ) | |||||
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Net decrease in cash and cash equivalents | (949 | ) | (147,649 | ) | ||||
Cash and cash equivalents at beginning of period | 2,221 | 153,794 | ||||||
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Cash and cash equivalents at end of period | $ | 1,272 | $ | 6,145 | ||||
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Supplemental disclosures of cash paid: | ||||||||
Interest | $ | 322 | $ | 5,304 | ||||
Supplemental information: | ||||||||
Transfer of loans to OREO | $ | – | $ | 4,752 | ||||
Transfer of non-cash assets to Capital Bank, N.A. | – | 1,390,516 | ||||||
Transfer of non-cash liabilities to Capital Bank, N.A. | – | 1,473,981 | ||||||
Acquisitions of Equity Method investment in Capital Bank, N.A. | – | 190,200 |
See accompanying notes to consolidated financial statements
F-138
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Note 1—Basis of Presentation & Accounting Policies
TIB Financial Corp. (the “Company”) is a bank holding company headquartered in Naples, Florida. Prior to April 29, 2011, TIB Financial Corp. conducted its business primarily through its wholly-owned subsidiaries, TIB Bank (together with its successor entities following the Bank Merger (as defined below), the “Bank”) and Naples Capital Advisors, Inc. As described in additional detail in Note 2, on April 29, 2011 (the “Merger Date”), the Bank merged (the “Bank Merger”) with and into NAFH National Bank (“NAFH Bank”), a subsidiary of our majority shareholder, Capital Bank Financial Corp. (formerly known as North American Financial Holdings, Inc.); (“CBF”), in an all-stock transaction, with NAFH Bank as the surviving entity. On June 30, 2011, NAFH Bank merged with Capital Bank, a wholly-owned subsidiary of Capital Bank Corporation, a controlled subsidiary of our majority shareholder, with NAFH Bank as the surviving entity (the “Capital Bank Merger”). On June 30, 2011, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, NA”). Subsequently, GreenBank, a previously wholly-owned subsidiary of Green Bankshares, Inc. (“Green”), merged with and into Capital Bank, NA when Green became a controlled subsidiary of CBF on September 7, 2011. Collectively the subsidiary bank mergers discussed above are referred to herein as the “Subsidiary Bank Mergers”.
Subsequent to the Subsidiary Bank Mergers, the Company holds an approximately 21% ownership interest in Capital Bank, NA which is recorded as an equity-method investment in that entity. As of June 30, 2012, the Company’s investment in Capital Bank, NA totaled $206,536, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company has and will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income. In connection with the Bank Merger, assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and total liabilities of the Company in the second quarter of 2011. Accordingly, as of June 30, 2012 and December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet. Subsequent to the Merger Date, the Company’s significant assets and liabilities included in the Consolidated Balance Sheet are comprised of the company’s wholly-owned registered investment advisor, along with the Company’s equity method investment in Capital Bank, NA, current and deferred income tax accounts and trust preferred securities. The Company’s operating results subsequent to the Merger Date include the Company’s proportional share of the equity method earnings of Capital Bank, NA and interest income and interest expense resulting from cash deposited in Capital Bank, NA and the outstanding trust preferred securities issued by the Company, respectively and investment advisory fees earned from the Company’s wholly owned subsidiary Naples Capital Advisories, Inc. (“NCA”). Unless otherwise specified, this report describes TIB Financial Corp., NCA and its subsidiaries including TIB Bank through the Merger Date.
As used in this document, the terms “we,” “us,” “our,” “TIB Financial,” and “Company” mean TIB Financial Corp. and its subsidiaries (unless the context indicates another meaning) and the term “Bank” means TIB Bank, and, after the Bank Merger, its successor entities.
Capital Bank Financial Corp. Investment
On September 30, 2010, (the “Transaction Date”) the Company completed the issuance and sale to CBF of 7,000 shares of common stock, 70 shares of Series B Preferred Stock and a warrant (the “Warrant”) to purchase up to 11,667 shares of Common Stock of the Company (the “Warrant Shares”) for aggregate consideration of $175,000 (the “Investment”). The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of a contribution to the Company of all 37 outstanding shares of Series A Preferred Stock previously issued to the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock, which CBF
F-139
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 30, 2010 and are no longer outstanding. The 70 shares of Series B Preferred Stock received by CBF converted into an aggregate of 4,667 shares of common stock following shareholder approval of an amendment to increase the number of authorized shares of common stock to 50,000. The Warrant was exercisable, in whole or in part, and from time to time, from September 30, 2010 to March 30, 2012, at an exercise price of $15.00 per Warrant Share. On March 31, 2012, the Warrant expired unexercised.
As a result of the Investment, pursuant to which CBF acquired approximately 97% (which has subsequently been reduced to approximately 94% as a result of the Rights Offering described below) of the voting securities of the Company, the Company followed the acquisition method of accounting as required by the Business Combinations Topic of the FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the accounting guidance the application of “push down” accounting was required.
In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, acquisition accounting also requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the elimination of any accumulated other comprehensive income or loss and surplus within the Company’s Shareholders’ Equity section of the Company’s Consolidated Financial Statements. Accordingly, retained earnings and accumulated other comprehensive income at June 30, 2012 and December 31, 2011 represent only the results of operations subsequent to September 30, 2010, the date of the CBF Investment.
Critical Accounting Policies
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 footnotes required by U.S. GAAP for complete financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information and an additional description of the Company’s accounting policies, refer to the Company’s consolidated financial statements for the year ended December 31, 2011.
The accounting and reporting policies conform to U.S. GAAP. The following is a summary of the more significant of these policies.
Earnings Per Common Share
Basic earnings per share is net income allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Earnings per share have been computed based on the following for the periods ended:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 12,350 | 12,350 | 12,350 | 12,055 | ||||||||||||
Dilutive effect of options outstanding | – | – | – | – | ||||||||||||
Dilutive effect of restricted shares | – | – | – | – | ||||||||||||
Dilutive effect of warrants outstanding | – | 1,080 | – | 1,993 | ||||||||||||
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Diluted | 12,350 | 13,430 | 12,350 | 14,048 | ||||||||||||
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The dilutive effect of stock options and warrants and the dilutive effect of 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 warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||
Anti-dilutive stock options | 2 | 6 | 2 | 7 | ||||||||||||
Anti-dilutive restricted stock awards | – | – | – | – | ||||||||||||
Anti-dilutive warrants | – | – | 5,769 | 5 |
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company is included in CBF’s consolidated Federal and Florida income tax return.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Stands Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
Also in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Stands Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 did not have an impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity’s valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-02, Receivables. The new guidance amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of ASU 2011-02 did not have a material impact on the Company’s consolidated financial condition or results of operations.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend ASC Topic 310, Receivables . The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
Note 2—Equity Method Investment in Capital Bank, NA
On April 29, 2011, the Company’s primary operating subsidiary, TIB Bank, was merged with and into NAFH Bank, an affiliate institution which had been wholly-owned by the Company’s controlling shareholder, CBF, preceding the Bank Merger. Pursuant to the merger agreement dated April 27, 2011, between NAFH Bank and the Bank, the Company exchanged its 100% ownership interest in TIB Bank for an approximately 53% ownership interest in the surviving combined entity, NAFH Bank (which subsequently changed its name to Capital Bank National Association). CBF is deemed to control Capital Bank, NA due to CBF’s 94% ownership interest in the Company and CBF’s direct ownership of the remaining 47% interest in Capital Bank, NA subsequent to the Bank Merger. Accordingly, subsequent to April 29, 2011, the Company began to account for its ownership in Capital Bank, NA under the equity method of accounting and the assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet. The deconsolidation resulted in a significant decrease in the total assets and total liabilities of the Company in the second quarter of 2011. Additionally, at the
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
time of the Bank Merger, due to the de-consolidation of the Bank, the balance of accumulated other comprehensive income was reclassified as additional paid in capital. Accordingly, as of June 30, 2012, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet and subsequent to the Merger Date, interest income and interest expense are the result of cash deposited in Capital Bank, NA and the outstanding trust preferred securities issued by the Company, respectively.
On June 30, 2011, Capital Bank, a wholly-owned subsidiary of Capital Bank Corporation, an affiliated bank holding company in which CBF has an 83% ownership interest, was merged with and into Capital Bank, NA, with Capital Bank, NA as the surviving entity. Subsequently and as a result of that transaction, the Company’s ownership interest in Capital Bank, NA was reduced to 33%.
Subsequent to the mergers on June 30, 2011, CBF, the Company and Capital Bank Corporation made contributions of additional capital to Capital Bank, NA of $4,695, $5,241 and $6,063, respectively, in proportion to their respective ownership interests in Capital Bank NA. The contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.
On September 7, 2011, GreenBank, a wholly-owned subsidiary of Green Bankshares Inc., an affiliated bank holding company in which CBF has a 90% ownership interest, was merged with and into Capital Bank, NA., with Capital Bank, NA as the surviving entity. On September 30, 2011, Capital Bank Corporation made a contribution of additional capital to Capital Bank, NA of $10,000. Subsequently and as a result of these transactions, the Company’s ownership interest in Capital Bank, NA was reduced to 21%.
The mergers of the Bank, Capital Bank and GreenBank into Capital Bank, NA were restructuring transactions between commonly-controlled entities. The difference between the amount of the Company’s initial equity method investment in NAFH Bank, subsequent to the Bank Merger, and the Company’s investment in the Bank, immediately preceding the Bank Merger, was accounted for as a reduction in additional paid in capital. The amount of the equity method investment in NAFH Bank on April 29, 2011, immediately subsequent to the Bank Merger, was equal to approximately 53% of the total shareholders’ equity of NAFH Bank post-merger (the combined entity). Additionally, at the time of the Bank Merger, due to the de-consolidation of the Bank, the balance of accumulated other comprehensive income was reclassified as additional paid in capital. As the Company began to account for its investment in the combined entity under the equity method subsequent to April 29, 2011, the Company’s proportional share of earnings of $2,420 and $4,965, respectively, was recorded in “Equity in income from investment in Capital Bank, NA.” in the Company’s Consolidated Statements of Income for the three and six months ended June 30, 2012, the related other comprehensive income net of tax was $1,275 and $759, respectively.
At June 30, 2012, the Company’s net investment of $206,536 in Capital Bank, NA, was recorded in the Consolidated Balance Sheet as “Equity method investment in Capital Bank NA.”
The initial estimated fair values of assets and liabilities acquired were based upon information that was available at the time to make preliminary estimates of fair value. The Company expected to obtain additional information during the measurement period which could result in changes to the estimated fair value amounts. The Company is still within the measurement period and has not yet finalized its estimates of fair value. However, as required by the acquisition method of accounting, the Company has retrospectively adjusted certain preliminary estimates to reflect refinements of estimates of fair values and new information obtained about facts and circumstances that existed as of the acquisition date. As a result of the Bank Merger, such changes are principally reflected in the accompanying financial statements as changes in the Company’s equity method investment in Capital Bank, NA. The most significant refinements include: (1) increases in the collectability of
F-144
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
certain legacy bank fully charged-off loan balances and fees; (2) an increase in the estimated fair value of the core deposit intangible asset; (3) an increase in deferred tax assets related to the other fair value estimate changes offset by a reduction of expected realization of items considered to be built in losses; and (4) an increase in Goodwill caused by the net effect of these adjustments. Accordingly, the financial statements herein reflect an decrease of $31 in the Company’s investment in Capital Bank, NA and addition paid in capital for the reported period and as of December 31, 2011.
The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA. Prior to April 29, 2011 there was no equity method investment:
Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 | Period From April 29, 2011 Through June 30, 2011 | ||||||||||
Interest income | $ | 72,893 | $ | 147,025 | $ | 20,710 | ||||||
Interest expense | 8,000 | 16,725 | 3,280 | |||||||||
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|
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| |||||||
Net interest income | 64,893 | 130,300 | 17,430 | |||||||||
Provision for loan losses | 6,608 | 11,984 | 6,496 | |||||||||
Non-interest income | 12,298 | 26,912 | 4,465 | |||||||||
Non-interest expense | 52,799 | 108,017 | 13,388 | |||||||||
Net income | 11,326 | 23,234 | 1,248 |
Note 3—Capital Adequacy
The Company (on a consolidated basis) is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial position and results of operations. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
F-145
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Capital Adequacy and Ratios
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At June 30, 2012 the Company maintained capital ratios exceeding the requirement to be considered adequately capitalized. These minimum amounts and ratios along with the actual amounts and ratios for the Company as of June 30, 2012 and December 31, 2011 are presented in the following tables.
Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | ||||||||||||||||||||||
June 30, 2012 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$ 8,330 | ³ | 4.0 | % | $ | 208,262 | 97.2 | % | ||||||||||||||
Tier 1 Capital ( to Risk Weighted Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$ 8,336 | ³ | 4.0 | % | $ | 208,409 | 97.1 | % | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$16,672 | ³ | 8.0 | % | $ | 208,409 | 97.1 | % | ||||||||||||||
Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | ||||||||||||||||||||||
December 31, 2011 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$ 8,229 | ³ | 4.0 | % | $ | 205,737 | 96.4 | % | ||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$ 8,103 | ³ | 4.0 | % | $ | 202,580 | 97.9 | % | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
TIB Financial Corp. | N/A | N/A | ³$16,206 | ³ | 8.0 | % | $ | 202,580 | 97.9 | % |
Management believes, as of June 30, 2012, that the Company meets all capital requirements to which the it is subject. Tier 1 Capital for the Company includes the trust preferred securities that were issued in September 2000, July 2001 and June 2006 to the extent allowable.
On September 22, 2010 the Federal Reserve Bank of Atlanta (“FRB”) and the Company entered into a written agreement (the “Written Agreement”) where the Company agreed, among other things, that it would not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB. On September 28, 2011, pursuant to approval by the FRB of a written request by the Company, the Company resumed payments of all amounts due for current and deferred interest through the subsequent payment date for each of its trust preferred securities. On November 8, 2011, the FRB notified the Company that the Written Agreement was terminated effective April 30, 2011 given that TIB Bank was merged into Capital Bank NA and that the condition of the Company was subsequently upgraded.
On January 18, 2011, the Company concluded a rights offering (the “Rights Offering”) wherein legacy shareholders received rights to purchase up to 1,489 shares of common stock, at a price of $15.00 per share, and acquired 533 shares of newly issued common stock. The rights offering resulted in net proceeds of $7,763. The record date for the rights offering was July 12, 2010.
F-146
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Subsidiary Dividend Limitations
In August 2010, Capital Bank, NA entered into an Operating Agreement (the “OCC Operating Agreement”) with the Office of the Comptroller of the Currency (the “OCC”). Currently, the OCC Operating Agreement with Capital Bank, NA prohibits the Bank from paying a dividend for three years following July 16, 2010, the date Capital Bank, NA acquired the assets and certain deposits of three failed banks from the Federal Deposit Insurance Corporation. Once the three-year period has elapsed, the agreement imposes other restrictions on Capital Bank, NA’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made.
Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2012, if not subject to other restrictions, would have been limited to approximately $13,643.
Note 4—Fair Value Measurements
FASB guidance on fair value measurements defines fair value, establishes a framework for measuring fair value, and requires fair value disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis.
This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of inputs and the classification of financial instruments within the fair value hierarchy are as follows:
Level 1: | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. | |
Level 2: | Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and | |
Level 3: | Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Cash & cash equivalents
For cash & cash equivalents, the carrying value is primarily utilized as a reasonable estimate of fair value.
F-147
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Valuation of securities available for sale
The fair values of securities available for sale are determined by (1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), (2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and (3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the second quarter of 2011, the Company had no assets or liabilities measured at fair value on a recurring or non recurring basis as of June 30, 2012 and December 31, 2011.
Assets and Liabilities Measured on a Recurring Basis
As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the second quarter of 2011, the Company had no assets or liabilities measured at fair value on a recurring or non recurring basis as of June 30, 2012 and December 31, 2011.
Sensitivity to Changes in Significant Unobservable Inputs
For recurring fair value estimates categorized within Level 3 of the fair value hierarchy, as of June 30, 2011, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The significant unobservable inputs used in the fair value measurement of the Company’s collateralized debt security are incorporated in the discounted cash flow modeling valuation used. Significant changes in any inputs in isolation would result in a significantly different fair value estimate.
Discount rates utilized in the modeling of this security were estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of this security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers.
As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the second quarter of 2011, the Company no longer had any Level 3 assets or liabilities as of June 30, 2012.
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2011.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | ||||
June 30, 2011 | ||||
Beginning balance, April 1, | $ | 791 | ||
Included in earnings—other than temporary impairment | – | |||
Included in other comprehensive income | – | |||
Transfer into Level 3 | – | |||
Reduction due to deconsolidation of the Bank | (791 | ) | ||
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| |||
Ending balance June 30, | $ | – | ||
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|
F-148
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
(Unaudited)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | ||||
June 30, 2011 | ||||
Beginning balance, January 1, | $ | 795 | ||
Included in earnings—other than temporary impairment | – | |||
Included in other comprehensive income | (4 | ) | ||
Transfer into Level 3 | – | |||
Reduction due to deconsolidation of the Bank | (791 | ) | ||
|
| |||
Ending balance June 30, | $ | – | ||
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|
Assets and Liabilities Measured on a Non-Recurring Basis
As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the second quarter of 2011, the Company had no assets or liabilities measured at fair value on a recurring or non recurring basis as of June 30, 2012 and December 31, 2011.
Fair values of cash and cash equivalents are equal to the carrying value. Fair value of subordinated debt is estimated based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates.
The carrying amounts, estimated fair values and the fair value measurement levels, of financial instruments at June 30, 2012 and December 31, 2011 are as follows:
Fair Value Measurements | ||||||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
June 30, 2012 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,272 | $ | 1,272 | $ | 1,272 | $ | – | $ | – | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Subordinated debentures | 23,324 | 24,199 | – | – | 24,199 | |||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,221 | $ | 2,221 | $ | 2,221 | $ | – | $ | – | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Subordinated debentures | 23,176 | 24,093 | – | – | 24,093 |
F-149
Table of Contents
TIB Financial Corp.
Consolidated Financial Statements as of and for the
Year Ended December 31, 2011, 2010 and 2009
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of TIB Financial Corporation:
In our opinion, the accompanying consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year ended December 31, 2011 present fairly, in all material respects, the financial position of TIB Financial Corporation and its subsidiaries (Successor Company) at December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 9, 2012
F-151
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TIB Financial Corp.
Naples, Florida
We have audited the accompanying consolidated balance sheet of TIB Financial Corp. as of December 31, 2010 (Successor), and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the three-month period ended December 31, 2010 (Successor), the nine-month period ended September 30, 2010 (Predecessor) and the year ended December 31, 2009. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2010 consolidated financial statements referred to above present fairly, in all material respects, the financial position of TIB Financial Corp. as of December 31, 2010 (Successor), and the results of its operations and its cash flows for the three-month period ended December 31, 2010 (Successor), the nine-month period ended September 30, 2010 (Predecessor) and the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Crowe Horwath LLP
Fort Lauderdale, Florida
March 31, 2011
F-152
Table of Contents
TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Dollars and shares in thousands, except per share data) | 2011 | 2010 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 1,159 | $ | 22,209 | ||||
Interest-bearing deposits with banks | 1,062 | 131,585 | ||||||
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Cash and cash equivalents | 2,221 | 153,794 | ||||||
Investment securities available-for-sale | – | 418,092 | ||||||
Loans, net of deferred loan costs and fees | – | 1,004,630 | ||||||
Less: Allowance for loan losses | – | 402 | ||||||
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Loans, net | – | 1,004,228 | ||||||
Premises and equipment, net | – | 43,153 | ||||||
Goodwill | – | 29,999 | ||||||
Intangible assets, net | 235 | 11,406 | ||||||
Other real estate owned | – | 25,673 | ||||||
Deferred income tax asset | – | 19,973 | ||||||
Accrued interest receivable and other assets | 1,324 | 50,548 | ||||||
Equity method investment in Capital Bank, N.A. | 200,843 | – | ||||||
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Total assets | $ | 204,623 | $ | 1,756,866 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest-bearing demand | $ | – | $ | 198,092 | ||||
Interest-bearing | – | 1,168,933 | ||||||
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Total deposits | – | 1,367,025 | ||||||
Federal Home Loan Bank advances | – | 131,116 | ||||||
Short-term borrowings | – | 47,158 | ||||||
Long-term borrowings | 23,176 | 22,887 | ||||||
Deferred income tax liability | 3,641 | – | ||||||
Accrued interest payable and other liabilities | 428 | 11,930 | ||||||
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Total liabilities | 27,245 | 1,580,116 | ||||||
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Shareholders’ Equity | ||||||||
Preferred stock—$.10 par value: 5,000 shares authorized, 0 shares issued and outstanding | – | – | ||||||
Common stock—$.10 par value: 50,000 shares authorized, 12,350 and 11,817 shares issued and outstanding, respectively | 1,235 | 1,182 | ||||||
Additional paid in capital | 170,801 | 177,316 | ||||||
Retained earnings | 3,360 | 560 | ||||||
Accumulated other comprehensive income (loss) | 1,982 | (2,308 | ) | |||||
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Total shareholders’ equity | 177,378 | 176,750 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 204,623 | $ | 1,756,866 | ||||
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See accompanying notes to consolidated financial statements
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TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars and shares in thousands, except per share data) | Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | ||||||||||||||
Interest and dividend income | ||||||||||||||||||
Loans, including fees | $ | 17,745 | $ | 13,698 | $ | 45,471 | $ | 68,925 | ||||||||||
Investment securities: | ||||||||||||||||||
U.S. Government agencies and corporations | 3,185 | 1,802 | 6,347 | 11,395 | ||||||||||||||
States and political subdivisions, tax-exempt | 19 | 14 | 137 | 299 | ||||||||||||||
States and political subdivisions, taxable | 31 | 36 | 106 | 143 | ||||||||||||||
Other investments | 22 | 17 | 26 | 212 | ||||||||||||||
Interest-bearing deposits in other banks | 113 | 103 | 204 | 124 | ||||||||||||||
Federal Home Loan Bank stock | 31 | 11 | 26 | 24 | ||||||||||||||
Federal funds sold and securities purchased under agreements to resell | – | – | – | 5 | ||||||||||||||
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Total interest and dividend income | 21,146 | 15,681 | 52,317 | 81,127 | ||||||||||||||
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Interest expense | ||||||||||||||||||
Interest-bearing demand and money market | 678 | 548 | 1,994 | 4,052 | ||||||||||||||
Savings | 231 | 128 | 418 | 2,142 | ||||||||||||||
Time deposits of $100 or more | 1,190 | 931 | 5,419 | 8,587 | ||||||||||||||
Other time deposits | 1,177 | 935 | 5,972 | 12,865 | ||||||||||||||
Long-term debt—subordinated debentures | 1,885 | 458 | 1,119 | 1,578 | ||||||||||||||
Federal Home Loan Bank advances | 301 | 233 | 3,590 | 5,199 | ||||||||||||||
Short-term borrowings | 19 | 15 | 69 | 104 | ||||||||||||||
Long-term borrowings | – | 1 | 854 | 1,209 | ||||||||||||||
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Total interest expense | 5,481 | 3,249 | 19,435 | 35,736 | ||||||||||||||
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Net interest income | 15,665 | 12,432 | 32,882 | 45,391 | ||||||||||||||
Provision for loan losses | 621 | 402 | 29,697 | 42,256 | ||||||||||||||
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Net interest income after provision for loan losses | 15,044 | 12,030 | 3,185 | 3,135 | ||||||||||||||
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Non-interest income | ||||||||||||||||||
Service charges on deposit accounts | 1,070 | 864 | 2,585 | 4,165 | ||||||||||||||
Fees on mortgage loans originated and sold | 498 | 449 | 1,219 | 1,143 | ||||||||||||||
Investment advisory and trust fees | 1,293 | 354 | 948 | 997 | ||||||||||||||
Loss on sale of indirect auto loans | – | – | (344 | ) | – | |||||||||||||
Equity in income from investment in Capital Bank, N.A. | 4,084 | – | – | – | ||||||||||||||
Other income | 1,669 | 1,043 | 2,283 | 3,510 | ||||||||||||||
Investment securities gains, net | 12 | – | 2,635 | 5,058 | ||||||||||||||
Other-than-temporary impairment losses on investments prior to April 1, 2009 adoption of ASC 320-10-65-1 | – | – | – | (23 | ) | |||||||||||||
Other-than-temporary impairment losses on investments subsequent to April 1, 2009 | ||||||||||||||||||
Gross impairment losses | – | – | – | (740 | ) | |||||||||||||
Less: Impairments recognized in other comprehensive income | – | – | – | – | ||||||||||||||
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Net impairment losses recognized in earnings subsequent to April 1, 2009 | – | – | – | (740 | ) | |||||||||||||
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Total non-interest income | 8,626 | 2,710 | 9,326 | 14,110 | ||||||||||||||
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TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars and shares in thousands, except per share data) | Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | ||||||||||||||
Non-interest expense | ||||||||||||||||||
Salaries and employee benefits | $ | 9,009 | $ | 6,632 | $ | 19,859 | $ | 28,594 | ||||||||||
Net occupancy and equipment expense | 2,760 | 2,051 | 6,948 | 9,442 | ||||||||||||||
Goodwill impairment | – | – | – | 5,887 | ||||||||||||||
Foreclosed asset related expense | 565 | 536 | 21,687 | 2,847 | ||||||||||||||
Impairment of wealth management customer relationship intangible | 2,872 | – | – | – | ||||||||||||||
Other expense | 6,564 | 4,704 | 16,822 | 18,572 | ||||||||||||||
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Total non-interest expense | 21,770 | 13,923 | 65,316 | 65,342 | ||||||||||||||
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Income (loss) before income taxes | 1,900 | 817 | (52,805 | ) | (48,097 | ) | ||||||||||||
Income tax (benefit) expense | (900 | ) | 257 | – | 13,451 | |||||||||||||
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Net income (loss) | $ | 2,800 | $ | 560 | $ | (52,805 | ) | $ | (61,548 | ) | ||||||||
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Preferred dividends earned by preferred shareholders and discount accretion | – | – | 2,009 | 2,662 | ||||||||||||||
Gain on retirement of Series A preferred allocated to common shareholders | – | – | (24,276 | ) | ||||||||||||||
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Net income (loss) allocated to common shareholders | $ | 2,800 | $ | 560 | $ | (30,538 | ) | $ | (64,210 | ) | ||||||||
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Basic income (loss) per common share | $ | 0.23 | $ | 0.05 | $ | (205.64 | ) | $ | (433.27 | ) | ||||||||
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Diluted income (loss) per common share | $ | 0.23 | $ | 0.03 | $ | (205.64 | ) | $ | (433.27 | ) | ||||||||
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See accompanying notes to consolidated financial statements
F-155
Table of Contents
TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars and shares in thousands except per share data)
Predecessor Company | Preferred Shares Series A | Preferred Stock Series A | Common Shares | Common Stock | Additional Paid in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||||||
Balance, January 1, 2009 | 37 | $ | 32,920 | 149 | $ | 15 | $ | 74,630 | $ | 14,737 | $ | (619 | ) | $ | (569 | ) | $ | 121,114 | ||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | (61,548 | ) | (61,548 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale | 1,096 | |||||||||||||||||||||||||||||||||||
Less: reclassification adjustment for gains | (4,295 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive loss | (3,199 | ) | ||||||||||||||||||||||||||||||||||
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Comprehensive loss | $ | (64,747 | ) | |||||||||||||||||||||||||||||||||
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Issuance costs associated with preferred stock issued | (48 | ) | (48 | ) | ||||||||||||||||||||||||||||||||
Preferred stock discount accretion | 810 | (810 | ) | – | ||||||||||||||||||||||||||||||||
Stock-based compensation and related tax effect | 484 | 484 | ||||||||||||||||||||||||||||||||||
Common stock dividends declared | 1,088 | (1,088 | ) | – | ||||||||||||||||||||||||||||||||
Cash dividends declared, preferred stock | (1,285 | ) | (1,285 | ) | ||||||||||||||||||||||||||||||||
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Balance, December 31, 2009 | 37 | $ | 33,730 | 149 | $ | 15 | $ | 76,154 | $ | (49,994 | ) | $ | (3,818 | ) | $ | (569 | ) | $ | 55,518 | |||||||||||||||||
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Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | (52,805 | ) | (52,805 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale | 5,896 | |||||||||||||||||||||||||||||||||||
Add: reclassification adjustment for gains | (2,635 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax benefit of $523 | 3,261 | |||||||||||||||||||||||||||||||||||
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Comprehensive income | $ | (49,544 | ) | |||||||||||||||||||||||||||||||||
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Preferred stock discount accretion | 572 | (572 | ) | – | ||||||||||||||||||||||||||||||||
Stock-based compensation and related tax effect | 785 | 785 | ||||||||||||||||||||||||||||||||||
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Balance, September 30, 2010 | 37 | $ | 34,302 | 149 | $ | 15 | $ | 76,939 | $ | (103,371 | ) | $ | (557 | ) | $ | (569 | ) | $ | 6,759 | |||||||||||||||||
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F-156
Table of Contents
TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars and shares in thousands except per share data)
(Continued)
Successor Company | Preferred Shares Series B | Preferred Stock Series B | Common Shares | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||||||
Balance, September 30, 2010 | 70 | $ | 70,000 | 7,149 | $ | 715 | $ | 107,783 | $ | – | $ | – | $ | – | $ | 178,498 | ||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net income | 560 | 560 | ||||||||||||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale | (2,308 | ) | (2,308 | ) | ||||||||||||||||||||||||||||||||
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Comprehensive loss | $ | (1,748 | ) | |||||||||||||||||||||||||||||||||
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Conversion of Preferred Stock, Series B | (70 | ) | (70,000 | ) | 4,667 | 467 | 69,533 | – | ||||||||||||||||||||||||||||
Reverse stock split fractional shares | 1 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
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Balance, December 31, 2010 | – | $ | – | 11,817 | $ | 1,182 | $ | 177,316 | $ | 560 | $ | (2,308 | ) | $ | – | $ | 176,750 | |||||||||||||||||||
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Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net income | 2,800 | 2,800 | ||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||
Net market valuation adjustment on securities available for sale | 4,787 | |||||||||||||||||||||||||||||||||||
Less: reclassification adjustment for gains | (7 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $2,902 | 4,780 | |||||||||||||||||||||||||||||||||||
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Comprehensive income | $ | 7,580 | ||||||||||||||||||||||||||||||||||
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Common stock issued in Rights Offering | 533 | 53 | 7,710 | 7,763 | ||||||||||||||||||||||||||||||||
Effects of merger of TIB Bank into Capital Bank, | ||||||||||||||||||||||||||||||||||||
NA | (14,225 | ) | (490 | ) | (14,715 | ) | ||||||||||||||||||||||||||||||
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Balance, December 31, 2011 | – | $ | – | 12,350 | $ | 1,235 | $ | 170,801 | $ | 3,360 | $ | 1,982 | $ | – | $ | 177,378 | ||||||||||||||||||||
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See accompanying notes to consolidated financial statements
F-157
Table of Contents
TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars and shares in thousands except per share data)
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net income (loss) | $ | 2,800 | $ | 560 | $ | (52,805 | ) | $ | (61,548 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||
Accretion of acquired loans | (17,059 | ) | (13,334 | ) | – | – | ||||||||||||
Equity in income from investment in Capital Bank, N.A. | (4,084 | ) | – | – | – | |||||||||||||
Depreciation and amortization | 664 | 138 | 3,572 | 4,516 | ||||||||||||||
Customer relationship intangible impairment | 2,872 | – | – | – | ||||||||||||||
Provision for loan losses | 621 | 402 | 29,697 | 42,256 | ||||||||||||||
Deferred income tax expense (benefit) | (745 | ) | 681 | – | 10,998 | |||||||||||||
Investment securities net realized gains | (12 | ) | – | (2,635 | ) | (5,058 | ) | |||||||||||
Net amortization of investment premium/discount | 1,967 | 1,731 | 2,330 | 2,031 | ||||||||||||||
Write-down of investment securities | – | – | – | 763 | ||||||||||||||
Goodwill impairment | – | – | – | 5,887 | ||||||||||||||
Stock based compensation | – | – | 785 | 690 | ||||||||||||||
(Gain) loss on sale of OREO | (121 | ) | – | 55 | 168 | |||||||||||||
OREO Valuation Adjustments | – | – | 19,116 | 1,812 | ||||||||||||||
Loss on sale of indirect auto loans | – | – | 344 | – | ||||||||||||||
Other | (656 | ) | (357 | ) | 194 | 178 | ||||||||||||
Mortgage loans originated for sale | (17,154 | ) | (22,194 | ) | (56,265 | ) | (60,439 | ) | ||||||||||
Proceeds from sales of mortgage loans originated for sale | 24,854 | 18,942 | 55,383 | 57,778 | ||||||||||||||
Fees on mortgage loans sold | (498 | ) | (449 | ) | (1,219 | ) | (1,143 | ) | ||||||||||
Change in accrued interest receivable and other assets | (3,361 | ) | (1,134 | ) | 4,681 | 1,894 | ||||||||||||
Change in accrued interest payable and other liabilities | 2,346 | (10,022 | ) | 6,576 | (4,118 | ) | ||||||||||||
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Net cash provided by (used in) operating activities | (7,566 | ) | (25,036 | ) | 9,809 | (3,335 | ) | |||||||||||
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Cash flows from investing activities: | ||||||||||||||||||
Net change in cash due to merger of TIB Bank with and into Capital Bank, N.A. | (98,182 | ) | – | – | – | |||||||||||||
Investment in Capital Bank, N.A. | (5,241 | ) | – | – | – | |||||||||||||
Purchases of investment securities available for sale | (15,474 | ) | (164,028 | ) | (335,038 | ) | (728,578 | ) | ||||||||||
Sales of investment securities available for sale | 2,319 | – | 188,601 | 525,359 | ||||||||||||||
Repayments of principal and maturities of investment securities available for sale | 43,101 | 49,824 | 90,955 | 209,566 | ||||||||||||||
Acquisition of Naples Capital Advisors business | – | – | (296 | ) | (148 | ) | ||||||||||||
Net cash received in acquisition of operations-Riverside Bank of the Gulf Coast | – | – | – | 271,397 | ||||||||||||||
Sales of FHLB stock | 244 | 365 | 749 | 1,277 | ||||||||||||||
Principal repayments on loans, net of loans originated or acquired | (6,751 | ) | 24,855 | 27,168 | (30,111 | ) | ||||||||||||
Purchases of premises and equipment | (405 | ) | (319 | ) | (12,629 | ) | (2,760 | ) | ||||||||||
Proceeds from sales of loans | – | – | 26,902 | 3,500 | ||||||||||||||
Proceeds from sales of OREO | 8,661 | 5,932 | 6,794 | 4,122 | ||||||||||||||
Proceeds from disposal of equipment | – | – | 41 | 51 | ||||||||||||||
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Net cash provided by (used in) investing activities | (71,728 | ) | (83,371 | ) | (6,753 | ) | 253,675 | |||||||||||
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Cash flows from financing activities: | ||||||||||||||||||
Net increase (decrease) in demand, money market and savings accounts | 73,351 | 50,260 | (107,167 | ) | 82,350 | |||||||||||||
Net increase (decrease) in time deposits | (138,414 | ) | (11,053 | ) | 60,181 | (167,699 | ) | |||||||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | (4,979 | ) | 3,329 | (36,647 | ) | 8,116 | ||||||||||||
Net change short term FHLB advances | – | – | – | (70,000 | ) | |||||||||||||
Repayment of long term FHLB advances | (10,000 | ) | – | – | (7,900 | ) |
F-158
Table of Contents
TIB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars and shares in thousands except per share data)
(Continued)
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Net repayment of long term repurchase agreements | $ | – | $ | (10,000 | ) | $ | (20,000 | ) | $ | – | ||||||||
Net proceeds from Capital Bank Financial, Corp. Investment | – | – | 162,840 | – | ||||||||||||||
Income tax effect related to stock-based compensation | – | – | – | (206 | ) | |||||||||||||
Net costs from issuance of preferred stock and common warrants | – | – | – | (48 | ) | |||||||||||||
Net proceeds from common stock rights offering | 7,763 | – | – | – | ||||||||||||||
Cash dividends paid to preferred shareholders | – | – | – | (1,285 | ) | |||||||||||||
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Net cash provided by (used in) financing activities | (72,279 | ) | 32,536 | 59,207 | (156,672 | ) | ||||||||||||
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Net increase (decrease) in cash and cash equivalents | (151,573 | ) | (75,871 | ) | 62,263 | 93,668 | ||||||||||||
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Cash and cash equivalents at beginning of period | 153,794 | 229,665 | 167,402 | 73,734 | ||||||||||||||
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Cash and cash equivalents at end of period | $ | 2,221 | $ | 153,794 | $ | 229,665 | $ | 167,402 | ||||||||||
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Supplemental disclosures of cash paid: | ||||||||||||||||||
Interest | $ | 9,116 | $ | 4,578 | $ | 16,303 | $ | 38,291 | ||||||||||
Income taxes | – | – | – | – | ||||||||||||||
Supplemental disclosures of non-cash transactions: | ||||||||||||||||||
Transfer of non-cash assets to Capital Bank, N.A. | $ | 1,390,516 | $ | – | $ | – | $ | – | ||||||||||
Transfer of non-cash liabilities to Capital Bank, N.A. | 1,473,981 | – | – | – | ||||||||||||||
Acquisitions of Equity Method investment in Capital Bank, N.A. | 190,200 | – | – | – | ||||||||||||||
Transfer of loans to OREO | 4,569 | 1,992 | 35,007 | 27,547 | ||||||||||||||
Fair value of noncash assets acquired | – | – | – | 49,193 | ||||||||||||||
Fair value of liabilities assumed | – | – | – | 320,594 | ||||||||||||||
Transfer of OREO to Premises and Equipment | – | – | – | 2,941 | ||||||||||||||
Exchange of Preferred Series A for common shares issued in CBF Investment | – | – | 12,160 | – |
See accompanying notes to consolidated financial statements
F-159
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 1—Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
TIB Financial Corp. is a bank holding company headquartered in Naples, Florida. Prior to April 29, 2011, TIB Financial Corp. (the “Company”) conducted its business primarily through its wholly-owned subsidiaries, TIB Bank (together with its successor entities following the Merger (as defined below), the “Bank”) and Naples Capital Advisors, Inc. As described in additional detail in Note 2, on April 29, 2011 (the “Merger Date”), the Bank merged (the “Merger”) with and into NAFH National Bank (“NAFH Bank”), a subsidiary of our majority shareholder, Capital Bank Financial, Corp. (formerly known as North American Financial Holdings, Inc.; “CBF”) in an all-stock transaction, with NAFH Bank as the surviving entity. On June 30, 2011, NAFH Bank merged with Capital Bank, a wholly-owned subsidiary of Capital Bank Corporation, a controlled subsidiary of our majority shareholder, with NAFH Bank as the surviving entity (the “Capital Bank Merger”). On June 30, 2011, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, N.A.”). Subsequently, GreenBank, a previously wholly-owned subsidiary of Green Bankshares, Inc. (“Green”), merged with and into Capital Bank, N.A. when Green became a controlled subsidiary of CBF on September 7, 2011. Collectively the subsidiary bank mergers discussed above are referred to herein as the “Subsidiary Bank Mergers”.
Subsequent to the Subsidiary Bank Mergers, the Company holds an approximately 21% ownership interest in Capital Bank, N.A. which is recorded as an equity-method investment in that entity. As of December 31, 2011, the Company’s investment in Capital Bank, N.A. totaled $200,843, which reflected the Company’s pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company has and will adjust this equity investment balance based on its equity in Capital Bank, N.A.’s net income and comprehensive income. In connection with the Merger, assets and liabilities of the Bank were deconsolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and total liabilities of the Company in the second quarter of 2011. Accordingly, as of December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet. Subsequent to the Merger Date, the Company’s significant assets and liabilities included in the Consolidated Balance Sheet are comprised of a customer relationship intangible associated with Naples Capital Advisors, Inc., the company’s wholly-owned registered investment advisor, along with the Company’s equity method investment in Capital Bank, N.A., current and deferred income tax accounts and trust preferred securities. The Company’s operating results subsequent to the Merger Date include the Company’s proportional share of the equity method earnings of Capital Bank, N.A. and interest income and interest expense resulting from cash deposited in Capital Bank, N.A. and the outstanding trust preferred securities issued by the Company, respectively. Unless otherwise specified, this report describes TIB Financial Corp. and its subsidiaries including TIB Bank through the Merger Date, and subsequent to that date, includes TIB Financial Corp. and Naples Capital Advisors, Inc.
Share and per share amounts have been adjusted to account for the effects of the 1 for 100 reverse stock split on December 15, 2010. As a result of the reverse stock split, every 100 shares of the Company’s common stock issued and outstanding immediately prior to the effective time were combined and reclassified into 1 share of common stock. All numerical dollar and share amounts are in thousands, other than per-share amounts or as otherwise noted. We have considered the impact on these consolidated financial statements of subsequent events.
As used in this document, the terms “we,” “us,” “our,” “TIB Financial,” and “Company” mean TIB Financial Corp. and its subsidiaries (unless the context indicates another meaning) and the term “Bank” means TIB Bank, and, after the Merger, its successor entities.
F-160
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Capital Bank Financial Corp. Investment
On September 30, 2010, (the “Transaction Date”) the Company completed the issuance and sale to CBF of 7,000 shares of common stock, 70 shares of Series B Preferred Stock and a warrant (the “Warrant”) to purchase up to 11,667 shares of Common Stock of the Company (the “Warrant Shares”) for aggregate consideration of $175,000 (the “Investment”). The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of a contribution to the Company of all 37 outstanding shares of Series A Preferred Stock previously issued to the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock, which CBF purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 30, 2010 and are no longer outstanding. The 70 shares of Series B Preferred Stock received by CBF converted into an aggregate of 4,667 shares of common stock following shareholder approval of an amendment to increase the number of authorized shares of common stock to 50,000. The Warrant is exercisable, in whole or in part, and from time to time, from September 30, 2010 to March 30, 2012, at an exercise price of $15.00 per Warrant Share.
As a result of the Investment, pursuant to which CBF acquired approximately 99% (which has subsequently been reduced to approximately 94% as a result of the Rights Offering) of the voting securities of the Company, the Company followed the acquisition method of accounting as required by the Business Combinations Topic of the FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the accounting guidance the application of “push down” accounting was required.
Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. Acquisition accounting requires that the valuation of assets, liabilities, and non-controlling interests be recorded in the acquiree’s records as well. Accordingly, the Company’s Consolidated Financial Statements and transactional records prior to the CBF Investment reflect the historical accounting basis of assets and liabilities and are labeled “Predecessor Company,” while such records subsequent to the CBF Investment are labeled “Successor Company” and reflect the push down basis of accounting for the new fair values in the Company’s financial statements. This change in accounting basis is represented in the Consolidated Financial Statements by a vertical black line which appears between the columns entitled “Predecessor Company” and “Successor Company” on the statements and in the relevant notes. The black line signifies that the amounts shown for the periods prior to and subsequent to the CBF Investment are not comparable.
In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, acquisition accounting also requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the elimination of any accumulated other comprehensive income or loss and surplus within the Company’s Shareholders’ Equity section of the Company’s Consolidated Financial Statements. Accordingly, retained earnings and accumulated other comprehensive income at December 31, 2011 and December 31, 2010 represent only the results of operations subsequent to September 30, 2010, the date of the CBF Investment.
Pursuant to the Investment Agreement, shareholders as of July 12, 2010 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $15.00 per share, subject to certain limitations (the “Rights Offering”). Approximately 533 shares of the Company’s common stock were issued in exchange for net proceeds of approximately $7,764 upon completion of the Rights Offering on January 18, 2011. Subsequent to the Rights Offering, CBF owned 94% of the Company’s outstanding common stock.
F-161
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. Another material estimate is the fair value and impairment of financial instruments. Changes in assumptions or in market conditions could significantly affect the fair value estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta. Net cash flows are reported for customer loan and deposit transactions and short term borrowings.
Equity Method
We account for our investment in Capital Bank, N.A. under the equity method of accounting. The investment in Capital Bank, N.A. is reflected in our Consolidated Balance Sheet under the “Equity method investment in Capital Bank, N.A.” caption and our equity in earnings is reported on our Consolidated Statement of Operations under “Equity in income from investment in Capital Bank, N.A.”. See Note 3 of our consolidated financial statements for additional information about the Equity Investment in Capital Bank, N.A.
Investment Securities and Other than Temporary Impairment
Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. As of September 30, 2010, resulting from the application of acquisition accounting and related fair value adjustments, unrealized gains and losses on investment securities were eliminated as the recorded costs of these investments were adjusted to their fair values. Subsequent to April 29, 2011, there were no investment securities reported in the balance sheet and unrealized changes in values of investment securities at the Bank are reflected in OCI in proportion to the Company’s ownership interest.Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the
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appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.
In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC 325-10-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no available for sale securities were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Loans Held for Sale
The majority of residential fixed rate mortgage loans originated by TIB Bank are sold servicing released to third parties immediately with temporary recourse provisions. The recourse provisions may require the repurchase of the outstanding balance of loans which default within a limited period of time subsequent to the sale of the loan. The recourse periods vary by investor and extend up to seven months subsequent to the sale of the loan. All fees are recognized as income at the time of the sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. TIB Bank has not historically experienced significant losses resulting from the recourse provisions described above. Accordingly, management believes that no such provision or allowance is necessary as of December 31, 2010.
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As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no loans were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Loans Held for Investment
Loans held for investment are reported at the principal amounts outstanding, net of unamortized purchase discount or premium, nonrefundable loan fees and related direct loan origination costs. Unearned income and deferred net fees, costs, purchase premiums or discounts related to loans held for investment are recognized in interest income on an effective yield basis over the contractual loan term.
Non-accrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or, for commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, such loans have become contractually past due 90 days with respect to principal or interest. Home equity loans and residential real estate loans are placed on non-accrual when these loans are delinquent 90 days or more, or in foreclosure. Indirect auto loans and other consumer loans are placed on non-accrual when these loans are delinquent 90 days or more. These loans are charged off or written down to their net realizable value when delinquency reaches 120 days. For commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, interest accruals are also continued for loans that are both well-secured and in the process of collection. For this purpose, loans are considered well-secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered “in the process of collection” if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status. For all loans, past due status is determined based on the contractual terms of the loan and the actual number of days since the due date of the earliest unpaid payment.
When a loan is placed on non-accrual status, all previously accrued but uncollected interest is reversed against current period operating results. When full collection of the outstanding principal balance is in doubt, subsequent payments received are first applied to unpaid principal and then to uncollected interest. A loan may be returned to accrual status at such time as the loan is brought fully current as to both principal and interest, and, in management’s judgment, such loan is considered to be fully collectible on a timely basis. However, the Company’s policy also allows management to continue the recognition of interest income on certain commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans placed on non-accrual status. This portion of the non-accrual portfolio is referred to as “Cash Basis Non-accrual” loans. This policy only applies to loans that are well-secured and in management’s judgment are considered to be fully collectible but the timely collection of payments is in doubt. Although the accrual of interest is suspended, interest income is recognized as it is received.
A troubled debt restructuring is a restructuring of a loan in which a concession is granted to a borrower experiencing financial difficulty. A loan is accounted for as a troubled debt restructured loan (“TDR”) if the Company, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a modification of terms such as a reduction of the interest rate below the current market rate for a loan with similar risk characteristics or the waiving of certain financial loan covenants without corresponding offsetting compensation or additional support. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no loans were reported on the Company’s consolidated balance sheet as of December 31, 2011.
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Purchased Credit-Impaired Loans
Loans acquired in a transfer, including business combinations and transactions similar to the Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as non-accrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charges the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans. The impact of changes in variable interest rates are recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and credit risk.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no loans were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses incurred in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. The Company’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formulaic allowance and the specific allowance for impaired loans. Management develops and documents its systematic methodology for determining the allowance for loan losses by first dividing its portfolio into segments—commercial mortgage, residential mortgage, construction and vacant land, commercial and agricultural, indirect auto, home equity and other consumer loans. The Company furthers divides the portfolio segments into classes based on initial measurement attributes, risk characteristics or its method of monitoring and assessing credit risk. The classes for the Company are as follows:
• | Commercial real estate mortgage—owner occupied, office building, hotel or motel, guest houses, retail, multi-family, and other; |
• | Residential mortgage—primary residence, second residence and investment; |
• | Land, lot and construction; |
• | Consumer; |
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• | Indirect auto—prime and sub-prime; and |
• | Home equity. |
The allowance is calculated by applying loss factors to outstanding loans. Loss factors are based on the Company’s historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The Company derives the loss factors for all segments from pooled loan loss factors. Such pooled loan loss factors (for loans not individually graded) are based on expected net charge off ranges.
Loan loss factors, which are used in determining the allowance, are adjusted quarterly primarily based upon the changes in the level of historical net charge offs and parameter updates by management. Management estimates probable incurred losses in the portfolio based on a historical loss look-back period. The look-back period is representative of management’s expectations of relevant historical loss experience. Based upon the Company’s evaluation process, management believes that the look-back period is generally eight quarters.
Furthermore, based on management’s judgment, the Company’s methodology permits adjustments to any loss factor used in the computation of the allowance for significant factors, which affect the collectability of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates based upon the most recent information that has become available. This includes changing the number of periods that are included in the calculation of the loss factors and adjusting qualitative factors to be representative of the economic cycle that management expects will impact the portfolio. Updates of the loss confirmation period are done when significant events cause management to reexamine data.
At December 31, 2010, substantially all of the Company’s loans are purchased credit-impaired loans. Estimates of cash flows expected to be collected for purchased credit-impaired loans are updated each reporting period. If the Company has probable decreases in expected cash flows to be collected after acquisition, the Company charges the provision for loan losses and establishes an allowance for loan losses.
The Company individually evaluates for impairment larger nonaccruing commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans. Residential mortgage and consumer loans are not individually evaluated for impairment unless they exceed $500 in recorded investment or represent troubled debt restructurings. Loans are considered impaired when the individual evaluation of current information regarding the borrower’s financial condition, loan collateral, and cash flows indicates that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the present value of expected future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer, indirect auto and residential mortgage loans, which are evaluated on a pool basis. The Company’s policy for recognition of interest income, charge offs of loans, and application of payments on impaired loans is the same as the policy applied to non-accrual loans.
Significant risk characteristics considered in estimating the allowance for credit losses include the following:
• | Commercial and agricultural—industry specific economic trends and individual borrower financial condition; |
• | Construction and vacant land, farmland and commercial mortgage loans—type of property (i.e., residential, commercial, industrial) and geographic concentrations and risks and individual borrower financial condition; and |
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• | Residential mortgage, indirect auto and consumer—historical and expected future charge-offs, borrower’s credit, property collateral, and loan characteristics. |
Loans are charged off in whole or in part when they are considered to be uncollectible. For commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, they are generally considered uncollectible based on an evaluation of borrower financial condition as well as the value of any collateral. For residential mortgage and consumer loans, this is generally based on past due status as discussed above, as well as an evaluation of borrower creditworthiness and the value of any collateral. Recoveries of amounts previously charged off are recorded as a recovery to the allowance for loan losses.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no allowance for loan losses was reported on the Company’s consolidated balance sheet as of December 31, 2011.
Premises and Equipment
Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, building and related components are depreciated using the straight-line method with useful lives ranging from 3 to 40 years. Furniture, fixtures and equipment are depreciated using straight-line method with useful lives ranging from 1 to 40 years. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. For Federal income tax reporting purposes, depreciation is computed using primarily accelerated methods.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no premises and equipment were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs incurred after acquisition are generally expensed.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no foreclosed assets were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Goodwill and Other Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value. The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no goodwill and other intangible assets were reported on the Company’s consolidated balance sheet as of December 31, 2011.
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Long-lived Assets
Long-lived assets, including premises and equipment, core deposit and other intangible assets, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, no long-lived assets were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, the Company does not have any loan commitments or related financial instruments as of December 31, 2011.
Company Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, the Company does not hold any company owned life insurance as of December 31, 2011.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The predecessor company filed a consolidated Federal and Florida income tax return for the period ended September 30, 2010. The successor company was included in CBF’s consolidated Federal and Florida income tax return for the year ended December 31, 2010. For the tax period ending December 31, 2011, the successor company will be included in CBF’s consolidated Federal and Florida income tax return.
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Stock Splits and Stock Dividends
Stock splits and stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital.
Effective December 15, 2010, the Company completed a reverse stock split of the Company’s issued and outstanding common stock at a ratio of 1:100. The number of authorized shares of common stock was correspondingly adjusted from 5,000,000,000 shares to 50,000,000 shares. As a result of the reverse stock split, every 100 shares of the Company’s common stock issued and outstanding immediately prior to the effective time were combined and reclassified into 1 share of common stock. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
Earnings (loss) per share have been computed based the following for the periods ended:
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||
Basic | 12,324 | 11,817 | 149 | 148 | ||||||||||||||
Dilutive effect of options outstanding | – | – | – | – | ||||||||||||||
Dilutive effect of restricted shares | – | – | – | – | ||||||||||||||
Dilutive effect of warrants outstanding | – | 6,503 | – | – | ||||||||||||||
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| |||||||||||
Diluted | 12,324 | 18,320 | 149 | 148 | ||||||||||||||
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The dilutive effect of stock options and warrants and the dilutive effect of unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
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Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Anti-dilutive stock options | 6 | 8 | 8 | 7 | ||||||||||||||
Anti-dilutive restricted stock awards | – | – | 0 | 1 | ||||||||||||||
Anti-dilutive warrants | 11,669 | 13 | 24 | 24 |
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is regularly monitored, and additional collateral is obtained, provided or requested to be returned as appropriate.
As discussed above, due to the deconsolidation of the Bank during the second quarter of 2011, the Company does not hold securities purchased under agreements to resell or securities sold under agreements to repurchase as of December 31, 2011.
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.
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Operating Segments
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. As operating results for all segments are similar, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial condition or results of operations but will alter disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU
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2011-04”). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity’s valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-02, Receivables. The new guidance amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Management is currently evaluating the impact the new guidance will have on the consolidated financial statements.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend ASC Topic 310, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 310, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 310, Receivables. The amendments in this
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Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Note 2—Business Combinations
CBF Investment
On September 30, 2010, the Company issued and sold to CBF 7,000 shares of Common Stock, 70 shares of Series B Preferred Stock and a warrant to purchase up to 11,667 shares of Common Stock of the Company for aggregate consideration of $175,000. The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of contribution to the Company of all 37 shares of preferred stock issued to the United States Department of the Treasury under the TARP Capital Purchase Program and the related C- to purchase shares of the Company’s Common Stock which CBF purchased directly from the Treasury.
Immediately following the Investment, CBF controlled 98.7% of the voting securities of the Company (which has been subsequently reduced to approximately 94% as a result of the Rights Offering) and followed the acquisition method of accounting and applied “acquisition accounting.” Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets were identified and a fair value was determined as required by the accounting guidance for business combinations. Accounting guidance also requires the application of “push down accounting,” whereby the adjustments of assets and liabilities to fair value and the resultant goodwill are shown in the financial statements of the acquiree.
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methodology used to obtain the fair values to apply acquisition accounting is described in Note 19, “Fair Value Measurements of Financial Instruments” of these Consolidated Financial Statements. The following table summarizes the Investment Transaction:
September 30, 2010 | ||||
Fair value of assets acquired: | ||||
Cash and cash equivalents | $ | 229,665 | ||
Securities available for sale | 309,320 | |||
Loans | 1,017,842 | |||
Goodwill and intangible assets, net | 41,769 | |||
Other assets | 138,587 | |||
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Total assets acquired | $ | 1,737,183 | ||
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Fair value of liabilities assumed: | ||||
Deposits | $ | 1,327,663 | ||
Long-term debt and other borrowings | 208,783 | |||
Other liabilities | 22,239 | |||
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Total liabilities assumed | $ | 1,558,685 | ||
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Net assets | 178,498 | |||
Less: Non-controlling interest at fair value | 5,955 | |||
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$ | 172,543 | |||
Underwriting, due diligence and legal costs | 2,457 | |||
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Purchase consideration | $ | 175,000 | ||
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A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:
Cash and cash equivalents
The cash and cash equivalents of $229,665 held at the Transaction Date approximated the fair value on the Transaction Date and did not require a fair value adjustment.
Investment securities
Investment securities are reported at fair value and were $309,320 on the Transaction Date. To account for the CBF Investment, the unamortized premium and discounts were recognized as acquisition accounting adjustments and the unrealized gain or loss on investment securities became the new premium or discount for each security held by the Company.
The fair value of the investment securities is primarily based on values obtained from third parties which are based on recent activity for the same or similar securities. Before the Transaction Date, the investment securities portfolio had a book value of $310,316 and a fair value of $309,320. The difference between the fair value and the current par value was recorded as the new premium or discount on a security by security basis.
F-174
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Loans
All loans in the loan portfolio at the Transaction Date were evaluated and a fair value of $1,017,842 was assigned in accordance with the accounting guidance for receivables. All loans were considered to be purchase credit impaired loans or “PCI loans” with the exception of revolving lines of credit, loans collateralized by cash deposits and other types of loans with no real credit risk. The revolving lines of credit were also evaluated but are not considered PCI loans. A summary of the valuation for the PCI loans is in Note 5, “Loans” of these Consolidated Financial Statements.
Goodwill and intangible assets
As disclosed above, the excess of purchase consideration over the net assets being reported at fair value is the goodwill. The goodwill represents the value of the Company’s total franchise. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. The intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”), Customer Relationship Intangibles (“CRI”) and Trade Names. All of the identified intangible assets are amortized as a non-interest expense over their estimated lives, except the TIB Bank and Naples Capital Advisors trade names.
Core Deposit Intangible
The CDI valuation is based on the Bank’s transaction related deposit accounts, interest rates on the deposits compared to the market rate on the Transaction Date and estimated life of those deposits. The value of non-interest bearing deposits comprises the largest portion of the CDI. The estimated value of the CDI is the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the deposit base.
The types of deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.
Customer Relationship Intangible
The CRI was based on the assets under management by Naples Capital Advisors, Inc. on the Transaction Date. CRI is created when a customer relationship exists between an entity and its customer if the entity has information about the customer and has regular contact with the customer, and the customer has the ability to make direct contact with the entity. Customer relationships meet the contractual-legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date. Customer relationships also may arise through means other than contracts, such as through regular contact by sales or service representatives.
The value of the CRI is based on the present value of future cash flows arising from the management of investment accounts of customers generated from Naples Capital Advisors, Inc. based on the assets under management at September 30, 2010. The valuation of this intangible asset involves three steps: determining the useful life of the intangible asset, determining the resulting cash flows of the intangible and determining the discount rate.
The assets under management as of the Transaction Date were approximately $184,489.
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Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Other Assets
A majority of the other assets held by the Company did not have a fair value adjustment as part of the purchase accounting since their carrying value approximated fair value such as accrued interest receivable. It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $19,262. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including the fair value adjustments discussed elsewhere in this section, along with Federal and state net operating losses that the Company deemed realizable as of the acquisition date.
Deposits
Term deposits were not included as part of the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. The term deposits which were evaluated for acquisition accounting consisted of certificates of deposit, brokered deposits and Certificate of Deposit Account Registry Services (“CDARS”) CDs. The fair value of these deposits was determined by first stratifying the deposit pool by monthly maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates. Based on the characteristics of the certificates, either a retail rate or a brokered certificate of deposit rate was used.
Certificates of deposit liabilities had a fair value of $730,034 as of September 30, 2010, compared to a carrying value of $724,899 for an amortizable premium of $5,135. Brokered Deposit liabilities had a fair value of $11,054 as of September 30, 2010 compared to a carrying value of $10,836 for an amortizable premium of $217. CDARs liabilities had a fair value of $9,453 as of September 30, 2010, compared to a carrying value of $9,363 million for an amortizable premium of $90. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.
Long-term debt and other borrowings
Included in long-term debt and other borrowings in the summary table above are FHLB advances, securities sold under agreements to repurchase and trust preferred debt securities. These were fair valued by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The Company will amortize the premium and accrete the discount into income on a level-yield basis over the contractual term as an adjustment to interest expense.
FHLB advances had a fair value of $132,077 as of September 30, 2010, compared to a carrying value of $125,000 for an amortizable premium of $7,077.
Securities sold under agreements to repurchase on a long-term basis had a fair value of $10,063 as of September 30, 2010, compared to a carrying value of $10,000 for an amortizable premium of $63. The carrying values of Commercial customer repurchase agreements of $43,244 and Treasury tax and loan deposits of $584 approximated their fair values due to their short-term nature.
The trust preferred securities had a fair value of $22,815 as of September 30, 2010 compared to a book value of $33,000 for a net accretable discount of $10,185. The premium will be amortized and the discount will be accreted into income as a reduction of interest expense and an increase to interest expense on a level yield bases over the contractual terms, respectively.
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Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Lease Liability
The Company operates approximately 6 properties under long term operating leases. The classification of the Company’s leases as operating, as opposed to capital, was not changed in applying the acquisition method of accounting.
When reviewing the leases, the contractual lease payments and terms were compared to the current market conditions for a similar location and building leased. The Company’s leases were considered to be unfavorable relative to the market terms of leases at September 30, 2010 to the extent that the existing lease terms were higher than the current market terms, and a liability of $251 was recognized as part of the acquisition accounting.
Non-Controlling Interest
In determining the estimated fair value of the non-controlling interest, the Company utilized the market valuation of its common stock as part of the purchase accounting as of September 30, 2010.
Transaction Expenses
As required by the Investment Agreement, the Company reimbursed certain transaction-related third party due diligence, valuation and legal costs of approximately $2,457 which were recorded as a reduction of the $175,000 of proceeds received from the issuance of preferred and common shares.
There were no indemnification assets identified in this business combination, nor were there any contingent consideration assets or liabilities to be recognized.
Note 3—Equity Method Investment in Capital Bank, N.A.
On April 29, 2011, the Company’s primary operating subsidiary, TIB Bank, was merged with and into NAFH Bank, an affiliate institution which had been wholly-owned by the Company’s controlling shareholder, CBF, preceding the Merger. Pursuant to the merger agreement dated April 27, 2011, between NAFH Bank and the Bank, the Company exchanged its 100% ownership interest in TIB Bank for an approximately 53% ownership interest in the surviving combined entity, NAFH Bank. CBF is deemed to control NAFH Bank due to CBF’s 94% ownership interest in the Company and CBF’s direct ownership of the remaining 47% interest in NAFH Bank subsequent to the Merger. Accordingly, subsequent to April 29, 2011, the Company began to account for its ownership in NAFH Bank under the equity method of accounting and the assets and liabilities of the Bank were deconsolidated from the Company’s balance sheet. The deconsolidation resulted in a significant decrease in the total assets and total liabilities of the Company in the second quarter of 2011. Accordingly, as of December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet and subsequent to the Merger Date, interest income and interest expense are the result of cash deposited in Capital Bank, N.A. and the outstanding trust preferred securities issued by the Company, respectively.
On June 30, 2011, Capital Bank, a wholly-owned subsidiary of Capital Bank Corp., an affiliated bank holding company in which CBF has an 83% ownership interest, was merged with and into NAFH Bank, with NAFH Bank as the surviving entity. Subsequently and as a result of that transaction, the Company’s ownership interest in NAFH Bank was reduced to 33%. In connection with the transaction, NAFH Bank also changed its name to Capital Bank, National Association.
Subsequent to the mergers on June 30, 2011, CBF, the Company and Capital Bank Corp. made contributions of additional capital to Capital Bank, N.A. of $4,695, $5,241 and $6,063, respectively, in proportion to their respective ownership interests in Capital Bank N.A. The contributions were made to provide additional capital support for the general business operations of Capital Bank, N.A.
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
On September 7, 2011, GreenBank, a wholly-owned subsidiary of Green Bankshares Inc., an affiliated bank holding company in which CBF has a 90% ownership interest, was merged with and into Capital Bank, N.A., with Capital Bank, N.A. as the surviving entity. On September 30, 2011, Capital Bank Corp. made a contribution of additional capital to Capital Bank, N.A. of $10,000. Subsequently and as a result of these transactions, the Company’s ownership interest in Capital Bank, N.A. was reduced to 21%.
The mergers of the Bank, Capital Bank and GreenBank into Capital Bank, N.A. were restructuring transactions between commonly-controlled entities. The difference between the amount of the Company’s initial equity method investment in NAFH Bank, subsequent to the merger, and the Company’s investment in the Bank, immediately preceding the merger, was accounted for as a reduction in additional paid in capital. The amount of the equity method investment in NAFH Bank on April 29, 2011, immediately subsequent to the merger, was equal to approximately 53% of the total shareholders’ equity of NAFH Bank post-merger (the combined entity). Additionally, at the time of the merger, due to the de-consolidation of the Bank, the balance of accumulated other comprehensive income was reclassified as additional paid in capital. As the Company began to account for its investment in the combined entity under the equity method, the change in the balance of the Company’s equity method investment between April 29, 2011 and December 31, 2011 resulting from the Company’s proportional share of earnings of $4,084 was recorded in “Equity in income from investment in Capital Bank, N.A.” in the Company’s Consolidated Statements of Operations for the twelve months ended December 31, 2011, respectively. Other changes in the Company’s equity method investment in Capital Bank, N.A. resulted from the subsidiary bank mergers of Capital Bank and GreenBank into Capital Bank, N.A., as the Company’s equity method investment was adjusted at each merger date to equal its proportional ownership of Capital Bank, N.A. with the net change being recorded as cumulative net decrease in the total shareholders’ equity of the Company of $14,225.
At December 31, 2011, the Company’s net investment of $200,843 in Capital Bank, N.A., was recorded in the Consolidated Balance Sheet as “Equity method investment in Capital Bank N.A.”
The following table presents summarized financial information for the Company’s equity method investee; Capital Bank, N.A.:
Period From April 29, 2011 Through December 31, 2011 | ||||
Interest income | $ | 158,218 | ||
Interest expense | 21,089 | |||
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Net interest income | 137,129 | |||
Provision for loan losses | 35,132 | |||
Non-interest income | 33,175 | |||
Non-interest expense | 111,143 | |||
Net income | 15,232 |
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 4—Cash and Due From Banks
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no cash was reported on deposit with the Federal Reserve Bank or the Federal Home Loan Bank of Atlanta on the Company’s consolidated balance sheet as of December 31, 2011. As of December 31, 2011, the company had cash on hand of $2.2 million. This cash is available for general corporate purposes.
At December 31, 2010, cash on hand or on deposit with the Federal Reserve Bank of $2,393 was required to meet regulatory reserve and clearing requirements. The total on deposit was approximately $130,946 at December 31, 2010.
The Bank maintained an interest bearing account at the Federal Home Loan Bank of Atlanta. The total on deposit was approximately $638 at December 31, 2010.
Note 5—Investment Securities
Investment Portfolio
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no investment in available for sale securities is reported on the Company’s consolidated balance sheet as of December 31, 2011.
The amortized cost, estimated fair value and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at December 31, 2010 are presented below:
December 31, 2010 | ||||||||||||||||
(Successor Company) | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
U.S. Government agencies and corporations | $ | 40,980 | $ | 15 | $ | 296 | $ | 40,699 | ||||||||
States and political subdivisions—tax-exempt | 3,082 | 2 | 25 | 3,059 | ||||||||||||
States and political subdivisions—taxable | 2,308 | – | 151 | 2,157 | ||||||||||||
Marketable equity securities | 102 | – | 28 | 74 | ||||||||||||
Mortgage-backed securities—residential | 372,409 | 946 | 4,152 | 369,203 | ||||||||||||
Corporate bonds | 2,104 | 1 | – | 2,105 | ||||||||||||
Collateralized debt obligation | 807 | – | 12 | 795 | ||||||||||||
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$ | 421,792 | $ | 964 | $ | 4,664 | $ | 418,092 | |||||||||
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
(Successor Company) | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||
U.S. Government agencies and corporations | $ | 14,304 | $ | 296 | $ | – | $ | – | $ | 14,304 | $ | 296 | ||||||||||||
States and political subdivisions—tax-exempt | 2,458 | 25 | – | – | 2,458 | 25 | ||||||||||||||||||
States and political subdivisions—taxable | 2,157 | 151 | – | – | 2,157 | 151 | ||||||||||||||||||
Marketable equity securities | 74 | 28 | – | – | 74 | 28 | ||||||||||||||||||
Mortgage-backed securities—residential | 213,153 | 4,152 | – | – | 213,153 | 4,152 | ||||||||||||||||||
Corporate bonds | – | – | – | – | – | – | ||||||||||||||||||
Collateralized debt obligation | 795 | 12 | – | – | 795 | 12 | ||||||||||||||||||
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Total temporarily impaired | $ | 232,941 | $ | 4,664 | $ | – | $ | – | $ | 232,941 | $ | 4,664 | ||||||||||||
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The table below presents a rollforward of the credit losses recognized in earnings for the period from April 1, 2009 (the effective date of ASC 325-40 which requires the recognition of unrealized credit losses determined as a result of other than temporary impairment charges through the income statement and the unrealized losses related to all other factors through accumulated other comprehensive income) through December 31, 2011:
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Balance, beginning of period | $ | – | $ | – | $ | 9,996 | $ | 9,256 | ||||||||||
Additions/Subtractions | ||||||||||||||||||
Credit losses recognized during the period | – | – | – | 740 | ||||||||||||||
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Balance, end of period | $ | – | $ | – | $ | 9,996 | $ | 9,996 | ||||||||||
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At December 31, 2010, securities with a fair value of approximately $38,363 were subject to call during 2011.
Sales of available for sale securities were as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Proceeds | $ | 2,362 | $ | – | $ | 188,601 | $ | 525,359 | ||||||||||
Gross gains | 12 | – | 2,635 | 5,003 | ||||||||||||||
Gross losses | – | – | 0 | 6 |
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Maturities, principal repayments, and calls of investment securities available for sale were as follows: $43,101 for the year ended December 31, 2011, $49,824 for the three months ended December 31, 2010 (Successor Company); $90,955 for the nine months ended September 30, 2010 (Predecessor Company); and $209,566 for the year ended 2009 (Predecessor Company). Net gains realized from calls and mandatory redemptions of securities during the year ended December 31, 2011 and for the three months ended December 31, 2010 (Successor Company) were $0, for the nine months ended September 30, 2010 and year ended 2009 (Predecessor Company) were $0 and $61, respectively.
Investment securities having carrying values of approximately $110,408 at December 31, 2010 were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.
Note 6—Loans
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no loans or allowance for loan losses were reported on the Company’s consolidated balance sheet as of December 31, 2011.
Major classifications of loans for December 31, 2010 are as follows:
2010 | ||||
Real estate mortgage loans: | ||||
Commercial | $ | 600,372 | ||
Residential | 225,850 | |||
Farmland | 12,083 | |||
Construction and vacant land | 38,956 | |||
Commercial and agricultural loans | 60,642 | |||
Indirect auto loans | 28,038 | |||
Home equity loans | 29,658 | |||
Other consumer loans | 8,730 | |||
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Total loans | 1,004,329 | |||
Net deferred loan costs | 301 | |||
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Loans, net of deferred loan costs | $ | 1,004,630 | ||
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Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:
Year Ended December 31, 2011 | ||||
Balance, beginning of period | $ | 263,381 | ||
New loans purchased | – | |||
Accretion of income | (17,059 | ) | ||
Reclassifications from nonaccretable difference | – | |||
Disposals | (246,322 | ) | ||
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Balance, end of period | $ | – | ||
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TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the CBF Investment. 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, which is their fair value at the time of the CBF Investment. 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.
The following table presents the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2010 by class of loans:
Non-purchased credit impaired loans | 30-89 Days Past Due | Greater than 90 Days Past Due and Still Accruing/Accreting | Non-accrual | Total | ||||||||||||
Real estate mortgage loans: | ||||||||||||||||
Owner occupied commercial | $ | – | $ | – | $ | – | $ | – | ||||||||
Office building | – | – | – | – | ||||||||||||
Hotel/motel | – | – | – | – | ||||||||||||
Guest houses | – | – | – | – | ||||||||||||
Retail | – | – | – | – | ||||||||||||
Multi-family | – | – | – | – | ||||||||||||
Other commercial | – | – | – | – | ||||||||||||
Primary residential | – | – | – | – | ||||||||||||
Secondary residential | – | – | – | – | ||||||||||||
Investment residential | – | – | – | – | ||||||||||||
Farmland | – | – | – | – | ||||||||||||
Land, lot and construction | – | – | – | – | ||||||||||||
Acquired commercial and agricultural | 121 | – | – | 121 | ||||||||||||
Prime indirect auto loans | – | – | – | – | ||||||||||||
Sub-prime indirect auto loans | – | – | – | – | ||||||||||||
Acquired home equity loans | 405 | 636 | – | 1,041 | ||||||||||||
Acquired other consumer loans | 15 | – | – | 15 | ||||||||||||
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Total loans | $ | 541 | $ | 636 | $ | – | $ | 1,177 | ||||||||
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Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Purchased credit impaired loans | 30-89 Days Past Due | Greater than 90 Day Past Due and Still Accruing/Accreting | Non-accrual | Total | ||||||||||||
Real estate mortgage loans: | ||||||||||||||||
Owner occupied commercial | $ | 3,027 | $ | 31,043 | $ | – | $ | 34,070 | ||||||||
Office building | – | 2,184 | – | 2,184 | ||||||||||||
Hotel/motel | 4,794 | 3,812 | – | 8,606 | ||||||||||||
Guest houses | 3,873 | – | – | 5,873 | ||||||||||||
Retail | – | 1,989 | – | 1,989 | ||||||||||||
Multi-family | – | – | – | – | ||||||||||||
Other commercial | 992 | 6,953 | – | 7,945 | ||||||||||||
Primary residential | – | – | – | – | ||||||||||||
Secondary residential | 235 | 507 | – | 742 | ||||||||||||
Investment residential | – | 1,146 | – | 1,146 | ||||||||||||
Farmland | – | 942 | – | 942 | ||||||||||||
Land, lot and construction | 1,777 | 6,433 | – | 8,210 | ||||||||||||
Commercial and agricultural | 1,175 | 402 | – | 1,577 | ||||||||||||
Prime indirect auto loans | 229 | 100 | – | 329 | ||||||||||||
Sub-prime indirect auto loans | 745 | 146 | – | 891 | ||||||||||||
Home equity loans | – | – | – | – | ||||||||||||
Other consumer loans | 22 | 44 | – | 66 | ||||||||||||
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Total loans | $ | 16,869 | $ | 55,701 | $ | – | $ | 72,570 | ||||||||
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Purchased credit-impaired loans are not classified as non-accrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments.
There were no troubled debt restructurings as of December 31, 2010.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
• | Pass—These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted. |
• | Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
• | Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
F-183
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
• | Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
The following table summarizes loans, excluding purchased credit-impaired loans, monitored for credit quality based on internal ratings at December 31, 2010:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Real estate mortgage loans: | ||||||||||||||||||||
Owner occupied commercial | $ | 351 | $ | – | $ | – | $ | – | $ | 351 | ||||||||||
Office building | 31 | – | – | – | 31 | |||||||||||||||
Hotel/motel | – | – | – | – | – | |||||||||||||||
Guest houses | – | – | – | – | – | |||||||||||||||
Retail | – | – | – | – | – | |||||||||||||||
Multi-family | – | – | – | – | – | |||||||||||||||
Other commercial | 170 | – | – | – | 170 | |||||||||||||||
Primary residential | 4,441 | – | – | – | 4,441 | |||||||||||||||
Secondary residential | 3,056 | – | – | – | 3,056 | |||||||||||||||
Investment residential | 4,371 | – | – | – | 4,371 | |||||||||||||||
Farmland | – | – | – | – | – | |||||||||||||||
Land, lot and construction | – | – | – | – | – | |||||||||||||||
Commercial and agricultural | 4,901 | – | – | – | 4,901 | |||||||||||||||
Prime indirect auto loans | 6,213 | – | – | – | 6,213 | |||||||||||||||
Sub-prime indirect auto loans | 82 | – | – | – | 82 | |||||||||||||||
Home equity loans | 24,090 | 78 | 1,137 | – | 25,305 | |||||||||||||||
Other consumer loans | 5,459 | – | 87 | – | 5,546 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 53,165 | $ | 78 | $ | 1,224 | $ | – | $ | 54,467 | ||||||||||
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|
|
|
Activity in the allowance for loan losses is as follows:
Successor Company | Predecessor Company | |||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||
Balance, beginning of period | $ | 402 | $ | – | $ | 29,083 | ||||||||
Provision for loan losses charged to expense | 621 | 402 | 29,697 | |||||||||||
Loans charged off | (24 | ) | – | (27,432 | ) | |||||||||
Recoveries of loans previously charged off | – | – | 1,058 | |||||||||||
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| |||||||||
Balance, end of period predecessor company | $ | – | $ | – | $ | 32,406 | ||||||||
Acquisition accounting adjustment | – | – | (32,046 | ) | ||||||||||
Reduction due to deconsolidation of the Bank | (999 | ) | – | – | ||||||||||
|
|
|
|
|
| |||||||||
Balance, end of period successor company | $ | – | $ | 402 | $ | – | ||||||||
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|
|
F-184
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Roll forward of allowance for loan losses for the twelve months ended December 31, 2011:
(Successor Company) | December 31, 2010 | Provision | Net Charge-offs | Reduction Due to Deconsolidation of the Bank | December 31, 2011 | |||||||||||||||
Real estate mortgage loans: | ||||||||||||||||||||
Commercial | $ | 7 | $ | 201 | $ | – | $ | (208 | ) | $ | – | |||||||||
Residential | 164 | 206 | – | (370 | ) | – | ||||||||||||||
Construction and vacant land | – | 75 | – | (75 | ) | – | ||||||||||||||
Commercial and agricultural loans | 24 | 13 | – | (37 | ) | – | ||||||||||||||
Indirect auto loans | 184 | 108 | (24 | ) | (268 | ) | – | |||||||||||||
Home equity loans | 14 | 11 | – | (25 | ) | – | ||||||||||||||
Other consumer loans | 9 | 7 | – | (16 | ) | – | ||||||||||||||
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|
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| |||||||||||
Total loans | $ | 402 | $ | 621 | $ | (24 | ) | $ | (999 | ) | $ | – | ||||||||
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|
|
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Purchased Credit- Impaired | Individually Evaluated for Impairment | Collectively Evaluated for Impairment(1) | Purchased Credit- Impaired | |||||||||||||||||||
Real estate mortgage loans: | ||||||||||||||||||||||||
Commercial | $ | – | $ | 7 | $ | – | $ | – | $ | 552 | $ | 599,820 | ||||||||||||
Residential | – | 164 | – | – | 11,868 | 213,983 | ||||||||||||||||||
Farmland | – | – | – | – | – | 12,083 | ||||||||||||||||||
Construction and vacant land | – | – | – | – | – | 38,956 | ||||||||||||||||||
Commercial and agricultural | – | 24 | – | – | 4,901 | 55,740 | ||||||||||||||||||
Indirect auto loans | – | 184 | – | – | 6,295 | 21,744 | ||||||||||||||||||
Home equity loans | – | 14 | – | – | 25,305 | 4,353 | ||||||||||||||||||
Other consumer loans | – | 9 | – | – | 5,546 | 3,183 | ||||||||||||||||||
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|
|
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|
|
|
| |||||||||||||
Total loans | $ | – | $ | 402 | $ | – | $ | – | $ | 54,467 | $ | 949,862 | ||||||||||||
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(1) | Loans collectively evaluated for impairment include $24,395 of acquired home equity loans, $3,269 of commercial and agricultural loans and $4,935 of other consumer loans which are presented net of unamortized purchase discounts of $(897), $(61), and $(46), respectively. |
There were no loans individually evaluated for impairment at December 31, 2010 or during the three months ended December 31, 2010, due to substantially all loans being accounted for as purchase credit-impaired loans as a result of the CBF Investment. No allowance for loan losses was recorded for those purchased credit-impaired loans disclosed above during the three months ended December 31, 2010.
Note 7—Premises and Equipment
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no premises and equipment are reported on the Company’s consolidated balance sheet as of December 31, 2011.
F-185
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A summary of the cost and accumulated depreciation of premises and equipment as of December 31, 2010 follows:
December 31, | 2010 | |||
Land | $ | 13,891 | ||
Buildings and leasehold improvements | 25,133 | |||
Furniture, fixtures and equipment | 4,597 | |||
Construction in progress | 259 | |||
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| |||
43,880 | ||||
Less accumulated depreciation | (727 | ) | ||
|
| |||
Premises and equipment, net | $ | 43,153 | ||
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Depreciation expense for the year ended December 31, 2011 was $890. Depreciation expense for the Successor Company in the three months ended December 31, 2010 was $727 and for the Predecessor Company in the nine months ended September 30, 2010 was $2,363.
Rental expense for the year ended December 31, 2011 was $338. Rental expense for the Successor Company in the three months ended December 31, 2010 was $250 and for the Predecessor Company in the nine months ended September 30, 2010 was $821.
Note 8—Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the Successor Company year ended December 31, 2011, the Successor Company three months ended December 31, 2010, for the Predecessor Company nine months ended September 30, 2010 and year ended December 31, 2009 are as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Balance at beginning of period | $ | 29,999 | $ | 29,999 | $ | 622 | $ | 5,160 | ||||||||||
Goodwill associated with the acquisition of Naples | ||||||||||||||||||
Capital Advisors, Inc. | – | 296 | 148 | |||||||||||||||
Goodwill associated with the acquisition of Riverside | ||||||||||||||||||
Bank of the Gulf Coast | – | – | 1,201 | |||||||||||||||
Goodwill impairment | – | – | (5,887 | ) | ||||||||||||||
Reduction due to deconsolidation of the Bank | (29,999 | ) | ||||||||||||||||
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Balance at end of period | $ | – | $ | 29,999 | 918 | 622 | ||||||||||||
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Less: Elimination of Predecessor Company goodwill | (918 | ) | ||||||||||||||||
|
| |||||||||||||||||
Successor company balance before application of acquisition method of accounting | $ | – | ||||||||||||||||
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|
F-186
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
December 31, 2011 (Successor Company)
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no goodwill was reported on the Company’s consolidated balance sheet as of December 31, 2011.
December 31, 2010 (Successor Company)
CBF acquired the voting securities of the Company immediately following its Investment and followed the acquisition method of accounting and applied “acquisition accounting”. Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported at fair value is the goodwill. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes.
Predecessor Company
The Company performed a review of goodwill for potential impairment as of December 31, 2009. Based on this review, which included valuing the Company considering a variety of methodologies including using the Company’s stock price as of year-end 2009, transaction multiples of recent comparable transactions and the expected present value of future cash flows, it was determined that impairment existed as of December 31, 2009. Accordingly, the Company wrote off $5,887 of goodwill relating primarily to the acquisitions of The Bank of Venice and Riverside.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of a reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. We determine the fair value of the reporting unit and compare it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test.
Our annual impairment analysis as of December 31, 2009, indicated that the Step 2 analysis was necessary. Step 2 of the goodwill impairment test is performed to measure the impairment loss. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. As the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill, an impairment loss was required to be recognized in an amount equal to that excess.
Intangible assets consist of the following:
Year Ended December 31, 2011 | Year Ended December 31, 2010 | |||||||||||||||||||||||
Successor Company | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||
Core deposit intangible | $ | – | $ | – | $ | – | $ | 7,500 | $ | 187 | $ | 7,313 | ||||||||||||
Customer relationship intangible | 628 | 438 | 190 | 3,500 | 88 | 3,412 | ||||||||||||||||||
Trade Name and Other | 60 | 15 | 45 | 770 | 89 | 681 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 688 | $ | 453 | $ | 235 | $ | 11,770 | $ | 364 | $ | 11,406 | ||||||||||||
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Due to the Merger, as discussed in Note 1, intangible assets of the Bank were deconsolidated. Subsequently, customer relationship intangible and trade name associated with NCA comprised the Company’s remaining intangible assets. The Company’s registered investment advisor, Naples Capital Advisors, Inc. experienced a
F-187
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
decrease in assets under advisement following the departure of certain employees, leading to a $2,872 customer relationship intangible impairment recorded in fourth quarter of 2011.
All of the identified intangible assets are amortized as a non-interest expense over their estimated lives.
Aggregate intangible asset amortization expense was $733 for the year ended December 31, 2011 (Successor Company), $364 for the three months ended December 31, 2010 (Successor Company) and $1,168 and $1,430 for the nine months ended September 30, 2010, and year ended 2009, (Predecessor Company), respectively.
Estimated amortization expense for each of the next five years is as follows:
Years Ending December 31, | Successor Company | |||
2012 | $ | 22 | ||
2013 | 22 | |||
2014 | 22 | |||
2015 | 22 | |||
2016 | 22 |
Note 9—Other Real Estate Owned
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no other real estate owned is reported on the Company’s consolidated balance sheet as of December 31, 2011. Activity in other real estate owned is as follows:
Successor Company | Predecessor Company | |||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||
Balance beginning of period | $ | 25,673 | $ | 29,531 | $ | 21,352 | ||||||||
Real estate acquired | 4,569 | 1,992 | 35,007 | |||||||||||
Changes in valuation reserve | – | – | (19,171 | ) | ||||||||||
Property sold | (8,661 | ) | (5,932 | ) | (6,794 | ) | ||||||||
Reduction due to deconsolidation of the Bank | (21,581 | ) | – | – | ||||||||||
Other | – | 82 | 137 | |||||||||||
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Predecessor Company Balance, end of period | NA | NA | $ | 30,531 | ||||||||||
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| |||||||||||||
Successor Company acquisition accounting adjustment | NA | NA | (1,000 | ) | ||||||||||
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Balance end of period | $ | – | $ | 25,673 | $ | 29,531 | ||||||||
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Note 10—Time Deposits
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no time deposits are reported on the Company’s consolidated balance sheet as of December 31, 2011.
Time deposits of $100 or more were $359,869 at December 31, 2010 (Successor Company).
F-188
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 11—Short-Term Borrowings and Federal Home Loan Bank Advances
As of December 31, 2010 and through the period until deconsolidation of the Bank in the second quarter of 2011, short-term borrowings included securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and the weighted average rates paid for each of the categories of short-term borrowings and FHLB advances:
Successor Company | Successor Company | Predecessor Company | ||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | ||||||||||||
Securities sold under agreements to repurchase: | ||||||||||||||
Balance: | ||||||||||||||
Average daily outstanding | $ | 13,993 | $ | 42,834 | $ | 64,706 | ||||||||
Year-end outstanding | – | 45,430 | 43,245 | |||||||||||
Maximum month-end outstanding | 45,448 | 45,430 | 73,476 | |||||||||||
Rate: | ||||||||||||||
Weighted average | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||
Weighted average interest rate | NA | 0.1 | % | 0.1 | % | |||||||||
Treasury, tax and loan note option: | ||||||||||||||
Balance: | ||||||||||||||
Average daily outstanding | $ | 351 | $ | 928 | $ | 1,184 | ||||||||
Year-end outstanding | – | 1,728 | 584 | |||||||||||
Maximum month-end outstanding | 1,700 | 1,728 | 1,749 | |||||||||||
Rate: | ||||||||||||||
Weighted average | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Weighted average interest rate | NA | 0.0 | % | 0.0 | % | |||||||||
Advances from the Federal Home Loan Bank-Long Term: | ||||||||||||||
Balance: | ||||||||||||||
Average daily outstanding | $ | 41,465 | $ | 131,740 | $ | 125,000 | ||||||||
Year-end outstanding | – | 131,116 | 125,000 | |||||||||||
Maximum month-end outstanding | 130,796 | 131,757 | 125,000 | |||||||||||
Rate: | ||||||||||||||
Weighted average | 0.7 | % | 0.7 | % | 3.8 | % | ||||||||
Weighted average interest rate | NA | 0.7 | % | 3.8 | % |
Note 12—Long-Term Borrowings
Securities Sold Under Agreements to Repurchase
During 2007, the Company entered into agreements with another financial institution for the sale of certain securities to be repurchased at a future date. The interest rates on these repurchase agreements are fixed for the remaining term of the agreement. The agreement in the amount of $20,000 and an interest rate of 4.18% matured in September 2010 and the agreement in the amount of $10,000 with an interest rate of 3.46% matured in December 2010.
F-189
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Subordinated Debentures
TIBFL Statutory Trust I, TIBFL Statutory Trust II and TIBFL Statutory Trust III were formed in conjunction with the issuance of trust preferred securities as further discussed below. The Company is not considered the primary beneficiary of the trusts (variable interest entities), therefore the trusts are not consolidated in the Company’s consolidated financial statements, but rather the subordinate debentures are presented as a liability.
On September 7, 2000, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust I (the “Trust”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust used the proceeds from the issuance of $8,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate equal to the 10.6% interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after ten years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2011, the carrying value was $8,813.
On July 31, 2001, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust II (the “Trust II”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust II used the proceeds from the issuance of $5,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 358 basis points). The initial rate in effect at the time of issuance was 7.29% and is subject to change quarterly. The rate in effect at December 31, 2011 was 4.01%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2011, the carrying value was $3,734.
On June 23, 2006, the Company issued $20,000 of additional trust preferred securities through a private placement. The Company formed TIBFL Statutory Trust III (the “Trust III”), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust III used the proceeds from the issuance of $20,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 155 basis points). The rate in effect at December 31, 2011 was 1.95%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option at par after five years, and sooner, at a 5% premium, if specific events occur, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2011, the carrying value was $10,629.
The Company received a request from the Federal Reserve Bank of Atlanta (FRB) for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. On September 22, 2010 the FRB and the Company entered into a written agreement where the Company agrees, among other things, that it will not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB. The Company has
F-190
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
notified the trustees of its $20,000 trust preferred securities due July 7, 2036 and its $5,000 trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. The Company also notified the trustees of its $8,000 trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payments due in March 2010. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default.
The Company submitted a written request to the FRB to authorize the payment of deferred and current interest payments through the next payment date and future interest payments when due as scheduled on the three trust preferred securities. On September 28, 2011, pursuant to receipt of the FRB’s approval, concurrent interest payments were made on each of the trust preferred securities and the Company began the process of exiting from the deferral period.
The Company has treated the trust preferred securities as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes (see Note 15).
At December 31, 2011, the maturities of long-term borrowings were as follows:
Successor Company | Fixed Rate | Floating Rate | Total | |||||||||
Due in 2012 | $ | – | $ | – | $ | – | ||||||
Due in 2013 | – | – | – | |||||||||
Due in 2014 | – | – | – | |||||||||
Due in 2015 | – | – | – | |||||||||
Thereafter | 8,813 | 14,363 | 23,176 | |||||||||
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| |||||||
Total long-term debt | $ | 8,813 | $ | 14,363 | $ | 23,176 | ||||||
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Note 13—Income Taxes
Income tax expense (benefit) from continuing operations was as follows:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||||
Current income tax benefit: | ||||||||||||||||||||
Federal | $ | (149 | ) | $ | (287 | ) | $ | – | $ | (188 | ) | |||||||||
State | (6 | ) | (53 | ) | – | (32 | ) | |||||||||||||
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| |||||||||||||
(155 | ) | (340 | ) | – | (220 | ) | ||||||||||||||
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Deferred tax benefit: | ||||||||||||||||||||
Federal | (676 | ) | 504 | (16,877 | ) | (14,292 | ) | |||||||||||||
State | (69 | ) | 93 | (2,893 | ) | (2,429 | ) | |||||||||||||
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| |||||||||||||
(745 | ) | 597 | (19,770 | ) | (16,721 | ) | ||||||||||||||
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| |||||||||||||
Valuation allowance | – | – | 19,770 | 30,392 | ||||||||||||||||
|
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|
| |||||||||||||
Total | $ | (900 | ) | $ | 257 | $ | – | $ | 13,451 | |||||||||||
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F-191
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income taxes reported is as follows:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Pretax income from continuing operations | $ | 1,900 | $ | 817 | $ | (52,805 | ) | $ | (48,097 | ) | ||||||||
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| |||||||||||
Income taxes computed at Federal statutory tax rate | $ | 665 | $ | 278 | $ | (17,954 | ) | $ | (16,353 | ) | ||||||||
Effect of: | ||||||||||||||||||
Tax-exempt income, net | (27 | ) | (55 | ) | (238 | ) | (685 | ) | ||||||||||
State income taxes, net | (79 | ) | 26 | (1,909 | ) | (1,624 | ) | |||||||||||
Non-deductible goodwill | – | – | 1,557 | |||||||||||||||
Equity in income from investment | (1,429 | ) | – | – | – | |||||||||||||
Stock based compensation expense, net | – | – | 205 | 96 | ||||||||||||||
Other, net | (30 | ) | 8 | 126 | 68 | |||||||||||||
Change in valuation allowance | – | 19,770 | 30,392 | |||||||||||||||
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Total income tax expense (benefit) | $ | (900 | ) | $ | 257 | $ | – | $ | 13,451 | |||||||||
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The details of the net deferred tax asset/ (liability) as of December 31, 2011 and 2010 are as follows:
Successor Company | ||||||||||
2011 | 2010 | |||||||||
Allowance for loan losses | $ | – | $ | 130 | ||||||
Purchase accounting adjustment | – | 13,752 | ||||||||
Net operating loss and AMT carryforward | – | 5,167 | ||||||||
Recognized impairment of other real estate owned | – | 1,632 | ||||||||
Net unrealized losses on securities available for sale | – | 1,392 | ||||||||
Acquisition related intangibles | 148 | – | ||||||||
Other | – | 89 | ||||||||
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Total gross deferred tax assets | 148 | 22,162 | ||||||||
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| |||||||
Purchase accounting adjustment | (3,789 | ) | – | |||||||
Deferred loan costs | – | (452 | ) | |||||||
Acquisition related intangibles | – | (1,676 | ) | |||||||
Other | – | (61 | ) | |||||||
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Total gross deferred tax liabilities | (3,789 | ) | (2,189 | ) | ||||||
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Net temporary differences | (3,641 | ) | 19,973 | |||||||
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Valuation allowance | – | – | ||||||||
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Net deferred tax asset/(liability) | $ | (3,641 | ) | $ | 19,973 | |||||
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F-192
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Successor Company
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. As of December 31, 2011, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time of the analysis, concluded that a valuation allowance was not necessary as temporary differences would become recognizable for tax purposes after consideration of the limitation on the utilization of net operating losses and net unrealized built-in losses (NUBIL).
Due to the Merger discussed above, TIB Bank deconsolidated from the Company as of April 29, 2011. As a result, the current and deferred provision/(benefit) includes four months of the operations of TIB Bank. The deferred tax assets and liabilities of TIB Bank were transferred to Capital Bank, N.A. Thus, the deferred tax asset and liabilities as of December 31, 2011 include the amortized trust preferred and unrealized gains on securities available for sale at the Company, and the acquisition related intangibles at NCA.
As a result of the Investment made by CBF on September 30, 2010, the Company had undergone a “change in ownership” as that term is defined in the Internal Revenue Code. This change in ownership resulted in a significant limitation of the amount of net operating losses and net NUBIL that can be utilized by the Company. NUBIL represents the excess of the tax basis of the Company’s assets over their fair market value. As a consequence, no deferred taxes have been recognized for NUBIL’s that are estimated not to be realizable as a result of the limitation on the utilization of NUBILs.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the State of Florida. For the tax period ending December 31, 2011, the successor company will be included in CBF’s consolidated Federal and Florida income tax return. The Company is no longer subject to examination by taxing authorities for years before 2008.
There were no unrecognized tax benefits at December 31, 2011 and the Company does not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Note 14—Employee Benefit Plans
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no assets or liabilities related to benefit plans were reported on the Company’s consolidated balance sheet as of December 31, 2011.
The Company maintains an Employee Stock Ownership Plan with 401(k) provisions that covers all employees who are qualified as to age and length of service. Three types of contributions can be made to the Plan by the Company and participants: basic voluntary contributions which are discretionary contributions made by all participants; a matching contribution, whereby the Company will match 50 percent of salary reduction contributions up to 5 percent of compensation; and an additional discretionary contribution which may be made by the Company and allocated to the accounts of participants on the basis of total relative compensation. The Successor Company contributed $102 to the plan for the year end December 31, 2011 and $83 for the three months ended December 31, 2010 and the Predecessor Company contributed $256 and $334 to the plan for the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively.
TIB Bank entered into salary continuation agreements with several of its executive officers. The plans were nonqualified deferred compensation arrangements that were designed to provide supplemental retirement income
F-193
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
benefits to participants. The Predecessor Company expensed $236 and $227 for the accrual of future salary continuation benefits in the nine months ended September 30, 2010, and year ended December 31, 2009, respectively. The Bank purchased single premium life insurance policies on several of these individuals. Cash value income (net of related insurance premium expense) totaled $197 and $328 in the nine months ended 2010, and year ended December 31, 2009 (Predecessor Company), respectively and $101 and $66 in the year ended December 31, 2011 and the three months ended December 31, 2010 (Successor Company), respectively. Other assets at December 31, 2010 included $6,610 in cash surrender value of life insurance. In 2010, following the investment by CBF and the TARP repayment, the salary continuation agreements were terminated and the executives each received a lump sum distribution of their respective accrued benefit earned under their agreement resulting in a total payout of $1,305 by the Successor Company.
In 2001, TIB Bank established a non qualified retirement benefit plan for eligible Bank directors. Under the plan, the Bank pays each participant, or their beneficiary, the amount of directors fees deferred and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. The Company expensed $3 and $9, in the year ended December 31, 2011 and three months ended December 31, 2010 (Successor Company), respectively and $29 and $42 in the nine months ended September 30, 2010 and year ended December 31, 2009 (Predecessor Company), respectively, for the accrual of retirement benefits. TIB Bank purchased single premium split dollar life insurance policies on these individuals. Cash value income (net of related insurance premium expense) totaled $50 and $38 in the year ended December 31, 2011 and the three months ended December 31, 2010 (Successor Company), respectively and $120 and $170 in the nine months ended September 30, 2010, and year ended December 31, 2009 (Predecessor Company), respectively. In addition, a $134 gain was recognized on the policy of a deceased former director by the Predecessor Company in the nine months ended September 30, 2010. Other assets included $4,336 in surrender value and other liabilities included retirement benefits payable of $430 at December 31, 2010 (Successor Company). In connection with changes made to bring the plan agreements into compliance with section 409A of the Internal Revenue Code the four current directors participating in the plan each elected to receive a lump sum distribution from the Predecessor Company in 2009 of the amount vested, accrued and earned through December 31, 2008. In 2011 the director deferred agreements were terminated and the directors participating in the plan each received a lump sum distribution of their respective deferral account balances resulting in a total payout of $431 by the Successor Company.
Note 15—Related Party Transactions
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no loans or deposits were reported on the Company’s consolidated balance sheet as of December 31, 2011. Activity in loans outstanding to certain of the Company’s executive officers, directors, and their related business interests is as follows:
Beginning balance, January 1, 2011 | $ | 182 | ||
New loans | 9 | |||
Repayments | (34 | ) | ||
Reduction due to deconsolidation of the Bank | (157 | ) | ||
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Ending balance, December 31, 2011 | $ | – | ||
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F-194
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 16—Regulatory Capital Requirements
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no capital ratios for the Bank as of December 31, 2011 are reported in the Company’s notes to consolidated financial statements.
The Company (on a consolidated basis) is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital Adequacy and Ratios
To be considered adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Company must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At December 31, 2011 the Company maintained capital ratios exceeding the requirement to be considered adequately capitalized. These minimum amounts and ratios along with the actual amounts and ratios for the Company as of December 31, 2011 and 2010 and the Bank as of December 31, 2010 are presented in the following tables.
December 31, 2011 | Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³8,231 | ³ | 4.0 | % | $ | 198,337 | 96.4 | % | |||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³8,065 | ³ | 4.0 | % | $ | 198,337 | 98.4 | % | |||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³16,129 | ³ | 8.0 | % | $ | 198,337 | 98.4 | % | |||||||||||||
December 31, 2010 | Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³67,746 | ³ | 4.0 | % | $ | 139,152 | 8.2 | % | |||||||||||||
TIB Bank | $ | ³84,269 | ³ | 5.0% | ³ | 67,415 | ³ | 4.0 | % | 135,783 | 8.1 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³41,733 | ³ | 4.0 | % | $ | 139,152 | 13.3 | % | |||||||||||||
TIB Bank | $ | ³62,599 | ³ | 6.0% | ³ | 41,733 | ³ | 4.0 | % | 135,783 | 13.0 | % | ||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Consolidated | N/A | N/A | $ | ³83,465 | ³ | 8.0 | % | $ | 139,583 | 13.4 | % | |||||||||||||
TIB Bank | $ | ³104,332 | ³ | 10.0% | ³ | 83,466 | ³ | 8.0 | % | 136,214 | 13.1 | % |
F-195
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Management believes, as of December 31, 2011, that the Company meets all capital requirements to which they are subject. Tier 1 Capital for the Company includes the trust preferred securities that were issued in September 2000, July 2001 and June 2006 to the extent allowable.
On September 22, 2010 the Federal Reserve Bank of Atlanta (FRB) and the Company entered into a written agreement (the “Written Agreement”) where the Company agreed, among other things, that it would not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB. On September 28, 2011, pursuant to approval by the FRB of a written request by the Company, the Company resumed payments of all amounts due for current and deferred interest through the next payment date for each of its trust preferred securities. On November 8, 2011, the FRB notified the Company that the Written Agreement was terminated effective April 30, 2011 given that TIB Bank was merged into Capital Bank and that the condition of the Company was subsequently upgraded.
On January 18, 2011, the Company concluded a rights offering wherein legacy shareholders with rights to purchase up to 1,489 shares of common stock, at a price of $15.00 per share, acquired 533 shares of newly issued common stock. The rights offering resulted in net proceeds of $7,763. The record date for the rights offering was July 12, 2010.
Subsidiary Dividend Limitations
Currently, the OCC Operating Agreement with Capital Bank prohibits the Bank from paying a dividend for three years following the July 16, 2010 initial acquisition date. Once the three-year period has elapsed, the agreement imposes other restrictions on Capital Bank’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made.
Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2011, if not subject to other restrictions, would have been limited to approximately $9,245.
Note 17—Stock-Based Compensation
As of December 31, 2011, the Company has one compensation plan under which shares of its common stock are issuable in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units. This is its 2004 Equity Incentive Plan (the “2004 Plan”), which was approved by the Company’s shareholders at the May 25, 2004 annual meeting. Pursuant to the merger agreement, upon the April 30, 2007 closing of its acquisition of The Bank of Venice, the Company granted 1 stock options in exchange for the options outstanding for the purchase of shares of common stock of The Bank of Venice at such date. The options were fully vested at the grant date and ranged in price from $863.92 to $992.68 per share as determined by the conversion ratio specified in the merger agreement. Previously, the Company had granted stock options under the 1994 Incentive Stock Option and Nonstatutory Stock Option Plan (the “1994 Plan”) as amended and restated as of August 31, 1996. Under the 2004 Plan, the Board of Directors of the Company may grant nonqualified stock–based awards to any director, and incentive or nonqualified stock-based awards to any officer, key executive, administrative, or other employee including an employee who is a director of the Company. Subject to the provisions of the 2004 Plan, the maximum number of shares of common stock of the Company that may be optioned or awarded through the 2014 expiration of the plan is 13 shares, no more than 3 of which may be issued pursuant to awards granted in the form of restricted shares. Such shares may be treasury,
F-196
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
or authorized but unissued, shares of common stock of the Company. If options or awards granted under the Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan as long as no dividends have been paid to the holder in accordance with the provisions of the grant agreement.
The following table summarizes the components and classification of stock-based compensation expense for the year ended December 31, 2011 and three months ended December 31, 2010 (Successor Company), and for the nine months ended September 31, 2010 and the year ended December 31, 2009 (Predecessor Company).
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||||
Stock options | $ | – | $ | – | $ | 625 | $ | 296 | ||||||||||
Restricted stock | – | – | 344 | 394 | ||||||||||||||
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Total stock-based compensation expense | $ | – | $ | – | $ | 969 | $ | 690 | ||||||||||
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Salaries and employee benefits | $ | – | $ | – | $ | 768 | $ | 381 | ||||||||||
Other expense | – | – | 201 | 309 | ||||||||||||||
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Total stock-based compensation expense | $ | – | $ | – | $ | 969 | $ | 690 | ||||||||||
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No tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was recorded for the nine months ended September 30, 2010 and year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets.
The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted for the year ended December 31, 2009:
Predecessor Company | ||||
2009 | ||||
Dividend yield | 0.00 | % | ||
Risk-free interest rate | 3.06 | % | ||
Expected option life | 6.5 years | |||
Volatility | 80 | % | ||
Weighted average grant-date fair value of options granted | $ | 116.34 |
• | The dividend yield was estimated using historical dividends paid and market value information for the Company’s stock. An increase in dividend yield will decrease stock compensation expense. |
• | The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense. |
F-197
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
• | The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. An increase in the option life will increase stock compensation expense. |
• | The volatility was estimated using historical volatility for periods approximating the expected option life. An increase in the volatility will increase stock compensation expense. |
No stock options were granted for the Successor Company year ended December 31, 2011 and three months ended December 31, 2010 or the Predecessor Company nine months ended September 30, 2010.
ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During 2009 and 2010, stock based compensation expense was recorded based upon estimates that we would experience no forfeitures. Our estimate of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in our estimates will be accounted for prospectively in the period of change.
As of December 31, 2011, there was no unrecognized compensation expense associated with stock options and restricted stock due to the accelerated vesting of all stock options and restricted stock and the recognition of associated compensation expense upon the closing of the investment by CBF on September 30, 2010.
Stock Options
Under the 2004 Plan, the exercise price for common stock must equal at least 100 percent of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10 percent of the common stock must equal at least 110 percent of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options vest over varying service periods which range from vesting immediately to up to nine years.
A summary of the stock option activity in the plans is as follows:
Predecessor Company
Shares | Weighted Average Exercise Price | |||||||
Balance, January 1, 2009 | 7 | $ | 894.82 | |||||
Granted | 2 | 162.18 | ||||||
Exercised | – | – | ||||||
Expired or forfeited | (1 | ) | 947.37 | |||||
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Balance, December 31, 2009 | 8 | $ | 680.42 | |||||
Granted | – | – | ||||||
Exercised | – | – | ||||||
Expired or forfeited | (0 | ) | 666.32 | |||||
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Balance, September 30, 2010 | 8 | $ | 681.31 | |||||
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F-198
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Successor Company
Shares | Weighted Average Exercise Price | |||||||
Balance, September 30, 2010 | 8 | $ | 681.31 | |||||
Granted | – | – | ||||||
Exercised | – | – | ||||||
Expired or forfeited | (1 | ) | 497.55 | |||||
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Balance, December 31, 2010 | 7 | $ | 688.80 | |||||
Granted | – | – | ||||||
Exercised | – | – | ||||||
Expired or forfeited | (5 | ) | 744.86 | |||||
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Balance, December 31, 2011 | 2 | $ | 541.61 | |||||
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Successor Company |
| Predecessor Company | ||||||||||||||||||||||||
Options exercisable at: | December 31, 2011 | December 31, 2010 |
| September 30, 2010 | ||||||||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price |
| Shares | Weighted Average Exercise Price | ||||||||||||||||||||
2 | $ | 541.61 | 7 | $ | 688.80 | 8 | $ | 681.31 |
Successor Company
The weighted average remaining terms for outstanding stock options and for exercisable stock options were 5.2 years and 5.2 years at December 31, 2011, respectively. The aggregate intrinsic value at December 31, 2011 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.
Options outstanding at December 31, 2011 were as follows:
Outstanding Options | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||||
$158.42 – $584.28 | 1 | 5.85 | $ | 242.16 | 1 | $ | 242.16 | |||||||||||||
584.29 – 1,072.46 | 1 | 4.68 | 783.56 | 1 | 783.56 | |||||||||||||||
1,072.47 – 1,489.52 | 0 | 3.51 | 1,276.43 | 0 | 1,276.43 | |||||||||||||||
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$158.42 – $1,489.52 | 2 | 5.19 | $ | 541.61 | 2 | $ | 541.61 | |||||||||||||
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Proceeds received from the exercise of stock options were $0 during the year ended December 31, 2011 and three months ended December 31, 2010. The intrinsic value related to the exercise of stock options was $0 during the year ended December 31, 2011 and the three months ended December 31, 2010. No tax benefit was recorded for the year ended December 31, 2011 and the three months ended December 31, 2010 as there were no exercises of non-qualified stock options or disqualifying dispositions.
F-199
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Predecessor Company
Proceeds received from the exercise of stock options were $0 and $0 during the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively. The intrinsic value related to the exercise of stock options was $0 and $0, the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively. No tax benefit was recorded for the nine months ended September 30, 2010 and the year ended December 31, 2009 as there were no exercises of non-qualified stock options or disqualifying dispositions.
Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares is generally on a straight-line basis and ranges from one to five years. The value of the restricted stock, estimated to be equal to the closing market price on the date of grant, is amortized on a straight-line basis over the respective service periods.
Successor Company
For the year ended December 31, 2011 and the three months ended December 31, 2010, no restricted stock awards vested due to the accelerated vesting of all restricted stock upon the closing of the investment by CBF on September 30, 2010.
Predecessor Company
The fair market value of restricted stock awards that vested was $27 and $101 during the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively. No tax benefit was recorded for the nine months ended September 30, 2010 and the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets.
A summary of the restricted stock activity in the plan is as follows:
Predecessor Company
Shares | Weighted Average Grant-Date Fair Value | |||||||
Balance, January 1, 2009 | 1 | $ | 1,084.83 | |||||
Granted | – | – | ||||||
Vested | (0 | ) | 1,140.67 | |||||
Expired or forfeited | (0 | ) | 725.88 | |||||
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Balance, December 31, 2009 | 1 | $ | 1,089.43 | |||||
Granted | – | – | ||||||
Vested | (1 | ) | 1,089.43 | |||||
Expired or forfeited | – | – | ||||||
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Balance, September 30, 2010 | – | $ | – | |||||
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F-200
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Successor Company
Shares | Weighted Average Grant-Date Fair Value | |||||||
Balance, September 30, 2010 | – | $ | – | |||||
Granted | – | – | ||||||
Vested | – | – | ||||||
Expired or forfeited | – | – | ||||||
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Balance, December 31, 2010 | – | $ | – | |||||
Granted | – | – | ||||||
Vested | – | – | ||||||
Expired or forfeited | – | – | ||||||
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Balance, December 31, 2011 | – | $ | – | |||||
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Note 18—Loan Commitments and Other Related Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no loan commitments or other related activities were reported on the Company’s consolidated balance sheet as of December 31, 2011. The contractual amount of financial instruments with off-balance-sheet risk was as follows at December 31, 2010:
2010 | ||||||||
Fixed Rate | Variable Rate | |||||||
Commitments to make loans | $ | 7,149 | $ | 4,549 | ||||
Unfunded commitments under lines of credit | 4,150 | 44,857 | ||||||
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Commitments to make loans are generally made for periods of 30 days. As of December 31, 2010, the fixed rate loan commitments have interest rates ranging from 2.94% to 11.00% and maturities ranging from 1 year to 30 years.
As of December 31, 2010 letters of credit totaled $1,638.
F-201
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 19—Supplemental Financial Data
Components of other expense in excess of 1 percent of total interest and non-interest income are as follows:
Successor Company |
| Predecessor Company | ||||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 |
| Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | ||||||||||||||
Foreclosed asset related expense | $ | 565 | $ | 536 | $ | 21,687 | $ | 3,149 | ||||||||||
Goodwill impairment | – | – | – | 5,887 | ||||||||||||||
FDIC & state assessments | 1,278 | 1,184 | 3,515 | 3,962 | ||||||||||||||
Legal and professional fees | 1,995 | 856 | 2,866 | 3,270 | ||||||||||||||
Computer services | 628 | 849 | 2,022 | 2,708 | ||||||||||||||
Capital raise expense | – | – | 2,067 | – | ||||||||||||||
Customer relationship intangible impairment | 2,872 | – | – | – | ||||||||||||||
Amortization of intangibles | 733 | 364 | 1,168 | 1,431 | ||||||||||||||
Postage, courier and armored car | 377 | 260 | 823 | 1,084 | ||||||||||||||
Insurance non-building | 531 | 447 | 1,171 | 870 | ||||||||||||||
Marketing and community relations | 267 | 258 | 860 | 1,128 | ||||||||||||||
Collection expense | (9 | ) | (7 | ) | 40 | 353 | ||||||||||||
Operational charge-offs | 51 | 48 | 69 | 155 | ||||||||||||||
Net (gain) loss on disposition of repossessed assets | (16 | ) | 39 | 9 | (244 | ) |
Note 20—Fair Values of Financial Instruments
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
As discussed in Note 3 Equity Method Investment in Capital Bank NA, due to the deconsolidation of the Bank during the second quarter of 2011, the Company had no assets or liabilities measured at fair value on a recurring or non recurring basis as of December 31, 2011.
Valuation of securities available for sale
The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
F-202
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
As of December 31, 2010, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining its estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers.
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The Company’s policy is to update appraisals, at a minimum, annually for all classified assets, which include collateral dependent loans and OREO. We consider appraisals dated within the past 12 months to be current and do not typically make adjustments to such appraisals. In the Company’s process for reviewing third-party prepared appraisals, any differences of opinion on values, assumptions or adjustments to comparable sales data are typically reconciled directly with the independent appraiser prior to acceptance of the final appraisal.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using | ||||||||||||||||
December 31, 2010 (Successor Company) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
U.S. Government agencies and corporations | $ | 40,699 | $ | – | $ | 40,699 | $ | – | ||||||||
States and political subdivisions— | 3,059 | – | 3,059 | – | ||||||||||||
States and political subdivisions—taxable | 2,157 | – | 2,157 | – | ||||||||||||
Marketable equity securities | 74 | 74 | – | – | ||||||||||||
Mortgage-backed securities—residential | 369,203 | – | 369,203 | – | ||||||||||||
Corporate bonds | 2,105 | – | 2,105 | – | ||||||||||||
Collateralized debt obligations | 795 | – | – | 795 | ||||||||||||
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Available for sale securities | $ | 418,092 | $ | 74 | $ | 417,223 | $ | 795 | ||||||||
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F-203
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2010 (Successor Company), and nine month ended September 30, 2010 (Predecessor Company) and still held at the end of each respective period.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | ||||||||
Successor Company | Predecessor Company | |||||||
Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | |||||||
Balance, beginning of period | $ | 808 | $ | 759 | ||||
Included in earnings – other than temporary impairment | – | – | ||||||
Included in other comprehensive income | (13 | ) | 49 | |||||
Transfer in to Level 3 | – | – | ||||||
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Balance, end of period | $ | 795 | $ | 808 | ||||
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Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Successor Company | Fair Value Measurements Using | |||||||||||||||
December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Other real estate owned | $ | 25,673 | $ | – | $ | – | $ | 25,673 | ||||||||
Other repossessed assets | 104 | – | 104 | – |
During the nine months ended September 30, 2010 prior to the application of adjustments related to the application of the acquisition method of accounting, $18,581 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment were considered in the overall determination of the provision for loan losses. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, valuation adjustments of $19,171 were recognized in our statement of operations during the nine months ended September 30, 2010. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, losses of $39 and $9 were recognized in our statements of operations during the Successor Company three months ended December 31, 2010 and the Predecessor Company nine months ended September 30, 2010, respectively. During the year ended December 31, 2009, $26,085 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, write downs of fair value of $1,980 were recognized in our statements of operations during the year ended December 31, 2009. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains of $244 were recognized in our statements of operations during the year ended December 31, 2009.
F-204
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Carrying amount and estimated fair values of financial instruments were as follows at December 31:
Successor Company | Successor Company | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,221 | $ | 2,221 | $ | 153,794 | $ | 153,794 | ||||||||
Investment securities available for sale | – | – | 418,092 | 418,092 | ||||||||||||
Loans, net | – | – | 1,004,228 | 995,744 | ||||||||||||
Federal Home Loan Bank and Independent Bankers’ Bank stock | – | – | 9,621 | N/A | ||||||||||||
Accrued interest receivable | – | – | 4,917 | 4,917 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Non-contractual deposits | – | – | 648,019 | 648,019 | ||||||||||||
Contractual deposits | – | – | 719,006 | 719,328 | ||||||||||||
Federal Home Loan Bank Advances | – | – | 131,116 | 130,906 | ||||||||||||
Short-term borrowings | – | – | 47,158 | 47,156 | ||||||||||||
Long-term repurchase agreements | – | – | – | – | ||||||||||||
Subordinated debentures | 23,176 | 24,093 | 22,887 | 25,267 | ||||||||||||
Accrued interest payable | 132 | 132 | 7,260 | 7,260 |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, non contractual which consists of demand deposits and deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For loans, contractual deposits, which consist of deposits with infrequent repricing or repricing limits and debt, fair value is based on discounted cash flows using current market rates. It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability. The fair value of off balance sheet items is not considered material.
F-205
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 21—Condensed Financial Information of TIB Financial Corp.
Condensed Balance Sheets
(Parent Only)
Successor Company | ||||||||
December 31, | 2011 | 2010 | ||||||
Assets: | ||||||||
Cash and due from banks | $ | 1,645 | $ | 3,506 | ||||
Investment in bank subsidiaries | 200,843 | 198,403 | ||||||
Investment in other subsidiaries | 2,224 | 3,726 | ||||||
Other assets | 1,092 | 410 | ||||||
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Total Assets | $ | 205,804 | $ | 206,045 | ||||
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Liabilities and Shareholders’ Equity: | ||||||||
Accrued interest payable | $ | 132 | $ | 2,102 | ||||
Long-term borrowings | 24,198 | 23,909 | ||||||
Other liabilities | 4,096 | 3,284 | ||||||
Shareholders’ equity | 177,378 | 176,750 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 205,804 | $ | 206,045 | ||||
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F-206
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Condensed Statements of Income
(Parent Only)
Successor Company | Predecessor Company | |||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||
Operating income: | ||||||||||||||||
Interest Income | $ | 42 | $ | 12 | $ | 3 | $ | 97 | ||||||||
Dividends from other subsidiaries | 48 | – | – | 31 | ||||||||||||
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Total operating income | 90 | 12 | 3 | 128 | ||||||||||||
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Operating expense: | ||||||||||||||||
Interest expense | 1,934 | 470 | 1,153 | 1,626 | ||||||||||||
Other expense | 886 | 202 | 1,720 | 1,660 | ||||||||||||
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Total operating expense | 2,820 | 672 | 2,873 | 3,286 | ||||||||||||
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Loss before income tax benefit and equity in undistributed earnings of subsidiaries | (2,730 | ) | (660 | ) | (2,870 | ) | (3,158 | ) | ||||||||
Income tax benefit | 1,023 | 244 | – | 540 | ||||||||||||
Loss before equity in undistributed earnings of subsidiaries | (1,707 | ) | (416 | ) | (2,870 | ) | (2,618 | ) | ||||||||
Equity in income (losses) of subsidiaries | 4,507 | 976 | (49,935 | ) | (58,930 | ) | ||||||||||
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Net income (loss) | $ | 2,800 | $ | 560 | $ | (52,805 | ) | $ | (61,548 | ) | ||||||
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F-207
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Condensed Statements of Cash Flows
(Parent Only)
Successor Company | Predecessor Company | |||||||||||||||
Year Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 2,800 | $ | 560 | $ | (52,805 | ) | $ | (61,548 | ) | ||||||
Equity in (income) losses of subsidiaries | (4,507 | ) | (976 | ) | 49,935 | 58,930 | ||||||||||
Stock-based compensation expense | – | – | 178 | 287 | ||||||||||||
Increase (decrease) in net income tax obligation | (1,166 | ) | (238 | ) | 184 | 997 | ||||||||||
(Increase) decrease in other assets | (70 | ) | 415 | (58 | ) | 128 | ||||||||||
Increase (decrease) in other liabilities | (1,740 | ) | (3,746 | ) | 1,146 | 307 | ||||||||||
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Net cash provided by (used in) operating activities | (4,683 | ) | (3,985 | ) | (1,420 | ) | (899 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||||||
Investment in bank subsidiaries | (5,241 | ) | (5,114 | ) | (150,000 | ) | (20,500 | ) | ||||||||
Investment in other subsidiaries | 300 | – | (296 | ) | (148 | ) | ||||||||||
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Net cash used in investing activities | (4,941 | ) | (5,114 | ) | (150,296 | ) | (20,648 | ) | ||||||||
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Cash flows from financing activities: | ||||||||||||||||
Net proceeds from issuance of common shares | – | – | – | (48 | ) | |||||||||||
Income tax effect of stock based compensation | – | – | (184 | ) | (206 | ) | ||||||||||
Proceeds from issuance of common stock | 7,763 | – | – | – | ||||||||||||
Proceeds from subsidiaries for equity awards | – | – | 791 | 401 | ||||||||||||
Net proceeds from Capital Bank Financial, Corp. investment | – | – | 162,840 | – | ||||||||||||
Cash dividends paid | – | – | – | (1,285 | ) | |||||||||||
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Net cash provided by (used in) financing activities | 7,763 | – | 163,447 | (1,138 | ) | |||||||||||
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Net increase (decrease) in cash | (1,861 | ) | (9,099 | ) | 11,731 | (22,685 | ) | |||||||||
Cash, beginning of period | 3,506 | 12,605 | 874 | 23,559 | ||||||||||||
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Cash, end of period | $ | 1,645 | $ | 3,506 | $ | 12,605 | $ | 874 | ||||||||
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F-208
Table of Contents
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 22–Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results for 2011 and 2010:
Successor Company | Predecessor Company | |||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
Condensed income statements: | ||||||||||||||||||||||||||||||||
Interest income | $ | 2 | $ | 10 | $ | 5,290 | $ | 15,844 | $ | 15,681 | $ | 17,042 | $ | 16,988 | $ | 18,287 | ||||||||||||||||
Net interest income | (490 | ) | (461 | ) | 3,934 | 12,682 | 12,432 | 10,786 | 10,602 | 11,494 | ||||||||||||||||||||||
Provision for loan losses | – | – | 136 | 485 | 402 | 17,072 | 7,700 | 4,925 | ||||||||||||||||||||||||
Equity in income from investment in Capital Bank, N.A. | 1,453 | 1,973 | 658 | – | – | – | – | – | ||||||||||||||||||||||||
Investment securities gain | – | – | – | 12 | – | – | 993 | 1,642 | ||||||||||||||||||||||||
Customer relationship intangible impairment | 2,872 | – | – | – | – | –�� | – | – | ||||||||||||||||||||||||
Income (Loss) from continuing operations | (819 | ) | 1,591 | 960 | 1,068 | 560 | (33,655 | ) | (14,099 | ) | (5,051 | ) | ||||||||||||||||||||
Income earned by preferred shareholders | – | – | – | – | – | 680 | 669 | 660 | ||||||||||||||||||||||||
Gain on Retirement of Series A preferred allocated to common shareholders | – | – | – | – | – | (24,276 | ) | – | – | |||||||||||||||||||||||
Net income (loss) allocated to common shareholders | (819 | ) | 1,591 | 960 | 1,068 | 560 | (10,059 | ) | (14,768 | ) | (5,711 | ) | ||||||||||||||||||||
Basic earnings (loss) per common share | $ | (0.07 | ) | $ | 0.13 | $ | 0.08 | $ | 0.09 | $ | 0.05 | $ | (67.56 | ) | $ | (99.19 | ) | $ | (38.36 | ) | ||||||||||||
Diluted earnings (loss) per common share | $ | (0.07 | ) | $ | 0.13 | $ | 0.07 | $ | 0.07 | $ | 0.03 | $ | (67.56 | ) | $ | (99.19 | ) | $ | (38.36 | ) |
The Successor Company reported net income of $2,800 for the year ended December 31, 2011. As discussed in Note 1, due to the deconsolidation of the Bank during the second quarter of 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet and subsequent to the Merger date, the company began to account for its ownership in Capital Bank, N.A. under the equity method of accounting. Equity in income from investment in Capital Bank, N.A. was $4,084 for the year ended December 31, 2011. During the fourth quarter of 2011, the Company performed an impairment test which resulted in the recognition of an impairment charge of $2,872 relating to Naples Capital Advisors, Inc.’s customer relationship intangible asset. The termination of employment and subsequent direct competition of several employees of Naples Capital Advisors resulted in a decrease in assets under management. Interest income and interest expense after deconsolidation of the Bank are the result of cash deposited in Capital Bank, N.A. and the outstanding trust preferred securities issued by the Company, respectively.
The Successor Company reported net income of $560 for the three months ended December 31, 2010. Increases in net interest income are primarily due to the impact of the purchase accounting adjustments which revalued market deposits and borrowings to yield market interest rates as of September 30, 2010. The provision for loan losses of $402 recorded reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010. No net charge-offs or losses on the disposition of other real estate owned were recorded as credit losses experienced were incorporated in the net discounts recorded on loans and other real estate acquired as of September 30, 2010.
F-209
Table of Contents
Capital Bank Corporation
Unaudited Consolidated Financial Statements as of and for the
Three and Six Months Ended June 30, 2012
Table of Contents
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Successor Company | ||||||||
(Dollars in thousands) | Jun. 30, 2012 | Dec. 31, 2011 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 985 | $ | 2,163 | ||||
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Total cash and cash equivalents | 985 | 2,163 | ||||||
Equity method investment in Capital Bank, NA | 250,637 | 243,691 | ||||||
Advance to Capital Bank, NA | 3,393 | 3,393 | ||||||
Other assets | 772 | 458 | ||||||
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Total assets | $ | 255,787 | $ | 249,705 | ||||
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Liabilities | ||||||||
Subordinated debentures | $ | 19,274 | $ | 19,163 | ||||
Other liabilities | 5,383 | 5,715 | ||||||
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Total liabilities | 24,657 | 24,878 | ||||||
Shareholders’ Equity | ||||||||
Common stock, no par value; 300,000,000 shares authorized; and 85,802,164 shares issued and outstanding | 218,802 | 218,789 | ||||||
Retained earnings | 10,636 | 5,267 | ||||||
Accumulated other comprehensive income | 1,692 | 771 | ||||||
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Total shareholders’ equity | 231,130 | 224,827 | ||||||
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Total liabilities and shareholders’ equity | $ | 255,787 | $ | 249,705 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
F-211
Table of Contents
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Successor Company | Successor Company |
| Predecessor Company | |||||||||||||||||||
(Dollars in thousands except per share data) | Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 |
| Jan. 1, 2011 to Jan. 28, 2011 | ||||||||||||||||
Interest income: | ||||||||||||||||||||||
Loans and loan fees | $ | – | $ | 16,465 | $ | – | $ | 27,521 | $ | 5,479 | ||||||||||||
Investment securities: | ||||||||||||||||||||||
Taxable interest income | – | 2,216 | – | 3,206 | 391 | |||||||||||||||||
Tax-exempt interest income | – | 239 | – | 398 | 74 | |||||||||||||||||
Dividends | – | 30 | – | 59 | – | |||||||||||||||||
Federal funds and other interest income | 85 | 40 | 170 | 87 | 11 | |||||||||||||||||
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Total interest income | 85 | 18,990 | 170 | 31,271 | 5,955 | |||||||||||||||||
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Interest expense: | ||||||||||||||||||||||
Deposits | – | 2,786 | – | 4,560 | 1,551 | |||||||||||||||||
Borrowings and subordinated debentures | 369 | 765 | 731 | 1,251 | 445 | |||||||||||||||||
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Total interest expense | 369 | 3,551 | 731 | 5,811 | 1,996 | |||||||||||||||||
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Net interest income | (284 | ) | 15,439 | (561 | ) | 25,460 | 3,959 | |||||||||||||||
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Provision for loan losses | – | 1,283 | – | 1,450 | 40 | |||||||||||||||||
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Net interest income (loss) after provision for loan losses | (284 | ) | 14,156 | (561 | ) | 24,010 | 3,919 | |||||||||||||||
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Noninterest income: | ||||||||||||||||||||||
Equity income from investment in Capital Bank, NA | 2,937 | – | 6,025 | – | – | |||||||||||||||||
Service charges and other fees | – | 807 | – | 1,355 | 291 | |||||||||||||||||
Bank card services | – | 547 | – | 847 | 174 | |||||||||||||||||
Mortgage origination and other loan fees | – | 255 | – | 518 | 210 | |||||||||||||||||
Brokerage fees | – | 212 | – | 308 | 78 | |||||||||||||||||
Bank-owned life insurance | – | 114 | – | 134 | 10 | |||||||||||||||||
Other | – | 130 | – | 155 | 69 | |||||||||||||||||
Total noninterest income | 2,937 | 2,065 | 6,025 | 3,317 | 832 | |||||||||||||||||
Noninterest expense: | ||||||||||||||||||||||
Salaries and employee benefits | – | 5,568 | – | 9,525 | 1,977 | |||||||||||||||||
Occupancy | – | 1,830 | – | 2,970 | 548 | |||||||||||||||||
Furniture and equipment | – | 857 | – | 1,401 | 275 | |||||||||||||||||
Data processing and telecommunications | – | 635 | – | 911 | 180 | |||||||||||||||||
Advertising and public relations | – | 144 | – | 325 | 131 | |||||||||||||||||
Office expenses | – | 269 | – | 498 | 93 | |||||||||||||||||
Professional fees | – | 208 | – | 543 | 190 | |||||||||||||||||
Business development and travel | – | 304 | – | 550 | 87 | |||||||||||||||||
Amortization of other intangible assets | – | 287 | – | 478 | 62 | |||||||||||||||||
ORE losses and miscellaneous loan costs | – | 1,085 | – | 1,608 | 176 | |||||||||||||||||
Directors’ fees | – | 53 | – | 93 | 68 | |||||||||||||||||
FDIC deposit insurance | – | 513 | – | 1,076 | 266 | |||||||||||||||||
Contract termination fees | – | 374 | – | 3,955 | – | |||||||||||||||||
Other | 257 | 670 | 414 | 1,093 | 102 | |||||||||||||||||
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Total noninterest expense | 257 | 12,797 | 414 | 25,026 | 4,155 | |||||||||||||||||
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Net income before taxes | 2,396 | 3,424 | 5,050 | 2,301 | 596 | |||||||||||||||||
Income tax expense (benefit) | (230 | ) | 1,115 | (319 | ) | 566 | – | |||||||||||||||
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Net income | 2,626 | 2,309 | 5,369 | 1,735 | 596 | |||||||||||||||||
Dividends and accretion on preferred stock | – | – | – | – | 861 | |||||||||||||||||
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Net income (loss) attributable to common shareholders | $ | 2,626 | $ | 2,309 | $ | 5,369 | $ | 1,735 | $ | (265 | ) | |||||||||||
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Earnings (loss) per common share—basic | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | |||||||||||
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Earnings (loss) per common share—diluted | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | |||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
F-212
Table of Contents
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Successor Company | Successor Company |
| Predecessor Company | |||||||||||||||||||
(Dollars in thousands) | Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 |
| Jan. 1, 2011 to Jan. 28, 2011 | ||||||||||||||||
Net income | $ | 2,626 | $ | 2,309 | $ | 5,369 | $ | 1,735 | $ | 596 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||
Unrealized holding gains (losses) on securities—available for sale | – | 5,080 | – | 7,315 | (528 | ) | ||||||||||||||||
Unrealized holding gains from investment in Capital Bank, NA | 2,535 | – | 1,510 | – | – | |||||||||||||||||
Amortization of prior service cost on SERP | – | – | – | – | 1 | |||||||||||||||||
Income tax effect | (989 | ) | (1,958 | ) | (589 | ) | (2,820 | ) | 204 | |||||||||||||
Other comprehensive income (loss), net of tax | 1,546 | 3,122 | 921 | 4,495 | (323 | ) | ||||||||||||||||
Comprehensive income | $ | 4,172 | $ | 5,431 | $ | 6,290 | $ | 6,230 | $ | 273 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-213
Table of Contents
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income (loss) | $ | 5,369 | $ | 1,735 | $ | 596 | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||
Equity income from investment in Capital Bank, NA | (6,025 | ) | – | – | ||||||||||
Accretion of purchased credit-impaired loans | – | (26,262 | ) | – | ||||||||||
Amortization/accretion on acquired liabilities, net | 111 | (3,529 | ) | – | ||||||||||
Provision for loan losses | – | 1,450 | 40 | |||||||||||
Amortization of other intangible assets | – | 478 | 62 | |||||||||||
Depreciation | – | 1,354 | 240 | |||||||||||
Stock-based compensation | 13 | 140 | 42 | |||||||||||
Amortization of premium on securities, net | – | 695 | 171 | |||||||||||
Loss on disposal of premises, equipment and ORE | – | 5 | 26 | |||||||||||
ORE valuation adjustments | – | 74 | – | |||||||||||
Bank-owned life insurance income | – | (134 | ) | (10 | ) | |||||||||
Deferred income tax expense (benefit) | (40 | ) | – | – | ||||||||||
Net change in: | ||||||||||||||
Mortgage loans held for sale | – | 1,907 | 4,424 | |||||||||||
Accrued interest receivable and other assets | (314 | ) | (4,214 | ) | (1,309 | ) | ||||||||
Accrued interest payable and other liabilities | (292 | ) | 2,927 | (3,939 | ) | |||||||||
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Net cash provided by (used in) operating activities | (1,178 | ) | (23,374 | ) | 343 | |||||||||
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Cash flows from investing activities: | ||||||||||||||
Net cash paid in Capital Bank merger | – | (42,880 | ) | – | ||||||||||
Investment in Capital Bank, NA | – | (6,063 | ) | – | ||||||||||
Principal repayments on loans, net of loans originated or acquired | – | 13,048 | 14,547 | |||||||||||
Purchases of premises and equipment | – | (607 | ) | (307 | ) | |||||||||
Proceeds from sales of premises, equipment and ORE | – | 4,545 | 20 | |||||||||||
Purchases of FHLB Stock | – | 1,259 | – | |||||||||||
Purchases of securities—available for sale | – | (138,855 | ) | (6,840 | ) | |||||||||
Proceeds from principal repayments/calls/maturities of | – | 25,761 | 3,936 | |||||||||||
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Net cash provided by (used in) investing activities | – | (143,792 | ) | 11,356 | ||||||||||
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(continued on next page)
F-214
Table of Contents
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 |
| Jan. 1, 2011 to Jan. 28, 2011 | ||||||||||
Cash flows from financing activities: | ||||||||||||||
Decrease in deposits, net | – | (2,426 | ) | (4,960 | ) | |||||||||
Principal repayments of borrowings | – | (30,000 | ) | (5,000 | ) | |||||||||
Repurchase of preferred stock | – | – | (41,279 | ) | ||||||||||
Proceeds from CBF Investment | – | – | 181,050 | |||||||||||
Proceeds from issuance of common stock, net of offering costs | – | 3,814 | – | |||||||||||
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Net cash provided by (used in) financing activities | – | (28,612 | ) | 129,811 | ||||||||||
Net change in cash and cash equivalents | $ | (1,178 | ) | $ | (195,778 | ) | $ | 141,510 | ||||||
Cash and cash equivalents at beginning of period | 2,163 | 208,255 | 66,745 | |||||||||||
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Cash and cash equivalents at end of period | $ | 985 | $ | 12,477 | $ | 208,255 | ||||||||
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Supplemental Disclosure of Cash Flow Information | ||||||||||||||
Noncash investing activities: | ||||||||||||||
Transfer of noncash assets to Capital Bank, NA | $ | – | 1,419,308 | $ | – | |||||||||
Transfer of liabilities to Capital Bank, NA | – | 1,457,413 | – | |||||||||||
Equity method investment in Capital Bank, NA | – | 232,264 | – | |||||||||||
Transfers of loans and premises to ORE | – | 7,573 | 248 | |||||||||||
Transfers of OREO to loans | – | 857 | 146 | |||||||||||
Capital leases recorded in premises and other liabilities | – | 6,618 | – | |||||||||||
Cash paid for (received from): | ||||||||||||||
Income taxes | $ | – | $ | 130 | $ | – | ||||||||
Interest | 634 | 9,989 | 1,531 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-215
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Organization and Nature of Operations
Capital Bank Corporation (the “Company”) is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Capital Bank (“Old Capital Bank”), a state-chartered banking corporation that was incorporated under the laws of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. The Company also has interests in three trusts: Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the “Trusts”).
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to Capital Bank Financial Corp. (“CBF,” formerly known as “North American Financial Holdings, Inc.”) for $181.1 million (the “CBF Investment”). As a result of the CBF Investment and the Company’s rights offering on March 11, 2011, CBF currently owns approximately 83% of the Company’s common stock. Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).
On June 30, 2011, Old Capital Bank merged (the “Bank Merger”) with and into NAFH National Bank (“NAFH Bank”), a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, NA” or the “Bank”). On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, Inc. (“Green Bankshares”) and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial Corp. (“TIB Financial”) owning 21%, and Green Bankshares owning the remaining 34%. CBF is the owner of approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. The accounts of Old Capital Bank were consolidated with the Company until the Bank Merger on June 30, 2011. The Trusts have not been consolidated with the financial statements of the Company. In connection with the Bank Merger, assets and liabilities of Old Capital Bank were deconsolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and liabilities of the Company in the second quarter of 2011. The Company now accounts for its investment in Capital Bank, NA under the equity method. Accordingly, as of June 30, 2012, no investment securities, loans or deposits are reported on the Company’s Consolidated Balance Sheet.
In the periods subsequent to the Bank Merger, the Company has and will adjust the equity investment balance based on its equity in Capital Bank, NA’s net income and other comprehensive income. The interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all of the information and footnotes required by such accounting principles for complete financial statements, and therefore should be read in conjunction with the audited consolidated financial statements and accompanying footnotes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
F-216
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all significant intercompany transactions have been eliminated in consolidation. The Company has considered the impact on these condensed consolidated financial statements of subsequent events. The results of operations for the six months ended June 30, 2012 (Successor Company) are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and reflects the impact of measurement period adjustments.
The initial estimated fair values of assets and liabilities acquired were based upon information that was available at the time to make preliminary estimates of fair value. The Company expected to obtain additional information during the measurement period which could result in changes to the estimated fair value amounts. The Company is still within the measurement period and has not yet finalized its estimates of fair value. However, as required by the acquisition method of accounting, the Company has retrospectively adjusted certain preliminary estimates to reflect refinements of estimates of fair values and new information obtained about facts and circumstances that existed as of the acquisition date. As a result of the Bank Merger, such changes are principally reflected in the accompanying financial statements as changes in the Company’s equity method investment in Capital Bank, NA. The most significant refinements include: (1) increases in the collectability of certain legacy bank fully charged-off loan balances and fees; (2) an increase in the estimated fair value of the core deposit intangible asset; (3) an increase in deferred tax assets related to the other fair value estimate changes offset by a reduction of expected realization of items considered to be built in losses; and (4) an increase in Goodwill caused by the net effect of these adjustments. Accordingly, the financial statements herein reflect a decrease of less than $0.1 million in the Company’s investment in Capital Bank, NA and additional paid in capital for the reported period and as of December 31, 2011.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A description of the accounting policies followed by the Company are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also, in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with TARP were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations (the “Rights Offering”). The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
F-217
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.
Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.
Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures About Offsetting Assets and Liabilities. This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). However, as the FASB and the International Accounting Standards Board (collectively, the “Boards”) were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, we expect that the adoption of ASU No. 2011-11 will not have an impact on the Company’s consolidated financial condition or results of operation.
Also in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other
F-218
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 did not have an impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. The adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this update did not have a material impact on the Company’s financial position or results of operations.
F-219
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. The adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In January 2011, the FASB issued ASU 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
2. Equity Method Investment in Capital Bank, NA
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, NA. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial Corp. and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
Capital Bank, NA was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks—Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina)—from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of June 30, 2012, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.3 billion, total deposits of $5.1 billion and shareholders’ equity of $966.5 million.
The Bank Merger, the preceding merger of TIB Bank and Capital Bank, NA, and the succeeding merger of GreenBank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. At the
F-220
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
time of the Bank Merger, due to the deconsolidation of Old Capital Bank, the balance of accumulated other comprehensive income was reclassified to common stock within shareholders’ equity. Immediately following the Bank Merger, on June 30, 2011, CBF, the Company and TIB Financial made cash contributions of additional capital to Capital Bank, NA of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, NA. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, NA in exchange for additional shares of Capital Bank, NA. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.
As of June 30, 2012 (Successor) and December 31, 2011 (Successor), the Company’s investment in Capital Bank, NA totaled $250.6 million and $243.7 million, respectively, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of June 30, 2012 (Successor) and December 31, 2011 (Successor). The advance pays annual interest at 10% payable in quarterly installments and matures March 18, 2020. In the three months ended June 30, 2012 (Successor), the Company increased the equity investment balance by $2.9 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $1.5 million based on its equity in Capital Bank, NA’s other comprehensive income.
In the six months ended June 30, 2012 (Successor), the Company increased the equity investment balance by $6.0 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $921 thousand based on its equity in Capital Bank, NA’s other comprehensive income. Prior to the Bank Merger on June 30, 2011, the equity method of accounting was not appropriate and therefore no comparable period exists for the three and six months ended June 30, 2011.
The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA. Prior to the Bank Merger on June 30, 2011, there was no equity method investment in Capital Bank, NA. As the equity interest includes the operations of the Company’s previously consolidated subsidiary bank, the operations of the equity method investee prior to the Bank Merger is not meaningful and comparable since they do not reflect the subsequent combined operations.
Capital Bank, NA | Three Months Ended Jun. 30, 2012 | Six Months Ended Jun. 30, 2012 | ||||||
(Dollars in thousands) | ||||||||
Interest income | $ | 72,893 | $ | 147,025 | ||||
Interest expense | 8,000 | 16,725 | ||||||
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Net interest income | 64,893 | 130,300 | ||||||
Provision for loan losses | 6,608 | 11,984 | ||||||
Noninterest income | 12,298 | 26,912 | ||||||
Noninterest expense | 52,799 | 108,017 | ||||||
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Net income | 11,326 | 23,234 | ||||||
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3. Earnings (Loss) Per Share
Basic earnings (loss) per common share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments, such as stock options and warrants, unless the effect is to reduce a loss or increase earnings. Basic EPS is adjusted for outstanding stock options and warrants using the treasury stock method in order to compute diluted EPS.
F-221
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The calculation of basic and diluted EPS was based on the following for each period presented:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||||||
(Dollars in thousands except per share data) | Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||||||||
Net income (loss) attributable to common shareholders | $ | 2,626 | $ | 2,309 | $ | 5,369 | $ | 1,735 | $ | (265 | ) | |||||||||||
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Weighted average number of common shares outstanding: | ||||||||||||||||||||||
Basic | 85,802,164 | 85,802,164 | 85,802,164 | 85,465,250 | 13,188,612 | |||||||||||||||||
Dilutive effect of options outstanding | – | 9 | – | – | – | |||||||||||||||||
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Diluted | 85,802,164 | 85,802,173 | 85,802,164 | 85,465,250 | 13,188,612 | |||||||||||||||||
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Earnings (loss) per common share—basic | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | |||||||||||
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Earnings (loss) per common share—diluted | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | |||||||||||
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Weighted average anti-dilutive stock options and warrants excluded from the computation of diluted earnings per share for each period presented are as follows:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||||||
Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | ||||||||||||||||||
Anti-dilutive stock options | 140,300 | 291,980 | 140,300 | 292,480 | 297,880 | |||||||||||||||||
Anti-dilutive warrants | – | – | – | – | 749,619 |
F-222
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Allowance for Loan Losses
The following is a summary of activity in the allowance for loan losses for each period presented:
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||
Balance at beginning of period, predecessor | $ | – | $ | – | $ | 36,061 | ||||||||
Loans charged off | – | (339 | ) | (49 | ) | |||||||||
Recoveries of loans previously charged off | – | – | 9 | |||||||||||
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Net charge-offs | – | (339 | ) | (40 | ) | |||||||||
Provision for loan losses | – | 1,450 | 40 | |||||||||||
Merger of Old Capital Bank into Capital Bank, NA | – | (1,111 | ) | – | ||||||||||
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Balance at the end of period, predecessor | – | – | 36,061 | |||||||||||
Acquisition accounting adjustment | – | – | (36,061 | ) | ||||||||||
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Balance at end of period, successor | $ | – | $ | – | $ | – | ||||||||
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The allowance for credit losses includes the allowance for loan losses, detailed above, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheet. Due to the Bank Merger, the Company had no allowance for credit losses as of June 30, 2012 (Successor) and December 31, 2011 (Successor).
5. Stock-Based Compensation
Stock Options
Pursuant to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”), the Company had a stock option plan providing for the issuance of up to 1,150,000 options to purchase shares of the Company’s stock to officers and directors. As of June 30, 2012 (Successor), options for 140,300 shares of common stock were outstanding. Pursuant to the Equity Incentive Plan, no options may be granted after February 21, 2012 and the Equity Incentive Plan was terminated. In addition, there were 566,071 options which were assumed under various plans from previously acquired financial institutions, none of which remain outstanding. Grants of options were made by the Board of Directors or the Compensation/Human Resources Committee of the Board. All grants were made with an exercise price at no less than fair market value on the date of grant and must be exercised no later than 10 years from the date of grant.
F-223
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the activity of the Company’s stock option plans, including the weighted average exercise price (“WAEP”), for each period is presented below:
Successor Company | Predecessor Company | |||||||||||||||||||||||||
Six Months Ended Jun. 30, 2012 | Period of Jan. 29 to Jun. 30, 2011 | Period of Jan. 1 to Jan. 28, 2011 | ||||||||||||||||||||||||
Shares | WAEP | Shares | WAEP | Shares | WAEP | |||||||||||||||||||||
Outstanding options, beginning of period | 193,600 | $ | 13.11 | 297,880 | $ | 12.11 | 297,880 | $ | 12.11 | |||||||||||||||||
Granted | – | – | – | – | – | – | ||||||||||||||||||||
Exercised | – | – | – | – | – | – | ||||||||||||||||||||
Forfeited and expired | (53,300 | ) | 13.50 | (5,400 | ) | 14.51 | – | – | ||||||||||||||||||
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Outstanding options, end of period | 140,300 | $ | 12.97 | 292,480 | $ | 12.07 | 297,880 | $ | 12.11 | |||||||||||||||||
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Options exercisable at end of period | 126,700 | $ | 13.62 | 253,280 | $ | 12.92 | 226,430 | $ | 13.53 |
The following table summarizes information about the Company’s stock options as of June 30, 2012 (Successor):
Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life in Years | Number Exercisable | Intrinsic Value | ||||||||||||
$3.85 – $6.00 | 45,050 | 5.46 | 33,050 | $ | – | |||||||||||
$6.01 – $9.00 | – | – | – | – | ||||||||||||
$9.01 – $12.00 | 2,500 | 10.29 | 2,500 | – | ||||||||||||
$12.01 – $15.00 | 16,000 | 13.15 | 14,400 | – | ||||||||||||
$15.01 – $18.00 | 39,000 | 16.52 | 39,000 | – | ||||||||||||
$18.01 – $18.37 | 37,750 | 18.35 | 37,750 | – | ||||||||||||
140,300 | 12.97 | 126,700 | $ | – |
The fair values of options granted are estimated on the date of the grant using the Black-Scholes option pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. There were no options granted in the six months ended June 30, 2012 (Successor), the period from January 29, 2011 to June 30, 2011 (Successor) or the period from January 1, 2011 to January 28, 2011 (Predecessor).
For the six months ended June 30, 2012 (Successor), the period from January 29, 2011 to June 30, 2011 (Successor) and the period from January 1, 2011 to January 28, 2011 (Predecessor), the Company recorded total compensation expense related to stock options of $13,000, $72,000, and $5,000, respectively. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the controlling investment in the Company made by CBF.
Restricted Stock
Pursuant to the Equity Incentive Plan, the Board of Directors could grant restricted stock to certain employees and Board members at its discretion. There have been no restricted stock grants since 2008, and the Equity Incentive Plan expired on February 21, 2012. Nonvested shares were subject to forfeiture if employment was terminated prior to the vesting dates. The Company expensed the cost of the stock awards, determined to be the fair value of the shares at the date of grant, ratably over the period of the vesting. There was no restricted stock activity for the six months ended June 30, 2012 (Successor).
F-224
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Total compensation expense related to these restricted stock awards for the period of January 29 to June 30, 2011 (Successor) and the period of January 1, 2011 to January 28, 2011 (Predecessor) totaled $68,000, and $2,000, respectively. On January 28, 2011, vesting was accelerated on certain outstanding nonvested restricted shares in connection with the controlling investment in the Company made by CBF.
Deferred Compensation for Non-employee Directors
Until the CBF Investment, the Company administered the Capital Bank Corporation Deferred Compensation Plan for Outside Directors (“Deferred Compensation Plan”). Eligible directors may have elected to participate in the Deferred Compensation Plan by deferring all or part of their directors’ fees for at least one calendar year, in exchange for common stock of the Company. If a director did not elect to defer all or part of his fees, then he was not considered a participant in the Deferred Compensation Plan. The amount deferred was equal to 125 percent of total director fees. Each participant was fully vested in his account balance. The Deferred Compensation Plan provides for payment of share units in shares of common stock of the Company after the participant ceased to serve as a director for any reason.
Upon closing of the CBF Investment, the Deferred Compensation Plan was terminated and all phantom shares in the Plan were distributed to the participants. For the period of January 1, 2011 to January 28, 2011 (Predecessor), the Company recognized stock-based compensation expense of $35,000 related to the Deferred Compensation Plan.
6. Fair Value
Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. FASB guidance on fair value measurements defines fair value, establishes a framework for measuring fair value, and requires fair value disclosures for certain assets and liabilities measured at fair value on a recurring and nonrecurring basis. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
The guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of inputs and the classification of financial instruments within the fair value hierarchy are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date;
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data; and
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
F-225
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Due to the Bank Merger and related deconsolidation of Old Capital Bank, the Company had no assets or liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2012 (Successor) and December 31, 2011 (Successor). Prior to the Bank Merger, investment securities, available for sale, were recorded at fair value on a recurring basis. Additionally, prior to the Bank Merger, the Company may have been required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involved application of lower of cost or market accounting or write-downs of individual assets.
Sensitivity to Changes in Significant Unobservable Inputs
Prior to the Bank Merger, the Company owned two corporate bonds measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The first of these investments was subordinated debt of a community bank and the second an investment in trust preferred securities of a different community bank. The significant unobservable inputs used in the fair value measurement of the Company’s corporate bonds were incorporated in the discounted cash flow method used. Discount rates utilized in the modeling of the bonds were estimated based on a variety of factors including the market yields of other non-investment grade corporate debt and a review of each bank’s performance. Significant changes in any of the inputs in isolation would have resulted in a significantly different fair value measurement.
Due to the Bank Merger, the Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2012 (Successor) and December 31, 2011 (Successor).
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods presented:
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||
Balance at beginning of period | $ | – | $ | 1,107 | $ | 1,300 | ||||||||
Total unrealized losses included in: | ||||||||||||||
Net income | – | – | – | |||||||||||
Other comprehensive income | – | – | (193 | ) | ||||||||||
Purchases, sales and issuances, net | – | – | – | |||||||||||
Transfers into Level 3 | – | – | – | |||||||||||
Merger of Old Capital Bank into Capital Bank, NA | – | (1,107 | ) | – | ||||||||||
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Balance at end of period | $ | – | $ | – | $ | 1,107 | ||||||||
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Fair Value of Financial Instruments
Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could
F-226
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.
Fair values of cash and cash equivalents are equal to the carrying value. The carrying amounts of accrued interest receivable and payable approximate the fair value given the short-term nature of these instruments. Fair value of subordinated debt is estimated based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates.
The carrying values, estimated fair values, and fair value measurement levels of the Company’s financial instruments as of June 30, 2012 (Successor) and December 31, 2011 (Successor) were as follows:
Successor Company | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
(Dollars in thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
June 30, 2012 | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 985 | $ | 985 | $ | 985 | $ | – | $ | – | ||||||||||
Financial Liabilities: | ||||||||||||||||||||
Subordinated debentures | $ | 19,274 | $ | 22,315 | $ | – | $ | – | $ | 22,315 | ||||||||||
December 31, 2011 | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,163 | $ | 2,163 | $ | 2,163 | $ | – | $ | – | ||||||||||
Financial Liabilities: | ||||||||||||||||||||
Subordinated debentures | $ | 19,163 | $ | 22,205 | $ | – | $ | – | $ | 22,205 |
7. Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial position and results of operation. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below.
F-227
Table of Contents
Capital Bank Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s actual capital amounts and ratios as of June 30, 2012 (Successor) and December 31, 2011 (Successor) and the minimum requirements are presented in the following table:
Successor Company | ||||||||||||||||||||||||
Minimum Requirements To Be: | ||||||||||||||||||||||||
Actual | Adequately Capitalized | Well Capitalized | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
June 30, 2012 | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 250,404 | 98.20 | % | $ | 20,400 | 8.00 | % | n/a | n/a | ||||||||||||||
Tier I capital (to risk-weighted assets) | 246,822 | 96.79 | 10,200 | 4.00 | n/a | n/a | ||||||||||||||||||
Tier I capital (to average assets) | 246,822 | 97.22 | 10,155 | 4.00 | n/a | n/a | ||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 243,990 | 98.39 | % | $ | 19,838 | 8.00 | % | n/a | n/a | ||||||||||||||
Tier I capital (to risk-weighted assets) | 240,400 | 96.95 | 9,919 | 4.00 | n/a | n/a | ||||||||||||||||||
Tier I capital (to average assets) | 240,400 | 96.56 | 9,959 | 4.00 | n/a | n/a |
F-228
Table of Contents
Capital Bank Corporation
Consolidated Financial Statements as of and for the
Year Ended December 31, 2011, 2010 and 2009
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of Capital Bank Corporation
In our opinion, the accompanying consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the period January 1, 2011 to January 28, 2011 present fairly, in all material respects, the results of operations and cash flows of Capital Bank Corporation and its subsidiaries (Predecessor Company) for the period January 1, 2011 to January 28, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 9, 2012
F-230
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of Capital Bank Corporation
In our opinion, the accompanying consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the period January 29, 2011 to December 31, 2011 present fairly, in all material respects, the financial position of Capital Bank Corporation and its subsidiaries (Successor Company) at December 31, 2011 and the results of their operations and their cash flows for the period January 29, 2011 to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 9, 2012
F-231
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Capital Bank Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Capital Bank Corporation (the Company) and Subsidiaries as of December 31, 2010, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive loss and cash flows for the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Bank Corporation and Subsidiaries as of December 31, 2010 and the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of Capital Bank Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2011, expressed an unqualified opinion (not included herein) on the effectiveness of Capital Bank Corporation’s internal control over financial reporting.
/s/ ELLIOTT DAVIS PLLC
Charlotte, North Carolina
March 15, 2011
F-232
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
of Capital Bank Corporation and Subsidiaries
We have audited the accompanying consolidated statements of operations, changes in shareholders’ equity and comprehensive loss and cash flows for the year ended December 31, 2009 of Capital Bank Corporation (a North Carolina corporation) and subsidiaries (the “Company”) as of December 31, 2009. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, Capital Bank Corporation and subsidiaries as results of its operations and its cash flows for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 10, 2010
F-233
Table of Contents
CONSOLIDATED BALANCE SHEETS
Successor Company | Predecessor Company | |||||||||
(Dollars in thousands) | Dec. 31, 2011 | Dec. 31, 2010 | ||||||||
Assets | ||||||||||
Cash and cash equivalents: | ||||||||||
Cash and due from banks | $ | 2,163 | $ | 13,646 | ||||||
Interest-bearing deposits with banks | – | 53,099 | ||||||||
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Total cash and cash equivalents | 2,163 | 66,745 | ||||||||
Investment securities: | ||||||||||
Investment securities—available for sale, at fair value | – | 214,991 | ||||||||
Other investments | – | 8,301 | ||||||||
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Total investment securities | – | 223,292 | ||||||||
Mortgage loans held for sale | – | 6,993 | ||||||||
Loans: | ||||||||||
Loans—net of unearned income and deferred fees | – | 1,254,479 | ||||||||
Allowance for loan losses | – | (36,061 | ) | |||||||
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Net loans | – | 1,218,418 | ||||||||
Investment in and advance to Capital Bank, N.A. | 247,121 | – | ||||||||
Other real estate | – | 18,334 | ||||||||
Premises and equipment, net | – | 25,034 | ||||||||
Other intangible assets, net | – | 1,774 | ||||||||
Other assets | 458 | 24,957 | ||||||||
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Total assets | $ | 249,742 | $ | 1,585,547 | ||||||
|
|
|
| |||||||
Liabilities | ||||||||||
Deposits: | ||||||||||
Demand deposits | $ | – | $ | 116,113 | ||||||
NOW accounts | – | 185,782 | ||||||||
Money market accounts | – | 137,422 | ||||||||
Savings deposits | – | 30,639 | ||||||||
Time deposits | – | 873,330 | ||||||||
|
|
|
| |||||||
Total deposits | – | 1,343,286 | ||||||||
Borrowings | – | 121,000 | ||||||||
Subordinated debentures | 19,163 | 34,323 | ||||||||
Other liabilities | 5,715 | 10,250 | ||||||||
|
|
|
| |||||||
Total liabilities | 24,878 | 1,508,859 | ||||||||
Shareholders’ Equity | ||||||||||
Preferred stock, $1,000 par value; 100,000 shares authorized; 41,279 shares issued and outstanding (liquidation preference of $41,279) at December 31, 2010 | – | 40,418 | ||||||||
Common stock, no par value; 300,000,000 shares authorized; 85,802,164 and 12,877,846 shares issued and outstanding | 218,826 | 145,594 | ||||||||
Retained earnings (accumulated deficit) | 5,267 | (108,027 | ) | |||||||
Accumulated other comprehensive income (loss) | 771 | (1,297 | ) | |||||||
|
|
|
| |||||||
Total shareholders’ equity | 224,864 | 76,688 | ||||||||
|
|
|
| |||||||
Total liabilities and shareholders’ equity | $ | 249,742 | $ | 1,585,547 | ||||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-234
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands except per share data) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Interest income: | ||||||||||||||||||
Loans and loan fees | $ | 27,521 | $ | 5,479 | $ | 68,474 | $ | 70,178 | ||||||||||
Investment securities: | ||||||||||||||||||
Taxable interest income | 3,206 | 391 | 7,483 | 9,849 | ||||||||||||||
Tax-exempt interest income | 398 | 74 | 1,596 | 3,026 | ||||||||||||||
Dividends | 59 | – | 80 | 46 | ||||||||||||||
Federal funds and other interest income | 257 | 11 | 89 | 42 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total interest income | 31,441 | 5,955 | 77,722 | 83,141 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Interest expense: | ||||||||||||||||||
Deposits | 4,560 | 1,551 | 21,082 | 28,037 | ||||||||||||||
Borrowings and subordinated debentures | 1,968 | 445 | 5,677 | 6,226 | ||||||||||||||
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|
|
|
|
|
|
| |||||||||||
Total interest expense | 6,528 | 1,996 | 26,759 | 34,263 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net interest income | 24,913 | 3,959 | 50,963 | 48,878 | ||||||||||||||
Provision for loan losses | 1,450 | 40 | 58,545 | 23,064 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net interest income (loss) after provision for loan losses | 23,463 | 3,919 | (7,582 | ) | 25,814 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Noninterest income: | ||||||||||||||||||
Service charges and other fees | 1,355 | 291 | 3,311 | 3,883 | ||||||||||||||
Bank card services | 847 | 174 | 2,020 | 1,539 | ||||||||||||||
Mortgage origination and other loan fees | 518 | 210 | 1,861 | 1,935 | ||||||||||||||
Brokerage fees | 308 | 78 | 963 | 698 | ||||||||||||||
Bank-owned life insurance | 134 | 10 | 699 | 1,830 | ||||||||||||||
Equity income from investment in Capital Bank, N.A. | 4,045 | – | – | – | ||||||||||||||
Other | 155 | 69 | 840 | 607 | ||||||||||||||
Securities gains (losses): | ||||||||||||||||||
Realized securities gains, net | – | – | 5,855 | 173 | ||||||||||||||
Other-than-temporary impairments | – | – | – | (1,082 | ) | |||||||||||||
Less: non-credit portion recognized in other comprehensive income | – | – | – | 584 | ||||||||||||||
Total securities gains (losses), net | – | – | 5,855 | (325 | ) | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total noninterest income | 7,362 | 832 | 15,549 | 10,167 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Noninterest expense: | ||||||||||||||||||
Salaries and employee benefits | 9,525 | 1,977 | 22,675 | 22,112 | ||||||||||||||
Occupancy | 2,970 | 548 | 5,906 | 5,630 | ||||||||||||||
Furniture and equipment | 1,401 | 275 | 3,183 | 3,155 | ||||||||||||||
Data processing and telecommunications | 911 | 180 | 2,092 | 2,317 | ||||||||||||||
Advertising and public relations | 325 | 131 | 1,887 | 1,610 | ||||||||||||||
Office expenses | 498 | 93 | 1,260 | 1,383 | ||||||||||||||
Professional fees | 543 | 190 | 2,514 | 1,488 | ||||||||||||||
Business development and travel | 550 | 87 | 1,350 | 1,244 | ||||||||||||||
Amortization of other intangible assets | 478 | 62 | 937 | 1,146 | ||||||||||||||
ORE losses and miscellaneous loan costs | 1,608 | 176 | 5,006 | 1,646 | ||||||||||||||
Directors’ fees | 93 | 68 | 1,061 | 1,418 | ||||||||||||||
FDIC deposit insurance | 1,076 | 266 | 3,846 | 2,721 | ||||||||||||||
Contract termination fees | 3,955 | – | – | – | ||||||||||||||
Other | 1,344 | 102 | 2,592 | 3,940 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total noninterest expense | 25,277 | 4,155 | 54,309 | 49,810 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) before taxes | 5,548 | 596 | (46,342 | ) | (13,829 | ) | ||||||||||||
Income tax expense (benefit) | 281 | – | 15,124 | (7,013 | ) | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) | 5,267 | 596 | (61,466 | ) | (6,816 | ) | ||||||||||||
Dividends and accretion on preferred stock | – | 861 | 2,355 | 2,352 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) attributable to common shareholders | $ | 5,267 | $ | (265 | ) | $ | (63,821 | ) | $ | (9,168 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||||
Earnings (loss) per common share—basic | $ | 0.06 | $ | (0.02 | ) | $ | (4.98 | ) | $ | (0.80 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||||
Earnings (loss) per common share—diluted | $ | 0.06 | $ | (0.02 | ) | $ | (4.98 | ) | $ | (0.80 | ) | |||||||
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|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-235
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||
Preferred Stock | Common Stock | |||||||||||||||||||||||||||
Predecessor Company | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, 2009 | 41,279 | $ | 39,839 | 11,238,085 | $ | 139,209 | $ | 886 | $ | (31,420 | ) | $ | 148,514 | |||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | (6,816 | ) | (6,816 | ) | ||||||||||||||||||||||||
Net unrealized gain on securities, net of tax of $3,169 | 5,051 | 5,051 | ||||||||||||||||||||||||||
Net unrealized loss on cash flow hedge, net of tax benefit of $1,215 | (1,936 | ) | (1,936 | ) | ||||||||||||||||||||||||
Amortization of prior service cost on SERP | (46 | ) | (46 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total comprehensive loss | (3,747 | ) | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Accretion of preferred stock discount | 288 | (288 | ) | – | ||||||||||||||||||||||||
Restricted stock awards | 16,692 | 107 | 107 | |||||||||||||||||||||||||
Stock option expense | 50 | 50 | ||||||||||||||||||||||||||
Directors’ deferred compensation | 93,340 | 543 | 543 | |||||||||||||||||||||||||
Dividends on preferred stock | (2,064 | ) | (2,064 | ) | ||||||||||||||||||||||||
Dividends on common stock ($0.32 per share) | (3,618 | ) | (3,618 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2009 | 41,279 | $ | 40,127 | 11,348,117 | $ | 139,909 | $ | 3,955 | $ | (44,206 | ) | $ | 139,785 | |||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | (61,466 | ) | (61,466 | ) | ||||||||||||||||||||||||
Net unrealized loss on securities, net of tax benefit of $3,300 | (5,260 | ) | (5,260 | ) | ||||||||||||||||||||||||
Amortization of prior service cost on SERP | 8 | 8 | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total comprehensive loss | (66,718 | ) | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Accretion of preferred stock discount | 291 | (291 | ) | – | ||||||||||||||||||||||||
Issuance of common stock | 1,468,770 | 5,065 | 5,065 | |||||||||||||||||||||||||
Restricted stock forfeiture | (3,508 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||
Stock option expense | 54 | 54 | ||||||||||||||||||||||||||
Directors’ deferred compensation | 64,467 | 576 | 576 | |||||||||||||||||||||||||
Dividends on preferred stock | (2,064 | ) | (2,064 | ) | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2010 | 41,279 | $ | 40,418 | 12,877,846 | $ | 145,594 | $ | (1,297 | ) | $ | (108,027 | ) | $ | 76,688 |
(continued on next page)
F-236
Table of Contents
CAPITAL BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (Continued)
Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||
Preferred Stock | Common Stock | |||||||||||||||||||||||||||
Predecessor Company | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, 2011 | 41,279 | $ | 40,418 | 12,877,846 | $ | 145,594 | $ | (1,297 | ) | $ | (108,027 | ) | $ | 76,688 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 596 | 596 | ||||||||||||||||||||||||||
Net unrealized loss on securities, net of tax benefit of $204 | (324 | ) | (324 | ) | ||||||||||||||||||||||||
Amortization of prior service cost on SERP | 1 | 1 | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total comprehensive income | 273 | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Accretion of preferred stock discount | 24 | (24 | ) | – | ||||||||||||||||||||||||
Stock option expense | 5 | 5 | ||||||||||||||||||||||||||
Directors’ deferred compensation | 35 | 35 | ||||||||||||||||||||||||||
Dividends on preferred stock | (172 | ) | (172 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at January 28, 2011 | 41,279 | $ | 40,442 | 12,877,846 | $ | 145,634 | $ | (1,620 | ) | $ | (107,627 | ) | $ | 76,829 | ||||||||||||||
Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||
Preferred Stock | Common Stock | |||||||||||||||||||||||||||
Successor Company | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance at January 29, 2011 | – | $ | – | 83,877,846 | $ | 224,085 | $ | – | $ | – | $ | 224,085 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 5,267 | 5,267 | ||||||||||||||||||||||||||
Net unrealized gain on securities, net of tax of $3,367 | 5,266 | 5,266 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total comprehensive income | 10,533 | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Issuance of common stock, net of offering costs of $300 | 1,613,165 | 3,814 | 3,814 | |||||||||||||||||||||||||
Stock option expense | 78 | 78 | ||||||||||||||||||||||||||
Restricted stock forfeiture | (1,751 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||
Directors’ deferred compensation | 312,904 | – | – | |||||||||||||||||||||||||
Merger of Old Capital Bank into Capital Bank, N.A. | (4,124 | ) | (4,495 | ) | (8,619 | ) | ||||||||||||||||||||||
Merger of GreenBank into Capital Bank, N.A. | (5,020 | ) | (5,020 | ) | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2011 | – | $ | – | 85,802,164 | $ | 218,826 | $ | 771 | $ | 5,267 | $ | 224,864 | ||||||||||||||||
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|
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-237
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net income (loss) | $ | 5,267 | $ | 596 | $ | (61,466 | ) | $ | (6,816 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||
Equity income from investment in Capital Bank, N.A. | (4,045 | ) | – | – | – | |||||||||||||
Accretion of purchased credit-impaired loans | (26,262 | ) | – | – | – | |||||||||||||
Amortization/accretion on acquired liabilities, net | (3,403 | ) | – | – | – | |||||||||||||
Provision for loan losses | 1,450 | 40 | 58,545 | 23,064 | ||||||||||||||
Loss on repurchase of mortgage loans | – | – | – | 361 | ||||||||||||||
Amortization of other intangible assets | 478 | 62 | 937 | 1,146 | ||||||||||||||
Depreciation | 1,354 | 240 | 2,629 | 2,893 | ||||||||||||||
Stock-based compensation | 146 | 42 | 736 | 702 | ||||||||||||||
(Gain) loss on sale of securities, net | – | – | (5,855 | ) | 325 | |||||||||||||
Amortization of premium on securities, net | 695 | 171 | 98 | 180 | ||||||||||||||
Loss on disposal of premises, equipment and ORE | 5 | 26 | 444 | 88 | ||||||||||||||
ORE valuation adjustments | 74 | – | 2,088 | 217 | ||||||||||||||
Bank-owned life insurance income | (134 | ) | (10 | ) | (699 | ) | (378 | ) | ||||||||||
Deferred income tax expense (benefit) | 3,415 | – | 15,396 | (4,708 | ) | |||||||||||||
Net change in: | ||||||||||||||||||
Mortgage loans held for sale | 1,907 | 4,424 | (6,993 | ) | – | |||||||||||||
Accrued interest receivable and other assets | (7,659 | ) | (1,309 | ) | 5,070 | (5,972 | ) | |||||||||||
Accrued interest payable and other liabilities | 3,024 | (3,939 | ) | (1,279 | ) | (220 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) operating activities | (23,688 | ) | 343 | 9,651 | 10,882 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Cash flows from investing activities: | ||||||||||||||||||
Net cash paid in Capital Bank merger | (42,880 | ) | – | – | – | |||||||||||||
Investment in Capital Bank, N.A. | (16,063 | ) | – | – | – | |||||||||||||
Principal repayments on loans, net of loans originated or acquired | 13,048 | 14,547 | 68,805 | (162,132 | ) | |||||||||||||
Purchases of premises and equipment | (607 | ) | (307 | ) | (3,938 | ) | (3,326 | ) | ||||||||||
Proceeds from sales of premises, equipment and ORE | 4,545 | 20 | 8,350 | 5,856 | ||||||||||||||
Proceeds from surrender of bank-owned life insurance | – | – | 16,473 | – | ||||||||||||||
Sales (purchases) of FHLB stock | 1,259 | – | (1,680 | ) | (20 | ) | ||||||||||||
Purchases of securities—available for sale | (138,855 | ) | (6,840 | ) | (232,579 | ) | (31,842 | ) | ||||||||||
Proceeds from sales of securities—available for sale | – | – | 164,012 | 21,703 | ||||||||||||||
Proceeds from principal repayments/calls/maturities of securities—available for sale | 25,761 | 3,936 | 89,021 | 48,947 | ||||||||||||||
Proceeds from principal repayments/calls/maturities of securities—held to maturity | – | – | 853 | 1,503 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) investing activities | (153,792 | ) | 11,356 | 109,317 | (119,481 | ) | ||||||||||||
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(continued on next page)
F-238
Table of Contents
CAPITAL BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||
(Decrease) increase in deposits, net | $ | (2,426 | ) | $ | (4,960 | ) | $ | (34,679 | ) | $ | 62,651 | |||||||
Decrease in repurchase agreements, net | – | – | (6,543 | ) | (8,467 | ) | ||||||||||||
Proceeds from borrowings | – | – | 189,000 | 183,000 | ||||||||||||||
Principal repayments of borrowings | (30,000 | ) | (5,000 | ) | (235,000 | ) | (148,000 | ) | ||||||||||
Proceeds from issuance of subordinated debentures | – | – | 3,393 | – | ||||||||||||||
Repurchase of preferred stock | – | (41,279 | ) | – | – | |||||||||||||
Proceeds from CBF Investment | – | 181,050 | – | – | ||||||||||||||
Proceeds from issuance of common stock, net of offering costs | 3,814 | – | 5,065 | – | ||||||||||||||
Dividends paid | – | – | (2,972 | ) | (5,527 | ) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) financing activities | (28,612 | ) | 129,811 | (81,736 | ) | 83,657 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Net change in cash and cash equivalents | $ | (206,092 | ) | $ | 141,510 | $ | 37,232 | $ | (24,942 | ) | ||||||||
Cash and cash equivalents at beginning of year | 208,255 | 66,745 | 29,513 | 54,455 | ||||||||||||||
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|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of year | $ | 2,163 | $ | 208,255 | $ | 66,745 | $ | 29,513 | ||||||||||
|
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|
|
|
|
| |||||||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||||||||
Noncash investing activities: | ||||||||||||||||||
Transfer of noncash assets to Capital Bank, N.A. | $ | 1,419,308 | $ | – | $ | – | $ | – | ||||||||||
Transfer of liabilities to Capital Bank, N.A. | 1,457,413 | – | – | – | ||||||||||||||
Equity method investment in Capital Bank, N.A. | 232,264 | – | – | – | ||||||||||||||
Transfers of loans and premises to ORE | 7,573 | 248 | 18,453 | 15,356 | ||||||||||||||
Transfers of OREO to loans | 857 | 146 | – | – | ||||||||||||||
Transfers of securities from held to maturity to available for sale | – | – | 2,822 | – | ||||||||||||||
Capital leases recorded in premises and other liabilities | 6,618 | – | – | – | ||||||||||||||
Cash paid for (received from): | ||||||||||||||||||
Income taxes | $ | 130 | $ | – | $ | (2,190 | ) | $ | (4,521 | ) | ||||||||
Interest | 10,706 | 1,531 | 27,219 | 35,364 |
The accompanying notes are an integral part of these consolidated financial statements.
F-239
Table of Contents
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Capital Bank Corporation is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Capital Bank (“Old Capital Bank”), a state-chartered banking corporation that was incorporated under the laws of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. The Company also has interests in three trusts: Capital Bank Statutory Trust I, II, and III.
The Trusts were formed for the sole purpose of issuing trust preferred securities and are not consolidated with the financial statements of the Company. The proceeds from such issuances were loaned to the Company in exchange for the subordinated debentures, which are the sole assets of the Trusts. A portion of the proceeds from the issuance of the subordinated debentures were used by the Company to repurchase shares of Company common stock. The Company’s obligation under the subordinated debentures constitutes a full and unconditional guarantee by the Company of the Trust’s obligations under the trust preferred securities. The Trusts have no operations other than those that are incidental to the issuance of the trust preferred securities (See Note 10—Subordinated Debentures).
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. As a result of the CBF Investment and the Company’s rights offering on March 11, 2011, CBF currently owns approximately 83% of the Company’s common stock. Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).
On June 30, 2011, Old Capital Bank merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, N.A.” and the “Bank”). On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, N.A. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, N.A., with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. CBF is the owner of approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program (“TARP”) were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common
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Notes to Consolidated Financial Statements
stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan (the “Executive Plan” or “SERP”) to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.
Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.
Bank Mergers
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, N.A. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares and merged its banking subsidiary, GreenBank, with and into Capital Bank, N.A. Following the GreenBank merger, Capital Bank, N.A. is now owned by the Company, CBF, TIB Financial Corp. and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
Capital Bank, N.A. (formerly NAFH Bank) was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks—Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina)—from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, N.A. merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, N.A., dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, N.A. common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, N.A., with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, N.A. operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.
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Notes to Consolidated Financial Statements
The Bank Merger, the preceding merger of TIB Bank and Capital Bank, N.A., and the succeeding merger of GreenBank and Capital Bank, N.A. were restructuring transactions between commonly-controlled entities. At the time of the Bank Merger, due to the deconsolidation of Old Capital Bank, the balance of accumulated other comprehensive income was reclassified to common stock within shareholders’ equity. Immediately following the Bank Merger, on June 30, 2011, CBF, the Company and TIB Financial made cash contributions of additional capital to Capital Bank, N.A. of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, N.A. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, N.A. in exchange for additional shares of Capital Bank, N.A. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, N.A.
The Company reports its investment in Capital Bank, N.A. on the Consolidated Balance Sheet as an equity method investment in that entity. As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, N.A. totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity. The Company also had an advance to Capital Bank, N.A. totaling $3.4 million as of December 31, 2011 (Successor). In the successor period from June 30, 2011 to December 31, 2011, the Company increased the equity investment balance by $4.0 million based on its equity in Capital Bank, N.A.’s net income and increased the equity investment balance by $771 thousand based on its equity in Capital Bank, N.A.’s other comprehensive income.
The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, N.A.:
Capital Bank, N.A. | Jun. 30, 2011 to Dec. 31, 2011 | |||
(Dollars in thousands) | ||||
Interest income | $ | 137,508 | ||
Interest expense | 17,810 | |||
|
| |||
Net interest income | 119,698 | |||
Provision for loan losses | 28,636 | |||
Noninterest income | 28,710 | |||
Noninterest expense | 97,754 | |||
|
| |||
Net income | $ | 13,984 | ||
|
|
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Company in trust are not assets of the Company and are not included in the consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting
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Notes to Consolidated Financial Statements
period. The more significant estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, other-than-temporary impairment on investment securities, deferred tax asset valuation allowances, and impairment of long-lived assets. Actual results could differ from those estimates. Due to the CBF Investment, the Company has added an accounting policy related to purchased credit-impaired loans, and due to the Bank Merger, the Company has added an accounting policy related to its equity method investment in Capital Bank, N.A.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with Capital Bank, N.A., demand and time deposits (with original maturities of 90 days or less) at other high quality financial institutions, federal funds sold and other short-term investments. Generally, federal funds are purchased and sold for one-day periods.
Investment Securities
Investments in certain securities are classified into three categories and accounted for as follows:
• | Held to Maturity—Debt securities that the institution has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; or |
• | Trading Securities—Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; or |
• | Available for Sale—Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses reported as other comprehensive income, a separate component of shareholders’ equity. |
The initial classification of securities is determined at the date of purchase. Gains and losses on sales of investment securities, computed based on specific identification of the adjusted cost of each security, are included in noninterest income at the time of the sales. Premiums and discounts on debt securities are recognized in interest income using the level interest yield method over the period to maturity, or when the debt securities are called.
At each reporting date, the Company evaluates each held to maturity and available for sale investment security in a loss position for other-than-temporary impairment (“OTTI”). The review includes an analysis of the facts and circumstances of each individual investment such as (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.
Regardless of these factors, if the Company has developed a plan to sell the security or it is likely that the Company will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related
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to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings, and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.
Other investments primarily include Federal Home Loan Bank of Atlanta (“FHLB”) stock, which does not have a readily determinable fair value because its ownership is restricted and lacks a market for trading. This investment is carried at cost and is periodically evaluated for impairment.
Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Equity Method Investment
Noncontrolling investments that give the Company the ability to influence the operating or financial decisions of the investee are accounted for as equity method investments. An investment (direct or indirect) of 20 percent or more of the voting stock of an investee generally indicates that the ability to exercise significant influence over an investee. The carrying amount of an equity method investment is adjusted based on the Company’s share of the earnings or losses of the investee after the date of investment and those recognized earnings or losses are reported as a component of noninterest income. In addition, the Company’s proportionate share of the investee’s equity adjustments for other comprehensive income are recorded as increases or decreases to the investment account with corresponding adjustments in equity.
Mortgage Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Due to the Bank Merger, the Company reported no mortgage loans held for sale on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Loans
Loans are stated at the amount of unpaid principal, net of any unearned income, charge-offs, net deferred loan origination fees and costs, and unamortized premiums or discounts. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Deferred loan fees and costs are amortized to interest income over the contractual life of the loan using the level interest yield method.
For disclosures regarding the credit quality of loans and the allowance for loan losses, the loan portfolio is disaggregated into segments and then further disaggregated into classes. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e. amortized cost or purchased credit impaired), risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial real estate (“CRE”), commercial and industrial (“C&I”), and other loans, which includes agricultural and municipal loans. Classes within CRE include CRE—construction and land development, CRE—non-owner occupied, and CRE—owner occupied. Consumer loan portfolio segments include consumer real estate and other consumer loans. Classes within consumer real estate include residential mortgage and home equity lines of credit.
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Notes to Consolidated Financial Statements
Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Purchased Credit-Impaired Loans
Loans acquired in a transfer, including business combinations and transactions similar to the CBF Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as non-accrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charges the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and risk.
Due to the Bank Merger, the Company had no purchase credit-impaired loans as of December 31, 2011 (Successor).
Nonperforming Assets and Impaired Loans
Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. Loans are generally classified as non-accrual if they are past due for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or as partially charged off, the loan is generally classified as non-accrual. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.
While a loan is classified as non-accrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of
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Notes to Consolidated Financial Statements
interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Assets acquired as a result of foreclosure are recorded at estimated fair value in other real estate. Any excess of cost over estimated fair value at the time of foreclosure is charged to the allowance for loan losses. Valuations are periodically performed on these properties, and any subsequent write-downs are charged to noninterest expense. Routine maintenance and other holding costs are included in noninterest expense.
A loan is classified as a troubled debt restructuring (“TDR”) by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. The Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest.
Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restructured agreement, the loan is placed on non-accrual status and continues to be written down to the underlying collateral value.
The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as non-accrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on non-accrual status. The Company closely monitors these loans and ceases accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If a loan is restructured a second time, after previously being classified as a TDR, that loan is automatically placed on non-accrual status. The Company’s policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.
Due to the Bank Merger, the Company had no nonperforming assets or impaired loans as of December 31, 2011 (Successor).
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents management’s best estimate of probable credit losses that are inherent in the loan portfolio at the balance sheet date and is determined by management through at least quarterly evaluations of the loan portfolio.
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Notes to Consolidated Financial Statements
The allowance calculation consists of reserves on loans individually evaluated for impairment and reserves on loans collectively evaluated for impairment. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Reserves, or charge-offs, on individually impaired loans that are collateral dependent are based on the fair value of the underlying collateral while reserves, or charge-offs, on loans that are not collateral dependent are based on either an observable market price, if available, or the present value of expected future cash flows discounted at the historical effective interest rate. Management evaluates loans that are classified as doubtful, substandard or special mention to determine whether or not they are individually impaired. This evaluation includes several factors, including review of the loan payment status and the borrower’s financial condition and operating results such as cash flows, operating income or loss, etc.
Reserves on loans collectively evaluated for impairment are determined by applying loss rates to pools of loans that are grouped according to loan collateral type and credit risk. Loss rates are based on the Company’s historical loss experience in each pool and management’s consideration of the following environmental factors:
• | Levels of and trends in delinquencies, impaired loans and classified assets; |
• | Levels of and trends in charge-offs and recoveries; |
• | Trends in nature, volume and terms of loans; |
• | Existence of and changes in portfolio concentrations by product type and geographical location; |
• | Changes in national, regional and local economic conditions; |
• | Changes in the experience, ability and depth of lending management; |
• | Changes in the quality of the loan review system; and |
• | The effect of other external factors such as legal and regulatory requirements. |
The evaluation of the allowance for loan losses is inherently subjective, and management uses the best information available to establish this estimate. However, if factors such as economic conditions differ substantially from assumptions, or if amounts and timing of future cash flows expected to be received on impaired loans vary substantially from the estimates, future adjustments to the allowance for loan losses may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about all relevant information available to them at the time of their examination. Any adjustments to original estimates are made in the period in which the factors and other considerations indicate that adjustments to the allowance for loan losses are necessary.
Due to the Bank Merger, the Company reported no allowance for loan losses on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
In the successor period prior to the Bank Merger, allowance for loans losses were established through a provision for loan losses charged to expense, and reflected estimated losses inherent in loans originated subsequent to the CBF investment date, estimated impairment related to probable decreases in cash flows expected to be collected on certain purchase credit-impaired loan pools, and losses on acquired non-PCI loans.
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Notes to Consolidated Financial Statements
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain key employees and directors. These policies are recorded in other assets at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the net cash surrender value are recorded in noninterest income.
Due to the Bank Merger, the Company reported no bank-owned life insurance on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method based on estimated service lives of assets. Useful lives range from 3 to 10 years for furniture and equipment, and 10 to 40 years for buildings. The cost of leasehold improvements is being amortized using the straight-line method over the terms of the related leases. Repairs and maintenance are charged to expense as incurred. Upon disposition, the asset and related accumulated depreciation and/or amortization are relieved, and any gains or losses are reflected in earnings.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Assets to be disposed of are transferred to other real estate owned and are reported at the lower of the carrying amount or fair value less costs to sell.
Due to the Bank Merger, the Company reported no premises and equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Goodwill and Other Intangible Assets
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations. Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.
Other intangible assets include premiums paid for acquisitions of core deposits and other identifiable intangible assets. Intangible assets other than goodwill, which are determined to have finite lives, are amortized based upon the estimated economic benefits received.
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Notes to Consolidated Financial Statements
Due to the Bank Merger, the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Income Taxes
Deferred tax asset and liability balances are determined by application to temporary differences of the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
A valuation allowance is recorded for deferred tax assets if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.
Derivative Instruments
The Company uses derivative instruments to manage and mitigate interest rate risk, to facilitate asset and liability management strategies, and to manage other risk exposures. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index, or referenced interest rate.
Derivatives are recorded on the consolidated balance sheet at fair value. For fair value hedges, the change in the fair value of the derivative and the corresponding change in fair value of the hedged risk in the underlying item being hedged are accounted for in earnings. Any difference in these two changes in fair value results in hedge ineffectiveness that results in a net impact to earnings. For cash flow hedges, changes in the fair value of the derivative are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. Any portion of a hedge that is ineffective is recognized immediately as other noninterest income or expense.
Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risk. Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, and other contract provisions.
Due to the Bank Merger, the Company had no derivative instruments as of December 31, 2011 (Successor).
Advertising Costs
The Company expenses advertising costs as they are incurred and advertising communications costs the first time the advertising takes place. The Company may establish accruals for committed advertising costs as incurred.
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Notes to Consolidated Financial Statements
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees in addition to stock issued through a deferred compensation plan for non-employee directors. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes option pricing model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock options awards and as the restriction period for restricted stock awards.
Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which if changed can materially affect fair value estimates. The expected life of options used in the option pricing model is the period the options are expected to remain outstanding. Expected stock price volatility is based on the historical volatility of the Company’s common stock for a period approximating the expected life of the option, the expected dividend yield is based on the Company’s historical annual dividend payout, and the risk-free rate is based on the implied yield available on U.S. Treasury issues.
Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company follows the fair value hierarchy which gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to the management’s assumptions (unobservable inputs). For assets and liabilities recorded at fair value, the Company’s policy is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale investment securities and derivatives are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls to a lower level in the hierarchy. These levels are described as follows:
• | Level 1—Valuations for assets and liabilities traded in active exchange markets. |
• | Level 2—Valuations for assets and liabilities that can be obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets, and valuations are based on observable market data in those markets. |
• | Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
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Capital Bank Corporation
Notes to Consolidated Financial Statements
The determination of where an asset or liability falls in the fair value hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures at each reporting period and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.
Earnings (Loss) per Common Share
Basic earnings (loss) per common share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments, such as stock options and warrants, unless the effect is to reduce a loss or increase earnings. Basic EPS is adjusted for outstanding stock options and warrants using the treasury stock method in order to compute diluted EPS.
The calculation of basic and diluted EPS was based on the following for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands except per share data) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Net loss attributable to common shareholders | $ | 5,267 | $ | (265 | ) | $ | (63,821 | ) | $ | (9,168 | ) | |||||||
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Shares used in the computation of earnings per share: | ||||||||||||||||||
Weighted average number of shares outstanding—basic | 85,649,203 | 13,188,612 | 12,810,905 | 11,470,314 | ||||||||||||||
Incremental shares from assumed exercise of stock options | – | – | – | – | ||||||||||||||
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Weighted average number of shares outstanding—diluted | 85,649,203 | 13,188,612 | 12,810,905 | 11,470,314 | ||||||||||||||
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Earnings (loss) per common share—basic | $ | 0.06 | $ | (0.02 | ) | $ | (4.98 | ) | $ | (0.80 | ) | |||||||
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Earnings (loss) per common share—diluted | $ | 0.06 | $ | (0.02 | ) | $ | (4.98 | ) | $ | (0.80 | ) | |||||||
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Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share for each period presented are as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | |||||||||||||||
Anti-dilutive stock options | 193,600 | 297,880 | 297,880 | 366,583 | ||||||||||||||
Anti-dilutive warrants | – | 749,619 | 749,619 | 749,619 |
Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in the Company’s equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of unrealized gains and losses on certain investments in debt securities, and in prior years, derivatives that qualified as cash flow hedges to the extent that the hedge was effective.
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Capital Bank Corporation
Notes to Consolidated Financial Statements
The Company’s other comprehensive income (loss) was as follows for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Unrealized gains (losses) on securities—available for sale | $ | 8,633 | $ | (528 | ) | $ | (8,560 | ) | $ | 8,220 | ||||||||
Unrealized gain (loss) on cash flow hedge | – | – | – | (3,151 | ) | |||||||||||||
Amortization of prior service cost on SERP | 0 | 1 | 8 | (46 | ) | |||||||||||||
Income tax effect | (3,367 | ) | 204 | 3,300 | (1,954 | ) | ||||||||||||
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Other comprehensive income (loss) | $ | 5,266 | $ | (323 | ) | $ | (5,252 | ) | $ | 3,069 | ||||||||
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Segment Information
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that it has one significant operating segment, which is the providing of general commercial banking and financial services to individuals and businesses primarily in the southeastern region of the United States. The Company’s various products and services are those generally offered by community banks, and the allocation of its resources is based on the overall performance of the institution versus individual regions, branches or products and services.
Reclassifications
Certain amounts previously reported have been reclassified to conform to the current year’s presentation. These reclassifications impacted certain noninterest income and noninterest expense items and had no effect on total assets, net income, or shareholders’ equity previously reported. The noninterest income and noninterest expense reclassifications were made in an effort to more clearly disclose certain elements in the Consolidated Statements of Operations.
Current Accounting Developments
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.
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Capital Bank Corporation
Notes to Consolidated Financial Statements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.
In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the
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Capital Bank Corporation
Notes to Consolidated Financial Statements
beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 320, Receivables. The amendments in this update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
2. CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also, in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with TARP were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan to waive, with respect to unvested amounts only, any change in control provision and
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Capital Bank Corporation
Notes to Consolidated Financial Statements
corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.
Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.
The following table summarizes the CBF Investment and the Company’s opening balance sheet:
Successor Company | ||||||||||||
(Dollars in thousands) | Originally Reported as of Jan. 28, 2011 | Measurement Period Adjustments | Revised as of Jan. 28, 2011 | |||||||||
Fair value of assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 208,255 | $ | – | $ | 208,255 | ||||||
Investment securities | 225,336 | – | 225,336 | |||||||||
Mortgage loans held for sale | 2,569 | – | 2,569 | |||||||||
Loans | 1,135,164 | (30,701 | ) | 1,104,463 | ||||||||
Goodwill | 30,994 | 19,099 | 50,093 | |||||||||
Other intangible assets | 5,004 | – | 5,004 | |||||||||
Deferred tax asset | 55,391 | 11,118 | 66,509 | |||||||||
Other assets | 66,663 | (613 | ) | 66,050 | ||||||||
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Total assets acquired | 1,729,376 | (1,097 | ) | 1,728,279 | ||||||||
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Fair value of liabilities assumed: | ||||||||||||
Deposits | 1,351,467 | – | 1,351,467 | |||||||||
Borrowings | 123,837 | – | 123,837 | |||||||||
Subordinated debt | 19,392 | 475 | 19,867 | |||||||||
Other liabilities | 10,595 | (1,572 | ) | 9,023 | ||||||||
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Total liabilities assumed | 1,505,291 | (1,097 | ) | 1,504,194 | ||||||||
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Net assets acquired | 224,085 | – | 224,085 | |||||||||
Less: non-controlling interest at fair value | (43,785 | ) | – | (43,785 | ) | |||||||
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180,300 | – | 180,300 | ||||||||||
Underwriting and legal costs | 750 | – | 750 | |||||||||
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Purchase price | $ | 181,050 | $ | – | $ | 181,050 | ||||||
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The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information
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Capital Bank Corporation
Notes to Consolidated Financial Statements
provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts.
Measurement period adjustments reflected above were primarily due to (1) refinements to the acquisition date estimated fair values on certain acquired PCI loans (2) refinements to the acquisition date valuation of certain ORE properties based on subsequent selling prices, (3) refinements to the acquisition date valuation of a capital lease asset/obligation based on an updated appraisal of the leased asset, (4) refinements to the acquisition date valuation of off-balance sheet commitments to extend credit, (5) refinements to the acquisition date valuation of subordinated debentures, and (6) write-offs of miscellaneous other assets to properly reflect acquisition date fair value. The provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.
A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:
Cash and Cash Equivalents
The cash and cash equivalents, which include proceeds from the CBF Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.
Investment Securities
Investment securities are reported at fair value at acquisition date. To account for the CBF Investment, the difference between the fair value and par value became the new premium or discount for each security held by the Company. The fair value of investment securities is primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities. Two equity securities were valued at their respective stock market prices, and two corporate bonds were valued using an internal valuation model. Immediately before the acquisition, the investment portfolio had an amortized cost of $228.1 million and was in a net unrealized loss position of $2.8 million.
Loans
All loans in the loan portfolio were adjusted to estimated fair value at the CBF Investment date. Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates at acquisition, the Company recorded a loan fair value discount of $135.1 million. All acquired loans were considered to be PCI loans with the exception of certain consumer revolving lines of credit. Subsequent to the CBF Investment, PCI loans will be accounted for as described in Note 1 (Basis of Presentation and Significant Accounting Policies).
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.
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Capital Bank Corporation
Notes to Consolidated Financial Statements
Core Deposit Intangible
The estimated value of the CDI at acquisition date was $4.4 million. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on an accelerated method over an eight year period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.
Trade Name Intangible
Trademarks, service marks and other registered marks (collectively referred to as the “Trade Name”) can have great significance to customers. The function of a mark is to indicate to the consumer the sources from which goods and services originate. The Trade Name considered to have value is Capital Bank. The Trade Name value of $604 thousand at acquisition date was based on the present value of the Company’s projected income multiplied by an assumed royalty rate. This intangible will be amortized on a straight-line basis over a three year period.
Other Assets
A majority of other assets held by the Company did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $66.5 million. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deposits
Time deposits were not included in the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. Term deposits evaluated for acquisition accounting consisted of certificates of deposit (“CDs”), brokered deposits and CDs through the Certificate of Deposit Account Registry Services (“CDARS”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates.
The outstanding balance of CDs at acquisition date was $730.5 million, and the estimated fair value premium totaled $12.4 million. The outstanding balance of brokered deposits was $100.5 million, and the estimated fair value premium totaled $616 thousand. The outstanding balance of CDARS was $27.0 million, and the estimated fair value premium totaled $111 thousand. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.
Borrowings
Included in borrowings are FHLB advances and structured repurchase agreements. Fair values for these borrowings were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows
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Capital Bank Corporation
Notes to Consolidated Financial Statements
were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The outstanding balance of FHLB advances and structured repurchase agreements at acquisition date was $66.0 million and $50.0 million, respectively, and the estimated fair value premiums on each totaled $1.8 million and $6.0 million, respectively. The Company will amortize the premium into income as a reduction of interest expense on a level-yield basis over the contractual term of each debt instrument.
Subordinated Debt
Included in subordinated debt are variable rate trust preferred securities issued by the Company and fixed rate subordinated debt issued as part of a private placement offering early in 2010. Fair values for the trust preferred securities and subordinated debt were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The outstanding balance of trust preferred securities and subordinated debt at acquisition date was $30.0 million and $3.4 million, respectively, and the estimated fair value (discount)/premium on each totaled ($14.7) million and $211 thousand, respectively. The Company will accrete the discount as an increase to interest expense and will amortize the premium as a decrease to interest expense on a level-yield basis over the contractual term of each debt instrument.
Contingent Value Rights
In connection with the CBF Investment, each existing shareholder as of January 27, 2011 received one contingent value right per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. The Company assigned no value to the CVRs, which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments.
Non-controlling Interest
In determining the estimated fair value of the non-controlling interest, the Company utilized the closing market price of its common stock on the acquisition date of $3.40 and multiplied this stock price by the number of outstanding non-controlling shares at that date.
Transaction Expenses
As required by the CBF Investment, the Company incurred and reimbursed third party expenses of $750 thousand which were recorded as a reduction of proceeds received from the issuance of common shares to CBF.
There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized.
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Capital Bank Corporation
Notes to Consolidated Financial Statements
3. Investment Securities
Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:
Predecessor Company | ||||||||||||||||
December 31, 2010 | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available for sale: | ||||||||||||||||
U.S. agency obligations | $ | 19,003 | $ | 18 | $ | 87 | $ | 18,934 | ||||||||
Municipal bonds | 22,455 | 75 | 1,521 | 21,009 | ||||||||||||
Mortgage-backed securities issued by GSEs | 165,540 | 78 | 195 | 165,423 | ||||||||||||
Non-agency mortgage-backed securities | 6,790 | 39 | 242 | 6,587 | ||||||||||||
Other securities | 3,252 | – | 214 | 3,038 | ||||||||||||
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217,040 | 210 | 2,259 | 214,991 | |||||||||||||
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Other investments | 8,301 | – | – | 8,301 | ||||||||||||
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Total | $ | 225,341 | $ | 210 | $ | 2,259 | $ | 223,292 | ||||||||
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Prior to the Bank Merger, credit related other than temporary impairments (“OTTI”) were recognized in net income (loss) and non-credit related impairments were recognized in other comprehensive income (loss) during the period the impairment was identified. Gross realized gains and losses and OTTI recognized in net income and other comprehensive income are reflected in the following table for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Gross realized gains | $ | – | $ | – | $ | 5,863 | $ | 493 | ||||||||||
Gross realized losses | – | – | (8 | ) | (320 | ) | ||||||||||||
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Net realized gains | – | – | 5,855 | 173 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
OTTI recognized on non-agency mortgage-backed securities: | ||||||||||||||||||
Total OTTI on non-agency mortgage-backed securities | – | – | – | (381 | ) | |||||||||||||
Non-credit portion recognized in other comprehensive income | – | – | – | 381 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Credit related OTTI on non-agency mortgage-backed securities recognized in income | – | – | – | – | ||||||||||||||
OTTI recognized on corporate bonds (in other securities): | ||||||||||||||||||
Total OTTI on corporate bonds | – | – | – | (701 | ) | |||||||||||||
Non-credit portion recognized in other comprehensive income | – | – | – | 202 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Credit related OTTI on corporate bonds recognized in income | – | – | – | (498 | ) | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total OTTI recognized in income | – | – | – | (498 | ) | |||||||||||||
|
|
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|
|
|
|
| |||||||||||
Securities gains (losses), net | $ | – | $ | – | $ | 5,855 | $ | (325 | ) | |||||||||
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|
F-259
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Prior to the Bank Merger, on at least a quarterly basis, the Company completed an OTTI assessment of its investment portfolio. The Company considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.
In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, 2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million and ($202,000), respectively, as of both December 31, 2010 and 2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, 2009 (Predecessor).
The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position not recognized in earnings, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||
December 31, 2010 | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||
U.S. agency obligations | $ | 8,916 | $ | 87 | $ | – | $ | – | $ | 8,916 | $ | 87 | ||||||||||||
Municipal bonds | 14,886 | 1,134 | 2,453 | 387 | 17,339 | 1,521 | ||||||||||||||||||
Mortgage-backed securities issued by GSEs | 14,473 | 195 | – | – | 14,473 | 195 | ||||||||||||||||||
Non-agency mortgage-backed securities | – | – | 4,183 | 242 | 4,183 | 242 | ||||||||||||||||||
Other securities | – | – | 2,536 | 214 | 2,536 | 214 | ||||||||||||||||||
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|
| |||||||||||||
Total | $ | 38,275 | $ | 1,416 | $ | 9,172 | $ | 843 | $ | 47,447 | $ | 2,259 | ||||||||||||
|
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|
As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, were related to 4 different securities. These losses were due to a combination of changes in credit spreads and other market factors. These mortgage securities were not issued or guaranteed by an agency of the federal government but were instead issued by private financial institutions and therefore carry an element of credit risk. Prior to the Bank Merger, management closely monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of
F-260
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
collateral, remaining terms, interest rates, loan types, etc. The Company engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.
Unrealized losses on the Company’s investments in municipal bonds were related to 30 different securities as of December 31, 2010 (Predecessor). These losses were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities related to an investment in subordinated debt of one corporate financial institution. Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and considered its capital, liquidity and earnings in this review.
The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI continued to perform and were expected to perform through maturity, and the issuers had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company did not intend to sell these investments and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider unrealized losses on such securities to represent OTTI as of December 31, 2010 (Predecessor).
Prior to the Bank Merger, the Company’s other investment securities primarily included an investment in Federal Home Loan Bank (“FHLB”) stock, which has no readily determinable market value and was recorded at cost. As of December 31, 2010 (Predecessor) the Company’s investment in FHLB stock totaled $7.7 million. Based on its evaluation prior to the Bank Merger, management concluded that the Company’s investment in FHLB stock was not impaired as of December 31, 2010 (Predecessor), and that ultimate recoverability of the par value of this investment was probable. During 2009 (Predecessor), the Company recorded an investment loss of $320,000 related to an equity investment in Silverton Bank, a correspondent financial institution that was closed by its regulators in 2009. The loss represented the full amount of the Company’s investment in Silverton Bank and was recorded as a reduction to noninterest income.
The amortized cost and estimated market values of available-for-sale debt securities as of December 31, 2010 (Predecessor) by final contractual maturities are summarized in the table below. Expected maturities differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Predecessor Company | ||||||||
December 31, 2010 | Available for Sale | |||||||
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||
Debt securities: | ||||||||
Due within one year | $ | 300 | $ | 301 | ||||
Due after one year through five years | 17,882 | 17,904 | ||||||
Due after five years through ten years | 49,567 | 49,401 | ||||||
Due after ten years | 147,541 | 145,647 | ||||||
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|
|
| |||||
Total debt securities | 215,290 | 213,253 | ||||||
Equity securities | 1,750 | 1,738 | ||||||
|
|
|
| |||||
Total investment securities | $ | 217,040 | $ | 214,991 | ||||
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|
F-261
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
As of December 31, 2010 (Predecessor), investment securities with book values totaling $68.2 million were pledged to secure public deposits, FHLB advances and other borrowings.
4. Loans
Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The composition of the loan portfolio by loan classification as of December 31, 2010 (Predecessor) was as follows:
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Commercial real estate: | ||||
Construction and land development | $ | 350,587 | ||
Real estate—non-owner occupied | 283,943 | |||
Real estate—owner occupied | 170,470 | |||
|
| |||
Total commercial real estate | 805,000 | |||
|
| |||
Consumer real estate: | ||||
Residential mortgage | 173,777 | |||
Home equity lines | 89,178 | |||
|
| |||
Total consumer real estate | 262,955 | |||
|
| |||
Commercial and industrial | 145,435 | |||
Consumer | 6,163 | |||
Other loans | 33,742 | |||
|
| |||
1,253,295 | ||||
Deferred loan fees and origination costs, net | 1,184 | |||
|
| |||
$ | 1,254,479 | |||
|
|
Loans pledged as collateral for certain borrowings totaled $341.5 million as of December 31, 2010 (Predecessor).
Successor Company:
Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
(Dollars in thousands) | As of Jan. 28, 2011 | |||
Contractually required payments | $ | 1,318,702 | ||
Nonaccretable difference | (125,626 | ) | ||
|
| |||
Cash flows expected to be collected at acquisition | 1,193,076 | |||
Accretable yield | (163,630 | ) | ||
|
| |||
Fair value of acquired loans at acquisition | $ | 1,029,446 | ||
|
|
F-262
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | |||
Balance, beginning of period | $ | 163,630 | ||
New loans purchased | – | |||
Accretion of income | (26,262 | ) | ||
Reclassifications from nonaccretable difference | 9,975 | |||
Merger of Old Capital Bank into Capital Bank, N.A. | (147,343 | ) | ||
|
| |||
Balance, end of period | $ | – | ||
|
|
The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the CBF Investment. 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, which is their fair value at the time of the CBF Investment. 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.
F-263
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
5. Allowance for Loan Losses and Credit Quality
The following is a summary of activity in the allowance for loan losses for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Balance at beginning of period, predecessor | $ | – | $ | 36,061 | $ | 26,081 | $ | 14,795 | ||||||||||
Loans charged off | (339 | ) | (49 | ) | (49,420 | ) | (12,197 | ) | ||||||||||
Recoveries of loans previously charged off | – | 9 | 855 | 419 | ||||||||||||||
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| |||||||||||
Net charge-offs | (339 | ) | (40 | ) | (48,565 | ) | (11,778 | ) | ||||||||||
Provision for loan losses | 1,450 | 40 | 58,545 | 23,064 | ||||||||||||||
Merger of Old Capital Bank into Capital Bank, N.A. | (1,111 | ) | – | – | – | |||||||||||||
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| |||||||||||
Balance at the end of period, predecessor | – | 36,061 | 36,061 | 26,081 | ||||||||||||||
Acquisition accounting adjustment | – | (36,061 | ) | – | – | |||||||||||||
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Balance at end of period, successor | $ | – | $ | – | $ | – | $ | – | ||||||||||
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The allowance for credit losses includes the allowance for loan losses, detailed above, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheet. Due to the Bank Merger, the Company had no allowance for credit losses as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the reserve for unfunded lending commitments totaled $623,000.
F-264
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The following is an analysis of the allowance for loan losses by portfolio segment in addition to the disaggregation of the allowance and outstanding loan balances by impairment method as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||||||
December 31, 2010 | CRE – Non- Owner Occupied | Consumer Real Estate | CRE – Owner Occupied | Commercial and Industrial | Consumer | Other | Total | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning balance | $ | 14,987 | $ | 2,383 | $ | 2,650 | $ | 5,536 | $ | 326 | $ | 199 | $ | 26,081 | ||||||||||||||
Charge-offs | (33,803 | ) | (3,923 | ) | (4,417 | ) | (6,639 | ) | (429 | ) | (209 | ) | (49,420 | ) | ||||||||||||||
Recoveries | 616 | 54 | 48 | 115 | 22 | – | 855 | |||||||||||||||||||||
Provision | 39,195 | 6,218 | 5,114 | 7,420 | 435 | 163 | 58,545 | |||||||||||||||||||||
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| |||||||||||||||
Ending balance—total | $ | 20,995 | $ | 4,732 | $ | 3,395 | $ | 6,432 | $ | 354 | $ | 153 | $ | 36,061 | ||||||||||||||
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| |||||||||||||||
Ending balance—individually evaluated for impairment | $ | 212 | $ | 87 | $ | 139 | $ | 89 | $ | 2 | $ | – | $ | 529 | ||||||||||||||
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Ending balance—collectively evaluated for impairment | $ | 20,783 | $ | 4,645 | $ | 3,256 | $ | 6,343 | $ | 352 | $ | 153 | $ | 35,532 | ||||||||||||||
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Loans: | ||||||||||||||||||||||||||||
Ending balance—total | $ | 634,530 | $ | 262,955 | $ | 170,470 | $ | 145,435 | $ | 6,163 | $ | 33,742 | $ | 1,253,295 | ||||||||||||||
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| |||||||||||||||
Ending balance—individually evaluated for impairment | $ | 57,227 | $ | 3,879 | $ | 8,613 | $ | 6,013 | $ | 6 | $ | 781 | $ | 76,519 | ||||||||||||||
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| |||||||||||||||
Ending balance—collectively evaluated for impairment | $ | 577,303 | $ | 259,076 | $ | 161,857 | $ | 139,422 | $ | 6,157 | $ | 32,961 | $ | 1,176,776 | ||||||||||||||
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F-265
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The following is an analysis presenting impaired loan information by loan class as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||
December 31, 2010 | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
(Dollars in thousands) | ||||||||||||
Impaired loans for which the full loss has been charged-off: | ||||||||||||
Commercial real estate: | ||||||||||||
Construction and land development | $ | 53,675 | $ | 65,918 | $ | – | ||||||
Commercial real estate—non-owner occupied | 2,678 | 3,772 | – | |||||||||
Consumer real estate: | ||||||||||||
Residential mortgage | 3,222 | 4,436 | – | |||||||||
Home equity lines | 236 | 332 | – | |||||||||
Commercial real estate—owner occupied | 8,083 | 10,475 | – | |||||||||
Commercial and industrial | 5,466 | 6,128 | – | |||||||||
Other loans | 781 | 990 | – | |||||||||
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|
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|
|
| |||||||
Total with no related allowance | 74,141 | 92,051 | – | |||||||||
|
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| |||||||
Impaired loans with an allowance recorded: | ||||||||||||
Commercial real estate: | ||||||||||||
Construction and land development | 874 | 874 | 212 | |||||||||
Consumer real estate: | ||||||||||||
Residential mortgage | 380 | 380 | 79 | |||||||||
Home equity lines | 41 | 41 | 8 | |||||||||
Commercial real estate—owner occupied | 530 | 530 | 139 | |||||||||
Commercial and industrial | 547 | 565 | 89 | |||||||||
Consumer | 6 | 6 | 2 | |||||||||
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| |||||||
Total with an allowance | 2,378 | 2,396 | 529 | |||||||||
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| |||||||
Total impaired loans: | ||||||||||||
Commercial | 72,634 | 89,252 | 440 | |||||||||
Consumer | 3,885 | 5,195 | 89 | |||||||||
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| |||||||
Total impaired loans | $ | 76,519 | $ | 94,447 | $ | 529 | ||||||
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F-266
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Prior to the Bank Merger, all TDRs were classified as individually impaired. The following table summarizes the Company’s recorded investment in TDRs as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Nonperforming TDRs: | ||||
Commercial real estate | $ | 10,775 | ||
Consumer real estate | 808 | |||
Commercial owner occupied | 2,271 | |||
Commercial and industrial | 106 | |||
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| |||
Total nonperforming TDRs | 13,960 | |||
|
| |||
Performing TDRs: | ||||
Commercial real estate | 3,856 | |||
Consumer real estate | 121 | |||
Commercial owner occupied | 421 | |||
Commercial and industrial | 65 | |||
Consumer | – | |||
|
| |||
Total performing TDRs | 4,463 | |||
|
| |||
Total TDRs | $ | 18,423 | ||
|
|
As of December 31, 2010 (Predecessor), there was no allowance for loan losses allocated to TDRs as all of these loans were charged down to estimated fair value.
Prior to the Bank Merger, to monitor and quantify credit risk in the loan portfolio, the Company used a risk rating system. The risk rating scale ranged from 1 to 9, where a higher rating represents higher credit risk and was selected on the financial strength and overall resources of the borrower. The nine risk rating categories can generally be described by the following groupings:
• | Pass (risk rating 1–6)—These loans ranged from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted. |
• | Special Mention (risk rating 7)—Loans in this category had potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may have resulted in deterioration of the repayment prospects for the asset or the institution’s credit position at some future date. They contain unfavorable characteristics and were generally undesirable. Loans in this category were currently protected by current sound net worth and paying capacity of the obligor or of the collateral pledged, if any, but were potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification. |
• | Substandard (risk rating 8)—Loans in this category were inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies were not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. A substandard loan normally had one or more well-defined weaknesses that could jeopardize repayment of the debt. |
F-267
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
• | Doubtful (risk rating 9)—For loans in this category, the borrower’s ability to continue repayment was highly unlikely. Full collection based on currently known facts, conditions, and values was highly questionable and improbable. The possibility of loss was extremely high, but because of certain important and specific reasonable pending factors, which work to the bank’s advantage and strengthen the asset in the near term, its classification as loss was deferred until its more exact status may be determined. |
The following is an analysis of the Company’s credit risk profile on internally assigned risk ratings as of December 31, 2010 (Predecessor):
Commercial Loans | ||||||||||||||||||||||||
December 31, 2010 (Predecessor Company) | Construction and Land Development | Non-Owner Occupied Real Estate | Owner Occupied Real Estate | Commercial and Industrial | Other | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Pass | $ | 250,557 | $ | 266,523 | $ | 154,156 | $ | 101,674 | $ | 32,961 | $ | 805,871 | ||||||||||||
Special mention | 20,178 | 12,505 | 2,287 | 20,488 | – | 55,458 | ||||||||||||||||||
Substandard | 79,852 | 4,610 | 13,967 | 23,266 | 781 | 122,476 | ||||||||||||||||||
Doubtful | – | 305 | 60 | 7 | – | 372 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 350,587 | $ | 283,943 | $ | 170,470 | $ | 145,435 | $ | 33,742 | $ | 984,177 | ||||||||||||
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Consumer Loans | ||||||||||||||||
December 31, 2010 (Predecessor Company) | Residential Mortgage | Home Equity Lines | Other Consumer | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Pass | $ | 162,002 | $ | 85,000 | $ | 5,803 | $ | 252,805 | ||||||||
Special mention | 5,518 | 1,972 | 188 | 7,678 | ||||||||||||
Substandard | 6,138 | 2,110 | 172 | 8,420 | ||||||||||||
Doubtful | 119 | 96 | – | 215 | ||||||||||||
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| |||||||||
Total | $ | 173,777 | $ | 89,178 | $ | 6,163 | $ | 269,118 | ||||||||
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F-268
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The following is an aging analysis of the Company’s portfolio by loan class as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||
December 31, 2010 | 30–59 Days Past Due | 60–89 Days Past Due | Over 90 Days Past Due and Accruing | Non-accrual Loans | Current Loans | Total Loans | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction and land development | $ | 6,166 | $ | 204 | $ | – | $ | 50,693 | $ | 293,524 | $ | 350,587 | ||||||||||||
Real estate—non-owner occupied | 509 | – | – | 2,678 | 280,756 | 283,943 | ||||||||||||||||||
Real estate—owner occupied | 3,165 | – | – | 8,198 | 159,107 | 170,470 | ||||||||||||||||||
Consumer real estate: | ||||||||||||||||||||||||
Residential mortgage | 2,213 | 329 | – | 3,481 | 167,754 | 173,777 | ||||||||||||||||||
Home equity lines | 498 | 109 | – | 277 | 88,294 | 89,178 | ||||||||||||||||||
Commercial and industrial | 175 | 146 | – | 5,830 | 139,284 | 145,435 | ||||||||||||||||||
Consumer | 4 | 4 | – | 6 | 6,149 | 6,163 | ||||||||||||||||||
Other loans | – | – | – | 781 | 32,961 | 33,742 | ||||||||||||||||||
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Total | $ | 12,730 | $ | 792 | $ | – | $ | 71,944 | $ | 1,167,829 | $ | 1,253,295 | ||||||||||||
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For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), no interest income was recognized on loans while in non-accrual status, including cash received for interest on these loans. Prior to the Bank Merger, cumulative interest payments collected on non-accrual loans were applied as a reduction to the principal balance. Cumulative interest payments collected on non-accrual loans totaled $837,000 as of December 31, 2010 (Predecessor).
6. Premises and Equipment
Due to the Bank Merger, the Company reported no premises and equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Premises and equipment as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Land | $ | 6,795 | ||
Buildings and leasehold improvements | 17,927 | |||
Furniture and equipment | 19,163 | |||
Automobiles | 265 | |||
Construction in progress | 411 | |||
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44,561 | ||||
Less accumulated depreciation and amortization | (19,527 | ) | ||
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$ | 25,034 | |||
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Depreciation expense for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) was $1.4 million, $240 thousand, $2.6 million, and $2.9 million, respectively.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
7. Goodwill and Other Intangible Assets
Due to the Bank Merger, the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The changes in carrying amounts of goodwill and other intangible assets for each period presented were as follows:
Predecessor Company | Goodwill | Other Intangible Assets | ||||||||||||||
Gross | Accumulated Amortization | Net | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance at January 1, 2009 | $ | – | $ | 8,414 | $ | (4,557 | ) | $ | 3,857 | |||||||
Amortization expense | – | – | (1,146 | ) | (1,146 | ) | ||||||||||
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Balance at December 31, 2009 | – | 8,414 | (5,703 | ) | 2,711 | |||||||||||
Amortization expense | – | – | (937 | ) | (937 | ) | ||||||||||
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Balance at December 31, 2010 | – | 8,414 | (6,640 | ) | 1,774 | |||||||||||
Amortization expense | – | – | (62 | ) | (62 | ) | ||||||||||
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Balance at January 28, 2011, predecessor | $ | – | $ | 8,414 | $ | (6,702 | ) | $ | 1,712 | |||||||
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Successor Company | Goodwill | Other Intangible Assets | ||||||||||||||
Gross | Accumulated Amortization | Net | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Acquisition accounting adjustment | $ | – | $ | (8,414 | ) | $ | 6,702 | $ | (1,712 | ) | ||||||
Balance at January 29, 2011, successor | 50,093 | 5,004 | – | 5,004 | ||||||||||||
Amortization expense | – | – | (478 | ) | (478 | ) | ||||||||||
Merger of Old Capital Bank into Capital Bank, N.A. | (50,093 | ) | (5,004 | ) | 478 | (4,526 | ) | |||||||||
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Balance at December 31, 2011 | $ | – | $ | – | $ | – | $ | – | ||||||||
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Goodwill represents the excess of the purchase price over the fair value of acquired net assets in connection with the CBF Investment on January 28, 2011. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.
Other intangible assets were amortized over periods of up to ten years using an accelerated method approximating the period of economic benefits received. Due to the Bank Merger, the Company reported no intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor), and thus will record no amortization expense in future periods.
Prior to the Bank Merger, Goodwill was reviewed for potential impairment at least annually at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company’s annual goodwill impairment evaluation in the years ended December 31, 2010 and 2009 (Predecessor), respectively, did not result in a goodwill impairment charge.
Core deposit intangibles were evaluated for impairment if events and circumstances indicate a potential for impairment. Such an evaluation of other intangible assets was based on undiscounted cash flow projections. No impairment charges were recorded for other intangible assets in the years ended December 31, 2010 and 2009 (Predecessor), respectively.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
As of December 31, 2011 (Successor), the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet, thus no impairment evaluations were required in the successor period.
8. Deposits
Due to the Bank Merger, the Company reported no deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the scheduled maturities of time deposits were as follows:
Predecessor Company | ||||||||
December 31, 2010 | Amount | Weighted Average Rate | ||||||
(Dollars in thousands) | ||||||||
2011 | $ | 234,572 | 1.06 | % | ||||
2012 | 311,121 | 2.02 | ||||||
2013 | 257,327 | 1.76 | ||||||
2014 | 11,698 | 2.69 | ||||||
2015 | 58,568 | 2.72 | ||||||
Thereafter | 44 | 2.64 | ||||||
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$ | 873,330 | 1.74 | % | |||||
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Time deposits of $100,000 or greater totaled $327.5 million as of December 31, 2010 (Predecessor) while brokered deposits (excluding reciprocal CDARS deposits of $29.2 million) totaled $110.5 million as of December 31, 2010 (Predecessor). Deposit overdrafts of $71,000 were included in total loans as of December 31, 2010 (Predecessor).
In the normal course of business, prior to the Bank Merger, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, may have been deposit customers.
9. Borrowings
Due to the Bank Merger, the Company reported no outstanding borrowings on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The following is an analysis of securities sold under agreements to repurchase as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||
End of Period | Daily Average Balance | Maximum Outstanding at Any Month End | ||||||||||||||||||
December 31, 2010 | Balance | Weighted Average Rate | Balance | Interest Rate | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | – | – | % | $ | 1,564 | 0.32 | % | $ | 5,026 |
Interest expense on federal funds purchased totaled $0, $0, $0, and $2,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively. Interest expense on securities sold under agreements to repurchase totaled $0, $0, $5,000, and $21,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The following table presents information regarding the Company’s outstanding borrowings as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
FHLB advances without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 ranging from 1.86% to 5.50%; maturity dates on those advances ranging from January 26, 2011 to January 20, 2015 | $ | 41,000 | ||
FHLB advance with next quarterly call option on February 22, 2011; fixed interest rate of 3.63%; matures on August 21, 2017 | 10,000 | |||
FHLB overnight borrowings; interest rate of 0.47% as of December 31, 2010, subject to change daily | 20,000 | |||
Structured repurchase agreements without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 of 3.72% and 3.79%; agreements mature on December 18, 2017 | 20,000 | |||
Structured repurchase agreements with various forms of call options remaining; fixed interest rates ranging from 3.56% to 4.75%; maturity dates ranging from November 6, 2016 to March 22, 2019 | 30,000 | |||
Federal Reserve Bank primary credit facility; current interest rate of 0.75% as of December 31, 2010 | – | |||
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$ | 121,000 | |||
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Prior to the Bank Merger, advances from the FHLB totaled $51.0 million and had a weighted average rate of 4.22% as of December 31, 2010 (Predecessor). In addition, overnight borrowings on the Company’s credit line at the FHLB totaled $20.0 million as of December 31, 2010 (Predecessor). These fixed rate advances as well as the Company’s credit line with the FHLB were collateralized by eligible 1–4 family mortgages, home equity loans and commercial loans totaling $216.3 million as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $20.7 million of available borrowing capacity with the FHLB.
Outstanding structured repurchase agreements totaled $50.0 million as of December 31, 2010 (Predecessor). These repurchase agreements had a weighted average rate of 4.06% as of December 31, 2010 (Predecessor) and were collateralized by certain U.S. agency and mortgage-backed securities with a book value of $61.2 million as of December 31, 2010 (Predecessor).
Prior to the Bank Merger, the Company maintained a credit line at the FRB discount window that was used for short-term funding needs and as an additional source of liquidity. Primary credit borrowings as well as the Company’s credit line at the discount window were collateralized by eligible commercial construction as well as commercial and industrial loans totaling $125.2 as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $77.0 million of available borrowing capacity with the FRB.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
As of December 31, 2010 (Predecessor), the scheduled maturities of borrowings were as follows:
Predecessor Company | ||||||||
December 31, 2010 | Balance | Weighted Average Rate | ||||||
(Dollars in thousands) | ||||||||
2011 | $ | 51,000 | 3.21 | % | ||||
2012 | – | – | ||||||
2013 | 3,000 | 1.86 | ||||||
2014 | 3,000 | 2.43 | ||||||
2015 | 4,000 | 2.92 | ||||||
Thereafter | 60,000 | 3.99 | ||||||
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$ | 121,000 | 3.54 | % | |||||
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10. Subordinated Debentures
Capital Bank Statutory Trusts
The Company formed Capital Bank Statutory Trust I, Capital Bank Statutory Trust II and Capital Bank Statutory Trust III (the “Trusts”) in June 2003, December 2003 and December 2005, respectively. Each issued $10 million of its floating-rate capital securities (the “trust preferred securities”), with a liquidation amount of $1,000 per capital security, in pooled offerings of trust preferred securities. The Trusts sold their common securities to the Company for an aggregate of $900,000, resulting in total proceeds from each offering equal to $10.3 million, or $30.9 million in aggregate. The Trusts then used these proceeds to purchase $30.9 million in principal amount of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). Following payment by the Company of a placement fee and other expenses of the offering, the Company’s net proceeds from the offerings aggregated $30.0 million.
The trust preferred securities each have 30-year maturities and became redeemable after five years by the Company with certain exceptions. Prior to the redemption date, the trust preferred securities may be redeemed at the option of the Company after the occurrence of certain events, including without limitation events that would have a negative tax effect on the Company or the Trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as an investment company. The Trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the Debentures. The Company’s obligation under the Debentures constitutes a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities.
The securities associated with each trust are floating rate, based on 90-day LIBOR, and adjust quarterly. Trust I securities adjust at LIBOR + 3.10%, Trust II securities adjust at LIBOR + 2.85% and Trust III securities adjust at LIBOR +1.40%.
The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of the Company, are the sole assets of the Trusts, and the Company’s payment under the Debentures is the sole source of revenue for the Trusts.
The assets and liabilities of the Trusts are not consolidated into the consolidated financial statements of the Company. Interest on the Debentures is included in the Consolidated Statements of Operations as interest expense. The Debentures are recorded in subordinated debentures on the Consolidated Balance Sheets. For regulatory purposes, the $30 million of trust preferred securities qualifies as Tier 1 capital, subject to certain
F-273
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
limitations, or Tier 2 capital in accordance with regulatory reporting requirements. The Company recorded interest expense on the Debentures of $1.0 million, $74 thousand, $865 thousand, and $1.1 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.
Private Placement Offering of Investment Units
On March 18, 2010, the Company sold 849 investment units (“Units”) to certain accredited investors for gross proceeds of $8.5 million. Each Unit was priced at $10,000 and consisted of a $3,996.90 subordinated promissory note and a number of shares of the Company’s common stock valued at $6,003.10. As a result of the sale of the Units, the Company sold $3.4 million in aggregate principal amount of subordinated promissory notes due March 18, 2020 (the “Notes”) and 1,468,770 shares of the Company’s common stock valued at $5.1 million. The Notes are recorded in subordinated debentures on the Condensed Consolidated Balance Sheets. The Company may prepay the Notes at any time after March 18, 2015 subject to regulatory approval and compliance with applicable law. The Company’s obligation to repay the Notes is subordinate to all indebtedness owed by the Company to its current and future secured creditors and general creditors and certain other financial obligations of the Company.
The Company is obligated to pay annual interest on the Notes at 10% payable in quarterly installments. The Company recorded interest expense on the Notes of $297,000, $28,000 and $266,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the year ended December 31, 2010 (Predecessor), respectively.
11. Leases
Due to the Bank Merger, the company had no operating lease obligations as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company had non-cancelable operating leases for its corporate office, certain branch locations and corporate aircraft that expired at various times through 2036. Certain of the leases contained escalating rent clauses, for which the Company recognized rent expense on a straight-line basis. The Company subleased certain office space and the corporate aircraft to outside parties. Future minimum lease payments under the leases and sublease receipts for years subsequent to December 31, 2010 (Predecessor) were as follows:
Predecessor Company | ||||||||
December 31, 2010 | Lease Payments | Sublease Receipts | ||||||
(Dollars in thousands) | ||||||||
2011 | $ | 4,112 | $ | 383 | ||||
2012 | 4,058 | 295 | ||||||
2013 | 3,919 | 242 | ||||||
2014 | 3,817 | 240 | ||||||
2015 | 3,623 | 247 | ||||||
Thereafter | 29,747 | 62 | ||||||
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$ | 49,276 | $ | 1,469 | |||||
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Rent expense under operating leases was $1.9 million, $343 thousand, $3.8 million and $3.3 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
12. Related Party Transactions
Due to the Bank Merger, the Company reported no loans or deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, in the normal course of business, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, were borrowers. Total loans to such groups and activity for each period presented is summarized as follows:
Predecessor Company | 2011 | |||
(Dollars in thousands) | ||||
Balance as of January 1, 2011 | $ | 86,970 | ||
Advances | 55 | |||
Repayments | (11,150 | ) | ||
Reconstitution of Board of Directors in connection with CBF Investment | (63,709 | ) | ||
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Balance as of January 28, 2011 | $ | 12,166 | ||
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Successor Company | 2011 | |||
(Dollars in thousands) | ||||
Advances | $ | 487 | ||
Repayments | (744 | ) | ||
Merger of Old Capital Bank into Capital Bank, N.A. | (11,909 | ) | ||
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Balance as of December 31, 2011 | $ | – | ||
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These transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company. Prior to the Bank Merger, certain deposits were held by related parties, and the rates and terms of these accounts are consistent with those of non-related parties.
13. Employee Benefit Plans
401(k) Retirement Plan
The Company maintains the Capital Bank 401(k) Retirement Plan (the “Plan”) for the benefit of its employees, which includes provisions for employee contributions, subject to limitation under the Internal Revenue Code, and discretionary matching contributions by the Company. The Plan provides that employee’s contributions are 100% vested at all times, and the Company’s matching contributions vest 20% after the second year of service, an additional 20% after the third and fourth years of service and the remaining 40% after the fifth year of service. Through May 31, 2009, the Company matched 100% of employee contributions up to 6% of an employee’s salary. Effective June 1, 2009, the Company suspended its discretionary matching contributions to the Plan. Aggregate matching contributions, which are recorded in salaries and employee benefits expense on the Consolidated Statements of Operations, for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) were $0, $0, $0, and $387,000, respectively.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Supplemental Retirement Plans
In May 2005, the Company established two supplemental retirement plans for the benefit of certain executive officers and certain directors of the Company. The Capital Bank Defined Benefit Supplemental Executive Retirement Plan (“Executive Plan”) covers the Company’s chief executive officer and three other members of executive management. Under the Executive Plan, the participants were to receive a supplemental retirement benefit equal to a targeted percentage of the participant’s average annual salary during the last three years of employment. Under the Executive Plan, benefits vest over an eight-year period with the first 20% vesting after four years of service and 20% vesting annually thereafter. The Capital Bank Supplemental Retirement Plan for Directors (“Director Plan”) covered certain directors and provided for a fixed annual retirement benefit to be paid for a number of years equal to the director’s total years of service, up to a maximum of ten years. The Executive Plan was terminated in connection with the closing of the CBF Investment. As of December 31, 2011 (Successor), no current or former directors were participating in the Director Plan, and it is not anticipated that any current or future directors will be permitted to participate in the plan.
For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recognized $106,000, $18,000, $255,000, and $236,000, respectively, of expense related to the Executive Plan; and $0, $17,000, $238,000, and $353,000, respectively, of expense related to the Director Plan. Prior to the Bank Merger, the obligations associated with the two plans were included in other liabilities on the Consolidated Balance Sheet and totaled $1.0 million (Executive Plan) and $1.6 million (Director Plan) as of December 31, 2010 (Predecessor). On January 28, 2011, cash benefit payments were made to participants from both the Executive Plan and Director Plan in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details on these transactions.
14. Stock-Based Compensation
Stock Options
Pursuant to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”), the Company had a stock option plan providing for the issuance of up to 1,150,000 options to purchase shares of the Company’s stock to officers and directors. As of December 31, 2011 (Successor), options for 193,600 shares of common stock were outstanding and options for 698,859 shares of common stock remained available for future issuance; however, pursuant to the Equity Incentive Plan, no option may be granted after February 21, 2012 and the Equity Incentive Plan has expired. In addition, there were 566,071 options which were assumed under various plans from previously acquired financial institutions, none of which remain outstanding. Grants of options were made by the Board of Directors or the Compensation/Human Resources Committee of the Board. All grants were made with an exercise price at no less than fair market value on the date of grant and must be exercised no later than 10 years from the date of grant.
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
A summary of the activity of the Company’s stock option plans, including the weighted average exercise price (“WAEP”), for each period is presented below:
Successor Company | Predecessor Company | |||||||||||||||||||||||||||||||||
Period of Jan. 29 to Dec. 31, 2011 | Period of Jan. 1 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | |||||||||||||||||||||||||||||||
Shares | WAEP | Shares | WAEP | Shares | WAEP | Shares | WAEP | |||||||||||||||||||||||||||
Outstanding options, beginning of period | 297,880 | $ | 12.11 | 297,880 | $ | 12.11 | 366,583 | $ | 11.76 | 377,083 | $ | 11.71 | ||||||||||||||||||||||
Granted | – | – | – | – | 19,250 | 4.38 | – | – | ||||||||||||||||||||||||||
Exercised | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||
Forfeited and expired | (104,280 | ) | 10.26 | – | – | (87,953 | ) | 8.93 | (10,500 | ) | 10.09 | |||||||||||||||||||||||
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Outstanding options, end of period | 193,600 | $ | 13.11 | 297,880 | $ | 12.11 | 297,880 | $ | 12.11 | 366,583 | $ | 11.76 | ||||||||||||||||||||||
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Options exercisable at end of period | 180,000 | $ | 13.59 | 226,430 | $ | 13.53 | 226,430 | $ | 13.53 | 285,983 | $ | 12.33 | ||||||||||||||||||||||
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The following table summarizes information about the Company’s stock options as of December 31, 2011 (Successor):
Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life in Years | Number Exercisable | Intrinsic Value | ||||||||||||
$3.85 – $6.00 | 59,850 | 7.39 | 47,850 | $ | – | |||||||||||
$6.01 – $9.00 | – | – | – | – | ||||||||||||
$9.01 – $12.00 | 2,500 | 6.15 | 2,500 | – | ||||||||||||
$12.01 – $15.00 | 16,000 | 5.76 | 14,400 | – | ||||||||||||
$15.01 – $18.00 | 64,000 | 3.10 | 64,000 | – | ||||||||||||
$18.01 – $18.37 | 51,250 | 2.99 | 51,250 | – | ||||||||||||
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193,600 | 4.66 | 180,000 | $ | – | ||||||||||||
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The fair values of options granted are estimated on the date of the grants using the Black-Scholes option pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. The expected life of the options used in this calculation is the period the options are expected to be outstanding. Expected stock price volatility is based on the historical volatility of the Company’s common stock for a period approximating the expected life; the expected dividend yield is based on the Company’s historical annual dividend payout; and the risk-free rate is based on the implied yield available on U.S. Treasury issues. The following weighted-average assumptions were used in determining fair value for options granted for each period presented:
Assumptions | 2011 | 2010 | 2009 | |||||||||
Dividend yield | – | – | – | |||||||||
Expected volatility | – | 33.0 | % | – | ||||||||
Risk-free interest rate | – | 3.1 | % | – | ||||||||
Expected life | – | 7 years | – |
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The weighted average fair value of options granted for the year ended December 31, 2010 (Predecessor) was $1.80. There were no options granted in the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) or the year ended December 31, 2009 (Predecessor).
For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recorded total compensation expense related to stock options of $78,000, $5,000, $54,000 and $50,000, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details.
Restricted Stock
Pursuant to the Equity Incentive Plan, the Board of Directors may grant restricted stock to certain employees and Board members at its discretion. There have been no restricted stock grants since 2008, and the Equity Incentive Plan expired on February 21, 2012. Nonvested shares were subject to forfeiture if employment was terminated prior to the vesting dates. The Company expensed the cost of the stock awards, determined to be the fair value of the shares at the date of grant, ratably over the period of the vesting.
Nonvested restricted stock activity for the year ended December 31, 2011 is summarized in the following table:
Shares | Weighted Avg. Grant Date Fair Value | |||||||
Nonvested at beginning of period | 11,700 | $ | 6.00 | |||||
Granted | – | – | ||||||
Vested | (11,700 | ) | 6.00 | |||||
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Nonvested at end of period | – | $ | – | |||||
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Total compensation expense related to these restricted stock awards for the period of January 29 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) totaled $68,000, $2,000, $106,000 and $109,000, respectively. On January 28, 2011, vesting was accelerated on certain outstanding nonvested restricted shares in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details.
Deferred Compensation for Non-employee Directors
The Company administered the Capital Bank Corporation Deferred Compensation Plan for Outside Directors (“Deferred Compensation Plan”). Eligible directors may have elected to participate in the Deferred Compensation Plan by deferring all or part of their directors’ fees for at least one calendar year, in exchange for common stock of the Company. If a director did not elect to defer all or part of his fees, then he was not considered a participant in the Deferred Compensation Plan. The amount deferred was equal to 125 percent of total director fees. Each participant was fully vested in his account balance. The Deferred Compensation Plan provides for payment of share units in shares of common stock of the Company after the participant ceased to serve as a director for any reason.
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Capital Bank Corporation
Notes to Consolidated Financial Statements
Upon closing of the CBF Investment, the Deferred Compensation Plan was terminated and all phantom shares in the Plan were distributed to the participants. For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recognized stock-based compensation expense of $0, $35 thousand, $576 thousand and $543 thousand, respectively, related to the Deferred Compensation Plan.
15. Income Taxes
Income taxes charged to operations consisted of the following components for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Current income tax expense (benefit) | $ | (3,134 | ) | – | $ | (272 | ) | $ | (2,305 | ) | ||||||||
Deferred income tax expense (benefit) | 3,415 | – | 15,396 | (4,708 | ) | |||||||||||||
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Total income tax expense (benefit) | $ | 281 | – | $ | 15,124 | $ | (7,013 | ) | ||||||||||
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A reconciliation of the difference between income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate for each period presented is as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Amount Computed | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Tax expense (benefit) at statutory rate on net income (loss) before taxes | $ | 1,942 | $ | 203 | $ | (15,756 | ) | $ | (4,702 | ) | ||||||||
State taxes, net of federal benefit | 100 | 41 | (1,894 | ) | (558 | ) | ||||||||||||
Increase (reduction) in taxes resulting from: | ||||||||||||||||||
Valuation allowance on deferred tax asset | – | (187 | ) | 31,821 | – | |||||||||||||
Tax-exempt interest | (296 | ) | (57 | ) | (945 | ) | (1,184 | ) | ||||||||||
Nontaxable BOLI income | – | (3 | ) | (238 | ) | (622 | ) | |||||||||||
Taxable income on BOLI surrender | – | – | 1,981 | – | ||||||||||||||
Equity income from investment in Capital Bank, N.A. | (1,416 | ) | – | – | – | |||||||||||||
Other, net | (49 | ) | 3 | 155 | 53 | |||||||||||||
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$ | 281 | $ | – | $ | 15,124 | $ | (7,013 | ) | ||||||||||
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Capital Bank Corporation
Notes to Consolidated Financial Statements
Successor Company | Predecessor Company | |||||||||||||||||
Percent of Pretax Income (Loss) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Tax expense (benefit) at statutory rate on net income (loss) before taxes | 35.00 | % | 34.00 | % | 34.00 | % | 34.00 | % | ||||||||||
State taxes, net of federal benefit | 1.81 | 6.90 | 4.09 | 4.03 | ||||||||||||||
Increase (reduction) in taxes resulting from: | ||||||||||||||||||
Valuation allowance on deferred tax asset | – | (31.33 | ) | (68.67 | ) | – | ||||||||||||
Tax-exempt interest | (5.34 | ) | (9.58 | ) | 2.04 | 8.56 | ||||||||||||
Nontaxable BOLI income | – | (0.58 | ) | 0.51 | 4.50 | |||||||||||||
Taxable income on BOLI surrender | – | – | (4.27 | ) | – | |||||||||||||
Equity income from investment in Capital Bank, N.A. | (25.52 | ) | – | (4.27 | ) | – | ||||||||||||
Other, net | (0.88 | ) | 0.59 | (0.34 | ) | (0.38 | ) | |||||||||||
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5.07 | % | – | (32.64 | )% | 50.71 | % | ||||||||||||
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Significant components of deferred tax assets and liabilities as of December 31, 2011 (Successor) and 2010 (Predecessor) were as follows:
Successor Company | Predecessor Company | |||||||||
(Dollars in thousands) | Dec. 31, 2011 | Dec. 31, 2010 | ||||||||
Deferred tax assets: | ||||||||||
Allowance for loan losses | $ | – | $ | 14,143 | ||||||
ORE valuation adjustments | – | 666 | ||||||||
Intangible assets | – | 1,808 | ||||||||
Net unrealized loss on investment securities | – | 790 | ||||||||
Deferred compensation | – | 2,632 | ||||||||
Deferred rent | – | 335 | ||||||||
Non-accrual interest | – | 323 | ||||||||
Deferred gain on sale-leaseback | – | 318 | ||||||||
Stock offering costs | – | – | ||||||||
Net operating loss carryforwards | – | 11,587 | ||||||||
AMT credit carryforward | – | 1,831 | ||||||||
Other | – | 304 | ||||||||
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Gross deferred tax assets before valuation allowance | – | 34,737 | ||||||||
Less: valuation allowance | – | (31,821 | ) | |||||||
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Gross deferred tax assets after valuation allowance | – | 2,916 | ||||||||
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Deferred tax liabilities: | ||||||||||
Purchase accounting adjustment | (5,215 | ) | – | |||||||
Depreciation | – | 1,202 | ||||||||
FHLB stock dividends | – | 343 | ||||||||
Net unrealized gain on investment securities | – | – | ||||||||
Deferred loan origination costs | – | 719 | ||||||||
Prepaid expenses | – | 515 | ||||||||
Other | – | 137 | ||||||||
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Gross deferred tax liabilities | (5,215 | ) | 2,916 | |||||||
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Net deferred tax asset | $ | (5,215 | ) | $ | – | |||||
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F-280
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
As of December 31, 2011 (Successor) and 2010 (Predecessor), the Company had net deferred tax liabilities and assets before valuation allowance of $5.2 million and $31.8 million, respectively. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Due to a cumulative three-year, pre-tax loss position, significant net operating losses in 2010 (Predecessor), and ongoing stress on the Company’s financial performance from elevated credit losses, the Company fully reserved its deferred tax assets as of December 31, 2010 (Predecessor). A cumulative loss position makes it more difficult for management to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.
The Company and its subsidiaries are subject to U.S. federal income tax as well as North Carolina income tax. The Company has concluded all U.S. federal income tax matters for years through 2008.
16. Derivative Instruments
Due to the Bank Merger, the Company had no derivative instruments as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company entered into interest rate lock commitments with customers and commitments to sell mortgages to investors. The period of time between the issuance of a mortgage loan commitment and the closing and sale of the mortgage loan was generally less than 60 days. Interest rate lock commitments and forward loan sale commitments represented derivative instruments which were carried at fair value. These derivative instruments did not qualify for hedge accounting. The fair values of the Company’s interest rate lock commitments and forward loan sales commitments were based on current secondary market pricing and were included on the Condensed Consolidated Balance Sheets in mortgage loans held for sale and on the Condensed Consolidated Statements of Operations in mortgage origination and other loan fees.
As of December 31, 2010 (Predecessor), the Company had $10.3 million of commitments outstanding to originate mortgage loans held for sale at fixed rates and $17.3 million of forward commitments under best efforts contracts to sell mortgages to four different investors. The fair value of the interest rate lock commitments and forward loan sales commitments were not considered material as of December 31, 2010 (Predecessor). Thus, there was no impact to the Condensed Consolidated Statements of Operations at that date.
17. Commitments, Contingencies and Concentrations of Credit Risk
Due to the Bank Merger, the Company had no outstanding commitments or contingencies as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company was party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments were comprised of various types of commitments to extend credit, including unused lines of credit and overdraft lines, as well as standby letters of credit. These instruments involved, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
Prior to the Bank Merger, the Company’s exposure to credit loss in the event of nonperformance by the other party was represented by the contractual amount of those instruments. The Company used the same credit policies in making these commitments as it had for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit was based on management’s credit evaluation of the borrower. Collateral held varied but included trade accounts receivable, property, plant and equipment, and income-producing commercial properties. Since many unused lines of credit expired without being drawn upon, the total commitment amounts did not necessarily represent future cash requirements.
F-281
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The Company’s exposure to off-balance-sheet credit risk as of December 31, 2010 (Predecessor) was as follows:
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Commitments to extend credit | $ | 175,318 | ||
Standby letters of credit | 10,285 | |||
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Total commitments | $ | 185,603 | ||
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Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, the majority of the Company’s lending was concentrated in Alamance, Buncombe, Catawba, Chatham, Cumberland, Granville, Johnston, Lee and Wake counties in North Carolina, and economic conditions in those and surrounding counties significantly impacted the ability of borrowers to repay their loans. As of December 31, 2010 (Predecessor), $1.07 billion (85%) of the total loan portfolio was secured by real estate, including commercial owner occupied loans. The credits in the loan portfolio were diversified, and the Company did not have significant concentrations to any one credit relationship.
Further, the Company had limited partnership investments in two related private investment funds which totaled $1.8 million as of December 31, 2010 (Predecessor). These investments were recorded on the cost basis and were included in other assets on the Condensed Consolidated Balance Sheet. Remaining capital commitments to these funds totaled $1.6 million as of December 31, 2010 (Predecessor).
18. Fair Value
Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Prior to the Bank Merger, investment securities, available for sale, were recorded at fair value on a recurring basis. Additionally, prior to the Bank Merger, the Company may have been required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involved application of lower of cost or market accounting or write-downs of individual assets. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Prior to the Bank Merger, investment securities, available for sale, were recorded at fair value on a recurring basis. Fair value measurement was based upon quoted prices, if available. If quoted prices were not available, fair values were measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities included those traded on an active exchange, U.S. Treasury securities that were traded by dealers or brokers in active over-the-counter markets, and money market funds. Level 2 securities included mortgage-backed securities issued by government sponsored entities and corporate entities as well as municipal bonds. Securities classified as Level 3 included corporate debt instruments that were not actively traded and where certain assumptions were used to calculate fair value.
Mortgage loans held for sale were carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale were based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustment for mortgage loans held for sale were classified as nonrecurring Level 2.
F-282
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Prior to the Bank Merger, loans were not recorded at fair value on a recurring basis. However, certain loans were determined to be impaired, and those loans were charged down to estimated fair value. The fair value of impaired loans that were collateral dependent was based on collateral value. For impaired loans that were not collateral dependent, estimated value was based on either an observable market price, if available, or the present value of expected future cash flows. Those impaired loans not requiring a charge-off represent loans for which the estimated fair value exceeds the recorded investments in such loans. When the fair value of an impaired loan was based on an observable market price or a current appraised value with no adjustments, the Company recorded the impaired loan as nonrecurring Level 2. When an appraised value was not available, or management determined the fair value of the collateral was further impaired below the appraised value, and there was no observable market price, the Company classified the impaired loan as nonrecurring Level 3.
Prior to the Bank Merger, other real estate, which includes foreclosed assets, was adjusted to fair value upon transfer of loans and premises to other real estate. Subsequently, other real estate was carried at the lower of carrying value or fair value. Fair value was based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral was based on an observable market price or a current appraised value, the Company recorded other real estate as nonrecurring Level 2. When an appraised value was not available, or management determines the fair value of the collateral was further impaired below the appraised value, and there was no observable market price, the Company classified other real estate as nonrecurring Level 3.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 (Predecessor) are summarized below:
Predecessor Company | ||||||||||||||||
December 31, 2010 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Investment securities—available for sale: | ||||||||||||||||
U.S. agency obligations | $ | – | $ | 18,934 | $ | – | $ | 18,934 | ||||||||
Municipal bonds | – | 21,009 | – | 21,009 | ||||||||||||
Mortgage-backed securities issued by GSEs | – | 165,423 | – | 165,423 | ||||||||||||
Non-agency mortgage-backed securities | – | 6,587 | – | 6,587 | ||||||||||||
Other securities | 1,738 | – | 1,300 | 3,038 | ||||||||||||
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Total | $ | 1,738 | $ | 211,953 | $ | 1,300 | $ | 214,991 | ||||||||
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F-283
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for each period presented:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Balance at beginning of period | $ | 1,107 | $ | 1,300 | $ | 1,300 | $ | 2,000 | ||||||||||
Total unrealized losses included in: | ||||||||||||||||||
Net income (loss) | – | – | – | (498 | ) | |||||||||||||
Other comprehensive income (loss) | – | (193 | ) | – | (202 | ) | ||||||||||||
Purchases, sales and issuances, net | – | – | – | – | ||||||||||||||
Transfers into Level 3 | – | – | – | – | ||||||||||||||
Merger of Old Capital Bank into Capital Bank, N.A. | (1,107 | ) | – | – | – | |||||||||||||
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Balance at end of period | $ | – | $ | 1,107 | $ | 1,300 | $ | 1,300 | ||||||||||
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Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010 (Predecessor) are summarized below:
Predecessor Company | ||||||||||||||||
December 31, 2010 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Impaired loans | $ | – | $ | 61,006 | $ | 14,985 | $ | 75,990 | ||||||||
Other real estate | – | 18,334 | – | 18,334 |
Fair Value of Financial Instruments
Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.
Fair values of cash and cash equivalents are equal to the carrying value. Estimated fair values of investment securities are based on quoted market prices, if available, or model-based values from pricing sources for mortgage-backed securities and municipal bonds. Fair value of the loan portfolio has been estimated using the present value of expected future cash flows, discounted at a current market rate for each loan type. The amount of expected credit losses and the timing of those losses were factored into expected future cash. Carrying amounts for accrued interest approximate fair value given the short-term nature of interest receivable and payable.
F-284
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Fair values of time deposits and borrowings are estimated by discounting the future cash flows using the current rates offered for similar deposits and borrowings with the same remaining maturities. Fair value of subordinated debt is estimated based on current market prices for similar trust preferred issues of financial institutions with equivalent credit risk. The estimated fair value for the Company’s subordinated debt is significantly lower than carrying value since credit spreads (i.e., spread to LIBOR) on similar trust preferred issues are currently much wider than when these securities were originally issued. Interest-bearing deposit liabilities and repurchase agreements with no stated maturities are predominately at variable rates and, accordingly, the fair values have been estimated to equal the carrying amounts (the amount payable on demand).
The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2011 (Successor) and December 31, 2010 (Predecessor) were as follows:
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Dec. 31, 2011 | Dec. 31, 2010 | ||||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||
Financial Assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 2,163 | $ | 2,163 | $ | 66,745 | $ | 66,745 | ||||||||||
Investment securities | – | – | 223,292 | 223,292 | ||||||||||||||
Mortgage loans held for sale | – | – | 6,993 | 6,993 | ||||||||||||||
Loans | – | – | 1,218,418 | 1,146,256 | ||||||||||||||
Accrued interest receivable | 11 | 11 | 5,158 | 5,158 | ||||||||||||||
Financial Liabilities: | ||||||||||||||||||
Non-maturity deposits | $ | – | $ | – | $ | 469,956 | $ | 469,956 | ||||||||||
Time deposits | – | – | 873,330 | 885,105 | ||||||||||||||
Borrowings | – | – | 121,000 | 126,787 | ||||||||||||||
Subordinated debentures | 19,163 | 22,205 | 34,323 | 19,164 | ||||||||||||||
Accrued interest payable | 73 | 73 | 1,363 | 1,363 | ||||||||||||||
Unrecognized financial instruments: | ||||||||||||||||||
Commitments to extend credit | $ | – | $ | – | $ | 175,318 | $ | 167,817 | ||||||||||
Standby letters of credit | – | – | 10,285 | 10,285 |
19. TARP Capital Purchase Program
On December 12, 2008, the Company entered into a Securities Purchase Agreement—Standard Terms (“Securities Purchase Agreement”) with the Treasury pursuant to which, among other things, the Company sold to the Treasury for an aggregate purchase price of $41.3 million, 41,279 shares of Series A Preferred Stock and warrants to purchase up to 749,619 shares of common stock (“Warrants”) of the Company.
The Series A Preferred Stock ranked senior to the Company’s common shares and paid a compounding cumulative dividend, in cash, at a rate of 5% per annum for the first five years, and 9% per annum thereafter on the liquidation preference of $1,000 per share. While the Series A Preferred Stock was outstanding, the Company was prohibited from paying any dividend with respect to shares of common stock or repurchasing or redeeming any shares of the Company’s common shares unless all accrued and unpaid dividends were paid on the Series A Preferred Stock for all past dividend periods. The Series A Preferred Stock was non-voting, other than class voting rights on matters that could adversely affect the Series A Preferred Stock. The Series A Preferred Stock was callable at par after three years. In connection with the adoption of ARRA, subject to the approval of the Treasury and the Federal Reserve, the Company could redeem the Series A Preferred Stock at any time regardless of whether or not it had replaced such funds from any other source. The Treasury may also have
F-285
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
transferred the Series A Preferred Stock to a third party at any time. The Series A Preferred Stock qualified as Tier 1 capital in accordance with regulatory capital requirements (See Note 20—Regulatory Matters and Restrictions).
The Warrants had a term of 10 years and were exercisable at any time, in whole or in part, at an exercise price of $8.26 per share (subject to certain anti-dilution adjustments).
The $41.3 million in proceeds was allocated to the Series A Preferred Stock and the Warrants based on their relative fair values at issuance (approximately $40.0 million was allocated to the Series A Preferred Stock and approximately $1.3 million to the Warrants). The difference between the initial value allocated to the Series A Preferred Stock of approximately $40.0 million and the liquidation value of $41.3 million was to be charged to retained earnings and accreted to preferred stock over the first five years of the contract as an adjustment to the dividend yield using the effective yield method. Thus, at the end of the five year accretion period, the preferred stock balance was to have equaled the liquidation value of $41.3 million. The amount charged to retained earnings was deducted from the numerator in calculating basic and diluted earnings per common share. For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recorded accretion of the preferred stock discount $0, $24,000, $291,000, and $288,000, respectively.
The fair value of the Series A Preferred Stock was estimated using a discount rate of 11%, which approximated the dividend yield on the S&P U.S. Preferred Stock Index on the issuance date, and an expected life of five years. The fair value of each Warrant issued was estimated to be $1.42 on the date of issuance using the Black-Scholes option pricing model. The following assumptions were used in determining fair value for the Warrants:
Warrant Assumptions | December 12, 2008 | |||
Dividend yield | 4.4% | |||
Expected volatility | 26.4% | |||
Risk-free interest rate | 2.6% | |||
Expected life | 10 years |
On January 28, 2011, in connection with the CBF Investment, all outstanding shares of Series A Preferred Stock and the Warrants were repurchased for an aggregate purchase price of $41.3 million. The Company recognized a charge of $861,000 for dividends and accretion on preferred stock during the period of January 1, 2011 to January 28, 2011 (Predecessor), which reflected the difference between the carrying value of the preferred stock and its redemption price. See Note 2 (CBF Investment) for more details on these transactions.
20. Regulatory Matters and Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial position and results of operation. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios, as set forth in the table below.
On October 28, 2010, Old Capital Bank entered into an informal Memorandum of Understanding (“MOU”) with the Federal Depository Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks (“NCCOB”). An MOU is characterized by regulatory authorities as an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory
F-286
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
action, such as a formal written agreement or order. In accordance with the terms of the MOU, Old Capital Bank agreed to, among other things, (i) increase regulatory capital to achieve and maintain a minimum Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 12%, (ii) monitor and reduce its commercial real estate concentration, (iii) timely identify and reduce its overall level of problem loans, (iv) establish and maintain an adequate allowance for loan losses, and (v) ensure adherence to loan policy guidelines. In addition, Old Capital Bank had to obtain regulatory approval prior to paying any dividends to the Company. The MOU will remain in effect until modified, terminated, lifted, suspended or set aside by the regulatory authorities. In addition, the Company consulted with the Federal Reserve prior to payment of any dividends or interest on debt.
The FDIC’s Atlanta Regional Office terminated its involvement in the MOU effective October 29, 2011, between its Board of Directors of Old Capital Bank, the FDIC and NC Commissioner of Banks. The termination was effective at close of business June 30, 2011, upon the merger of Old Capital Bank with and into NAFH Bank, which was subsequently renamed Capital Bank, National Association.
Old Capital Bank, as a North Carolina banking corporation, could pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53–87. However, state and federal regulatory authorities may limit payment of dividends by any bank for other reasons, including when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of Old Capital Bank. On February 1, 2010, the Company announced that its Board of Directors voted to suspend payment of the Company’s quarterly cash dividend to its common shareholders.
The Company and the Bank must maintain minimum capital amounts and ratios. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2011 (Successor) and 2010 (Predecessor) and the minimum requirements are presented in the following table. Due to the Bank Merger, actual capital amounts and ratios are presented for Capital Bank, N.A. in the successor period and Old Capital Bank in the predecessor period.
Successor Company | ||||||||||||||||||||||||
Minimum Requirements To Be: | ||||||||||||||||||||||||
December 31, 2011 | Actual | Adequately Capitalized | Well Capitalized | |||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Capital Bank Corporation: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 244,027 | 98.39 | % | $ | 19,841 | 8.00 | % | n/a | n/a | ||||||||||||||
Tier I capital (to risk-weighted assets) | 240,437 | 96.95 | 9,920 | 4.00 | n/a | n/a | ||||||||||||||||||
Tier I capital (to average assets) | 240,437 | 96.56 | 9,960 | 4.00 | n/a | n/a | ||||||||||||||||||
Capital Bank, N.A.: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 687,971 | 16.67 | % | $ | 330,201 | 8.00 | % | $ | 412,752 | 10.00 | |||||||||||||
Tier I capital (to risk-weighted assets) | 649,523 | 15.74 | 165,101 | 4.00 | 247,651 | 6.00 | ||||||||||||||||||
Tier I capital (to average assets) | 649,523 | 10.38 | 250,180 | 4.00 | 312,725 | 5.00 |
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Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Predecessor Company | ||||||||||||||||||||||||
Minimum Requirements To Be: | ||||||||||||||||||||||||
December 31, 2010 | Actual | Adequately Capitalized | Well Capitalized | |||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Capital Bank Corporation: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 126,280 | 9.59 | % | $ | 105,289 | 8.00 | % | n/a | n/a | ||||||||||||||
Tier I capital (to risk-weighted assets) | 106,186 | 8.07 | 52,644 | 4.00 | n/a | n/a | ||||||||||||||||||
Tier I capital (to average assets) | 106,186 | 6.45 | 65,858 | 4.00 | n/a | n/a | ||||||||||||||||||
Old Capital Bank: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 124,841 | 9.50 | % | $ | 105,112 | 8.00 | % | $ | 131,391 | 10.00 | % | ||||||||||||
Tier I capital (to risk-weighted assets) | 104,774 | 7.97 | 52,556 | 4.00 | 78,834 | 6.00 | ||||||||||||||||||
Tier I capital (to average assets) | 104,774 | 6.37 | 65,821 | 4.00 | 82,276 | 5.00 |
21. Parent Company Financial Information
Condensed financial information of the bank holding company for each period presented is as follows:
Condensed Balance Sheets
Successor Company | Predecessor Company | |||||||||
(Dollars in thousands) | Dec. 31, 2011 | Dec. 31, 2010 | ||||||||
Assets: | ||||||||||
Cash | $ | 2,163 | $ | 492 | ||||||
Investment in and advance to Capital Bank, N.A. | 243,728 | – | ||||||||
Equity investment in subsidiary | – | 105,278 | ||||||||
Note receivable due from subsidiary | 3,393 | 3,393 | ||||||||
Other assets | 458 | 2,178 | ||||||||
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Total assets | $ | 249,742 | $ | 111,341 | ||||||
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Liabilities: | ||||||||||
Subordinated debt | $ | 19,163 | $ | 34,323 | ||||||
Dividends payable | – | 258 | ||||||||
Other liabilities | 5,715 | 72 | ||||||||
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Total liabilities | 24,878 | 34,653 | ||||||||
Shareholders’ equity | 224,864 | 76,688 | ||||||||
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Total liabilities and shareholders’ equity | $ | 249,742 | $ | 111,341 | ||||||
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F-288
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Condensed Statements of Operations
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Dividends from wholly-owned subsidiaries | $ | – | $ | – | $ | 3,548 | $ | 6,409 | ||||||||||
Undistributed net income (loss) of subsidiaries | 2,050 | 662 | (63,065 | ) | (11,245 | ) | ||||||||||||
Equity income from investment in Capital Bank, N.A. | 4,045 | – | – | – | ||||||||||||||
Interest income | 337 | 43 | 299 | 46 | ||||||||||||||
Interest expense | 1,327 | 101 | 1,140 | 1,072 | ||||||||||||||
Other expense | 285 | 8 | 88 | 1,974 | ||||||||||||||
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Net income (loss) before income taxes | 4,820 | 596 | (60,446 | ) | (7,836 | ) | ||||||||||||
Income tax expense (benefit) | (447 | ) | – | 1,020 | (1,020 | ) | ||||||||||||
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Net loss | $ | 5,267 | $ | 596 | $ | (61,466 | ) | $ | (6,816 | ) | ||||||||
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F-289
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Successor Company | Predecessor Company | |||||||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||
Operating activities: | ||||||||||||||||||
Net income (loss) | $ | 5,267 | $ | 596 | $ | (61,466 | ) | $ | (6,816 | ) | ||||||||
Equity in undistributed net (income) loss of subsidiaries | (2,050 | ) | (662 | ) | 63,065 | 11,245 | ||||||||||||
Equity income from investment in Capital Bank, N.A. | (4,045 | ) | – | – | – | |||||||||||||
Net change in other assets and liabilities | 119 | 34 | 93 | 1,591 | ||||||||||||||
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Net cash provided by (used in) operating activities | (709 | ) | (32 | ) | 1,692 | 6,020 | ||||||||||||
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Investing activities: | ||||||||||||||||||
Payments for equity investments in subsidiary | (182,563 | ) | 41,279 | (5,065 | ) | – | ||||||||||||
Payment for note receivable due from subsidiary | – | – | (3,393 | ) | – | |||||||||||||
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Net cash provided by (used in) investing activities | (182,563 | ) | 41,279 | (8,458 | ) | – | ||||||||||||
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Financing activities: | ||||||||||||||||||
Proceeds from issuance of subordinated debt | – | – | 3,393 | – | ||||||||||||||
Proceeds from issuance of preferred stock, net of issuance costs | – | – | – | – | ||||||||||||||
Proceeds from issuance of common stock | 3,885 | 40 | 5,314 | 700 | ||||||||||||||
Payments to repurchase common stock | – | – | – | – | ||||||||||||||
Proceeds from CBF Investment | – | 139,771 | – | – | ||||||||||||||
Dividends paid | – | – | (2,972 | ) | (5,527 | ) | ||||||||||||
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Net cash provided by (used in) financing activities | 3,855 | 139,811 | 5,735 | (4,827 | ) | |||||||||||||
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Net change in cash and cash equivalents | (179,387 | ) | 181,058 | (1,031 | ) | 1,193 | ||||||||||||
Cash and cash equivalents, beginning of year | 181,550 | 492 | 1,523 | 330 | ||||||||||||||
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Cash and cash equivalents, end of year | $ | 2,163 | $ | 181,550 | $ | 492 | $ | 1,523 | ||||||||||
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F-290
Table of Contents
Capital Bank Corporation
Notes to Consolidated Financial Statements
22. Selected Quarterly Financial Data (Unaudited)
Selected unaudited results of operations for each period presented are as follows:
Results of Operations | Successor Company | Predecessor Company | ||||||||||||||||||||
(Dollars in thousands except per share data) | Three Months Ended Dec. 31, 2011 | Three Months Ended Sep. 30, 2011 | Three Months Ended Jun. 30, 2011 | Jan. 29, 2011 to Mar. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||||||||
2011 | ||||||||||||||||||||||
Net interest income (loss) | $ | (277 | ) | $ | (270 | ) | $ | 15,439 | $ | 10,021 | $ | 3,959 | ||||||||||
Provision for loan losses | – | – | 1,283 | 167 | 40 | |||||||||||||||||
Noninterest income | 1,762 | 2,283 | 2,065 | 1,252 | 832 | |||||||||||||||||
Noninterest expense | 175 | 76 | 12,797 | 12,229 | 4,155 | |||||||||||||||||
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Net income (loss) before taxes | 1,310 | 1,937 | 3,424 | (1,123 | ) | 596 | ||||||||||||||||
Income tax expense (benefit) | (168 | ) | (117 | ) | 1,115 | (549 | ) | – | ||||||||||||||
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Net income (loss) | 1,478 | 2,054 | 2,309 | (574 | ) | 596 | ||||||||||||||||
Dividends and accretion on preferred stock | – | – | – | – | 861 | |||||||||||||||||
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Net income (loss) attributable to common shareholders | $ | 1,478 | $ | 2,054 | $ | 2,309 | $ | (574 | ) | $ | (265 | ) | ||||||||||
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Earnings (loss) per share—basic | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||||
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Earnings (loss) per share—diluted | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||||
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Predecessor Company | ||||||||||||||||
Three Months Ended | ||||||||||||||||
(Dollars in thousands except per share data) | December 31 | September 30 | June 30 | March 31 | ||||||||||||
2010 | ||||||||||||||||
Net interest income | $ | 12,287 | $ | 13,382 | $ | 12,744 | $ | 12,550 | ||||||||
Provision for loan losses | 20,011 | 6,763 | 20,037 | 11,734 | ||||||||||||
Noninterest income | 8,004 | 2,500 | 2,514 | 2,531 | ||||||||||||
Noninterest expense | 15,129 | 14,210 | 12,380 | 12,590 | ||||||||||||
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Net loss before taxes | (14,849 | ) | (5,091 | ) | (17,159 | ) | (9,243 | ) | ||||||||
Income tax expense (benefit) | 18,634 | 3,975 | (3,576 | ) | (3,909 | ) | ||||||||||
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Net loss | (33,483 | ) | (9,066 | ) | (13,583 | ) | (5,334 | ) | ||||||||
Dividends and accretion on preferred stock | 589 | 588 | 589 | 589 | ||||||||||||
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Net loss attributable to common shareholders | $ | (34,072 | ) | $ | (9,654 | ) | $ | (14,172 | ) | $ | (5,923 | ) | ||||
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Earnings (loss) per share—basic | $ | (2.59 | ) | $ | (0.74 | ) | $ | (1.09 | ) | $ | (0.49 | ) | ||||
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Earnings (loss) per share—diluted | $ | (2.59 | ) | $ | (0.74 | ) | $ | (1.09 | ) | $ | (0.49 | ) | ||||
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F-291
Table of Contents
Green Bankshares, Inc.
Unaudited Consolidated Financial Statements as of and for the Three and Six Months Ended June 30, 2012
Table of Contents
GREEN BANKSHARES, INC.
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Successor Company | Successor Company | |||||||||
(Dollars and shares in thousands, except per share data) | June 30, 2012 | December 31, 2011 | ||||||||
Assets | ||||||||||
Cash and due from banks | $ | 653 | $ | 2,091 | ||||||
Other assets | 4,451 | 3,804 | ||||||||
Equity method investment in Capital Bank, NA | 324,281 | 315,293 | ||||||||
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Total assets | $ | 329,385 | $ | 321,188 | ||||||
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Liabilities and Shareholders’ Equity | ||||||||||
Liabilities | ||||||||||
Subordinated debentures | $ | 45,798 | $ | 45,180 | ||||||
Deferred income tax liability | 15,620 | 15,608 | ||||||||
Accrued interest payable and other liabilities | 307 | 255 | ||||||||
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Total liabilities | 61,725 | 61,043 | ||||||||
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Shareholders’ Equity | ||||||||||
Preferred stock: no par value: 1,000 shares authorized, 0 shares outstanding | – | – | ||||||||
Common stock—$.01 par value: 300,000 shares authorized, 133,160 shares outstanding | 1,332 | 1,332 | ||||||||
Additional paid in capital | 257,628 | 257,627 | ||||||||
Retained earnings | 8,969 | 2,647 | ||||||||
Accumulated other comprehensive (loss) | (269 | ) | (1,461 | ) | ||||||
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Total shareholders’ equity | 267,660 | 260,145 | ||||||||
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Total Liabilities and Shareholders’ Equity | $ | 329,385 | $ | 321,188 | ||||||
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See accompanying notes to consolidated financial statements
F-293
Table of Contents
GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Successor Company | Predecessor Company | Successor Company | Predecessor Company | |||||||||||||||||||
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||||||||
Interest and dividend income | ||||||||||||||||||||||
Loans, including fees | $ | – | $ | 23,804 | $ | – | $ | 48,404 | ||||||||||||||
Investment securities: | ||||||||||||||||||||||
Taxable | – | 1,686 | – | 3,088 | ||||||||||||||||||
Tax-exempt | – | 281 | – | 586 | ||||||||||||||||||
Federal Home Loan Bank and other stock | – | 134 | – | 272 | ||||||||||||||||||
Federal funds sold and other | – | 170 | – | 350 | ||||||||||||||||||
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Total interest income | – | 26,075 | – | 52,700 | ||||||||||||||||||
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Interest expense | ||||||||||||||||||||||
Deposits | – | 4,561 | – | 9,892 | ||||||||||||||||||
Federal funds purchased and repurchase agreements | – | 4 | – | 8 | ||||||||||||||||||
Federal Home Loan Bank advances and notes payable | – | 1,570 | – | 3,113 | ||||||||||||||||||
Subordinated debentures | 841 | 488 | 1,683 | 969 | ||||||||||||||||||
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Total interest expense | 841 | 6,623 | 1,683 | 13,982 | ||||||||||||||||||
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Net interest income (loss) | (841 | ) | 19,452 | (1,683 | ) | 38,718 | ||||||||||||||||
Provision for loan losses | – | 14,333 | – | 28,229 | ||||||||||||||||||
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Net interest income (loss) after provision for loan losses | (841 | ) | 5,119 | (1,683 | ) | 10,489 | ||||||||||||||||
Non-interest income | ||||||||||||||||||||||
Equity method income in Capital Bank, NA | 3,801 | – | 7,796 | – | ||||||||||||||||||
Service charges on deposit accounts | – | 6,377 | – | 12,208 | ||||||||||||||||||
Other charges and fees | – | 369 | – | 799 | ||||||||||||||||||
Trust and investment services income | – | 497 | – | 1,012 | ||||||||||||||||||
Mortgage banking income | – | 112 | – | 199 | ||||||||||||||||||
Other income | 16 | 881 | 32 | 1,646 | ||||||||||||||||||
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Total non-interest income | 3,817 | 8,236 | 7,828 | 15,864 | ||||||||||||||||||
Non-interest expense | ||||||||||||||||||||||
Salaries and employee benefits | – | 8,203 | – | 17,311 | ||||||||||||||||||
Net occupancy and equipment expense | – | 2,348 | – | 5,020 | ||||||||||||||||||
Foreclosed asset related expense | – | 6,294 | – | 10,097 | ||||||||||||||||||
Other expense | 430 | 7,925 | 624 | 15,370 | ||||||||||||||||||
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Total non-interest expense | 430 | 24,770 | 624 | 47,798 | ||||||||||||||||||
Income (loss) before income taxes | 2,546 | (11,415 | ) | 5,521 | (21,445 | ) | ||||||||||||||||
Income tax benefit | (503 | ) | (281 | ) | (801 | ) | – | |||||||||||||||
Net income (loss) | $ | 3,049 | $ | (11,134 | ) | $ | 6,322 | $ | (21,445 | ) | ||||||||||||
Preferred dividends earned by preferred shareholders and discount accretion | – | 1,250 | – | 2,500 | ||||||||||||||||||
Net income (loss) allocated to common shareholders | $ | 3,049 | $ | (12,384 | ) | $ | 6,322 | $ | (23,945 | ) | ||||||||||||
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Basic income (loss) per common share | $ | 0.02 | $ | (0.94 | ) | $ | 0.05 | $ | (1.83 | ) | ||||||||||||
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Diluted income (loss) per common share | $ | 0.02 | $ | (0.94 | ) | $ | 0.05 | $ | (1.83 | ) | ||||||||||||
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See accompanying notes to consolidated financial statements
F-294
Table of Contents
GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Successor Company |
| Predecessor Company |
| Successor Company |
| Predecessor Company | ||||||||||||||||
Three months ended June 30, 2012 |
| Three months ended June 30, 2011 |
| Six months ended June 30, 2012 |
| Six months ended June 30, 2011 | ||||||||||||||||
Net income (loss) | $ | 3,049 | $ | (11,134 | ) | $ | 6,322 | $ | (21,445 | ) | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||
Unrealized holding gains on available for sale securities | – | 1,768 | – | 1,831 | ||||||||||||||||||
Unrealized holding gains from investment in Capital Bank NA | 3,255 | – | 1,940 | – | ||||||||||||||||||
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Net unrealized holding gains on available for sale securities | 3,255 | 1,768 | 1,940 | 1,831 | ||||||||||||||||||
Tax effect | (1,254 | ) | (693 | ) | (748 | ) | (718 | ) | ||||||||||||||
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Other comprehensive income, net of tax: | 2,001 | 1,075 | 1,192 | 1,113 | ||||||||||||||||||
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Comprehensive income (loss) | $ | 5,050 | $ | (10,059 | ) | $ | 7,514 | $ | (20,332 | ) | ||||||||||||
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F-295
Table of Contents
GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Successor Company | Predecessor Company | |||||||||
Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||
Cash flows from operating activities | ||||||||||
Net income (loss) | $ | 6,322 | $ | (21,445 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||
Equity income from investment in Capital Bank, NA | (7,796 | ) | – | |||||||
Provision for loan losses | – | 28,229 | ||||||||
Depreciation and amortization | – | 3,442 | ||||||||
Security amortization and accretion, net | – | 199 | ||||||||
Net gain on sale of mortgage loans | – | (185 | ) | |||||||
Originations of mortgage loans held for sale | – | (14,560 | ) | |||||||
Proceeds from sales of mortgage loans | – | 15,427 | ||||||||
Increase in cash surrender value of life insurance | – | (561 | ) | |||||||
Net losses from sales of fixed assets | – | 223 | ||||||||
Stock-based compensation expense | – | 287 | ||||||||
Net loss on other real estate and repossessed assets | – | 6,429 | ||||||||
Amortization of subordinated debenture discount | 618 | – | ||||||||
Change in other assets | (647 | ) | 12,193 | |||||||
Change in accrued interest payable and other liabilities | 65 | 2,779 | ||||||||
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Net cash (used in) provided by operating activities | (1,438 | ) | 32,457 | |||||||
Cash flows from investing activities | ||||||||||
Purchase of securities available for sale | – | (59,790 | ) | |||||||
Proceeds from maturities of securities available for sale | – | 45,868 | ||||||||
Proceeds from maturities of securities held to maturity | – | 465 | ||||||||
Net change in loans | – | 111,627 | ||||||||
Proceeds from sale of other real estate | – | 15,154 | ||||||||
Improvements to other real estate | – | (261 | ) | |||||||
Proceeds from sale of fixed assets | – | 7 | ||||||||
Premises and equipment expenditures | – | (516 | ) | |||||||
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| |||||||
Net cash provided by investing activities | – | 112,554 | ||||||||
Cash flows from financing activities | ||||||||||
Net change in deposits | – | (93,466 | ) | |||||||
Net change in repurchase agreements | – | (700 | ) | |||||||
Repayments of FHLB advances and notes payable | – | (794 | ) | |||||||
Net cash used in financing activities | – | (94,960 | ) | |||||||
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| |||||||
Net change in cash and cash equivalents | (1,438 | ) | 50,051 | |||||||
Cash and cash equivalents, beginning of year | 2,091 | 294,214 | ||||||||
Cash and cash equivalents, end of year | $ | 653 | $ | 344,265 | ||||||
Supplemental disclosures—cash and noncash | ||||||||||
Interest paid | $ | 1,066 | $ | 13,313 | ||||||
Loans converted to other real estate | – | 41,261 | ||||||||
Loans originated to finance / sell other real estate | – | 1,568 | ||||||||
Preferred dividends declared | – | 1,806 |
See accompanying notes to consolidated financial statements
F-296
Table of Contents
GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 1 – Basis of Presentation & Accounting Policies
Green Bankshares, Inc. (“the Company”) is a bank holding company headquartered in Greeneville, Tennessee. Prior to September 7, 2011, the Company conducted its business primarily through its wholly-owned subsidiary, GreenBank. On September 7, 2011 (the “Merger Date”), the Bank (as defined below) merged with and into Capital Bank, a subsidiary of our majority shareholder, Capital Bank Financial Corp. (“CBF”), in an all-stock transaction, with Capital Bank, National Association (“Capital Bank, NA) as the surviving entity (the “Bank Merger”). Pursuant to the Bank Merger, the Company acquired an approximately 34% ownership interest in Capital Bank, NA which is recorded as an equity-method investment in that entity. As of June 30, 2012, the Company’s investment in Capital Bank, NA totaled $324,281 which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income. In connection with the Bank Merger, assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and total liabilities of the Company in the third quarter of 2011. Accordingly, as of June 30, 2012 and December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet. Subsequent to the Merger Date, the Company’s significant assets and liabilities are comprised of cash, its equity method investment in Capital Bank, NA, deferred income tax liabilities and trust preferred securities. The Company’s operating results subsequent to the Merger Date include the Company’s proportionate share of equity method income from Capital Bank, NA and interest expense resulting from the outstanding trust preferred securities issued by the Company. Unless otherwise specified, this report describes Green Bankshares, Inc. and its subsidiaries including GreenBank through the Merger Date, and subsequent to that date, includes only Green Bankshares, Inc, and its equity method investment in Capital Bank, NA.
As used in this document, the terms “we,” “us,” “our,” “Green Bankshares,” and “Company” mean Green Bankshares, Inc. and its subsidiaries (unless the context indicates another meaning) and the term “Bank” means GreenBank, and, after the Bank Merger, its successor entities.
Capital Bank Financial Corp. Investment
On September 7, 2011 (the “Transaction Date”), the Company completed the issuance and sale to CBF of 119.9 million shares of common stock for aggregate consideration of $217,019 (the “CBF Investment”). The consideration consisted of approximately $148,319 in cash and approximately $68,700 in the form of a contribution to the Company of all 72,278 outstanding shares of Series A Preferred Stock previously issued to the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock, which CBF purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 7, 2011 and are no longer outstanding.
As a result of the CBF Investment, pursuant to which CBF acquired approximately 90% of the voting securities of the Company, the Company followed the acquisition method of accounting as required by the Business Combinations Topic of the FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the accounting guidance the application of “push down” accounting was applied.
Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, acquisition accounting also requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 1 – Basis of Presentation & Accounting Policies(Continued)
elimination of any accumulated other comprehensive income or loss and surplus within the Company’s Shareholders’ Equity section of the Company’s Consolidated Financial Statements. Accordingly, retained earnings and accumulated other comprehensive income at June 30, 2012 and December 31, 2011 represent only the results of operations subsequent to September 7, 2011, the date of the CBF Investment.
Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
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 footnotes required by U.S. GAAP for complete financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information and an additional description of the Company’s accounting policies, refer to the Company’s consolidated financial statements for the year ended December 31, 2011.
The accounting and reporting policies conform to general practices within the banking industry. The following is a summary of the more significant of these policies.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
Earnings (loss) per share have been computed based on the following for the periods ended:
Successor Company | Predecessor Company | Successor Company | Predecessor Company | |||||||||||||||||||
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||||
Basic | 133,160 | 13,127 | 133,160 | 13,118 | ||||||||||||||||||
Dilutive effect of options outstanding | – | – | – | – | ||||||||||||||||||
Dilutive effect of restricted shares | – | – | – | – | ||||||||||||||||||
Dilutive effect of warrants outstanding | – | – | – | – | ||||||||||||||||||
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Diluted | 133,160 | 13,127 | 133,160 | 13,118 | ||||||||||||||||||
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 1 – Basis of Presentation & Accounting Policies(Continued)
The dilutive effect of stock options and warrants and the dilutive effect of 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 warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
Successor Company | Predecessor Company | Successor Company | Predecessor Company | |||||||||||||||||||
Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | |||||||||||||||||||
Anti-dilutive stock options | 313 | 344 | 313 | 345 | ||||||||||||||||||
Anti-dilutive restricted stock awards | – | 93 | – | 86 | ||||||||||||||||||
Anti-dilutive warrants | – | 635 | – | 635 |
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The predecessor company filed a consolidated Federal and Tennessee income tax return for the short tax period ended September 7, 2011. For the tax periods ending December 31, 2011 and December 31, 2012, the successor company will be included in CBF’s consolidated Federal and Tennessee consolidated income tax return.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 1 – Basis of Presentation & Accounting Policies(Continued)
Also in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Stands Update No. 2011-05. ASU 2011-12 amended one of the requirements of Update 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have an impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends current guidance by (i) eliminating the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholders’ equity, (ii) requiring the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements, and (iii) requiring the presentation of reclassification adjustments on the face of the statement. The amendments of ASU 2011-05 do not change the option to present components of OCI either before or after related income tax effects, the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share (which continues to be based on net income). ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011 for public companies, with early adoption permitted and retrospective application required. The adoption of ASU 2011-05 did not have an impact on the Company’s consolidated financial condition or results of operations but did alter disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of nonfinancial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 1 – Basis of Presentation & Accounting Policies(Continued)
transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity’s valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-02, Receivables. The new guidance amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of ASU 2011-02 did not have a material impact on the Company’s consolidated financial condition or results of operations.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend ASC Topic 310, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
Note 2 – Equity Method Investment in Capital Bank, NA
On September 7, 2011, GreenBank, which was formerly a wholly-owned subsidiary of the Company, merged with and into Capital Bank, NA, a national banking association and subsidiary of TIB Financial Corp. (the “TIB Financial”), a corporation organized under the laws of the State of Florida, Capital Bank Corporation, a corporation organized under the laws of the state of North Carolina (“Capital Bank Corp.”) and CBF, with Capital Bank, NA as the surviving entity. Pursuant to the merger agreement dated September 7, 2011, between Capital Bank, NA and the Bank, the Company exchanged its 100% ownership interest in GreenBank for an approximately 34% ownership interest in the surviving combined entity, Capital Bank, NA.
CBF is the owner of approximately 90% of the Company’s common stock, approximately 83% of Capital Bank Corp’s common stock and approximately 94% of TIB Financial’s common stock. TIB Bank, the former wholly-owned banking subsidiary of TIB Financial, merged with and into Capital Bank, NA (formerly known as NAFH National Bank) on April 29, 2011. Capital Bank, the former wholly-owned banking subsidiary of Capital Bank Corp. merged with and into Capital Bank, NA (formerly known as NAFH National Bank) on June 30, 2011.
The Company’s approximately 34% ownership interest in Capital Bank, NA is recorded as an equity-method investment in that entity. As of June 30, 2012, the Company’s investment in Capital Bank, NA totaled $324,281 which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income.
In connection with the Bank Merger, assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and total liabilities of the Company
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 2 – Equity Method Investment in Capital Bank, NA(Continued)
in the third quarter of 2011. Accordingly, as of June 30, 2012, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet. Subsequent to the Merger Date, the Company’s significant assets and liabilities are comprised of cash, its equity method investment in Capital Bank, NA, deferred income tax liabilities and trust preferred securities. The Company’s operating results subsequent to the Merger Date include the Company’s proportionate share of equity method income from Capital Bank, NA and interest expense resulting from the outstanding trust preferred securities issued by the Company. Unless otherwise specified, this report describes Green Bankshares, Inc. and its subsidiaries including GreenBank through the Merger Date, and subsequent to that date, includes only Green Bankshares, Inc., and its equity method investment in Capital Bank, NA.
The mergers of the Bank, Capital Bank and TIB Bank into Capital Bank, NA were restructuring transactions between commonly-controlled entities. The difference between the amount of the Company’s initial equity method investment in Capital Bank, NA, subsequent to the Bank Merger, and the Company’s investment in the Bank, immediately preceding the Bank Merger, was accounted for as a change in additional paid in capital. Additionally, at the time of the Bank Merger, due to the de-consolidation of the Bank, the balance of accumulated other comprehensive income was reclassified as additional paid in capital. As the Company began to account for its investment in the combined entity under the equity method subsequent to September 7, 2011, the Company’s proportional share of earnings of $3,801 and $7,796 was recorded in “Equity in income from investment in Capital Bank, NA” in the Company’s Consolidated Statements of Income for the three and six months ended June 30, 2012, respectively.
At June 30, 2012, the Company’s net investment of $324,281 in Capital Bank, NA, was recorded in the Consolidated Balance Sheet as “Equity method investment in Capital Bank, NA.”
As discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2011, the initial estimated fair values of assets and liabilities acquired were based upon information that was available at the time to make preliminary estimates of fair value. The Company expected to obtain additional information during the measurement period which could result in changes to the estimated fair value amounts. The Company is still within the measurement period and has not yet finalized its estimates of fair value. However, as required by the acquisition method of accounting, the Company has retrospectively adjusted certain preliminary estimates to reflect refinements of estimates of fair values and new information obtained about facts and circumstances that existed as of the acquisition date. As a result of the Bank Merger, such changes are principally reflected in the accompanying financial statements as changes in the Company’s equity method investment in Capital Bank, NA. The most significant refinements include: (1) increases in the collectability of certain legacy bank fully charged-off loan balances and fees; (2) an increase in the estimated fair value of the core deposit intangible assets; (3) an increase in deferred tax assets related to the other fair value estimate changes offset by a reduction of expected realization of items considered to be built in losses; and (4) an increase in Goodwill caused by the net effect of these adjustments. Accordingly, the financial statements herein reflect a decrease of $50 in the Company’s investment in Capital Bank, NA, a decrease of $232 in accrued interest payable and other liabilities, an increase of $86 in the deferred tax liability and a decrease of $96 in additional paid in capital.
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 2 – Equity Method Investment in Capital Bank, NA(Continued)
The following table presents summarized financial information for the Company’s equity method investee; Capital Bank, NA. Prior to September 7, 2011, there was no equity method investment:
Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 | |||||||
Interest income | $ | 72,893 | $ | 147,025 | ||||
Interest expense | 8,000 | 16,725 | ||||||
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Net interest income | 64,893 | 130,300 | ||||||
Provision for loan losses | 6,608 | 11,984 | ||||||
Non-interest income | 12,298 | 26,912 | ||||||
Non-interest expense | 52,799 | 108,017 | ||||||
Net income | 11,326 | 23,234 |
Note 3 – Capital Requirements
As discussed in Note 1, due to the deconsolidation of the Bank during the third quarter of 2011, no capital ratios for the Bank as of June 30, 2012 and December 31, 2011 are reported in the Company’s notes to consolidated financial statements.
The Company (on a consolidated basis) is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial position and results of operations. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital Adequacy and Ratios
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At June 30, 2012, the Company maintained capital ratios exceeding the requirement to be considered adequately capitalized. These minimum amounts and ratios along with the actual amounts and ratios for the Company as of June 30, 2012 and December 31, 2011 are presented in the following tables.
Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | ||||||||||||||||||||||
June 30, 2012 (Successor Company) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 13,039 | 4.0 | % | $ | 313,726 | 96.2 | % | ||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 13,048 | 4.0 | % | $ | 313,726 | 96.2 | % | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 26,096 | 8.0 | % | $ | 313,726 | 96.2 | % |
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 3 – Capital Requirements(Continued)
Well Capitalized Requirement | Adequately Capitalized Requirement | Actual | ||||||||||||||||||||||
December 31, 2011 (Successor Company) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 12,186 | 4.0 | % | $ | 306,786 | 100.7 | % | ||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 12,674 | 4.0 | % | $ | 306,786 | 96.8 | % | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
Green Bankshares, Inc. | N/A | N/A | $ | 25,348 | 8.0 | % | $ | 306,786 | 96.8 | % |
Management believes, as of June 30, 2012, that the Company meets all capital requirements to which it is subject. Tier 1 Capital for the Company includes the trust preferred securities that were issued in July 2001, September 2003, June 2005, December 2005 and May 2007 to the extent allowable.
During the third quarter of 2011, the FDIC and the Tennessee Department of Financial Institutions (“TDFI”) issued a consent order against the Bank aimed at strengthening the Bank’s operations and its financial condition. The order’s provisions included requirements similar to those that the Bank had already informally committed to comply with, including requirements to maintain the Bank’s capital ratios above those levels required to be considered “well-capitalized” under federal banking regulations. As a result of the subsequent Bank Merger, the consent order is no longer in effect.
Subsidiary Dividend Limitations
In August 2010, Capital Bank, NA entered into an Operating Agreement (the “OCC Operating Agreement”) with the Office of the Comptroller of the Currency (the “OCC”). Currently, the OCC Operating Agreement with Capital Bank, NA prohibits the Bank from paying a dividend for three years following July 16, 2010, the date Capital Bank, NA acquired the assets and certain deposits of three failed banks from the Federal Deposit Insurance Corporation. Once the three-year period has elapsed, the agreement imposes other restrictions on Capital Bank, NA’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made.
Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2012, if not subject to other restrictions, would have been limited to approximately $21,421.
Note 4 – Fair Value Measurements
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 4 – Fair Value Measurements(Continued)
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Valuation of securities available for sale
The fair values of securities available for sale are determined by (1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), (2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and (3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The Company’s policy is to update appraisals, at a minimum, annually for all classified assets, which include collateral dependent loans and OREO. We consider appraisals dated within the past 12 months to be current and do not typically make adjustments to such appraisals. In the Company’s process for reviewing third-party prepared appraisals, any differences of opinion on values, assumptions or adjustments to comparable sales data are typically reconciled directly with the independent appraiser prior to acceptance of the final appraisal. As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the third quarter of 2011, the Company had no loans or OREO measured at fair value on a recurring or non recurring basis as of June 30, 2012 and December 31, 2011.
Assets and Liabilities Measured on a Recurring Basis
As discussed in Note 2 Equity Method Investment in Capital Bank, NA, due to the deconsolidation of the Bank during the third quarter of 2011, the Company had no loans or OREO measured at fair value on a recurring or non recurring basis as of June 30, 2012 and December 31, 2011.
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 4 – Fair Value Measurements(Continued)
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2011 and held at June 30, 2011, respectively.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | ||||
Predecessor Company | 2011 | |||
Beginning balance, April 1, | $ | 638 | ||
Included in earnings—other than temporary impairment | – | |||
Included in other comprehensive income | – | |||
Transfer in to Level 3 | – | |||
Ending balance June 30, | $ | 638 |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | ||||
Predecessor Company | 2011 | |||
Beginning balance, January 1, | $ | 638 | ||
Included in earnings—other than temporary impairment | – | |||
Included in other comprehensive income | – | |||
Transfer in to Level 3 | – | |||
Ending balance June 30, | $ | 638 |
Financial Assets and Liabilities
Fair values of cash and cash equivalents are equal to the carrying value. Fair value of subordinated debt is estimated based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates.
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GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
Note 4 – Fair Value Measurements(Continued)
The carrying amounts and estimated fair values of financial instruments, at June 30, 2012 and December 31, 2011 are as follows:
Fair Value Measurements | ||||||||||||||||||||
Successor Company June 30, 2012 | Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 653 | $ | 653 | $ | 653 | $ | – | $ | – | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Subordinated debentures | 45,798 | 46,781 | – | – | 46,781 | |||||||||||||||
Successor Company December 31, 2011 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,091 | $ | 2,091 | $ | 2,091 | $ | – | $ | – | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Subordinated debentures | 45,180 | 47,547 | – | – | 47,547 |
F-307
Table of Contents
Green Bankshares, Inc.
Consolidated Financial Statements as of and for December 31, 2011 and 2010 and for the Years Ended December 31, 2011, 2010 and 2009
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of Green Bankshares, Inc.
In our opinion, the accompanying consolidated balance sheet as of December 31, 2011 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the period September 8, 2011 to December 31, 2011 present fairly, in all material respects, the financial position of Green Bankshares, Inc. and its subsidiaries (Successor Company) at December 31, 2011 and the results of their operations and their cash flows for the period September 8, 2011 to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 9, 2012
F-309
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of Green Bankshares, Inc.
In our opinion, the accompanying consolidated statements of income, changes in shareholders’ equity, and cash flows for the period January 1, 2011 to September 7, 2011 present fairly, in all material respects, the results of operations and cash flows of Green Bankshares, Inc. and its subsidiaries (Predecessor Company) for the period January 1, 2011 to September 7, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Ft. Lauderdale, FL
April 9, 2012
F-310
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
GREEN BANKSHARES, INC.
We have audited the accompanying consolidated balance sheet of Green Bankshares, Inc. and subsidiaries (Predecessor Company) as of December 31, 2010, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Green Bankshares, Inc. and subsidiaries (Predecessor Company) as of December 31, 2010, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
Effective January 1, 2009, the Company changed its method of accounting for other-than-temporary impairments of debt securities in connection with the adoption of revised accounting guidance issued by the Financial Accounting Standards Board.
/s/ Dixon Hughes Goodman LLP
(formerly Dixon Hughes PLLC)
Atlanta, Georgia
March 15, 2011
F-311
Table of Contents
December 31, 2011 and 2010
(Amounts in thousands, except share and per share data)
Successor Company | Predecessor Company | |||||||||
Dec. 31 2011 | Dec. 31 2010 | |||||||||
ASSETS | ||||||||||
Cash and due from banks | $ | 2,091 | $ | 289,358 | ||||||
Federal funds sold | – | 4,856 | ||||||||
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| |||||||
Cash and cash equivalents | 2,091 | 294,214 | ||||||||
Investment in Capital Bank, N.A. | 315,343 | |||||||||
Securities available-for-sale (“AFS”) | – | 202,002 | ||||||||
Securities held-to-maturity (with a December 31, 2010 market value of $467) | – | 465 | ||||||||
FHLB and other stock, at cost | – | 12,734 | ||||||||
Loans held for sale | – | 1,299 | ||||||||
Loans, net of unearned income | – | 1,745,378 | ||||||||
Allowance for loan losses | – | (66,830 | ) | |||||||
Other real estate owned and repossessed assets | – | 60,095 | ||||||||
Bank premises and equipment, net | – | 78,794 | ||||||||
Cash surrender value of life insurance | – | 31,479 | ||||||||
Core deposit and other intangibles | – | 6,751 | ||||||||
Deferred Tax Asset ( December 31, 2010 net of valuation allowance of $43,455) | – | 2,177 | ||||||||
Other assets | 3,804 | 37,482 | ||||||||
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| |||||||
Total assets | $ | 321,238 | $ | 2,406,040 | ||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Non-interest-bearing deposits | $ | – | $ | 152,752 | ||||||
Interest-bearing deposits | – | 1,822,703 | ||||||||
Brokered deposits | – | 1,399 | ||||||||
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| |||||||
Total deposits | – | 1,976,854 | ||||||||
Federal funds purchased | – | – | ||||||||
Repurchase agreements | – | 19,413 | ||||||||
FHLB advances and notes payable | – | 158,653 | ||||||||
Subordinated debentures | 45,180 | 88,662 | ||||||||
Deferred Tax Liability | 15,522 | – | ||||||||
Accrued interest payable and other liabilities | 487 | 18,561 | ||||||||
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| |||||||
Total liabilities | $ | 61,189 | $ | 2,262,143 | ||||||
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| |||||||
SHAREHOLDERS’ EQUITY | ||||||||||
Preferred stock: no par value, 1,000,000 shares authorized; 0 and 72,278 shares outstanding | $ | – | $ | 68,121 | ||||||
Common stock: $.01 and $2 par value, 300,000,000 and 20,000,000 shares authorized; 133,160,384 and 13,188,896 shares outstanding | 1,332 | 26,378 | ||||||||
Common stock warrants | – | 6,934 | ||||||||
Additional paid in capital | 257,531 | 188,901 | ||||||||
Retained earnings (deficit) | 2,647 | (147,436 | ) | |||||||
Accumulated other comprehensive income | (1,461 | ) | 999 | |||||||
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| |||||||
Total shareholders’ equity | 260,049 | 143,897 | ||||||||
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| |||||||
Total liabilities & shareholders’ equity | $ | 321,238 | $ | 2,406,040 | ||||||
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See accompanying notes.
F-312
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2011, 2010 and 2009
(Amounts in thousands, except share and per share data)
Successor Company | Predecessor Company | |||||||||||||||||
Year Ended | ||||||||||||||||||
Sept 8 - Dec 31 2011 | Jan 1 - Sept 7 2011 | Dec. 31 2010 | Dec. 31 2009 | |||||||||||||||
Interest income: | ||||||||||||||||||
Interest and fees on loans | $ | – | $ | 65,258 | $ | 113,721 | $ | 129,212 | ||||||||||
Taxable securities | – | 4,290 | 4,938 | 7,035 | ||||||||||||||
Nontaxable securities | – | 790 | 1,241 | 1,260 | ||||||||||||||
FHLB and other stock | – | 374 | 530 | 573 | ||||||||||||||
Federal funds sold and other | – | 468 | 434 | 376 | ||||||||||||||
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| |||||||||||
Total interest income | – | 71,180 | 120,864 | 138,456 | ||||||||||||||
Interest expense: | ||||||||||||||||||
Deposits | – | 12,764 | 28,434 | 45,768 | ||||||||||||||
Federal funds purchased and repurchase agreements | – | 11 | 22 | 29 | ||||||||||||||
FHLB advances and notes payable | – | 4,314 | 6,835 | 9,557 | ||||||||||||||
Subordinated debentures | 977 | 1,315 | 1,980 | 2,577 | ||||||||||||||
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| |||||||||||
Total interest expense | 977 | 18,404 | 37,271 | 57,931 | ||||||||||||||
Net interest income | (977 | ) | 52,776 | 83,593 | 80,525 | |||||||||||||
Provision for loan losses | – | 43,742 | 71,107 | 50,246 | ||||||||||||||
|
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|
|
|
|
|
| |||||||||||
Net interest income (loss) after provision for loan losses | (977 | ) | 9,034 | 12,486 | 30,279 | |||||||||||||
Non-interest income: | ||||||||||||||||||
Service charges on deposit accounts | – | 16,346 | 24,179 | 23,738 | ||||||||||||||
Other charges and fees | – | 1,147 | 1,791 | 1,999 | ||||||||||||||
Trust and investment services income | – | 1,457 | 2,842 | 1,977 | ||||||||||||||
Mortgage banking income | – | 271 | 703 | 383 | ||||||||||||||
Equity Method Income in Capital Bank NA | 3,446 | – | – | – | ||||||||||||||
Other income | 19 | 2,258 | 3,122 | 3,042 | ||||||||||||||
Securities gains (losses), net | ||||||||||||||||||
Realized gains (losses), net | – | 6,324 | – | 1,415 | ||||||||||||||
Other-than-temporary impairment | – | – | (553 | ) | (1,678 | ) | ||||||||||||
Less non-credit portion recognized in other comprehensive income | – | – | 460 | 702 | ||||||||||||||
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|
| |||||||||||
Total non-interest income | 3,465 | 27,803 | 32,544 | 31,578 | ||||||||||||||
Non-interest expense: | ||||||||||||||||||
Employee compensation | – | 21,560 | 31,990 | 30,611 | ||||||||||||||
Employee benefits | – | 2,458 | 3,378 | 3,835 | ||||||||||||||
Occupancy expense | – | 5,308 | 6,908 | 6,956 | ||||||||||||||
Equipment expense | – | 2,176 | 2,846 | 3,092 | ||||||||||||||
Computer hardware/software expense | – | 2,508 | 3,523 | 2,816 | ||||||||||||||
Professional services | 163 | 3,099 | 2,777 | 2,108 | ||||||||||||||
Advertising | – | 1,533 | 2,388 | 1,894 | ||||||||||||||
OREO maintenance expense | – | 2,976 | 2,324 | 1,222 | ||||||||||||||
Collection and repossession expense | – | 1,727 | 3,228 | 3,131 | ||||||||||||||
Loss on OREO and repossessed assets | – | 20,101 | 29,895 | 8,156 | ||||||||||||||
FDIC insurance | – | 2,629 | 4,155 | 4,960 | ||||||||||||||
Core deposit and other intangible amortization | – | 1,716 | 2,584 | 2,750 | ||||||||||||||
Goodwill impairment | – | – | – | 143,389 | ||||||||||||||
Other expenses | 119 | 9,591 | 14,819 | 14,667 | ||||||||||||||
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|
|
|
| |||||||||||
Total non-interest expense | 282 | 77,382 | 110,815 | 229,587 | ||||||||||||||
Income (loss) before income taxes | 2,206 | (40,545 | ) | (65,785 | ) | (167,730 | ) | |||||||||||
Income taxes provision (benefit) | (441 | ) | 974 | 14,910 | (17,036 | ) | ||||||||||||
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| |||||||||||
Net income (loss) | 2,647 | (41,519 | ) | (80,695 | ) | (150,694 | ) | |||||||||||
Preferred stock dividends and accretion of discount on warrants | – | 3,409 | 5,001 | 4,982 | ||||||||||||||
Gain on retirement of Series A preferred allocated to common shareholders | – | 11,188 | ||||||||||||||||
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Net income (loss) available to common shareholders | $ | 2,647 | $ | (33,740 | ) | $ | (85,696 | ) | (155,676 | ) | ||||||||
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Per share of common stock: | ||||||||||||||||||
Basic earnings (loss) | $ | .02 | $ | (2.57 | ) | $ | (6.54 | ) | $ | (11.91 | ) | |||||||
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Diluted earnings (loss) | $ | .02 | $ | (2.57 | ) | $ | (6.54 | ) | $ | (11.91 | ) | |||||||
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Dividends | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
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Weighted average shares outstanding: | ||||||||||||||||||
Basic | 133,083,705 | 13,125,521 | 13,093,847 | 13,068,407 | ||||||||||||||
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Diluted | 133,160,384 | 13,125,521 | 13,093,847 | 13,068,407 | ||||||||||||||
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See accompanying notes.
F-313
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Period from January 1, 2011 through September 7, 2011 and
Years ended December 31, 2010 and 2009
(Amounts in thousands, except share and per share data)
Predecessor Company | Preferred Stock | Common Stock | Warrants for Common Stock | Additional Paid in Capital | Retained Earnings (Deficit) | Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||
Balance, January 1, 2009 | $ | 65,346 | 13,112,687 | $ | 26,225 | $ | 6,934 | $ | 187,742 | $ | 95,647 | $ | (663 | ) | $ | 381,231 | ||||||||||||||||
Preferred stock transactions: | ||||||||||||||||||||||||||||||||
Accretion of preferred stock discount | 1,389 | – | – | – | – | (1,389 | ) | – | – | |||||||||||||||||||||||
Preferred stock dividends | – | – | – | – | – | (3,593 | ) | – | (3,593 | ) | ||||||||||||||||||||||
Common stock transactions: | ||||||||||||||||||||||||||||||||
Issuance of Restricted Common Shares | – | 58,787 | 118 | – | (118 | ) | – | – | – | |||||||||||||||||||||||
Compensation Expense: | ||||||||||||||||||||||||||||||||
Stock Options | – | – | – | – | 387 | – | – | 387 | ||||||||||||||||||||||||
Restricted stock | – | – | – | – | 299 | – | – | 299 | ||||||||||||||||||||||||
Dividends paid ($.13 per share) | – | – | – | – | – | (1,713 | ) | – | (1,713 | ) | ||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | – | (150,694 | ) | – | (150,694 | ) | ||||||||||||||||||||||
Change in unrealized gain on AFS securities, net of tax | – | – | – | – | – | – | 852 | 852 | ||||||||||||||||||||||||
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Total comprehensive loss | – | – | – | – | – | – | – | (149,842 | ) | |||||||||||||||||||||||
Balance, December 31, 2009 | $ | 66,735 | 13,171,474 | $ | 26,343 | $ | 6,934 | $ | 188,310 | $ | (61,742 | ) | $ | 189 | $ | 226,769 | ||||||||||||||||
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Preferred stock transactions: | ||||||||||||||||||||||||||||||||
Accretion of preferred stock discount | 1,386 | – | – | – | – | (1,386 | ) | – | – | |||||||||||||||||||||||
Preferred stock dividends | – | – | – | – | – | (3,613 | ) | – | (3,613 | ) | ||||||||||||||||||||||
Common stock transactions: | ||||||||||||||||||||||||||||||||
Issuance of Restricted Common Shares | – | 17,422 | 35 | – | (35 | ) | – | – | – | |||||||||||||||||||||||
Compensation Expense: | ||||||||||||||||||||||||||||||||
Stock Options | – | – | – | – | 295 | – | – | 295 | ||||||||||||||||||||||||
Restricted stock | – | – | – | – | 331 | – | – | 331 | ||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | – | (80,695 | ) | – | (80,695 | ) | ||||||||||||||||||||||
Change in unrealized gain on AFS securities, net of tax | – | – | – | – | – | – | 810 | 810 | ||||||||||||||||||||||||
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Total comprehensive loss | – | – | – | – | – | – | – | (79,885 | ) | |||||||||||||||||||||||
Balance, December 31, 2010 | $ | 68,121 | 13,188,896 | $ | 26,378 | $ | 6,934 | $ | 188,901 | $ | (147,436 | ) | $ | 999 | $ | 143,897 | ||||||||||||||||
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Preferred stock transactions: | ||||||||||||||||||||||||||||||||
Stock-based compensation | – | 85,474 | 171 | – | 777 | – | – | 948 | ||||||||||||||||||||||||
Accretion of preferred stock discount | 925 | – | – | – | – | (925 | ) | – | – | |||||||||||||||||||||||
Preferred stock dividends | – | – | – | – | – | (2,484 | ) | – | (2,484 | ) | ||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | – | (41,519 | ) | – | (41,519 | ) | ||||||||||||||||||||||
Change in unrealized gain on AFS securities, net of tax | – | – | – | – | – | – | 2,601 | 5,082 | ||||||||||||||||||||||||
Gain on security sales, net of tax | (3,843 | ) | (6,324 | ) | ||||||||||||||||||||||||||||
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Total comprehensive loss | – | – | – | – | – | – | – | (42,761 | ) | |||||||||||||||||||||||
Balance, September 7, 2011 | $ | 69,046 | 13,274,370 | $ | 26,549 | $ | 6,934 | $ | 189,678 | $ | (192,364 | ) | $ | (243 | ) | $ | 99,600 | |||||||||||||||
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See accompanying notes.
F-314
Table of Contents
GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Period from September 8, 2011 through December 31, 2011
(Amounts in thousands, except share and per share data)
Common Stock Shares | Common Stock | Additional Paid in Capital | Accumulated Earnings (Deficit) | Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
Successor Company | ||||||||||||||||||||||||
Balance, September 8, 2011 | 133,174,370 | $ | 1,332 | $ | 257,711 | $ | – | $ | – | $ | 259,043 | |||||||||||||
Net income | – | – | – | 2,647 | – | 2,647 | ||||||||||||||||||
Change in unrealized gain on AFS securities, net of tax | – | – | – | – | (1,461 | ) | (1,461 | ) | ||||||||||||||||
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Comprehensive income | 1,186 | |||||||||||||||||||||||
Investment in Capital Bank, N.A. | (153 | ) | (153 | ) | ||||||||||||||||||||
RSA’s surrendered | (13,986 | ) | – | (27 | ) | – | – | (27 | ) | |||||||||||||||
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Balance, December 31, 2011 | 133,160,384 | $ | 1,332 | $ | 257,531 | $ | 2,647 | $ | (1,461 | ) | $ | 260,049 | ||||||||||||
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See accompanying notes.
F-315
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2011, 2010 and 2009
(Amounts in thousands)
Successor Company |
| |||||||||||||||||
Predecessor Company | ||||||||||||||||||
Sept 8 - Dec 31 2011 | Jan 1 - Sept 7 2011 | 2010 | 2009 | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||||
Net income (loss) | 2,647 | (41,519 | ) | (80,695 | ) | (150,694 | ) | |||||||||||
Adjustments to reconcile net income / (loss) to net cash provided by operating activities: | ||||||||||||||||||
Provision for loan losses | – | 43,742 | 71,107 | 50,246 | ||||||||||||||
Impairment of goodwill | – | – | – | 143,389 | ||||||||||||||
Depreciation and amortization | – | 3,597 | 7,152 | 7,117 | ||||||||||||||
Security amortization and accretion, net | – | 232 | 538 | 73 | ||||||||||||||
Write down of investments for impairment | – | – | 93 | 1,272 | ||||||||||||||
Gain on sales of securities available for sale | – | (6,324 | ) | – | (1,415 | ) | ||||||||||||
Net gain on sale of mortgage loans | – | (251 | ) | (653 | ) | (264 | ) | |||||||||||
Originations of mortgage loans held for sale | – | (20,563 | ) | (46,994 | ) | (43,879 | ) | |||||||||||
Proceeds from sales of mortgage loans | – | 20,362 | 47,881 | 43,050 | ||||||||||||||
Increase in cash surrender value of life insurance | – | (767 | ) | (1,202 | ) | (1,125 | ) | |||||||||||
Gain from settlement of life insurance | – | – | – | (305 | ) | |||||||||||||
Net losses from sales of fixed assets | – | 444 | (1 | ) | (85 | ) | ||||||||||||
Stock-based compensation expense | – | 948 | 626 | 686 | ||||||||||||||
Net loss on other real estate and repossessed assets | – | 20,100 | 29,895 | 8,156 | ||||||||||||||
Deferred tax benefit | – | – | 26,739 | (1,654 | ) | |||||||||||||
Amortization of Subordinated Debenture Discount | 1,543 | |||||||||||||||||
Net changes: | ||||||||||||||||||
Other assets | 554 | 11,996 | (4,139 | ) | (21,375 | ) | ||||||||||||
Accrued interest payable and other liabilities | (3,884 | ) | 700 | (5,505 | ) | (3,177 | ) | |||||||||||
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Net cash provided by operating activities | 860 | 32,697 | 44,842 | 30,016 | ||||||||||||||
Cash flows from investing activities | ||||||||||||||||||
Net change in interest-bearing deposits with banks | – | – | 11,000 | (11,000 | ) | |||||||||||||
Purchase of securities available for sale | – | (209,790 | ) | (171,820 | ) | (92,100 | ) | |||||||||||
Proceeds from sales of securities available for sale | – | 176,577 | – | 36,266 | ||||||||||||||
Proceeds from maturities of securities available for sale | – | 64,822 | 118,246 | 113,440 | ||||||||||||||
Proceeds from maturities of securities held to maturity | – | 465 | 160 | 30 | ||||||||||||||
Net change in loans | – | 146,969 | 195,847 | 99,111 | ||||||||||||||
Proceeds from settlement of life insurance | – | – | – | 691 | ||||||||||||||
Proceeds from sale of other real estate | – | 19,781 | 16,136 | 11,930 | ||||||||||||||
Improvements to other real estate | – | (261 | ) | (813 | ) | (307 | ) | |||||||||||
Proceeds from sale of fixed assets | – | 7 | 8 | 800 | ||||||||||||||
Net Change in Cash Due to Merger of GreenBank into Capital Bank, N.A. | (393,433 | ) | – | – | – | |||||||||||||
Investment in Capital Bank, N.A. | (142,850 | ) | – | – | – | |||||||||||||
Premises and equipment expenditures | – | (947 | ) | (1,551 | ) | (3,542 | ) | |||||||||||
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Net cash provided by investing activities | (536,283 | ) | 197,623 | 167,213 | 155,319 | |||||||||||||
Cash flows from financing activities | ||||||||||||||||||
Net change in deposits | – | (124,497 | ) | (102,057 | ) | 270,162 | ||||||||||||
Net change in brokered deposits | – | – | (5,185 | ) | (370,213 | ) | ||||||||||||
Net change in repurchase agreements | – | (4,026 | ) | (5,036 | ) | (10,853 | ) | |||||||||||
Repayments of FHLB advances and notes payable | – | (855 | ) | (13,346 | ) | (57,350 | ) | |||||||||||
Proceeds from Capital Bank Financial Corp. | ||||||||||||||||||
Investment | (5,211 | ) | 147,569 | – | – | |||||||||||||
Preferred stock dividends paid | (2,711 | ) | (3,232 | ) | ||||||||||||||
Common stock dividends paid | – | – | – | (1,713 | ) | |||||||||||||
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Net cash (used) in financing activities | (5,211 | ) | 18,191 | (128,335 | ) | (173,199 | ) | |||||||||||
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Net change in cash and cash equivalents | (540,634 | ) | 248,511 | 83,720 | 12,136 | |||||||||||||
Cash and cash equivalents, beginning of year | 542,725 | 294,214 | 210,494 | 198,358 | ||||||||||||||
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Cash and cash equivalents, end of year | 2,091 | 542,725 | 294,214 | 210,494 | ||||||||||||||
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Supplemental disclosures—cash and noncash | ||||||||||||||||||
Interest paid | 2,331 | 17,815 | 41,875 | 62,198 | ||||||||||||||
Income taxes paid net of refunds | – | – | (148 | ) | 1,675 | |||||||||||||
Loans converted to other real estate | – | 51,851 | 54,613 | 75,545 | ||||||||||||||
Unrealized gain (loss) on available for sale securities, net of tax | (1,461 | ) | (1,242 | ) | 810 | 852 |
On September 7, 2011, GreenBank merged with and into Capital Bank, N.A. in an all-stock transaction, resulting in all GreenBank assets and liabilities being transferred to Capital Bank, N.A. The net cash impact of this merger on the Successor Company is shown above in the Statement of Cash Flows. Successor Company cash flows from financing activities also includes $5.1 million of underwriting costs associated with the CBF Investment.
See accompanying notes.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 1—BASIS OF PRESENTATION
The accompanying consolidated financial statements of Green Bankshares, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the instructions to as promulgated by the SEC.
The Company is a bank holding company headquartered in Greeneville, Tennessee. Prior to September 7, 2011, the Company conducted its business primarily through its wholly-owned subsidiary, GreenBank. As described in additional detail in Note 3, on September 7, 2011 (the “Merger Date”), the Bank merged with and into Capital Bank, a subsidiary of our majority shareholder, CBF, in an all-stock transaction, with Capital Bank, N.A. as the surviving entity. The Company’s approximately 34% ownership interest in Capital Bank, N.A. is recorded as an equity-method investment in that entity. As of December 31 2011, the Company’s investment in Capital Bank, N.A. totaled $315,343 which reflected the Company’s pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company will adjust this equity investment balance based on its equity in Capital Bank, N.A.’s net income and comprehensive income. In connection with the Bank Merger, assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet resulting in a significant decrease in the total assets and total liabilities of the Company in the third quarter of 2011. Accordingly, as of December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet. Subsequent to the Merger Date, the Company��s significant assets and liabilities are comprised of cash, its equity method investment in Capital Bank, N.A., deferred income tax accounts and trust preferred securities. The Company’s operating results subsequent to the Merger Date include the Company’s proportionate share of equity method income from Capital Bank, N.A. and interest expense resulting from the outstanding trust preferred securities issued by the Company. Unless otherwise specified, this report describes Green Bankshares, Inc. and its subsidiaries including GreenBank through the Merger Date, and subsequent to that date, includes only Green Bankshares, Inc, and its equity method investment in Capital Bank, N.A.
On September 7, 2011, pursuant to the CBF Investment, GreenBank, the Company’s previously wholly-owned subsidiary, was merged with and into Capital Bank, N.A., a subsidiary of CBF, with Capital Bank, N.A. as the surviving entity. As a result of the Bank Merger, the Company received shares of Capital Bank, N.A. equating to an approximately 34% ownership interest in Capital Bank, N.A. As the Company is a majority owned subsidiary of CBF, the Bank Merger was a restructuring transaction between commonly-controlled entities. The difference between the amount of the Company’s initial equity method investment in Capital Bank, N.A., subsequent to the Bank Merger, and the Company’s investment in GreenBank, immediately preceding the Bank Merger, was accounted for as an increase in additional paid in capital of $15,960. As the Company began to account for its investment in the combined entity under the equity method, the change in the balance of the Company’s equity method investment between September 7, 2011 and December 31, 2011 resulting from the Company’s proportional share of earnings of $3,446 was recorded as “Equity method income in Capital Bank, N.A.,” in the Company’s Consolidated Statement of Income for the period. At December 31, 2011, the Company’s net investment of $315,343 in Capital Bank, N.A., was recorded in the Consolidated Balance Sheet as “Investment in Capital Bank, N.A.”
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 1—BASIS OF PRESENTATION(Continued)
The following table presents summarized financial information for Capital Bank, N.A. for the three months ended December 31, 2011:
Interest income | $ | 74,163 | ||
Interest expense | 9,266 | |||
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Net interest income | 64,897 | |||
Provision for loan losses | 16,790 | |||
Non-interest income | 16,105 | |||
Non-interest expense | 53,271 | |||
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Net income | $ | 6,797 | ||
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Beginning in 2012, the quarterly disclosure will be supplemented with the presentation of Capital Bank, N.A.’s condensed income statement for the calendar year to date.
Capital Bank Financial Corp. Investment
On September 7, 2011, (the “Transaction Date”) the Company completed the issuance and sale to CBF of 119.9 million shares of common stock for aggregate consideration of $217,019 (the “CBF Investment”). The consideration was comprised of approximately $148,319 in cash and approximately $68,700 in the form of a contribution to the Company of all 72,278 outstanding shares of Series A Preferred Stock previously issued to the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock, which CBF purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 7, 2011 and are no longer outstanding.
As a result of the CBF Investment, pursuant to which CBF acquired approximately 90% of the voting securities of the Company, the Company followed the acquisition method of accounting as required by the Business Combinations Topic of the FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the accounting guidance the application of “push down” accounting was applied.
Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. Application of the push down method of accounting requires that the valuation of assets, liabilities, and non-controlling interests be recorded in the acquiree’s records as well. Accordingly, the Company’s Consolidated Financial Statements and transactional records prior to the CBF Investment reflect the historical accounting basis of assets and liabilities and are labeled “Predecessor Company,” while such records subsequent to the CBF Investment are labeled “Successor Company” and reflect the push down basis of accounting for the new fair values in the Company’s financial statements. This change in accounting basis is represented in the Consolidated Financial Statements by a vertical black line which appears between the columns entitled “Predecessor Company” and “Successor Company” on the statements and in the relevant notes. The black line signifies that the amounts shown for the periods prior to and subsequent to the CBF Investment are not comparable.
In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, acquisition accounting also requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the elimination of any accumulated other comprehensive income or loss and surplus within the Company’s Shareholders’ Equity section of the Company’s Consolidated Financial Statements. Accordingly, retained earnings and accumulated other comprehensive income at December 31, 2011 represents only the results of operations subsequent to September 7, 2011, the date of the CBF Investment.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.
Financial results for the period of September 8, 2011—December 31, 2011 were significantly impacted by the controlling investment in the Company by CBF. The Company elected to apply push-down accounting. Accordingly, the Company’s assets and liabilities were adjusted to estimated fair values at the CBF Investment date, resulting in elimination of the allowance for loan losses. The Company is still in the process of completing its fair value analysis of assets and liabilities, and final fair value adjustments may differ from the preliminary estimates recorded to date.
Due to its ownership level and significant influence, the Company’s investment in Capital Bank, N.A. is recorded as an equity-method investment in that entity. As of December 31, 2011, the Company’s investment in Capital Bank, N.A. totaled $315.3 million, representing the Company’s primary asset. The investment reflected the Company’s 34% pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity as a result of the Bank Merger. In periods subsequent to the Merger, the Company will adjust this equity investment balance based on its equity in Capital Bank, N.A.’s net income and comprehensive income. In connection with the Bank Merger, assets and liabilities of GreenBank were de-consolidated from the Company’s balance sheet resulting in a significant decrease in total assets and total liabilities of the Company in the third quarter of 2011.
Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the existing facts and circumstances. Actual results could differ from those estimates made by management.
Prior to the Bank Merger, critical accounting policies and estimates included the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts, including OREO. Estimates of fair value were used in the accounting for securities available for sale, loans held for sale, goodwill, other intangible assets, OREO and acquisition accounting adjustments. Estimates of fair values are used in disclosures regarding securities held to maturity, stock compensation, commitments, and the fair values of financial instruments. Fair values are estimated using relevant market information and other assumptions such as interest rates, credit risk, prepayments and other factors. The fair values of financial instruments are subject to change as influenced by market conditions.
The Company believes its critical accounting policies and estimates also include the valuation of the allowance for net Deferred Tax Assets (“DTA”). As a result of the application of the acquisition method of accounting a net deferred tax asset of $53,407 was recognized at acquisition date. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Key Accounting Policies for the Predecessor Company were as follows:
Principles of Consolidation: The consolidated financial statements include the accounts of Green Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, GreenBank (the “Bank”), and the Bank’s wholly owned subsidiaries, Superior Financial Services, Inc., GCB Acceptance Corp., Inc., Fairway Title Company, Inc, and GB Holdings, LLC. All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions impact the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, deferred tax asset valuation, and fair values of financial instruments are significant items based on estimates and assumptions.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan, deposit and other borrowing transactions.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income.
Interest income includes amortization of purchase premium or discount and is recognized based upon the level-yield method. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is other than temporary.
Investments in Equity Securities Carried at Cost: Investment in Federal Home Loan Bank (“FHLB”) stock, which is carried at cost because it can only be redeemed at par, is a required investment based on membership requirements. The Bank also carries certain other equity investments at cost, which approximates fair value.
Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs.
Interest income is reported on the interest method over the loan term. Loan origination fees, net of certain direct originations costs, are deferred and recognized in interest income using the level-yield method. Interest income includes amortization of purchase premiums or discounts on loans purchased. Premiums and discounts are amortized on the level yield-method. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Most consumer loans are charged off no later than 120 days past due. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal and interest is doubtful. Interest accrued but not collected is reversed against interest income when a loan is placed on non-accrual status.
Interest received is recognized on the cash basis or cost recovery method until qualifying for return to accrual status. Accrual is resumed when all contractually due payments are brought current, six months of payment performance can be measured, and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed.
The Bank uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment and collateral status, borrowers’ financial data and borrowers’ operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant changes. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Larger groups of smaller balance, homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over an asset’s useful life on a straight-line basis. Buildings and related components have useful lives ranging from 10 to 40 years, while furniture, fixtures and equipment have useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lesser of the life of the asset or lease term.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value. The Company controls its interest rate risk with respect to mortgage loans held for sale and loan commitments expected to close by usually entering into agreements to sell loans. The Company records loan commitments related to the origination of mortgage loans held for sale as derivative instruments. The Company’s commitments for fixed rate mortgage loans, generally last 60 to 90 days and are at market rates when initiated. The Company had $4,813 in outstanding loan commitment derivatives at December 31, 2010. The aggregate fair value of mortgage loans held for sale takes into account the sales prices of such agreements. The Company also provides currently for any losses on uncovered commitments to lend or sell. The Company sells mortgage loans servicing released.
Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its cash surrender value or the amount that can be realized.
Goodwill, Core Deposit Intangibles and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. During the second quarter of 2009 the Company identified impairment in its goodwill and took the appropriate actions. This is explained further in“Note 8—Goodwill and Other Intangible Assets”.
Core deposit intangibles assets arise from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on a straight line method over their estimated useful lives, which range from seven to 15 years and are determined by an independent consulting firm. Core deposit intangible assets are assessed at least annually for impairment and any such impairment is recognized in the period identified.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Other intangible assets consist of mortgage servicing rights (“MSR’s”). MSR’s represent the cost of acquiring the rights to service mortgage loans. MSR’s are amortized based on the principal reduction of the underlying loans. The Company is obligated to service the unpaid principal balances of these loans, which were approximately $33 and $43 million as of December 31, 2010 and 2009, respectively. The Company pays a third party subcontractor to perform servicing and escrow functions with respect to loans sold with retained servicing. MSR’s are assessed at least annually for impairment. The Company does not intend to further pursue this line of business.
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: All repurchase agreement liabilities represent secured borrowings from existing Bank customers and are not covered by federal deposit insurance.
Benefit Plans: Retirement plan expense is the amount contributed to the plan as determined by Board decision. Deferred compensation expense is recognized during the year the benefit is earned.
Stock Compensation: Compensation cost for stock-based payments is measured based on the fair value of the award, which most commonly includes restricted stock (i.e., unvested common stock), stock options, and stock appreciation rights at the grant date and is recognized in the consolidated financial statements on a straight-line basis over the requisite service period for service-based awards. The fair value of restricted stock is determined based on the price of the Company’s common stock on the date of grant. The fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model and related assumptions.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance reduces deferred tax assets to the amount expected to be realized and as of December 31, 2010 the Company had recorded a deferred tax valuation allowance of $43,455.
Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as standby letters of credit are considered financial guarantees in accordance with applicable accounting standards. The fair value of these financial guarantees is not material.
Earnings Per Common Share: Basic earnings per common share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings available to common shareholders per common share includes the dilutive impact of additional potential common shares issuable under stock options, unvested restricted stock awards and stock warrants associated with the U.S. Treasury Capital Purchase Program.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity. Comprehensive income is presented in the consolidated statements of changes in shareholders’ equity.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
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 any such matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $14,457 and $19,245 was required to meet regulatory reserve and clearing requirements at year-end 2010 and 2009. These balances do not earn interest.
Segments: Internal financial reporting is primarily reported and aggregated in five lines of business: banking, mortgage banking, consumer finance, subprime automobile lending, and title insurance. Banking accounts for 93.6% of revenues for 2010.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassifications: Certain items in prior year financial statements have been reclassified to conform to the 2010 presentation. These reclassifications had no effect on net income or shareholders’ equity as previously reported.
NOTE 3—BUSINESS COMBINATION
On September 7, 2011, the Company completed the issuance and sale of 119.9 million shares of its common stock to CBF for gross consideration of $217,019 less $750 thousand of CBF’s expenses which were reimbursed by the Company. The consideration was comprised of approximately $147.6 million in cash and approximately $68.7 million in the form of a contribution to the Company of all 72,278 outstanding shares of Series A Preferred Stock previously issued to the United States Department of the Treasury under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s Common Stock, which CBF purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 7, 2011 and are no longer outstanding. In connection with the CBF Investment, each Company shareholder as of September 6, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of GreenBank’s then existing loan portfolio as of May 5, 2011.
As a result of the CBF Investment, CBF now owns approximately 90% of the voting securities of the Company and followed the acquisition method of accounting and applied “acquisition accounting.” Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets were identified and a fair value was determined as required by the accounting guidance for business combinations. Accounting guidance also allows the application of “push down accounting,” whereby the adjustments of assets and liabilities to fair value and the resultant goodwill are shown in the financial statements of the acquiree.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 3—BUSINESS COMBINATION(Continued)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methodology used to obtain the fair values to apply acquisition accounting is described in Note 6 “Fair Value Disclosures” of these Consolidated Financial Statements.
The following table summarizes the CBF Investment and Company’s opening balance sheet as of September 8, 2011 adjusted to fair value:
Fair value of assets acquired: | ||||
Cash and cash equivalents | $ | 542,725 | ||
Securities available for sale | 176,466 | |||
Loans | 1,344,184 | |||
Premises and equipment | 72,261 | |||
Goodwill | 19,032 | |||
Intangible assets | 12,118 | |||
Deferred tax asset | 53,407 | |||
Other assets | 142,836 | |||
Total assets acquired | $ | 2,363,029 | ||
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Fair value of liabilities assumed: | ||||
Deposits | $ | 1,872,050 | ||
Long-term debt and other borrowings | 229,345 | |||
Other liabilities | 18,551 | |||
Total liabilities assumed | $ | 2,119,946 | ||
Less: Non-controlling interest at fair value | 26,814 | |||
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$ | 216,269 | |||
Legal costs | 750 | |||
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Purchase consideration | $ | 217,019 | ||
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The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts. Thus, the provisional measurements of fair value reflected are subject to change as other confirming events occur including the receipt and finalization of updated appraisals. Such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.
A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:
Cash and Cash Equivalents
The cash and cash equivalents, which include proceeds from the CBF Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 3—BUSINESS COMBINATION(Continued)
Investment Securities
Investment securities are reported at fair value at acquisition date. To account for the CBF Investment, the difference between the fair value and par value became the new premium or discount for each security held by the Company. The fair value of investment securities is primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities.
The fair value of the investment securities is primarily based on values obtained from third parties that are based on recent activity for the same or similar securities. Immediately before the acquisition, the investment portfolio had an amortized cost of $174,841 and was in a net unrealized loss position of $392. The difference between the fair value and the current par value was recorded as the new premium or discount on a security by security basis.
Loans
All loans in the loan portfolio were adjusted to estimated fair value at the CBF Investment date. Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates at acquisition, the Company recorded a loan fair value discount of $165,708. All acquired loans were considered to be acquired impaired loans with the exception of certain consumer revolving lines of credit. Subsequent to the CBF Investment, acquired impaired loans will be accounted for as described in Critical Accounting Policies.
Premises and Equipment
Premises and equipment was adjusted to report these assets at their acquisition date fair values. To account for the CBF Investment in premises and equipment, the difference between the fair value and book value was recorded by the Company for each asset. The total adjustment to premises and equipment resulted in a net write down of $4,051. The estimates of fair value of premises and equipment were primarily based on values obtained from third parties including property appraisers and other asset valuation providers whose methods, models and assumptions were reviewed and accepted by management after being deemed reasonable and consistent with industry practice.
Goodwill
Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the resulting goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes.
Core Deposit Intangible
Other than goodwill, the only other intangible asset identified as part of the valuation of the Company was the Core Deposit Intangible (“CDI”) which is amortized as noninterest expense over its estimated useful life. The estimated fair value of the CDI at the acquisition date was $11,900. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on a straight line basis over an eight year period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 3—BUSINESS COMBINATION(Continued)
Deferred Tax Asset
As a result of the application of the acquisition method of accounting a net deferred tax asset of $53,407 was recognized at acquisition date. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Other Assets
The most significant other assets which are reported at fair value in the Company’s Consolidated Financial Statements at each reporting period and that were reviewed for valuation adjustments as part of the acquisition accounting were $71,914 in repossessed assets and other owned real estate, the $32,247 cash surrender value of bank owned life insurance policies, $12,734 in FHLB investment stock and $5,529 in prepaid FDIC assessments. It was deemed not practicable to determine the fair value of FHLB due to restrictions placed on their transferability.
Various other assets held by the Company did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value such as accrued interest receivable.
Deposits
Time deposits were not included in the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. Term deposits evaluated for acquisition accounting consisted of certificates of deposit (“CDs”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates.
The outstanding balance of CDs at acquisition date was $588,799, and the estimated fair value premium totaled $9,234. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.
Long-term and Other Borrowings
Included in borrowings are FHLB advances and repurchase agreements. Fair values for FHLB advances were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current market interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The outstanding balance of FHLB advances at acquisition date was $170,398 and the estimated fair value premium totals $12,600. The Company will amortize the premium into income as reductions of interest expense on a level-yield basis over the contractual term of each debt instrument. No adjustment was made to overnight repurchase agreements of $15,388 for which carrying value approximated fair value.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 3—BUSINESS COMBINATION(Continued)
Included in subordinated debt are variable rate trust preferred securities issued by the Company. Fair values for the trust preferred securities were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current market interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The outstanding balance of trust preferred securities and subordinated debt at acquisition date was $88,662 and the estimated fair value discount on each totaled $45,102. The Company will accrete the discount as an increase to interest expense on a level-yield basis over the contractual term of each debt instrument.
Contingent Value Rights
In connection with the CBF Investment, each existing shareholder as of September 6, 2011 received one contingent value right per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of GreenBanks’s existing loan portfolio as of May 5, 2011. The Company estimated the fair value of these CVRs at $520 which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments. These CVRs were recorded at fair value in other liabilities in acquisition accounting.
Non-controlling Interest
In determining the estimated fair value of the non-controlling interest, the Company utilized the closing market price of its common stock on the acquisition date of $2.02 and multiplied this stock price by the number of outstanding non-controlling shares at that date.
Transaction Expenses
As required by the CBF Investment, the Company incurred and reimbursed third party expenses of $750 which were recorded as a reduction of proceeds received from the issuance of common shares to CBF. The Company also incurred $5.1 million of underwriting costs associated with the CBF Investment.
There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized except for contingent value rights. In connection with the CBF Investment, each Company shareholder as of September 6, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of GreenBank’s then existing loan portfolio as of May 5, 2011.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 4—SECURITIES
Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
U.S. government agencies | $ | 84,106 | $ | 115 | $ | (922 | ) | $ | 83,299 | |||||||
States and political subdivisions | 31,192 | 705 | (396 | ) | 31,501 | |||||||||||
CMO Agency | 62,589 | 1,858 | (265 | ) | 64,182 | |||||||||||
CMO Non-Agency | 3,454 | 43 | (104 | ) | 3,393 | |||||||||||
Mortgage-backed securities | 17,168 | 815 | (19 | ) | 17,964 | |||||||||||
Trust preferred securities | 1,850 | – | (187 | ) | 1,663 | |||||||||||
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$ | 200,359 | $ | 3,536 | $ | (1,893 | ) | $ | 202,002 | ||||||||
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Held to Maturity | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
States and political subdivisions | $ | 215 | $ | 1 | $ | – | $ | 216 | ||||||||
Other securities | 250 | 1 | – | 251 | ||||||||||||
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$ | 465 | $ | 2 | $ | – | $ | 467 | |||||||||
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Contractual maturities of securities at year-end 2010 are shown below. Securities not due at a single maturity date, collateralized mortgage obligations and mortgage-backed securities are shown separately.
Available for Sale | Held to Maturity | |||||||||||
Fair Value | Carrying Amount | Fair Value | ||||||||||
Due in one year or less | $ | 979 | $ | 465 | $ | 467 | ||||||
Due after one year through five years | 4,226 | – | – | |||||||||
Due after five years through ten years | 61,208 | – | – | |||||||||
Due after ten years | 50,050 | – | – | |||||||||
Collateralized mortgage obligations | 67,575 | – | – | |||||||||
Mortgage-backed securities | 17,964 | – | – | |||||||||
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Total maturities | $ | 202,002 | $ | 465 | $ | 467 | ||||||
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Gross gains of $6,324, $0 and $1,415 were recognized for the Predecessor periods of January 1, 2011 through September 7, 2011 and full year 2010 and 2009, respectively, from proceeds of $177,787, $0 and $36,266, respectively, on the sale of securities available for sale.
Securities with a fair value of $135,692 and $125,005 at year-end 2010 and 2009 were pledged for public deposits and securities sold under agreements to repurchase and to the Federal Reserve Bank. The balance of pledged securities in excess of the pledging requirements was $7,983 and $9,135 at year-end 2010 and 2009, respectively.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 4—SECURITIES(Continued)
The Company held 200 and 168 securities in its portfolio as of December 31, 2010 and 2009, respectively, and of these securities 53 and 35 had an unrealized loss. Unrealized losses on securities are due to changes in interest rates and not due to credit quality issues.
Securities with unrealized losses at year-end 2010 not recognized in income were as follows:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
2010 | ||||||||||||||||||||||||
U. S. government agencies | $ | 65,178 | $ | (922 | ) | $ | – | $ | – | $ | 65,178 | $ | (922 | ) | ||||||||||
States and political subdivisions | 2,488 | (114 | ) | 1,659 | (282 | ) | 4,147 | (396 | ) | |||||||||||||||
Collateralized mortgage obligations | 14,666 | (266 | ) | 2,699 | (104 | ) | 17,365 | (370 | ) | |||||||||||||||
Mortgage-backed securities | 2,821 | (17 | ) | 8 | (2 | ) | 2,829 | (19 | ) | |||||||||||||||
Trust preferred securities | – | – | 1,663 | (186 | ) | 1,663 | (186 | ) | ||||||||||||||||
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Total temporarily impaired | $ | 85,153 | $ | (1,319 | ) | $ | 6,029 | $ | (574 | ) | $ | 91,182 | $ | (1,893 | ) | |||||||||
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The Predecessor Company reviewed its investment portfolio on a quarterly basis judging each investment for other-than-temporary impairment (“OTTI”). The OTTI analysis focused on the duration and amount a security is below book value and assessed a calculation for both a credit loss and a non credit loss for each measured security considering the security’s type, performance, underlying collateral, and any current or potential debt rating changes. The OTTI calculation for credit loss was reflected in the income statement while the non credit loss was reflected in other comprehensive income (loss).
The Predecessor Company held a single issue trust preferred security issued by a privately held bank holding company. Based upon available but limited information we estimated that the likelihood of collecting the security’s principal and interest payments is approximately 50%. In addition, the bank holding company deferred its interest payments beginning in the second quarter of 2009, and we had placed the security on non-accrual. The Federal Reserve Bank of St. Louis entered into an agreement with the bank holding company on October 22, 2009 which was made public on October 30, 2009. Among other provisions of the regulatory agreement, the bank holding company must strengthen its management of operations, strengthen its credit risk management practices, and submit a capital plan. As of December 31, 2010 no other communications between the bank holding company and the Federal Reserve Bank of St. Louis have been made public.
The Company valued the security by projecting estimated cash flows given the assumption of collecting approximately 50% of the security’s principal and interest and then discounting the amount back to the present value using a discount rate of 3.50% plus three month LIBOR. As of December 31, 2010, our best estimate for the three month LIBOR over the next twenty years (the remaining life of the security) was 3.17%. The difference in the present value and the carrying value of the security was the OTTI credit portion. Due to the illiquid trust preferred market for private issuers and the absence of a credible pricing source, we calculated a 15% illiquidity premium for the security to calculate the OTTI non credit portion. The security was booked at a fair value of $638 at December 31, 2010 and during the twelve months ended December 30, 2010 the Company recognized a write-down of $75 through non-interest income representing other-than-temporary impairment on the security.
The Predecessor Company held a private label class A21 collateralized mortgage obligation that was analyzed for the year ended December 31, 2010 with multiple stress scenarios using conservative assumptions for underlying collateral defaults, loss severity, and prepayments. The average principal at risk given the stress
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 4—SECURITIES(Continued)
scenarios was calculated at 4.37%, and then analyzed using the present value of the future cash flows using the fixed rate of the security of 5.5% as the discount rate. The difference in the present value and the carrying value of the security was the OTTI credit portion. The security was booked at a fair value of $2,699 at December 31, 2010 and during the twelve months ended December 31, 2010 the Company recognized a write-down of $18 through non-interest income representing other-than-temporary impairment on the security.
The Predecessor Company held a private label class 2A1 collateralized mortgage obligation that was analyzed for the year ended December 31, 2009 but was not analyzed for the year ended December 31, 2010. This security’s book value for the year ended December 31, 2010 was $651 while the fair value for the same period was recorded at $695. Since the fair value of the security was in excess of the book value at December 31, 2010, it was removed from the OTTI analysis for December 31, 2010.
The following table presents more detail on selective Predecessor Company security holdings as of year-end 2010. These details are listed separately due to the inherent level of risk for OTTI on these securities.
Description | Cusip # | Current Credit Rating | Book Value | Fair Value | Unrealized Loss | Present Value Discounted Cash Flow | ||||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||
Wells Fargo—2007—4 A21 | 94985RAW2 | Caa2 | $ | 2,802 | $ | 2,699 | $ | (103 | ) | $ | 2,887 | |||||||||||||
Trust preferred securities | ||||||||||||||||||||||||
West Tennessee Bancshares, Inc. | 956192AA6 | N/A | 675 | 638 | (37 | ) | 675 |
The following table presents a roll-forward of the cumulative amount of credit losses on the Company’s investment securities that have been recognized through earnings as of December 31, 2010 and 2009. Credit losses on the Company’s investment securities recognized in earnings were $93 for the year ended December 31, 2010 and $976 for the year ended December 31, 2009.
December 31, 2010 | December 31, 2009 | |||||||
Beginning balance of credit losses at January 1, 2010 and 2009 | $ | 976 | $ | – | ||||
Other-than-temporary impairment credit losses | 93 | 976 | ||||||
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Ending balance of cumulative credit losses recognized in earnings | $ | 1,069 | $ | 976 | ||||
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS
Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). All of the disclosures in this section are related to the Predecessor Company. The composition of the Predecessor Company’s loan portfolio by loan type as of December 31, 2010 and December 31, 2009 was as follows:
2010 | 2009 | |||||||
Commercial real estate | $ | 1,080,805 | $ | 1,306,398 | ||||
Residential real estate | 378,783 | 392,365 | ||||||
Commercial | 222,927 | 274,346 | ||||||
Consumer | 75,498 | 83,382 | ||||||
Other | 1,913 | 2,117 | ||||||
Unearned interest | (14,548 | ) | (14,801 | ) | ||||
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Loans, net of unearned interest | $ | 1,745,378 | $ | 2,043,807 | ||||
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Allowance for loan losses | $ | (66,830 | ) | $ | (50,161 | ) | ||
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Activity in the allowance for loan losses is as follows:
2010 | 2009 | |||||||
Beginning balance | $ | 50,161 | $ | 48,811 | ||||
Add (deduct): | ||||||||
Provision for loan losses | 71,107 | 50,246 | ||||||
Loans charged off | (57,818 | ) | (54,890 | ) | ||||
Recoveries of loans charged off | 3,380 | 5,994 | ||||||
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Balance, end of year | $ | 66,830 | $ | 50,161 | ||||
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Activity in the allowance for loan losses and recorded investment in loans by segment:
Commercial Real Estate | Residential Real Estate | Commercial | Consumer | Other | Total | |||||||||||||||||||
Jan 1 – Sept 7, 2011 | ||||||||||||||||||||||||
Allowance for loan losses: | �� | |||||||||||||||||||||||
Beginning balance | $ | 54,203 | $ | 4,431 | $ | 5,080 | $ | 3,108 | $ | 8 | $ | 66,830 | ||||||||||||
Add (deduct): | ||||||||||||||||||||||||
Charge-offs | (34,538 | ) | (1,466 | ) | (3,397 | ) | (1,413 | ) | – | (40,814 | ) | |||||||||||||
Recoveries | 726 | 142 | 633 | 486 | – | 1,987 | ||||||||||||||||||
Provision | 37,559 | 1,952 | 3,634 | 597 | – | 43,742 | ||||||||||||||||||
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Ending balance | $ | 57,950 | $ | 5,059 | $ | 5,950 | $ | 2,778 | $ | 8 | $ | 71,745 | ||||||||||||
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Commercial Real Estate | Residential Real Estate | Commercial | Consumer | Other | Total | |||||||||||||||||||
2010 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 36,527 | $ | 4,350 | $ | 5,840 | $ | 3,437 | $ | 7 | $ | 50,161 | ||||||||||||
Add (deduct): | ||||||||||||||||||||||||
Charge-offs | (48,617 | ) | (3,102 | ) | (3,210 | ) | (2,889 | ) | – | (57,818 | ) | |||||||||||||
Recoveries | 1,301 | 287 | 909 | 882 | 1 | 3,380 | ||||||||||||||||||
Provision | 64,992 | 2,896 | 1,541 | 1,678 | – | 71,107 | ||||||||||||||||||
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Ending balance | $ | 54,203 | $ | 4,431 | $ | 5,080 | $ | 3,108 | $ | 8 | $ | 66,830 | ||||||||||||
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Loans: | ||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | 170,175 | 8,697 | 6,149 | 970 | – | 185,991 | ||||||||||||||||||
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Ending balance: collectively evaluated for impairment | 910,630 | �� | 363,506 | 216,778 | 66,470 | 1,913 | 1,559,387 | |||||||||||||||||
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Impaired loans were as follows:
2010 | 2009 | |||||||
Loans with no allowance allocated | $ | 81,981 | $ | 89,292 | ||||
Loans with allowance allocated | $ | 104,010 | $ | 25,946 | ||||
Amount of allowance allocated | 24,834 | 5,737 | ||||||
Average impaired loan balance during the year | 212,167 | 125,280 | ||||||
Interest income not recognized during impairment | 1,105 | 558 |
Impaired loans, net of allowance, of $142,221 and $109,501, respectively, at December 31, 2010 and December 31, 2009 are shown net of amounts previously charged off of $36,574 and $27,937, respectively. Interest income actually recognized on these loans during 2010 and 2009 was $7,470 and $2,842, respectively.
F-332
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Impaired loans by class are presented below for 2010:
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Speculative 1-4 Family | $ | 72,138 | $ | 98,141 | $ | 11,830 | $ | 85,487 | $ | 2,292 | ||||||||||
Construction | 56,758 | 69,355 | 8,366 | 63,710 | 2,565 | |||||||||||||||
Owner Occupied | 13,590 | 14,513 | 851 | 14,119 | 644 | |||||||||||||||
Non-owner Occupied | 25,824 | 27,561 | 1,823 | 28,786 | 1,375 | |||||||||||||||
Other | 1,865 | 2,090 | 69 | 2,278 | 66 | |||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
HELOC | 2,807 | 2,894 | 346 | 2,603 | 88 | |||||||||||||||
Mortgage-Prime | 4,539 | 4,722 | 590 | 4,661 | 209 | |||||||||||||||
Mortgage-Subprime | 370 | 370 | 57 | 370 | – | |||||||||||||||
Other | 981 | 1,285 | 34 | 2,419 | 47 | |||||||||||||||
Commercial | 6,149 | 7,510 | 722 | 6,729 | 171 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Prime | 217 | 228 | 32 | 252 | 13 | |||||||||||||||
Subprime | 228 | 228 | 35 | 228 | – | |||||||||||||||
Auto-Subprime | 525 | 525 | 79 | 525 | – | |||||||||||||||
Other | – | – | – | – | – | |||||||||||||||
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Total | $ | 185,991 | $ | 229,422 | $ | 24,834 | $ | 212,167 | $ | 7,470 | ||||||||||
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The Predecessor Company managed the loan portfolio by assigning one of nine credit risk ratings based on an internal assessment of credit risk. The credit risk categories are prime, desirable, satisfactory I or pass, satisfactory II, acceptable with care, management watch, substandard, and loss.
Prime credit risk rating: Assets of this grade are the highest quality credits of the Bank. They exceed substantially all the Bank’s underwriting criteria, and provide superior protection for the Bank through the paying capacity of the borrower and value of the collateral. The Bank’s credit risk is considered to be negligible. Included in this section are well-established borrowers with significant, diversified sources of income and net worth, or borrowers with ready access to alternative financing and unquestioned ability to meet debt obligations as agreed. A loan secured by cash or other highly liquid collateral, where the Bank holds such collateral, may be assigned this grade.
Desirable credit risk rating: Assets of this grade also exceed substantially all of the Bank’s underwriting criteria; however, they may lack the consistent long-term performance of a Prime rated credit. The credit risk to the Bank is considered minimal on these assets. Paying capacity of the borrower is still very strong with favorable trends and the value of the collateral is considered more than adequate to protect the Bank. Unsecured loans to borrowers with above-average earnings, liquidity and capital may be assigned this grade.
Satisfactory I credit risk rating or pass credit rating: Assets of this grade conform to all of the Bank’s underwriting criteria and evidence a below-average level of credit risk. Borrower’s paying capacity is strong, with stable trends. If the borrower is a company, its earnings, liquidity and capitalization compare favorably to typical companies in its industry. The credit is well structured and serviced. Secondary sources of repayment are considered to be good. Payment history is good, and borrower consistently complies with all major covenants.
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Satisfactory II credit risk rating: Assets of this grade conform to substantially all of the Bank’s underwriting criteria and evidence an average level of credit risk. However, such assets display more susceptibility to economic, technological or political changes since they lack the above-average financial strength of credits rated Satisfactory Tier I. Borrower’s repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.
Acceptable with care credit risk rating: Assets of this grade conform to most of the Bank’s underwriting criteria and evidence an acceptable, though higher than average, level of credit risk. However, these loans have certain risk characteristics that could adversely affect the borrower’s ability to repay, given material adverse trends. Therefore, loans in this category require an above-average level of servicing or show more reliance on collateral and guaranties to preclude a loss to the Bank, should material adverse trends develop. If the borrower is a company, its earnings, liquidity and capitalization are slightly below average, when compared to its peers.
Management watch credit risk rating:Assets included in this category are currently protected but are potentially weak. These assets constitute an undue and unwarranted credit risk but do not presently expose the Bank to a sufficient degree of risk to warrant adverse classification. However, Management Watch assets do possess credit deficiencies deserving management’s close attention. If not corrected, such weaknesses or deficiencies may expose the Bank to an increased risk of loss in the future. Management Watch loans represent assets where the Bank’s ability to substantially affect the outcome has diminished to some degree, and thus it must closely monitor the situation to determine if and when a downgrade is warranted.
Substandard credit risk rating:Substandard assets are inadequately protected by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as Substandard.
Loss credit rating: These assets are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible.
Credit quality indicators by class are presented below for 2010:
Speculative 1-4 Family | Construction | Owner Occupied | Non-Owner Occupied | Other | ||||||||||||||||
Commercial Real Estate Credit Exposure | ||||||||||||||||||||
Prime | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
Desirable | – | 1,573 | 968 | 177 | – | |||||||||||||||
Satisfactory tier I | 2,836 | 978 | 38,623 | 56,221 | 4,246 | |||||||||||||||
Satisfactory tier II | 14,010 | 34,239 | 102,383 | 130,850 | 17,999 | |||||||||||||||
Acceptable with care | 69,902 | 47,093 | 62,198 | 159,216 | 45,597 | |||||||||||||||
Management Watch | 27,383 | 15,259 | 5,298 | 26,415 | 2,965 | |||||||||||||||
Substandard | 91,845 | 61,388 | 16,289 | 38,037 | 6,817 | |||||||||||||||
Loss | – | – | – | – | – | |||||||||||||||
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Total | 205,976 | 160,530 | 225,759 | 410,916 | 77,624 | |||||||||||||||
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Commercial | ||||
Commercial Credit Exposure | ||||
Prime | $ | 1,236 | ||
Desirable | 7,951 | |||
Satisfactory tier I | 33,859 | |||
Satisfactory tier II | 91,505 | |||
Acceptable with care | 72,286 | |||
Management Watch | 8,511 | |||
Substandard | 7,579 | |||
Loss | – | |||
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| |||
Total | 222,927 | |||
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HELOC | Mortgage | Mortgage— Subprime | Other | |||||||||||||
Consumer Real Estate Credit Exposure | ||||||||||||||||
Pass | $ | 188,086 | $ | 131,845 | $ | 11,692 | $ | 29,833 | ||||||||
Management Watch | 1,017 | 317 | – | – | ||||||||||||
Substandard | 2,807 | 5,117 | 50 | 1,529 | ||||||||||||
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| |||||||||
Total | 191,910 | 137,279 | 11,742 | 31,362 | ||||||||||||
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Consumer— Prime | Consumer— Subprime | Consumer Auto— Subprime | ||||||||||
Consumer Credit Exposure | ||||||||||||
Pass | $ | 35,029 | $ | 13,093 | $ | 18,588 | ||||||
Management Watch | – | – | – | |||||||||
Substandard | 217 | 39 | 474 | |||||||||
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| |||||||
Total | 35,246 | 13,132 | 19,062 | |||||||||
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A substantial portion of the Predecessor Company’s commercial real estate loans was secured by real estate in markets in which the Company is located. These loans are often structured with interest reserves to fund interest costs during the construction and development period. Additionally, certain of these loans were structured with interest-only terms. A portion of the consumer mortgage and commercial real estate portfolios were originated through the permanent financing of construction, acquisition and development loans. The prolonged economic downturn has negatively impacted many borrower’s and guarantors’ ability to make payments under the terms of the loans as their liquidity has been depleted. Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in real estate values in these areas. Continued economic distress could negatively impact additional borrowers’ and guarantors’ ability to repay their debt which will make more of the Company’s loans collateral dependent.
F-335
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Age analysis of past due loans by class are presented below for 2010:
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Speculative 1-4 Family | $ | 22,267 | $ | 1,777 | $ | 30,802 | $ | 54,846 | $ | 151,130 | $ | 205,976 | $ | 1,758 | ||||||||||||||
Construction | 14,541 | – | 26,915 | 41,456 | 119,074 | 160,530 | – | |||||||||||||||||||||
Owner Occupied | 8,114 | 1,633 | 4,137 | 13,884 | 211,875 | 225,759 | – | |||||||||||||||||||||
Non-owner Occupied | 4,014 | 5,961 | 8,814 | 18,789 | 392,127 | 410,916 | 170 | |||||||||||||||||||||
Other | 116 | 865 | 1491 | 2,472 | 75,152 | 77,624 | 18 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
HELOC | 747 | 358 | 644 | 1,749 | 190,161 | 191,910 | – | |||||||||||||||||||||
Mortgage-Prime | 1,359 | 915 | 1,779 | 4,053 | 133,226 | 137,279 | 8 | |||||||||||||||||||||
Mortgage-Subprime | 100 | 51 | 98 | 249 | 11,493 | 11,742 | – | |||||||||||||||||||||
Other | 403 | 176 | 566 | 1,145 | 30,217 | 31,362 | 19 | |||||||||||||||||||||
Commercial | 2,422 | 593 | 3,922 | 6,937 | 215,990 | 222,927 | 92 | |||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Prime | 315 | 86 | 108 | 509 | 34,737 | 35,246 | 29 | |||||||||||||||||||||
Subprime | 155 | 64 | 6 | 225 | 12,907 | 13,132 | – | |||||||||||||||||||||
Auto-Subprime | 476 | 166 | 101 | 743 | 18,319 | 19,062 | 18 | |||||||||||||||||||||
Other | 72 | – | – | 73 | 1,840 | 1,913 | – | |||||||||||||||||||||
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Total | 55,102 | 12,645 | 79,383 | 147,130 | 1,598,248 | 1,745,378 | 2,112 | |||||||||||||||||||||
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Non-accrual loans by class are presented below:
2010 | ||||
Commercial real estate: | ||||
Speculative 1-4 Family | $ | 63,298 | ||
Construction | 41,789 | |||
Owner Occupied | 5,511 | |||
Non-owner Occupied | 18,772 | |||
Other | 1,865 | |||
Residential real estate: | ||||
HELOC | 1,668 | |||
Mortgage-Prime | 3,350 | |||
Mortgage-Subprime | 254 | |||
Other | 957 | |||
Commercial | 5,813 | |||
Consumer: | ||||
Prime | 130 | |||
Subprime | 107 | |||
Auto-Subprime | 193 | |||
Other | – | |||
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Total | 143,707 | |||
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F-336
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 5—LOANS(Continued)
Nonperforming loans were as follows:
2010 | 2009 | |||||||
Loans past due 90 days still on accrual | $ | 2,112 | $ | 147 | ||||
Non-accrual loans | 143,707 | 75,411 | ||||||
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| |||||
Total | $ | 145,819 | $ | 75,558 | ||||
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Nonperforming loans and impaired loans are defined differently. Nonperforming loans are loans that are 90 days past due and still accruing interest and non-accrual loans. Impaired loans are loans that based upon current information and events it is considered probable that the Company will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. Some loans may be included in both categories, whereas other loans may only be included in one category.
The Predecessor Company may have elected to formally restructure a loan due to the weakening credit status of a borrower so that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to otherwise incur. At December 31, 2010, the Company had $49,537 of restructured loans of which $9,597 was classified as non-accrual and the remaining were performing. The Company had taken charge-offs of $843 on the restructured non-accrual loans as of December 31, 2010.
The aggregate amount of loans to executive officers and directors of the Company and their related interests was approximately $7,848 at year-end 2010. During 2010, new loans aggregating approximately $22,124, and amounts collected of approximately $19,212 were transacted with such parties.
NOTE 6—FAIR VALUE DISCLOSURES
Following completion of the CBF Investment, and the Bank Merger of GreenBank into Capital Bank, N.A., the Company’s primary asset is its ownership of approximately 34% of Capital Bank, N.A., recorded as an equity-method investment in that entity.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting principles generally accepted in the United States of America (“GAAP”), also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt
F-337
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 6—FAIR VALUE DISCLOSURES(Continued)
securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held for sale.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, if available and these securities are classified as Level 1 or Level 2. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are classified as Level 3.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable
F-338
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 6—FAIR VALUE DISCLOSURES(Continued)
market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Other Real Estate
Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of foreclosed real estate expense. Other real estate is included in Level 3 of the valuation hierarchy.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Below is a table that presents information about certain Predecessor Company assets and liabilities measured at fair value at year-end 2010 and 2009:
Description | Fair Value Measurement Using | Total Carrying Amount in Balance Sheet | Assets/Liabilities Measured at Fair Value | |||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
2010 | ||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||
U.S. government agencies | $ | – | $ | 83,299 | $ | – | $ | 83,299 | $ | 83,299 | ||||||||||
States and political subdivisions | – | 31,501 | – | 31,501 | 31,501 | |||||||||||||||
Collateralized mortgage obligations | – | 67,575 | – | 67,575 | 67,575 | |||||||||||||||
Mortgage-backed securities | – | 17,964 | – | 17,964 | 17,964 | |||||||||||||||
Trust preferred securities | – | 1,025 | 638 | 1,663 | 1,663 | |||||||||||||||
2009 | ||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||
U.S. government agencies | $ | – | $ | 52,048 | $ | – | $ | 52,048 | $ | 52,048 | ||||||||||
States and political subdivisions | – | 32,192 | – | 32,192 | 32,192 | |||||||||||||||
Collateralized mortgage obligations | – | 44,677 | – | 44,677 | 44,677 | |||||||||||||||
Mortgage-backed securities | – | 16,892 | – | 16,892 | 16,892 | |||||||||||||||
Trust preferred securities | – | 1,277 | 638 | 1,915 | 1,915 |
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
The Predecessor Company had one trust preferred security that is considered Level 3. For more information on this security please refer to Note 4—Securities.
F-339
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 6—FAIR VALUE DISCLOSURES(Continued)
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value for the periods ended September 7, 2011 and December 31, 2010 on a recurring basis using significant unobservable inputs.
Predecessor Company | ||||||||
Jan 1 - Sept 7 2011 | Jan 1 - Dec 31 2010 | |||||||
Beginning balance, January 1 | $ | 638 | $ | 638 | ||||
Total gains or (loss) (realized/unrealized) | ||||||||
Included in earnings | – | (75 | ) | |||||
Included in other comprehensive income | (162 | ) | 75 | |||||
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| |||||
Ending balance | $ | 476 | $ | 638 | ||||
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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Predecessor Company was required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.
Description | Fair Value Measurement Using | Total Carrying Amount in Balance Sheet | Assets/Liabilities Measured at Fair Value | |||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||
Other real estate | $ | – | $ | – | $ | 38,086 | $ | 38,086 | $ | 38,086 | ||||||||||
Impaired loans | – | – | 129,088 | 129,088 | 129,088 | |||||||||||||||
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Total assets at fair value | $ | – | $ | – | $ | 167,174 | $ | 167,174 | $ | 167,174 | ||||||||||
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F-340
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 6—FAIR VALUE DISCLOSURES(Continued)
The carrying value and estimated fair value of the Company’s financial instruments are as follows at December 31, 2011 (Successor period) and December 31, 2010 (Predecessor period).
Successor December 31, 2011 | Predecessor December 31, 2010 | |||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||
Financial assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 2,091 | $ | 2,091 | $ | 294,214 | $ | 294,214 | ||||||||||
Securities available for sale | – | – | 202,002 | 202,002 | ||||||||||||||
Securities held to maturity | – | – | 465 | 467 | ||||||||||||||
Loans held for sale | – | – | 1,299 | 1,317 | ||||||||||||||
Loans, net | – | – | 1,678,548 | 1,664,126 | ||||||||||||||
FHLB and other stock | – | – | 12,734 | 12,734 | ||||||||||||||
Cash surrender value of life insurance | – | – | 31,479 | 31,479 | ||||||||||||||
Accrued interest receivable | – | – | 7,845 | 7,845 | ||||||||||||||
Financial liabilities: | ||||||||||||||||||
Deposit accounts | $ | – | $ | – | $ | 1,976,854 | $ | 1,987,105 | ||||||||||
Federal funds purchased and repurchase agreements | – | – | 19,413 | 19,413 | ||||||||||||||
FHLB Advances and notes payable | – | – | 158,653 | 166,762 | ||||||||||||||
Subordinated debentures | 45,180 | 47,547 | 88,662 | 64,817 | ||||||||||||||
Accrued interest payable | – | – | 2,140 | 2,140 |
The following methods and assumptions were used to estimate the fair values for financial instruments that are not disclosed previously in this note. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, liabilities for repurchase agreements, variable rate loans or deposits that reprice frequently and fully, and accrued interest receivable and payable. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. Liabilities for FHLB advances and notes payable are estimated using rates of debt with similar terms and remaining maturities. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements, which is not material. The fair value of commitments to sell loans is based on the difference between the interest rates at which the loans have been committed to sell and the quoted secondary market price for similar loans, which is not material.
Subordinated debentures are associated with prior years’ issuance of variable rate trust preferred securities. Fair value for these instruments was determined using a discounted cash flow method, incorporating the relevant terms, including balance, remaining term, interest rate and payment terms.
F-341
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 7—PREMISES AND EQUIPMENT
Due to the Bank Merger, the Company reported no premises or equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
Predecessor Company year-end premises and equipment were as follows:
2010 | 2009 | |||||||
Land | $ | 18,372 | $ | 18,372 | ||||
Premises | 62,474 | 61,809 | ||||||
Leasehold improvements | 3,092 | 3,061 | ||||||
Furniture, fixtures and equipment | 28,057 | 25,222 | ||||||
Automobiles | 103 | 112 | ||||||
Construction in progress | 138 | 2,162 | ||||||
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| |||||
112,236 | 110,738 | |||||||
Accumulated depreciation | (33,442 | ) | (28,920 | ) | ||||
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| |||||
$ | 78,794 | $ | 81,818 | |||||
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|
Predecessor Company rent expense for operating leases was $766 for the period of January 1 through September 7, 2011 and $1,013, and $1,223 for the full year 2010 and full year 2009, respectively.
The Successor Company had no rent commitments as of December 31, 2011.
NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Successor Company reported no goodwill on its Consolidated Balance Sheet as of December 31, 2011.
For the Predecessor Company, the change in the amount of goodwill was as follows:
2010 | 2009 | |||||||
Beginning of year | $ | – | $ | 143,389 | ||||
Impairment | – | (143,389 | ) | |||||
Adjustment to Goodwill | – | – | ||||||
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| |||||
End of year | $ | – | $ | – | ||||
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In conjunction with significant acquisitions, the Predecessor Company recognized goodwill impairment in 2009 of $143,389. The Predecessor Company’s goodwill remained at $0 since the 2009 goodwill impairment.
Core deposit and other intangible
Due to the Bank Merger, the Successor Company reported no core deposit and other intangibles on its Consolidated Balance Sheet as of December 31, 2011.
F-342
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS(Continued)
For the Predecessor Company, the change in core deposit and other intangibles was as follows:
Core deposit intangibles | 2010 | 2009 | ||||||
Gross carrying amount | $ | 19,796 | $ | 19,796 | ||||
Accumulated amortization, beginning of year | (10,803 | ) | (8,304 | ) | ||||
Amortization | (2,495 | ) | (2,499 | ) | ||||
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| |||||
Accumulated amortization, end of year | (13,298 | ) | (10,803 | ) | ||||
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| |||||
End of year | $ | 6,498 | $ | 8,993 | ||||
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| |||||
Other intangibles | 2010 | 2009 | ||||||
Gross carrying amount | $ | 745 | $ | 745 | ||||
Accumulated amortization, beginning of year | (403 | ) | (152 | ) | ||||
Amortization | (89 | ) | (251 | ) | ||||
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| |||||
Accumulated amortization, end of year | (492 | ) | (403 | ) | ||||
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End of year | $ | 253 | $ | 342 | ||||
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NOTE 9—DEPOSITS
Due to the Bank Merger, the Company reported no deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor).
For the Predecessor Company, deposits at year-end were as follows:
2010 | 2009 | |||||||
Noninterest-bearing demand deposits | $ | 152,752 | $ | 177,602 | ||||
Interest-bearing demand deposits | 939,091 | 837,268 | ||||||
Savings deposits | 101,925 | 86,166 | ||||||
Brokered deposits | 1,399 | 6,584 | ||||||
Time deposits | 781,687 | 976,476 | ||||||
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Total deposits | $ | 1,976,854 | $ | 2,084,096 | ||||
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|
Predecessor Company brokered and time deposits of $100 or more were $309,701 and $395,595 at year-end 2010 and 2009, respectively.
The aggregate amount of Predecessor Company deposits of executive officers and directors of the Company and their related interests was approximately $3,679 and $3,611 at year-end 2010 and 2009, respectively.
F-343
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 10—BORROWINGS
Due to the Bank Merger, the only borrowings reported on the Successor Company’s Consolidated Balance Sheet as of December 31, 2011 were subordinated debentures associated with prior years’ issuance of variable rate trust preferred securities.
Federal funds purchased, securities sold under agreements to repurchase and treasury tax and loan deposits are financing arrangements. Securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Securities sold under agreements to repurchase consist of short-term excess funds and overnight liabilities to deposit customers arising from a cash management program.
Regarding the Predecessor Company, information concerning securities sold under agreements to repurchase at year-end 2010 and 2009 is as follows:
2010 | 2009 | |||||||
Average balance during the year | $ | 22,342 | $ | 28,008 | ||||
Average interest rate during the year | 0.10 | % | 0.10 | % | ||||
Maximum month-end balance during the year | $ | 26,161 | $ | 35,935 | ||||
Weighted average interest rate at year-end | 0.10 | % | 0.10 | % |
Predecessor Company FHLB advances and notes payable consisted of the following at year-end:
2010 | 2009 | |||||||
Short-term FHLB borrowings | ||||||||
Fixed rate FHLB advance, 4.44% | $ | 15,000 | $ | – | ||||
Variable rate FHLB advances at 5.00% to 5.31% Matured December 2010 | – | 12,000 | ||||||
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| |||||
Total short-term borrowings | 15,000 | 12,000 | ||||||
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Long-term FHLB borrowings | ||||||||
Fixed rate FHLB advances, from 1.50% to 6.35%, Various maturities through June 2023 | 143,653 | 159,999 | ||||||
Total FHLB borrowings | $ | 158,653 | $ | 171,999 | ||||
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Each FHLB advance was payable at its maturity date; however, prepayment penalties were required if paid before maturity. The fixed rate advances included $155,000 of advances that were callable by the FHLB under certain circumstances. The advances were collateralized by a required blanket pledge of qualifying mortgage, commercial, agricultural and home equity lines of credit loans and securities totaling $500,354 and $552,721 at year-end 2010 and 2009, respectively.
At year-end 2010, the Predecessor Company had approximately $70,000 of federal funds lines of credit available from correspondent institutions of which $10,000 was secured.
In September 2003, the Company formed Greene County Capital Trust I (“GC Trust I”). GC Trust I issued $10,000 of variable rate trust preferred securities as part of a pooled offering of such securities. The Company issued $10,310 subordinated debentures to the GC Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of GC Trust I. The debentures pay interest quarterly at the three-month
F-344
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 10—BORROWINGS(Continued)
LIBOR plus 2.85% adjusted quarterly (3.25% and 3.14% at year-end 2011 and 2010, respectively). The Company may redeem the subordinated debentures, in whole or in part, at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033.
In June 2005, the Company formed Greene County Capital Trust II (“GC Trust II”). GC Trust II issued $3,000 of variable rate trust preferred securities as part of a pooled offering of such securities. The Company issued $3,093 subordinated debentures to the GC Trust II in exchange for the proceeds of the offering, which debentures represent the sole asset of GC Trust II. The debentures pay interest quarterly at the three-month LIBOR plus 1.68% adjusted quarterly (2.23% and 1.98% at year-end 2011 and 2010, respectively). The Company may redeem the subordinated debentures, in whole or in part, beginning September 2010 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2035.
In May 2007, the Company formed GreenBank Capital Trust I (“GB Trust I”). GB Trust I issued $56,000 of variable rate trust preferred securities as part of a pooled offering of such securities. The Company issued $57,732 subordinated debentures to the GB Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of GB Trust I. The debentures pay interest quarterly at the three-month LIBOR plus 1.65% adjusted quarterly (2.20% and 1.95% at year-end 2011 and 2010). The Company may redeem the subordinated debentures, in whole or in part, beginning June 2012 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2037.
Also in May 2007 the Company assumed the liability for two trusts affiliated with the acquisition of Franklin, Tennessee-based Civitas Bankgroup, Inc. (“CVBG”) that the Company acquired on May 18, 2007, Civitas Statutory Trust I (“CS Trust I”) and Cumberland Capital Statutory Trust II (“CCS Trust II”).
In December 2005 CS Trust I issued $13,000 of variable rate trust preferred securities as part of a pooled offering of such securities. CVBG issued $13,403 subordinated debentures to the CS Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of CS Trust I. The debentures pay interest quarterly at the three-month LIBOR plus 1.54% adjusted quarterly (2.09% and 1.84% at year-end 2011 and 2010). The Company may redeem the subordinated debentures, in whole or in part, beginning March 2011 at a price of 100% of face value. The subordinated debentures must be redeemed no later than March 2036.
In July 2001 CCS Trust II issued $4,000 of variable rate trust preferred securities as part of a pooled offering of such securities. CVBG issued $4,124 subordinated debentures to the CCS Trust II in exchange for the proceeds of the offering, which debentures represent the sole asset of CCS Trust II. The debentures pay interest quarterly at the three-month LIBOR plus 3.58% adjusted quarterly (4.01% and 3.87% at year-end 2011 and 2010). The Company may redeem the subordinated debentures, in whole or in part, at a price of 100% of face value. The subordinated debentures must be redeemed no later than July 2031.
During September 2011, the Company paid interest payments on all of its series of junior subordinated debentures having an outstanding principal amount of $88.7 million, relating to outstanding trust preferred securities (“TRUPs”), for which payments had been deferred beginning in the fourth quarter of 2010.
The Company is not considered the primary beneficiary of GC Trust I, GC Trust II, GB Trust I, CS Trust I and CCS Trust II. Therefore the trusts are not consolidated in the Company’s consolidated financial statements, but rather the subordinate debentures issued by the Company and held by each Trust are presented as a liability. However, the Company has fully and unconditionally guaranteed the repayment of the variable rate trust preferred securities. These trust preferred securities currently qualify as Tier 1 capital for regulatory capital requirements of the Company.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 11—BENEFIT PLANS
Due to the Bank Merger, the Success Company had no benefit plans as of December 31, 2011.
The Predecessor Company had a profit sharing plan which allowed employees to contribute from 1% to 20% of their compensation. The Company contributed an additional amount at a discretionary rate established annually by the Board of Directors. Company contributions to the Plan were $0, $0 and $409 for the period from January 1 through September 7, 2011 and the full years 2010 and 2009, respectively. Effective July 2009 the Company suspended contributions to the profit sharing plan and intended to reevaluate re-instating contributions in the future when the Company solidly returned to profitability.
The Predecessor Company allowed directors to defer some of their fees for future payment, including interest. The amount accrued for deferred compensation was $2,274 and $2,637 at year-end 2010 and 2009. Amounts expensed under the Plan were $85 for the period from January 1, 2011 through September 7, 2011, $133 for 2010 and $27 for 2009. Beginning in 2009 the annual crediting rate was set equal to 100% of the annual return on stockholders’ equity with a 4% floor and a 12% ceiling, for the year then ended, on balances in the Plan until the director experienced a separation from services, and, thereafter, at a earnings crediting rate based on 75% of the Company’s return on average stockholders’ equity for the year then ending with a 3% floor and a 9% ceiling.
The Predecessor Company had certain officers participating in a Supplemental Executive Retirement Plan. The amount accrued for future payments under this Plan was $1,568 and $1,409 at year-end 2010 and 2009, respectively. Amounts expensed under the Plan were $166 for the period from January 1, 2011 through September 7, 2011, $259 for 2010 and $312 for 2009. Related to these plans, the Predecessor Company purchased single premium life insurance contracts on the lives of the related participants. The cash surrender value of these contracts was recorded as an asset of the Company. The Predecessor Company surrendered its life insurance contracts during 2011.
NOTE 12—INCOME TAXES
Income tax expense (benefit) is summarized as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Sept. 8 - Dec 31 2011 | Jan. 1 - Sept. 7 2011 | 2010 | 2009 | |||||||||||||||
Current—federal | $ | (305 | ) | $ | (8,277 | ) | $ | (10,054 | ) | $ | (12,906 | ) | ||||||
Current—state | (22 | ) | (1,681 | ) | (1,775 | ) | (2,476 | ) | ||||||||||
Deferred—federal | (109 | ) | (2,408 | ) | (13,870 | ) | (1,397 | ) | ||||||||||
Deferred—state | (5 | ) | (451 | ) | (2,846 | ) | (257 | ) | ||||||||||
Deferred tax asset—valuation allowance | – | 13,791 | 43,455 | |||||||||||||||
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Total | $ | (441 | ) | $ | 974 | $ | 14,910 | $ | (17,036 | ) | ||||||||
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 12—INCOME TAXES(Continued)
Deferred income taxes reflect the effect of “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws. The tax effects of the primary temporary differences giving rise to the Company’s net deferred tax assets and liabilities are as follows:
Successor Company | Predecessor Company | |||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
Allowance for loan losses | $ | – | $ | – | $ | 26,214 | $ | – | $ | 19,675 | $ | – | ||||||||||||||
Deferred compensation | 85 | – | 2,129 | – | 1,973 | – | ||||||||||||||||||||
REO basis | – | – | 12,175 | – | – | – | ||||||||||||||||||||
Purchase accounting adjustments | – | – | – | (1,424 | ) | 672 | – | |||||||||||||||||||
Depreciation | – | – | – | (1,998 | ) | – | (2,129 | ) | ||||||||||||||||||
FHLB dividends | – | – | – | (1,658 | ) | – | (1,658 | ) | ||||||||||||||||||
Core deposit intangible | – | – | 2,189 | – | – | (4,860 | ) | |||||||||||||||||||
PAA Borrowings TRUPS | – | (15,934 | ) | – | – | – | – | |||||||||||||||||||
Unrealized (gain) loss on securities | – | – | – | (645 | ) | – | (122 | ) | ||||||||||||||||||
NOL carryforward | – | – | 10,192 | – | – | – | ||||||||||||||||||||
Other | 327 | – | – | (1,542 | ) | 49 | – | |||||||||||||||||||
Deferred tax asset—valuation allowance | – | – | – | (43,455 | ) | – | – | |||||||||||||||||||
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Total deferred income taxes | $ | 412 | $ | (15,934 | ) | $ | 52,899 | $ | (50,722 | ) | $ | 22,369 | $ | (8,769 | ) | |||||||||||
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A valuation allowance is recognized for a net DTA if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of the increased credit losses, the Predecessor Company entered into a three-year cumulative pre-tax loss position (excluding the goodwill impairment charge recognized in the first quarter of 2009) as of September 30, 2010.
A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome. The Predecessor Company’s estimate of the realization of its net DTA was based on the scheduled reversal of deferred tax liabilities and taxable income available in prior carry back years and tax planning strategies. Based on management’s calculation, a valuation allowance of $43,455, or 95% of the Predecessor Company’s net DTA, was an adequate estimate as of December 31, 2010. This estimate resulted in a valuation allowance for the net DTA in the income statement of $43,455 for the period end 2010.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 12—INCOME TAXES(Continued)
A reconciliation of expected income tax expense (benefit) at the statutory federal income tax rate of 35% with the actual effective income tax rates is as follows:
Successor Company | Predecessor Company | |||||||||||||||||
Sept. 8 –Dec 31 2011 | Jan. 1 –Sept. 7 2011 | 2010 | 2009 | |||||||||||||||
Statutory federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||
State income tax, net of federal benefit | (0.9 | ) | 4.3 | 4.6 | 1.1 | |||||||||||||
Equity in income from investment in subsidiary | (54.7 | ) | ||||||||||||||||
Tax-exempt income | 0.7 | 2.0 | 0.5 | |||||||||||||||
Goodwill impairment | – | (26.4 | ) | |||||||||||||||
Deferred tax asset – valuation allowance | (42.5 | ) | (66.1 | ) | – | |||||||||||||
Other | 0.6 | 0.1 | 1.8 | – | ||||||||||||||
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Total | (20.0 | %) | (2.4 | %) | (22.7 | %) | 10.2 | % | ||||||||||
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The Company recognizes accrued interest and penalties related to uncertain tax positions in tax expense. At the date of adoption of interpretive guidance on accounting for uncertainty in income taxes, the Predecessor Company had recognized approximately $150 for the payment of interest and penalties.
The Predecessor Company’s Federal returns are open and subject to examination for the years of 2008, 2009 and 2010. The Predecessor Company’s State returns are open and subject to examination for the years of 2008, 2009 and 2010.
NOTE 13—COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Due to the Bank Merger, the Company reported no commitments or financial instruments with off-balance sheet risk as of December 31, 2011 (Successor).
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer-financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Predecessor Company financial instruments with off-balance-sheet risk were as follows at year-end:
2010 | 2009 | |||||||
Commitments to make loans—fixed | $ | 3,827 | $ | 1,202 | ||||
Commitments to make loans—variable | 2,464 | 4,718 | ||||||
Unused lines of credit | 201,973 | 239,374 | ||||||
Letters of credit | 25,674 | 30,107 |
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 13—COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK(Continued)
The fixed rate loan commitments have interest rates ranging from 5.49% to 8.75% and maturities ranging from one to fifteen years. Letters of credit are considered financial guarantees under ASC 460.
NOTE 14—CAPITAL REQUIREMENTS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
On September 7, 2011, the Company completed the issuance and sale of 119.9 million shares of its common stock to CBF for approximately $217 million in consideration (“CBF Investment”). CBF is the controlling owner of Capital Bank, N.A. In connection with the CBF Investment, all of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and related warrants to purchase shares of the Company’s common stock issued to the U.S. Treasury through the TARP were repurchased by CBF.
During the third quarter of 2011, the FDIC and the TDFI issued a consent order against the Bank aimed at strengthening the Bank’s operations and its financial condition. The order’s provisions included requirements similar to those that the Bank has already informally committed to comply with, including requirements to maintain the Bank’s capital ratios above those levels required to be considered “well-capitalized” under federal banking regulations. As a result of the subsequent Bank merger, the consent order is no longer in effect.
The Successor Company’s primary source of funds to pay dividends to shareholders is the dividends it receives from Capital Bank. In August 2010, Capital Bank entered into an Operating Agreement with the OCC (which we refer to as the “OCC Operating Agreement”), in connection with the acquisition of the Failed Banks. Capital Bank (and, with respect to certain provisions, the Company and CBF) is also subject to an Order of the FDIC, dated July 16, 2010 (which we refer to as the “FDIC Order”) issued in connection with the FDIC’s approval of CBF’s deposit insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the business and they restrict Capital Bank’s ability to pay dividends to CBF and the Company and to make changes to its capital structure. A failure by CBF or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could subject CBF to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions, by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent CBF from executing its business strategy and negatively impact its business, financial condition, liquidity and results of operations.
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GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 14—CAPITAL REQUIREMENTS(Continued)
Actual capital levels and minimum required levels to be well capitalized under the regulatory framework for prompt corrective action (in millions) were as follows:
Actual | Minimum Required to be Well Capitalized | |||||||||||||||
Actual | Ratio (%) | Actual | Ratio (%) | |||||||||||||
Successor Company: | ||||||||||||||||
December 31, 2011: | ||||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | $ | 306.7 | 99.8 | $ | 30.7 | 10 | ||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | $ | 306.7 | 99.8 | $ | 18.4 | 6 | ||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||
Consolidated | $ | 306.7 | 100.7 | $ | 15.2 | 5 | ||||||||||
Predecessor Company: | ||||||||||||||||
December 31, 2010: | ||||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | $ | 239.7 | 13.2 | $ | 181.6 | 10 | ||||||||||
Bank | 239.6 | 13.2 | 181.3 | 10 | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||
Consolidated | $ | 216.5 | 11.9 | $ | 108.9 | 6 | ||||||||||
Bank | 216.4 | 11.9 | 108.8 | 6 | ||||||||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||
Consolidated | $ | 216.5 | 8.9 | $ | 122.0 | 5 | ||||||||||
Bank | 216.4 | 8.9 | 121.8 | 5 |
NOTE 15—STOCK-BASED COMPENSATION
For the period from September 8, 2011 through December 31, 2011, the Successor Company had no stock or option grants and had no expenses associated with stock-based compensation.
The Predecessor Company maintained a 2004 Long-Term Incentive Plan, as amended (the “Plan”), whereby a maximum of 500,000 shares of common stock could be issued to directors and employees of the Company and the Bank. The Plan provided for the issuance of awards in the form of stock options, stock appreciation rights, restricted shares, restricted share units, deferred share units and performance awards. Stock options granted under the Plan were typically granted at exercise prices equal to the fair market value of the Company’s common stock on the date of grant and typically had terms of ten years and vested at an annual rate of 20%. Shares of restricted stock awarded under the Plan had restrictions that expired within the vesting period of the award which range from 12 months to 60 months. At December 31, 2010, 170,324 shares remained available for future grant. The compensation cost related to options that has been charged against income for the Plan was approximately $177, $295 and $387 for the period of January 1 through September 7, 2011 and the years ended December 31, 2010 and 2009, respectively. The compensation cost related to restricted stock that had been charged against income for the Plan was approximately $771, $331 and $299 for the period of January 1 through September 7, 2011 and the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010, there was $678 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 15—STOCK-BASED COMPENSATION(Continued)
Stock Options
The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Company did not grant any incentive stock options for 2011, 2010 or 2009.
A summary of stock option activity under the Predecessor Company Plan for the years ended December 31, 2010 and 2009 is presented below:
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2009 | 388,194 | $ | 26.14 | |||||||||||||
Exercised | – | – | ||||||||||||||
Forfeited | (6,484 | ) | 33.12 | |||||||||||||
Expired | – | – | ||||||||||||||
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Outstanding at December 31, 2010 | 381,710 | $ | 25.96 | 3.6 years | $ | – | ||||||||||
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Options exercisable at December 31, 2010 | 344,029 | $ | 25.17 | 3.4 years | $ | – | ||||||||||
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The total aggregate intrinsic value of stock options (which is the amount by which the stock price exceeded the exercise price of the stock options) exercised during the years ended December 31, 2010 and 2009, was $0 and $0, respectively. The total fair value of stock options vesting during the period of January 1 through September 7, 2011 and the year ended December 31, 2010 was $319 and $376, respectively.
During 2011 and 2010 there were no exercised stock options.
Stock options outstanding at year-end 2010 were as follows:
Outstanding | Exercisable | |||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | ||||||||||||||||||
$12.41 – $15.00 | 24,142 | 1.8 | $ | 12.95 | 24,142 | 1.8 | $ | 12.95 | ||||||||||||||||
$15.01 – $20.00 | 77,698 | 1.8 | $ | 17.63 | 77,698 | 1.8 | $ | 17.63 | ||||||||||||||||
$20.01 – $25.00 | 50,635 | 3.1 | $ | 23.36 | 50,635 | 3.1 | $ | 23.36 | ||||||||||||||||
$25.01 – $30.00 | 135,476 | 4.7 | $ | 28.00 | 122,137 | 4.6 | $ | 27.91 | ||||||||||||||||
$30.01 – $36.32 | 93,759 | 4.4 | $ | 34.80 | 69,417 | 3.8 | $ | 34.37 | ||||||||||||||||
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Total | 381,710 | 344,029 | ||||||||||||||||||||||
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 15—STOCK-BASED COMPENSATION(Continued)
Restricted Stock
A summary of restricted stock activity under the Predecessor Company Plan as of September 7, 2011 and for the year ended December 31, 2010 and 2009 is presented below.
Predecessor Company: | Shares | Weighted Average Price Per Share | ||||||
Balance at January 1, 2009 | 60,907 | $ | 18.83 | |||||
Granted: | ||||||||
Non-employee Directors | 7,060 | 7.08 | ||||||
Non-executive officers & management | 56,934 | 7.08 | ||||||
Vested: | ||||||||
Non-employee Directors | (7,852 | ) | 16.56 | |||||
Executive officers, non-executive officers & management | (10,584 | ) | 19.16 | |||||
Cancelled: | ||||||||
Non-employee Directors | – | – | ||||||
Non-executive officers & management | (5,207 | ) | 14.98 | |||||
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Balance at December 31, 2009 | 101,258 | $ | 11.74 | |||||
Granted: | ||||||||
Non-employee Directors | 6,548 | 6.11 | ||||||
Executive officers | 18,382 | 8.16 | ||||||
Vested: | ||||||||
Non-employee Directors | (7,060 | ) | 7.08 | |||||
Executive officers, non-executive officers & management | (20,335 | ) | 12.77 | |||||
Cancelled: | ||||||||
Executive officers | (1,543 | ) | 16.56 | |||||
Non-executive officers & management | (5,968 | ) | 11.82 | |||||
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Balance at December 31, 2010 | 91,282 | $ | 10.67 | |||||
Granted: | ||||||||
Non-employee Directors | 22,336 | 2.65 | ||||||
Executive officers | 72,807 | 1.60 | ||||||
Vested: | ||||||||
Non-employee Directors | (28,884 | ) | 3.43 | |||||
Executive officers, non-executive officers & management | (18,716 | ) | 12.66 | |||||
Cancelled: | ||||||||
Executive officers | (1,029 | ) | 16.56 | |||||
Non-executive officers & management | (8,646 | ) | 10.88 | |||||
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Balance at September 7, 2011 | 129,150 | $ | 5.74 | |||||
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Weighted-average fair value of non-vested stock awards granted during the period from January 1 through September 7, 2011 and the year ended December 31, 2010 and 2009:
Predecessor: | ||||
Jan 1–Sept 7, 2011 | $ | 1.54 | ||
2010 | $ | 7.62 | ||
2009 | $ | 7.08 |
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 15—STOCK-BASED COMPENSATION(Continued)
Cash Settled Stock Appreciation Rights
During the year ended December 31, 2009 the Predecessor Company granted cash-settled stock appreciation rights (“SAR’s”) awards to non-employee Directors, executive officers and select employees. Each award, when granted, provided the participant with the right to receive payment in cash, upon exercise of each SAR, for the difference between the appreciation in market value of a specified number of shares of the Company’s Common Stock over the award’s exercise price. The SAR’s vest over the same period as the stock option awards issued and the restricted stock grants and can only be exercised in tandem with the stock option awards or vesting of the restricted stock grants. The per-share exercise price of an SAR is equal to the closing market price of a share of the Predecessor Company’s common stock on the date of grant. For the year ended December 31, 2010 the Company recognized a recovery in expense of $15 and for the year ended December 31, 2009 the Company recognized an expense of $24 related to outstanding awarded SAR’s. As of December 31, 2010, there was an estimated $346 of unrecognized compensation cost related to SAR’s. The cost, measured at each reporting period until the award is settled, is expected to be recognized over a weighted average period of 1.3 years. As of December 31, 2010, no cash settled SAR’s had been exercised and as such, no share-based liabilities were paid.
A summary of the SAR activity during years ended December 31, 2010 and 2009 is presented below.
Predecessor Company: | Shares | Weighted Average Price Per Share | ||||||
Balance at January 1, 2009 | 79,907 | $ | 22.58 | |||||
Granted: | ||||||||
Non-employee Directors | 7,060 | 7.08 | ||||||
Non-executive officers & management | 56,934 | 7.08 | ||||||
Cancelled/Expired: | ||||||||
Non-employee Directors | (7,852 | ) | 16.56 | |||||
Non-executive officers & management | (15,817 | ) | 17.78 | |||||
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Balance at December 31, 2009 | 120,232 | $ | 15.36 | |||||
Granted: | ||||||||
Non-employee Directors | 6,548 | 6.11 | ||||||
Non-executive officers & management | – | – | ||||||
Cancelled/Expired: | ||||||||
Non-employee Directors | (7,060 | ) | 7.08 | |||||
Non-executive officers & management | (27,777 | ) | 12.75 | |||||
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Balance at December 31, 2010 | 91,943 | $ | 16.12 | |||||
Granted: | ||||||||
Non-employee Directors | – | – | ||||||
Non-executive officers & management | – | – | ||||||
Cancelled: | ||||||||
Non-employee Directors | – | – | ||||||
Non-executive officers & management | (8,158 | ) | 12.48 | |||||
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Balance at September 7, 2011 | 83,785 | $ | 16.48 | |||||
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Weighted-average fair value of cash-settled SAR’s granted during the year ended December 31, | ||||||||
Predecessor: | ||||||||
Jan 1–Sept 7, 2011 | N/A | |||||||
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2010 | $ | 6.11 | ||||||
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2009 | $ | 7.08 | ||||||
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 15—STOCK-BASED COMPENSATION(Continued)
The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of the SAR’s at the time of grant for the periods ending December 31.
2010 | 2009 | |||
Risk-free interest rate | 0.307% | 0.67% – 1.89% | ||
Volatility | 57.06% | 40.18% | ||
Expected life | 1 year | 1 – 5 years | ||
Dividend yield | 0.00% | 7.34% |
Cash-settled SAR’s awarded in stock-based payment transactions are accounted for under ASC 718 which classifies these awards as liabilities. Accordingly, the Predecessor Company recorded these awards as a component of other non-current liabilities on the balance sheet. For liability awards, the fair value of the award, which determines the measurement of the liability on the balance sheet, was remeasured at each reporting period until the award is settled. Fluctuations in the fair value of the liability award were recorded as increases or decreases in compensation cost, either immediately or over the remaining service period, depending on the vested status of the award.
The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected life of the SAR. Expected volatility is based upon the historical volatility of the Company’s common stock based upon prior year’s trading history. The expected term of the SAR is based upon the average life of previously issued stock options and restricted stock grants. The expected dividend yield is based upon current yield on the date of grant. These SAR’s can only be exercised in tandem with stock options being exercised or vesting of restricted stock.
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 16—EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations are presented below.
Successor Company | Predecessor Company | |||||||||||||||||
Sept 8 - Dec 31 2011 | Jan 1 - Sept 7 2011 | 2010 | 2009 | |||||||||||||||
Basic Earnings (loss) Per Share | ||||||||||||||||||
Net income (loss) | $ | 2,647 | $ | (41,519 | ) | $ | (80,695 | ) | $ | (150,694 | ) | |||||||
Less: preferred stock dividends and accretion of discount on warrants | – | $ | 3,409 | 5,001 | 4,982 | |||||||||||||
Less: Gain on retirement of Series A preferred allocated to common shareholders | – | 11,188 | – | – | ||||||||||||||
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Net income (loss) available to common shareholders | $ | 2,647 | $ | (33,740 | ) | $ | (85,696 | ) | $ | (155,676 | ) | |||||||
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Weighted average common shares outstanding | 133,083,705 | 13,125,521 | 13,093,847 | 13,068,407 | ||||||||||||||
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Basic earnings (loss) per share available to common shareholders | .02 | (2.57 | ) | (6.54 | ) | (11.91 | ) | |||||||||||
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Diluted Earnings (loss) Per Share | ||||||||||||||||||
Net income (loss) | $ | 2,647 | $ | (41,519 | ) | $ | (80,695 | ) | $ | (150,694 | ) | |||||||
Less: preferred stock dividends and accretion of discount on warrants | – | 3,409 | 5,001 | 4,982 | ||||||||||||||
Less: Gain on retirement of Series A preferred allocated to common shareholders | – | 11,188 | – | – | ||||||||||||||
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Net income (loss) available to common shareholders | $ | 2,647 | $ | (33,740 | ) | $ | (85,696 | ) | $ | (155,676 | ) | |||||||
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Weighted average common shares outstanding | 133,083,705 | 13,125,521 | 13,093,847 | 13,068,407 | ||||||||||||||
Add: Dilutive effects of assumed conversions of restricted stock and exercises of stock options and warrants(1)(2) | 76,679 | – | – | – | ||||||||||||||
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Weighted average common and dilutive potential common shares outstanding | 133,160,384 | 13,125,521 | 13,093,847 | 13,068,407 | ||||||||||||||
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Diluted earnings (loss) per share available to common shareholders | .02 | (2.57 | ) | (6.54 | ) | (11.91 | ) | |||||||||||
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(1) | Diluted weighted average shares outstanding for the period from Jan 1, 2011 to September 7, 2011, and 2010 and 2009 excludes 94,930, 92,979 and 96,971 shares of unvested restricted stock because they are anti-dilutive and is equal to weighted average common shares outstanding. |
(2) | Stock options and warrants of 976,659, 1,017,645 and 1,058,992 were excluded from Jan 1, 2011 to September 7, 2011 and 2010 and 2009 diluted earnings per share because their impact was anti-dilutive. |
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Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 17—PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Due to the Bank Merger, the Successor Company’s financial results are equivalent to those of the parent company.
BALANCE SHEETS
Successor Company | Predecessor Company | |||||||||||||
Dec. 31, 2011 | Dec. 31, 2010 | Dec. 31, 2009 | ||||||||||||
ASSETS | ||||||||||||||
Cash and due from financial institutions | $ | 2,091 | $ | 1,707 | $ | 3,081 | ||||||||
Investment in subsidiary | 315,343 | 228,590 | 308,831 | |||||||||||
Other | 3,804 | 4,795 | 4,692 | |||||||||||
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Total assets | $ | 321,238 | $ | 235,092 | $ | 316,604 | ||||||||
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LIABILITIES | ||||||||||||||
Subordinated debentures | $ | 45,180 | $ | 88,662 | $ | 88,662 | ||||||||
Other liabilities | 16,009 | 2,532 | 1,173 | |||||||||||
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Total liabilities | 61,189 | 91,194 | 89,835 | |||||||||||
Shareholders’ equity | 260,049 | 143,898 | 226,769 | |||||||||||
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Total liabilities and shareholders’ equity | $ | 321,238 | $ | 235,092 | $ | 316,604 | ||||||||
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STATEMENTS OF INCOME
Successor Company | Predecessor Company | |||||||||||||||||
Sep. 8, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Sep. 7, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | |||||||||||||||
Dividends from subsidiary | $ | – | $ | – | $ | 2,500 | $ | 3,000 | ||||||||||
Other income | 19 | 88 | 96 | 180 | ||||||||||||||
Interest expense | (977 | ) | (1,383 | ) | (1,980 | ) | (2,577 | ) | ||||||||||
Other expense | (282 | ) | (2,110 | ) | (2,002 | ) | (1,718 | ) | ||||||||||
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Income before income taxes | (1,240 | ) | (3,405 | ) | (1,386 | ) | (1,115 | ) | ||||||||||
Income tax benefit | (441 | ) | (889 | ) | (743 | ) | (1,488 | ) | ||||||||||
Equity in undistributed net income (loss) of subsidiary | 3,446 | (39,003 | ) | (80,052 | ) | (151,067 | ) | |||||||||||
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Net income (loss) | 2,647 | (41,519 | ) | (80,695 | ) | (150,694 | ) | |||||||||||
Preferred stock dividends and accretion of discount on warrants | – | 3,409 | 5,001 | 4,982 | ||||||||||||||
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Net income (loss) available to common shareholders | $ | 2,647 | $ | (44,928 | ) | $ | (85,696 | ) | $ | (155,676 | ) | |||||||
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F-356
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 17—PARENT COMPANY CONDENSED FINANCIAL STATEMENTS(Continued)
STATEMENTS OF CASH FLOWS
Years ended December 31, 2010 and 2009
Successor Company | Predecessor Company | |||||||||||||||||
Sept. 8, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Sept. 7, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | |||||||||||||||
Operating activities | ||||||||||||||||||
Net income (loss) | $ | 2,647 | $ | (41,519 | ) | $ | (80,695 | ) | $ | (150,694 | ) | |||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||||||||
Undistributed (net income) loss of subsidiaries | – | 39,003 | 80,052 | 151,067 | ||||||||||||||
Stock compensation expense | – | 528 | 627 | 686 | ||||||||||||||
Amortization of Subordinated Debenture Discount | 1,543 | |||||||||||||||||
Change in other assets | 554 | 996 | 103 | 1,868 | ||||||||||||||
Change in liabilities | (3,884 | ) | 4,416 | 1,250 | (412 | ) | ||||||||||||
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Net cash provided (used) by operating activities | 860 | 3,424 | 1,337 | 2,515 | ||||||||||||||
Investing activities | ||||||||||||||||||
Capital investment in Capital Bank | (142,850 | ) | – | – | – | |||||||||||||
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Net cash used in investing activities | (142,850 | ) | – | – | ||||||||||||||
Financing activities | ||||||||||||||||||
Preferred stock dividends paid | – | (3,409 | ) | (2,711 | ) | (3,232 | ) | |||||||||||
Common stock dividends paid | – | – | – | (1,713 | ) | |||||||||||||
Proceeds from CBF Investment | (5,211 | ) | 147,569 | – | – | |||||||||||||
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Net cash provided (used in) financing activities | (5,211 | ) | 144,160 | (2,711 | ) | (4,945 | ) | |||||||||||
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Net change in cash and cash equivalents | (147,201 | ) | 147,584 | (1,374 | ) | (2,430 | ) | |||||||||||
Cash and cash equivalents, beginning of year | 149,292 | 1,708 | 3,081 | 5,511 | ||||||||||||||
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Cash and cash equivalents, end of year | $ | 2,091 | $ | 149,292 | $ | 1,707 | $ | 3,081 | ||||||||||
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F-357
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 18—OTHER COMPREHENSIVE INCOME
Other comprehensive income components were as follows.
Sucessor Company | Predecessor Company | |||||||||||||||||
Sept. 8, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Sept. 7, 2011 | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | |||||||||||||||
Unrealized holding gains and (losses) on securities available for sale, net of tax of $943, $1,678, $523, $1,105 respectively | $ | (1,461 | ) | $ | 2,601 | $ | 810 | $ | 1,712 | |||||||||
Reclassification adjustment for losses (gains) realized in net income, net of tax of $0, $(2,481), $0, ($555), respectively |
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| (3,843 | ) | – | (860 | ) | ||||||||||
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Other comprehensive income (loss) | $ | (1,461 | ) | $ | (1,242 | ) | $ | 810 | $ | 852 | ||||||||
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NOTE 19—SEGMENT INFORMATION
The Successor’s Company has a single operating segment, its 34% ownership of Capital Bank, N.A., which is accounted for using the equity method. Thus, segment information is not relevant for the Successor Company.
The Predecessor Company’s operating segments include banking, mortgage banking, consumer finance, automobile lending and title insurance. The reportable segments are determined by the products and services offered, and internal reporting. Loans, investments and deposits provide the revenues in the banking operation; loans and fees provide the revenues in consumer finance and mortgage banking and insurance commissions provide revenues for the title insurance company. Consumer finance, automobile lending and title insurance do not meet the quantitative threshold on an individual basis, and are therefore shown below in “Other Segments”. Mortgage banking operations are included in “Bank”. All operations are domestic.
F-358
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 19—SEGMENT INFORMATION (Continued)
Predecessor Company segment performance is evaluated using net interest income and non-interest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on time spent for each segment. Transactions among segments are made at fair value. Information reported internally for performance assessment follows.
Predecessor Company Jan 1, 2011 through Sept 7, 2011 | Banking | Other Segments | Holding Company | Eliminations | Total Segments | |||||||||||||||
Net interest income | $ | 48,181 | $ | 5,977 | $ | (1,382 | ) | $ | – | $ | 52,776 | |||||||||
Provision for loan losses | 43,116 | 626 | – | – | 43,742 | |||||||||||||||
Noninterest income | 27,196 | 1,150 | 88 | (631 | ) | 27,803 | ||||||||||||||
Noninterest expense | 72,577 | 3,326 | 2,110 | (631 | ) | 77,382 | ||||||||||||||
Income tax expense (benefit) | 641 | 1,222 | (889 | ) | – | 974 | ||||||||||||||
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Segment profit (loss) | $ | (40,957 | ) | $ | 1,953 | $ | (2,515 | ) | $ | – | $ | (41,519 | ) | |||||||
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Segment assets | $ | 2,191,032 | $ | 43,661 | $ | 153,308 | $ | – | $ | 2,388,001 | ||||||||||
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2010 | Banking | Other Segments | Holding Company | Eliminations | Total Segments | |||||||||||||||
Net interest income | $ | 77,246 | $ | 8,327 | $ | (1,980 | ) | $ | – | $ | 83,593 | |||||||||
Provision for loan losses | 69,568 | 1,539 | – | – | 71,107 | |||||||||||||||
Noninterest income | 31,467 | 1,899 | 96 | (918 | ) | 32,544 | ||||||||||||||
Noninterest expense | 105,088 | 4,643 | 2,002 | (918 | ) | 110,815 | ||||||||||||||
Income tax expense (benefit) | 14,068 | 1,585 | (743 | ) | – | 14,910 | ||||||||||||||
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Segment profit (loss) | $ | (80,011 | ) | $ | 2,459 | $ | (3,143 | ) | $ | – | $ | (80,695 | ) | |||||||
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Segment assets | $ | 2,356,543 | $ | 42,995 | $ | 6,502 | $ | – | $ | 2,406,040 | ||||||||||
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2009 | Banking | Other Segments | Holding Company | Eliminations | Total Segments | |||||||||||||||
Net interest income | $ | 74,628 | $ | 8,474 | $ | (2,577 | ) | $ | – | $ | 80,525 | |||||||||
Provision for loan losses | 47,483 | 2,763 | – | – | 50,246 | |||||||||||||||
Noninterest income | 30,258 | 2,127 | 180 | (987 | ) | 31,578 | ||||||||||||||
Noninterest expense | 223,989 | 4,868 | 1,717 | (987 | ) | 229,587 | ||||||||||||||
Income tax expense (benefit) | (16,712 | ) | 1,164 | (1,488 | ) | – | (17,036 | ) | ||||||||||||
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Segment profit (loss) | $ | (149,874 | ) | $ | 1,806 | $ | (2,626 | ) | $ | – | $ | (150,694 | ) | |||||||
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Segment assets | $ | 2,568,926 | $ | 42,251 | $ | 7,962 | $ | – | $ | 2,619,139 | ||||||||||
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F-359
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 19—SEGMENT INFORMATION(Continued)
Asset Quality Ratios
As of and for the period ended December 31, 2010 | Bank | Other | Total | |||||||||
Nonperforming loans as percentage of total loans, net of unearned income | 8.40 | % | 1.30 | % | 8.35 | % | ||||||
Nonperforming assets as a percentage of total assets | 8.52 | % | 1.34 | % | 8.56 | % | ||||||
Allowance for loan losses as a percentage of total loans, net of unearned income | 3.68 | % | 7.33 | % | 3.83 | % | ||||||
Allowance for loan losses as a percentage of nonperforming loans | 43.80 | % | 562.24 | % | 45.83 | % | ||||||
Net charge-offs to average total loans, net of unearned income | 2.76 | % | 4.20 | % | 2.84 | % | ||||||
As of and for the period ended December 31, 2009 | Bank | Other | Total | |||||||||
Nonperforming loans as percentage of total loans, net of unearned income | 3.69 | % | 1.50 | % | 3.70 | % | ||||||
Nonperforming assets as a percentage of total assets | 5.04 | % | 2.02 | % | 5.07 | % | ||||||
Allowance for loan losses as a percentage of total loans, net of unearned income | 2.30 | % | 8.05 | % | 2.45 | % | ||||||
Allowance for loan losses as a percentage of nonperforming loans | 62.29 | % | 538.31 | % | 66.39 | % | ||||||
Net charge-offs to average total loans, net of unearned income | 2.15 | % | 5.88 | % | 2.25 | % |
NOTE 20—SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data:
Predecessor Company | Successor Company | |||||||||||||||||||||
Three months ended | 07/01/2011 through 09/07/2011 | 09/08/2011 through 09/30/2011 | Three Months Ended | |||||||||||||||||||
Summary of Operations | 03/31/2011 | 06/30/2011 | 12/31/2011 | |||||||||||||||||||
Net interest income | $ | 19,267 | $ | 19,452 | $ | 14,058 | $ | (236 | ) | $ | (741 | ) | ||||||||||
Provision for loan losses | 13,897 | 14,333 | 15,513 | – | – | |||||||||||||||||
Noninterest income | 7,627 | 8,236 | 11,940 | 1,169 | 2,297 | |||||||||||||||||
Noninterest expense | 23,027 | 24,770 | 29,585 | 95 | 188 | |||||||||||||||||
Income tax expense (benefit) | 281 | 281 | 974 | (123 | ) | (318 | ) | |||||||||||||||
Net income (loss) | $ | (10,311 | ) | $ | (11,134 | ) | $ | (20,074 | ) | $ | 961 | $ | 1,686 | |||||||||
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Net income (loss) available to common shareholders | $ | (11,561 | ) | $ | (12,384 | ) | $ | (20,983 | ) | $ | 961 | $ | 1,686 | |||||||||
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Comprehensive income | $ | (10,272 | ) | $ | (11,096 | ) | $ | (20,286 | ) | $ | (308 | ) | $ | 1,494 | ||||||||
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Basic earnings (loss) per share | $ | (0.88 | ) | $ | (0.94 | ) | $ | (3.23 | ) | $ | 0.01 | $ | .01 | |||||||||
Diluted earnings (loss) per share | $ | (0.88 | ) | $ | (0.94 | ) | $ | (3.23 | ) | $ | 0.01 | $ | .01 | |||||||||
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Dividends per common share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||
Average common shares outstanding | 13,108,598 | 13,126,923 | 13,145,744 | 133,083,075 | 133,083,075 | |||||||||||||||||
Average common shares outstanding—diluted | 13,108,598 | 13,126,923 | 13,145,744 | 133,174,370 | 133,160,384 |
F-360
Table of Contents
GREEN BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
NOTE 20—SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(Continued)
Predecessor Company:
For the three months ended | ||||||||||||||||
Summary of Operations | 03/31/2010 | 06/30/2010 | 09/30/2010 | 12/31/2010 | ||||||||||||
Net interest income | $ | 21,659 | $ | 21,473 | $ | 20,747 | $ | 19,714 | ||||||||
Provision for loan losses | 3,889 | 4,749 | 36,823 | 25,646 | ||||||||||||
Noninterest income | 7,686 | 8,771 | 9,029 | 7,058 | ||||||||||||
Noninterest expense | 20,546 | 21,274 | 27,009 | 41,986 | ||||||||||||
Income tax expense (benefit) | 1,714 | 1,410 | 1,098 | 10,688 | ||||||||||||
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Net income (loss) | $ | 3,196 | $ | 2,811 | $ | (35,154 | ) | $ | (51,548 | ) | ||||||
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Net income (loss) available to common shareholders | $ | 1,946 | $ | 1,561 | $ | (36,405 | ) | $ | (52,798 | ) | ||||||
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Comprehensive income | $ | 4,166 | $ | 3,705 | $ | (34,583 | ) | $ | (53,173 | ) | ||||||
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Basic earnings (loss) per share | $ | 0.15 | $ | 0.12 | $ | (2.78 | ) | $ | (4.03 | ) | ||||||
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Diluted earnings (loss) per share | $ | 0.15 | $ | 0.12 | $ | (2.78 | ) | $ | (4.03 | ) | ||||||
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Dividends per common share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Average common shares outstanding | 13,082,347 | 13,097,611 | 13,097,611 | 13,097,611 | ||||||||||||
Average common shares outstanding—diluted | 13,172,727 | 13,192,648 | 13,097,611 | 13,097,611 |
F-361
Table of Contents
Southern Community Financial
Corporation
Unaudited Consolidated Financial Statements as of and for the
Three and Six Months Ended June 30, 2012
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
June 30, 2012 | December 31, 2011* | |||||||
(Amounts in thousands, except share data) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 25,144 | $ | 23,356 | ||||
Federal funds sold and overnight deposits | 101,784 | 23,198 | ||||||
Investment securities | ||||||||
Available for sale, at fair value | 261,944 | 362,298 | ||||||
Held to maturity, at amortized cost | 51,009 | 44,403 | ||||||
Federal Home Loan Bank stock | 5,957 | 6,842 | ||||||
Loans held for sale | 4,032 | 4,459 | ||||||
Loans | 913,591 | 950,022 | ||||||
Allowance for loan losses | (22,954 | ) | (24,165 | ) | ||||
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Net Loans | 890,637 | 925,857 | ||||||
Premises and equipment, net | 37,501 | 38,315 | ||||||
Foreclosed assets | 19,873 | 19,812 | ||||||
Other assets | 49,080 | 54,038 | ||||||
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Total Assets | $ | 1,446,961 | $ | 1,502,578 | ||||
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|
| |||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | ||||||||
Non-interest bearing demand | $ | 148,048 | $ | 135,434 | ||||
Money market, NOW and savings | 485,569 | 475,900 | ||||||
Time | 493,084 | 571,838 | ||||||
|
|
|
| |||||
Total Deposits | 1,126,701 | 1,183,172 | ||||||
Short-term borrowings | 59,268 | 33,629 | ||||||
Long-term borrowings | 147,426 | 177,514 | ||||||
Other liabilities | 13,227 | 10,628 | ||||||
|
|
|
| |||||
Total Liabilities | 1,346,622 | 1,404,943 | ||||||
|
|
|
| |||||
Stockholders’ Equity | ||||||||
Senior cumulative preferred stock (Series A), no par value, 1,000,000 shares authorized; 42,750 shares issued and outstanding at June 30, 2012 and December 31, 2011 | 42,091 | 41,870 | ||||||
Common stock, no par value, 30,000,000 shares authorized; issued and outstanding 16,854,775 shares at June 30, 2012 and 16,827,075 shares at December 31, 2011 | 119,534 | 119,505 | ||||||
Retained earnings (accumulated deficit) | (62,740 | ) | (64,425 | ) | ||||
Accumulated other comprehensive income | 1,454 | 685 | ||||||
|
|
|
| |||||
Total Stockholders’ Equity | 100,339 | 97,635 | ||||||
|
|
|
| |||||
Total Liabilities and Stockholders’ Equity | $ | 1,446,961 | $ | 1,502,578 | ||||
|
|
|
|
* | Derived from audited consolidated financial statements |
See accompanying notes.
F-363
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Amounts in thousands, except per share and share data) | ||||||||||||||||
Interest Income | ||||||||||||||||
Loans | $ | 12,824 | $ | 15,003 | $ | 26,040 | $ | 30,516 | ||||||||
Investment securities available for sale | 1,914 | 2,490 | 3,951 | 5,053 | ||||||||||||
Investment securities held to maturity | 690 | 618 | 1,267 | 1,167 | ||||||||||||
Federal funds sold and overnight deposits | 14 | 37 | 29 | 111 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Interest Income | 15,442 | 18,148 | 31,287 | 36,847 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Interest Expense | ||||||||||||||||
Money market, NOW and savings deposits | 521 | 731 | 1,036 | 1,611 | ||||||||||||
Time deposits | 1,987 | 2,561 | 4,153 | 5,304 | ||||||||||||
Borrowings | 2,264 | 2,286 | 4,510 | 4,531 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Interest Expense | 4,772 | 5,578 | 9,699 | 11,446 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Interest Income | 10,670 | 12,570 | 21,588 | 25,401 | ||||||||||||
Provision for Loan Losses | 2,300 | 3,700 | 5,200 | 7,800 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Interest Income After Provision for Loan Losses | 8,370 | 8,870 | 16,388 | 17,601 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Non-Interest Income | ||||||||||||||||
Service charges and fees on deposit accounts | 1,363 | 1,581 | 2,725 | 3,069 | ||||||||||||
Income from mortgage banking activities | 324 | 291 | 629 | 554 | ||||||||||||
Investment brokerage and trust fees | 356 | 320 | 586 | 508 | ||||||||||||
Gain on sale of investment securities | 864 | 524 | 1,127 | 1,468 | ||||||||||||
SBIC income and management fees | 300 | 123 | 970 | 245 | ||||||||||||
Other | 691 | 695 | 1,293 | 593 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Non-Interest Income | 3,898 | 3,534 | 7,330 | 6,437 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Non-Interest Expense | ||||||||||||||||
Salaries and employee benefits | 4,647 | 4,568 | 9,333 | 9,314 | ||||||||||||
Occupancy and equipment | 1,662 | 1,860 | 3,302 | 3,644 | ||||||||||||
FDIC deposit insurance | 771 | 932 | 1,522 | 2,065 | ||||||||||||
Foreclosed asset related | 1,023 | 636 | 1,821 | 1,515 | ||||||||||||
Merger related expense | 673 | – | 673 | – | ||||||||||||
Other | 2,401 | 3,259 | 5,161 | 6,200 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Non-Interest Expense | 11,177 | 11,255 | 21,812 | 22,738 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income Before Income Taxes | 1,091 | 1,149 | 1,906 | 1,300 | ||||||||||||
Income Tax (Benefit) Expense | – | – | – | – | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Income | 1,091 | 1,149 | 1,906 | 1,300 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Effective Dividend on Preferred Stock | 645 | 638 | 1,290 | 1,277 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Income Available to Common Shareholders | $ | 446 | $ | 511 | $ | 616 | $ | 23 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Income Per Common Share | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.03 | $ | 0.04 | $ | – | ||||||||
Diluted | 0.03 | 0.03 | 0.04 | – | ||||||||||||
Weighted Average Common Shares Outstanding | ||||||||||||||||
Basic | 16,858,572 | 16,835,724 | 16,849,841 | 16,829,898 | ||||||||||||
Diluted | 16,934,115 | 16,906,810 | 16,921,561 | 16,897,702 |
See accompanying notes.
F-364
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income | $ | 1,091 | $ | 1,149 | $ | 1,906 | $ | 1,300 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss): | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Unrealized holding gains on available for sale securities | 2,296 | 3,387 | 3,280 | 2,798 | ||||||||||||
Tax effect | (885 | ) | (1,306 | ) | (1,264 | ) | (1,079 | ) | ||||||||
Reclassification of gains recognized in net income | (864 | ) | (524 | ) | (1,127 | ) | (1,468 | ) | ||||||||
Tax effect | 333 | 202 | 434 | 566 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net of tax amount | 880 | 1,759 | 1,323 | 817 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Cash flow hedging activities: | ||||||||||||||||
Unrealized holding (gains) losses on cash flow hedging activities | (850 | ) | (137 | ) | (903 | ) | (150 | ) | ||||||||
Tax effect | 328 | 52 | 349 | 57 | ||||||||||||
Reclassification of (gains) losses recognized in net income, net: | ||||||||||||||||
Reclassified into income | – | 75 | – | 534 | ||||||||||||
Tax effect | – | (28 | ) | – | (206 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net of tax amount | (522 | ) | (38 | ) | (554 | ) | 235 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total other comprehensive income | 358 | 1,721 | 769 | 1,052 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income | $ | 1,449 | $ | 2,870 | $ | 2,675 | $ | 2,352 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes.
F-365
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Preferred Stock | Common Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
(Amounts in thousands, except share data) | ||||||||||||||||||||||||||||
Balance at December 31, 2011 | 42,750 | $ | 41,870 | 16,827,075 | $ | 119,505 | $ | (64,425 | ) | $ | 685 | $ | 97,635 | |||||||||||||||
Net income | – | – | – | – | 1,906 | – | 1,906 | |||||||||||||||||||||
Other comprehensive income, net of tax | – | – | – | – | – | 769 | 769 | |||||||||||||||||||||
Stock options exercised including income tax benefit of $0 | – | – | 200 | – | – | – | – | |||||||||||||||||||||
Restricted stock issued | – | – | 27,500 | 26 | – | – | 26 | |||||||||||||||||||||
Stock-based compensation | – | – | – | 3 | – | – | 3 | |||||||||||||||||||||
Preferred stock accretion of discount | – | 221 | – | – | (221 | ) | – | – | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at June 30, 2012 | 42,750 | $ | 42,091 | 16,854,775 | $ | 119,534 | $ | (62,740 | ) | $ | 1,454 | $ | 100,339 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-366
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
(Amounts in thousands) | ||||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 1,906 | $ | 1,300 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 2,630 | 2,156 | ||||||
Provision for loan losses | 5,200 | 7,800 | ||||||
Net proceeds from sales of loans held for sale | 28,173 | 29,164 | ||||||
Originations of loans held for sale | (27,117 | ) | (24,243 | ) | ||||
Gain from mortgage banking | (629 | ) | (554 | ) | ||||
Stock-based compensation | 29 | 47 | ||||||
Net increase in cash surrender value of life insurance | (511 | ) | (542 | ) | ||||
Realized gain on sale of available for sale securities, net | (1,127 | ) | (1,468 | ) | ||||
Realized loss on sale of premises and equipment | 4 | – | ||||||
(Gain) loss on economic hedges | (263 | ) | 424 | |||||
Deferred income taxes | (830 | ) | – | |||||
Realized gain on sales of foreclosed assets | (258 | ) | (490 | ) | ||||
Writedowns in carrying values of foreclosed assets | 1,291 | 912 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in other assets | 4,583 | 4,543 | ||||||
Increase in other liabilities | 3,085 | 1,126 | ||||||
|
|
|
| |||||
Total Adjustments | 14,260 | 18,875 | ||||||
|
|
|
| |||||
Net Cash Provided by (Used in) Operating Activities | 16,166 | 20,175 | ||||||
|
|
|
| |||||
Cash Flows from Investing Activities | ||||||||
(Increase) decrease in federal funds sold | (78,586 | ) | 3,207 | |||||
Purchase of: | ||||||||
Available-for-sale investment securities | (82,304 | ) | (136,116 | ) | ||||
Held-to-maturity investment securities | (8,552 | ) | (7,829 | ) | ||||
Proceeds from maturities and calls of: | ||||||||
Available-for-sale investment securities | 22,437 | 16,825 | ||||||
Held-to-maturity investment securities | 2,070 | 724 | ||||||
Proceeds from sale of: | ||||||||
Available-for-sale investment securities | 162,182 | 124,052 | ||||||
Proceeds from sales of Federal Home Loan Bank stock | 885 | 871 | ||||||
Net decrease in loans | 21,740 | 68,917 | ||||||
Capitalized cost in foreclosed assets | (55 | ) | (230 | ) | ||||
Purchases of premises and equipment | (526 | ) | (270 | ) | ||||
Proceeds from disposal of premises and equipment | 10 | – | ||||||
Proceeds from sales of foreclosed assets | 7,241 | 7,041 | ||||||
|
|
|
| |||||
Net Cash Provided by (Used in) Investing Activities | 46,542 | 77,192 | ||||||
|
|
|
| |||||
Cash Flows from Financing Activities | ||||||||
Net increase (decrease) in transaction accounts and savings accounts | 22,283 | (75,125 | ) | |||||
Net decrease in time deposits | (78,754 | ) | (25,406 | ) | ||||
Net decrease in short-term borrowings | (4,361 | ) | (14,745 | ) | ||||
Proceeds from long-term borrowings | – | 20,000 | ||||||
Repayment of long-term borrowings | (88 | ) | (85 | ) | ||||
|
|
|
| |||||
Net Cash Provided by (Used in) Financing Activities | (60,920 | ) | (95,361 | ) | ||||
|
|
|
| |||||
Net Increase (Decrease) in Cash and Due From Banks | 1,788 | 2,006 | ||||||
Cash and Due From Banks, Beginning of Period | 23,356 | 16,584 | ||||||
|
|
|
| |||||
Cash and Due From Banks, End of Period | $ | 25,144 | $ | 18,590 | ||||
|
|
|
| |||||
Supplemental Cash Flow Information: | ||||||||
Transfer of loans to foreclosed assets | $ | 8,280 | $ | 12,941 | ||||
|
|
|
|
See accompanying notes.
F-367
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 1 – Basis of Presentation
The consolidated financial statements include the accounts of Southern Community Financial Corporation (the “Company”), and its wholly-owned subsidiary, Southern Community Bank and Trust (the “Bank”). All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month and six-month periods ended June 30, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.
The preparation of the consolidated financial statements and accompanying notes requires management of the Company to make estimates and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from those estimates and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. To a lesser extent, significant estimates are also associated with the valuation of securities, intangibles and derivative instruments and determination of stock-based compensation and income tax assets or liabilities. Operating results for the three-month and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.
The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2011 annual report on Form 10-K. This quarterly report should be read in conjunction with the annual report.
Per Share Data
Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period. Diluted net income per share reflects the potential dilution that could occur if stock options or warrants were exercised, resulting in the issuance of common stock that then shared in the net income of the Company.
Basic and diluted net income per share have been computed based upon the weighted average number of common shares outstanding or assumed to be outstanding as summarized below.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Weighted average number of common shares used in computing basic net income per share | 16,858,572 | 16,835,724 | 16,849,841 | 16,829,898 | ||||||||||||
Effect of dilutive stock options | 75,543 | 71,086 | 71,720 | 67,804 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share | 16,934,115 | 16,906,810 | 16,921,561 | 16,897,702 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income available to common shareholders (in thousands) | $ | 446 | $ | 511 | $ | 616 | $ | 23 | ||||||||
Basic | 0.03 | 0.03 | 0.04 | – | ||||||||||||
Diluted | 0.03 | 0.03 | 0.04 | – |
F-368
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 1 – Basis of Presentation (continued)
For the three months ended June 30, 2012 and 2011, net income for determining net income per common share was reported as net income less the dividend on preferred stock. Options and warrants to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive (the exercise price is higher than the current market price) amount to 485,950 and 597,452 shares for the three months ended June 30, 2012 and 2011, respectively, and 485,950 and 597,452 shares for the six months ended June 30, 2012 and 2011, respectively. These options, warrants, unvested shares of restricted stock and all other common stock equivalents were excluded from the determination of diluted earnings per share for the three months ended June 30, 2012 since the exercise price exceeded the average market price for the period.
Recently issued accounting pronouncements
In May 2011, the FASB has issued Accounting Standards Update No. 2011-04, Fair Value Measurement. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for accounting principles generally accepted in the U.S. (GAAP) and international financial reporting standards (IFRS). The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company adopted this statement during the quarter ended March 31, 2012, which resulted in additional disclosures related to fair value in Notes 11 and 12.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements and SEC Staff Accounting Bulletins on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
Note 2 – Acquisition Agreement with Capital Bank Financial Corp.
On March 26, 2012, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Capital Bank Financial Corp. (“CBF”) and Winston 23 Corporation (“Winston”), a wholly-owned subsidiary of CBF, pursuant to which Southern Community Financial Corporation (“Southern Community”) will merge with Winston and become a wholly-owned subsidiary of CBF (the “Merger”). The Agreement and the transactions contemplated by it has been approved by the Board of Directors of both CBF and Southern Community.
Capital Bank Financial Corp. is a national bank holding company that was incorporated in the State of Delaware in 2009. CBF has raised approximately $900 million of equity capital with the goal of creating a regional banking franchise in the southeastern region of the United States. CBF has previously invested in First National of the South, Metro Bank of Dade Country, Turnberry Bank, TIB Financial Corporation, Capital Bank Corporation and Green Bankshares, Inc. CBF is the parent of Capital Bank, N.A., a national banking association with approximately $6.5 billion in total assets and 143 full-service banking offices throughout southern Florida and the Florida Keys, North Carolina, South Carolina, Tennessee and Virginia. CBF is also the parent company of Naples Capital Advisors, Inc., a registered investment advisor.
Subject to the terms and conditions set forth in the Agreement dated March 26, 2012 and as amended on June 25, 2012, each share of Southern Community Common Stock issued and outstanding at the effective time of the Merger will be converted into the right to receive $3.11 in cash, without interest and less any applicable withholding taxes.
F-369
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 2 – Acquisition Agreement with Capital Bank Financial Corp. (continued)
Each outstanding option to purchase shares of Southern Community common stock will be vested prior to the Merger and be paid in cash equal to the difference between the exercise price of the option and $3.11 and each share of Southern Community restricted stock will vest immediately prior to the Merger and all restrictions will immediately lapse.
Southern Community shareholders will also be granted one non-transferable contingent value right (“CVR”) per share, with each CVR eligible to receive a cash payment equal to 75% of the excess, if any, of (i) $87 million over (ii) net charge-offs and net realized losses on Southern Community’s legacy loan portfolio and foreclosed assets for a period of five years from the closing date of the Merger, with a maximum payment of $1.30 per CVR. Payout of the CVR will be overseen by a special committee of the CBF Board. Southern Community shareholders may also receive an additional cash payment based on the terms of a potential repurchase by CBF of the securities issued by Southern Community to the United States Department of the Treasury.
Upon the closing of the Merger, Dr. William G. Ward, Sr., the Chairman of Southern Community’s Board of Directors, will join the Board of Directors of both CBF and its subsidiary bank (“Capital Bank”), and James G. Chrysson, the Vice Chairman of the Board of Southern Community, will join the Board of Capital Bank.
The obligations of Southern Community and CBF to consummate the merger are subject to certain conditions, including: (i) approval of the Merger by the shareholders of Southern Community; (ii) receipt of required regulatory approvals (and in CBF’s case, without the imposition of an unduly burdensome regulatory condition); (iii) the absence of any injunction or similar restraint enjoining or making illegal consummation of the Merger or any of the other transactions contemplated by the Agreement; (iv) the continuing material truth and accuracy of representations and warranties made by the parties in the Agreement; and (vi) the performance in all material respects by each of the parties of its covenants under the Agreement. Some of these conditions may be waived by the party for whose benefit they were included in the Agreement. CBF’s obligation to close is subject to certain additional conditions, including the absence of a material adverse effect on Southern Community and the amendment or waiver of certain of Southern Community’s compensation-related agreements.
The Agreement may be terminated, before or after receipt of shareholder approval, in certain circumstances, including: (i) upon the mutual consent of the parties; (ii) failure to obtain any required regulatory approval; (iii) by either party if the Merger is not consummated on or before September 26, 2012 if such failure is not caused by material breach of the Agreement; (iv) by either party if there is a material breach of the other party’s representations, warranties, or covenants, and the breach or change that is not cured within 30 days following notice by the complaining party to the complaining party’s reasonable satisfaction; (v) by CBF if Southern Community’s Board fails to recommend that shareholders approve the Agreement and the Merger, changes such recommendation or breaches certain non-solicitation covenants with respect to third party proposals; or (vi) by either party if the shareholders of Southern Community fail to approve the Agreement.
Under certain circumstances, Southern Community will be obligated to pay CBF a termination fee of $4 million and reimburse CBF up to $1 million for all expenses incurred by it in connection with the Agreement and the transactions contemplated thereby.
On July 25, 2012, the Board terminated the employment of Messrs. Bauer and Clark effective September 22, 2012. Their employment agreements, which have now been terminated, contained change in control provisions that provided for a lump sum payment equal to three times the sum of the applicable officer’s base salary for the year of the change in control and the incentive compensation paid in the year prior to the change in control. As previously disclosed in Southern Community’s Form 10-K/A, Amendment No. 1 for the year ended December 31, 2011, the
F-370
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 2 – Acquisition Agreement with Capital Bank Financial Corp. (continued)
following would have been the estimated cost to the Company in the event of a change in control as of January 1, 2012, pursuant to the employment agreements and Salary Continuation Agreements and assuming that the Treasury’s investment in Southern Community was repaid in full, the Company was no longer under regulatory restrictions and not taking into account the amendments contemplated by the merger agreement. On behalf of Messrs. Bauer and Clark, the estimated cost to the Company would have been approximately $2,622,297 and $1,366,220, respectively. As a condition to the closing of the merger, both the amounts and the terms of potential change in control payments under the employment agreements with Messrs. Bauer and Clark were required to be amended. Since neither officer will be an employee of Southern Community at the time of the merger, amendments to their employment agreements will not be required to consummate the merger.
Note 3 – Investment Securities
The following is a summary of the securities portfolio by major classification at the dates presented.
June 30, 2012 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US Government agencies | $ | 19,681 | $ | 34 | $ | — | $ | 19,715 | ||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 155,698 | 2,406 | 66 | 158,038 | ||||||||||||
Collateralized mortgage obligations | 26,895 | 392 | 594 | 26,693 | ||||||||||||
Small Business Administration loan pools | 13,515 | 430 | 7 | 13,938 | ||||||||||||
Student loan pools | 8,538 | — | 62 | 8,476 | ||||||||||||
Municipals | 25,142 | 2,644 | — | 27,786 | ||||||||||||
Trust preferred securities | 3,250 | — | 695 | 2,555 | ||||||||||||
Corporate bonds | 4,213 | — | 469 | 3,744 | ||||||||||||
Other | 1,000 | — | 1 | 999 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 257,932 | $ | 5,906 | $ | 1,894 | $ | 261,944 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | $ | 389 | $ | 26 | $ | — | $ | 415 | ||||||||
Small Business Administration loan pools | 4,655 | 316 | — | 4,971 | ||||||||||||
Municipals | 31,452 | 2,833 | 24 | 34,261 | ||||||||||||
Trust preferred securities | 8,726 | — | 361 | 8,365 | ||||||||||||
Corporate bonds | 5,787 | — | 741 | 5,046 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
$ | 51,009 | $ | 3,175 | $ | 1,126 | $ | 53,058 | |||||||||
|
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|
F-371
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 3 – Investment Securities (continued)
December 31, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US Government agencies | $ | 34,660 | $ | 69 | $ | — | $ | 34,729 | ||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 185,838 | 1,713 | 245 | 187,306 | ||||||||||||
Collateralized mortgage obligations | 28,089 | 450 | 1,447 | 27,092 | ||||||||||||
Small Business Administration loan pools | 67,507 | 637 | 76 | 68,068 | ||||||||||||
Student loan pools | 8,903 | — | 1 | 8,902 | ||||||||||||
Municipals | 26,981 | 2,239 | — | 29,220 | ||||||||||||
Trust preferred securities | 3,250 | — | 929 | 2,321 | ||||||||||||
Corporate Bonds | 4,213 | — | 554 | 3,659 | ||||||||||||
Other | 1,000 | 1 | — | 1,001 | ||||||||||||
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|
|
|
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|
|
| |||||||||
$ | 360,441 | $ | 5,109 | $ | 3,252 | $ | 362,298 | |||||||||
|
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|
| |||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | $ | 474 | $ | 34 | $ | — | $ | 508 | ||||||||
Small Business Administration loan pools | 4,928 | 230 | — | 5,158 | ||||||||||||
Municipals | 33,214 | 1,904 | 1 | 35,117 | ||||||||||||
Corporate bonds | 5,787 | — | 1,056 | 4,731 | ||||||||||||
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| |||||||||
$ | 44,403 | $ | 2,168 | $ | 1,057 | $ | 45,514 | |||||||||
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|
|
Residential mortgage-backed securities and collateralized mortgage obligations are primarily government sponsored (GSE) agency issued whose underlying collateral are prime residential mortgage loans. The Company’s municipal securities are composed of geographic concentrations of 97.3% North Carolina, 1.7% of Texas independent school districts and less than 1.0% in other states. As the Company’s investment policy limits the purchase of municipal securities to “A” rated or better, the municipal investment portfolio segment has 98.3% of this portfolio rated “A” or better.
For the second quarter 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $864 thousand and $926 thousand, respectively, and realized losses of none and $402 thousand, respectively for each period. These investment sales generated $100.2 million and $72.4 million in proceeds during these respective periods. For the six months ended June 30, 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $1.2 million and $2.2 million, respectively, and realized losses of $38 thousand and $730 thousand, respectively, for each period. These investment sales generated $162.2 million and $124.1 million in proceeds during these respective periods.
F-372
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 3 – Investment Securities (continued)
The following table shows the gross unrealized losses and fair values for our investments and length of time that the individual securities have been in a continuous unrealized loss position.
June 30, 2012 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 18,036 | $ | 66 | $ | – | $ | – | $ | 18,036 | $ | 66 | ||||||||||||
Collateralized mortgage obligations | 1,506 | 128 | 5,602 | 466 | 7,108 | 594 | ||||||||||||||||||
Small Business Administration loan pools | 2,544 | 5 | 993 | 2 | 3,537 | 7 | ||||||||||||||||||
Student loan pools | 8,477 | 62 | – | – | 8,477 | 62 | ||||||||||||||||||
Trust preferred securities | – | – | 2,553 | 695 | 2,553 | 695 | ||||||||||||||||||
Corporate bonds | – | – | 3,744 | 469 | 3,744 | 469 | ||||||||||||||||||
Other | 1,000 | 1 | – | – | 1,000 | 1 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired securities | $ | 31,563 | $ | 262 | $ | 12,892 | $ | 1,632 | $ | 44,455 | $ | 1,894 | ||||||||||||
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| |||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Municipals | $ | 942 | $ | 24 | $ | – | $ | – | $ | 942 | $ | 24 | ||||||||||||
Trust preferred securities | 8,365 | 361 | – | – | 8,365 | 361 | ||||||||||||||||||
Corporate bonds | – | – | 5,046 | 741 | 5,046 | 741 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired securities | $ | 9,307 | $ | 385 | $ | 5,046 | $ | 741 | $ | 14,353 | $ | 1,126 | ||||||||||||
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December 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||||||||
(Amount in thousands) | ||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 54,446 | $ | 245 | $ | – | $ | – | $ | 54,446 | $ | 245 | ||||||||||||
Collateralized mortgage obligations | 12,248 | 1,447 | – | – | 12,248 | 1,447 | ||||||||||||||||||
Small Business Administration loan pools | 12,309 | 74 | 686 | 2 | 12,995 | 76 | ||||||||||||||||||
Student loan pools | 8,902 | 1 | – | – | 8,902 | 1 | ||||||||||||||||||
Municipals | 6 | – | – | – | 6 | – | ||||||||||||||||||
Trust preferred securities | – | – | 2,321 | 929 | 2,321 | 929 | ||||||||||||||||||
Corporate bonds | – | – | 3,659 | 554 | 3,659 | 554 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired securities | $ | 87,911 | $ | 1,767 | $ | 6,666 | $ | 1,485 | $ | 94,577 | $ | 3,252 | ||||||||||||
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| |||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Municipals | $ | – | $ | – | $ | 967 | $ | 1 | $ | 967 | $ | 1 | ||||||||||||
Corporate bonds | – | – | 4,731 | 1,056 | 4,731 | 1,056 | ||||||||||||||||||
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| |||||||||||||
Total temporarily impaired Securities | $ | – | $ | – | $ | 5,698 | $ | 1,057 | $ | 5,698 | $ | 1,057 | ||||||||||||
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F-373
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 3 – Investment Securities (continued)
In evaluating investment securities for “other-than-temporary impairment” losses, management considers, among other things, (i) the length of time and the extent to which the investment is in an unrealized loss position, (ii) the financial condition and near term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a sufficient period of time to allow for any anticipated recovery of unrealized loss. At June 30, 2012, there were six investment securities with aggregate fair values of $17.9 million in an unrealized loss position for at least twelve months including one trust preferred security valued at $2.6 million with a $695 thousand unrealized loss due to changes in the level of market interest rates. The security has a variable rate based on LIBOR which had declined steadily throughout 2009 and has stabilized during 2010, 2011 and the first six months of 2012. The fair value of this security increased from the prior quarter and the unrealized loss remained significant. Based on the nature of these securities and the continued timely receipt of scheduled payments, we believe the decline in value to be solely due to changes in interest rates and the general economic conditions and not deterioration in their credit quality. We have the intention and ability to hold these securities for a period of time sufficient to allow for their recovery in value or until maturity. The unrealized losses on the securities available for sale are reflected in other comprehensive income.
The amortized cost and fair values of securities available for sale and held to maturity at June 30, 2012 by contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation.
Securities Available for Sale | Securities Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(Amount in thousands) | ||||||||||||||||
US Government Agencies | ||||||||||||||||
Due after one but through five years | $ | 1,000 | $ | 1,001 | $ | – | $ | – | ||||||||
Due after ten years | 18,681 | 18,713 | – | – | ||||||||||||
Municipals | ||||||||||||||||
Due within one year | 103 | 103 | – | – | ||||||||||||
Due after one but through five years | 444 | 445 | 1,318 | 1,398 | ||||||||||||
Due after five but through ten years | 684 | 717 | 3,825 | 4,184 | ||||||||||||
Due after ten years | 23,911 | 26,521 | 26,309 | 28,679 | ||||||||||||
Trust preferred securities | ||||||||||||||||
Due after ten years | 3,250 | 2,555 | 8,726 | 8,365 | ||||||||||||
Corporate bonds | ||||||||||||||||
Due after five but through ten years | 4,213 | 3,744 | 5,787 | 5,046 | ||||||||||||
Other | ||||||||||||||||
Due after five but through ten years | 1,000 | 999 | – | – | ||||||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 155,698 | 158,038 | 389 | 415 | ||||||||||||
Collateralized mortgage obligations | 26,895 | 26,693 | – | – | ||||||||||||
Small Business Administration loan pools | 13,515 | 13,938 | 4,655 | 4,971 | ||||||||||||
Student loan pools | 8,538 | 8,477 | – | – | ||||||||||||
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|
|
|
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|
| |||||||||
$ | 257,932 | $ | 261,944 | $ | 51,009 | $ | 53,058 | |||||||||
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F-374
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 3 – Investment Securities (continued)
Federal Home Loan Bank Stock
As disclosed separately on our statements of financial condition, the Company has an investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock of $6.0 million and $6.8 million at June 30, 2012 and December 31, 2011 respectively. The Company carries its investment in FHLB at its cost which is the par value of the stock. Based on current borrowings, the FHLB periodically repurchases excess stock from the Company at par value as the stock is not actively traded and does not have a quoted market price. After briefly suspending the payment of dividends, the FHLB paid a quarterly cash dividend to its members for the second quarter of 2009 and each quarter following including the most recent quarter. Management believes that the investment in FHLB stock was not impaired as of June 30, 2012.
Note 4 – Loans
Following is a summary of loans by loan class:
At June 30, 2012 | At December 31, 2011 | |||||||||||||||
Percent | Percent | |||||||||||||||
Amount | of Total | Amount | of Total | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Commercial real estate | $ | 372,739 | 40.8 | % | $ | 387,275 | 40.8 | % | ||||||||
Commercial | ||||||||||||||||
Commercial and industrial | 82,816 | 9.1 | % | 85,321 | 9.0 | % | ||||||||||
Commercial line of credit | 48,008 | 5.3 | % | 44,574 | 4.7 | % | ||||||||||
Residential real estate | ||||||||||||||||
Residential construction | 104,927 | 11.5 | % | 101,945 | 10.7 | % | ||||||||||
Residential lots | 39,607 | 4.3 | % | 45,164 | 4.8 | % | ||||||||||
Raw land | 15,158 | 1.7 | % | 17,488 | 1.8 | % | ||||||||||
Home equity lines | 91,900 | 10.1 | % | 95,136 | 10.0 | % | ||||||||||
Consumer | 158,436 | 17.4 | % | 173,119 | 18.2 | % | ||||||||||
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|
|
|
|
|
|
| |||||||||
Subtotal | $ | 913,591 | 100 | % | $ | 950,022 | 100 | % | ||||||||
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|
|
| |||||||||||||
Less: Allowance for loan losses | (22,954 | ) | (24,165 | ) | ||||||||||||
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|
|
| |||||||||||||
Net Loans | $ | 890,637 | $ | 925,857 | ||||||||||||
|
|
|
|
Construction loans are non-revolving extensions of credit secured by real property, the proceeds of which will be used to a) finance the preparation of land for construction of industrial, commercial, residential, or farm buildings; or b) finance the on-site construction of such buildings. Construction loans are approved based on a set of projections regarding cost, time to completion, time to stabilization or sale, and availability of permanent financing. Any one of these projections may vary from actual results. Therefore, construction loans are considered based not only on the expected merits of the project itself, but also on secondary and tertiary repayment sources of the project sponsor, project sponsor expertise and experience and independent evaluation of project viability. Personal guarantees are typically required. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections to ensure that loan commitments remain in-balance with work completed to date and that adequate funds remain available to ensure completion.
Commercial real estate loans are underwritten by evaluating and understanding the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. These loans are viewed primarily as
F-375
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan amounts relative to equity sources of capitalization and higher debt service requirements relative to available cash flow. This heightened degree of financial and operating leverage can expose commercial real estate loans to increased sensitivity to changes in market and economic conditions. Repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Management monitors and evaluates commercial real estate loans based on collateral, geography, and secondary/tertiary sources of repayment of the property sponsors. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Loans secured by owner-occupied properties are generally considered to be less sensitive to real estate market conditions, since the profitability and cash flow of the occupying business are aligned via common ownership.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Underwriting processes include thorough examination of the borrower’s market, operating environment, and business model, to assess whether current and projected cash flows can reasonably be expected to present an acceptable source of repayment. Such repayments are generally sensitized with variances of growth/decline, profitability, and operating cycle changes. Secondary repayment sources, including collateral, are assessed. The level of control and monitoring over such secondary repayment sources may be impacted by the strength of the primary repayment source and the financial position of the borrower.
Residential lot loans are extensions of credit secured by developed tracts of land with appropriate entitlements to support construction of single family or multifamily residential buildings. Such loans were historically structured as time or term loans to finance the holding of the lot for future construction. Because the property is neither generating current income nor providing shelter, these loans have proven to be subject to a higher-than-average risk of abandonment. Extensions of credit for acquisition of finished lots are generally assessed based on the outside repayment sources readily available to the borrower in the current underwriting for such loans.
Consumer loans are originated utilizing a centralized approval process staffed by experienced consumer loan administration personnel. Policies and procedures are developed and maintained to ensure compliance with the Company’s risk management objectives and regulatory compliance requirements. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a periodic basis, along with periodic review activity of particular regions and individual lenders. Loans are concentrated in home equity lines of credit and term loans secured by first or second liens on owner-occupied residential real estate.
Home Equity loans are consumer-purpose revolving or term loans secured by 1st or 2nd liens on owner-occupied residential real estate. Such loans are underwritten and approved on the same centralized basis as other consumer loans. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established tolerances. The degree of utilization of revolving commitments within this asset class is reviewed monthly to identify changes in the behavior of this borrowing group.
Commercial lines of credit are underwritten according to the same standards applied to other commercial and industrial loans; with particular focus on the cash flow impact of the borrower’s operating cycle. Based on the risk profile of each borrower, an appropriate level of monitoring and servicing can be applied, such that higher risk categories involve more frequent monitoring and more involved control over the cash proceeds of asset conversion. Lower risk profiles may involve less restrictive controls and lighter servicing intensity.
F-376
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
Raw land loans are those secured by tracts of undeveloped raw land held for personal use or investment. Such properties are expected to be held for a period of not less than twenty-four months with no active development plan. Given the raw nature of the land, these loans are underwritten based on the ability of the borrower to service the indebtedness with sources of income unrelated to the property. Higher cash down payment and lower loan-to-value expectations are applied to such loans.
Loan origination fees and certain direct origination are capitalized and recognized as an adjustment to yield over the life of the related loan. Net unamortized deferred fees less related cost included in the above were $123 thousand at June 30, 2012 and $136 thousand at December 31, 2011.
Loans are placed in a nonaccrual status for all classes of loans when, in management’s opinion, the borrower may be unable to meet payments as they become due or payments are 90 days past due. Loans are returned to an accrual status when the borrower makes timely principal and interest payments for a period of at least six months and has demonstrated the ability to continue making scheduled payments until the loan is repaid in full.
The following is a summary of nonperforming assets at the periods presented:
June 30, 2012 | December 31, 2011 | June 30, 2011 | ||||||||||
(Amounts in thousands) | ||||||||||||
Nonaccrual loans | $ | 34,443 | $ | 38,715 | $ | 45,381 | ||||||
Restructured loans—nonaccruing | 20,669 | 29,333 | 21,422 | |||||||||
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|
| |||||||
Total nonperforming loans | 55,112 | 68,048 | 66,803 | |||||||||
Foreclosed assets | 19,873 | 19,812 | 23,022 | |||||||||
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| |||||||
Total nonperforming assets | $ | 74,985 | $ | 87,860 | $ | 89,825 | ||||||
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| |||||||
Restructured loans in accrual status not included above | $ | 24,107 | $ | 24,202 | $ | 15,471 | ||||||
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|
For loan modifications and in particular, troubled debt restructurings (TDRs), the Company generally utilizes its own loan modification programs whereby the borrower is provided one or more of the following concessions: interest rate reduction, extension of payment terms, forgiveness of principal or other modifications. The primary factor in the pre-modification evaluation of a troubled debt restructuring is whether such an action will increase the likelihood of achieving a better result in terms of collecting the amount owed to the Bank.
As illustrated in the table below, during the three months ended June 30, 2012, the following concessions were made on 11 loans for $3.4 million (measured as a percentage of loan balances on TDRs):
• | Reduced interest rate for 58% (2 loans for $2.0 million); |
• | Extension of payment terms for 29% (8 loans for $984 thousand); and |
• | Forgiveness of principal for 13% (1 loan for $435 thousand). |
During the six months ended June 30, 2012, the following concessions were made on 16 loans for $5.2 million (measured as a percentage of loan balances on TDRs):
• | Reduced interest rate for 40% (3 loans for $2.0 million); |
• | Extension of payment terms for 50% (11 loans for $2.6 million); and |
• | Forgiveness of principal for 10% (2 loans for $531 thousand). |
In cases where there was more than one concession granted, the modification was classified by the more dominant concession.
F-377
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following table presents a breakdown of the types of concessions made by loan class for the three and six months ended June 30, 2012.
Three months ended June 30, 2012 | Six months ended June 30, 2012 | |||||||||||||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
Below market interest rate | ||||||||||||||||||||||||
Commercial real estate | 1 | $ | 1,957 | $ | 1,957 | 1 | $ | 1,957 | $ | 1,957 | ||||||||||||||
Commercial and industrial | – | – | – | – | – | – | ||||||||||||||||||
Commercial line of credit | – | – | – | – | – | |||||||||||||||||||
Residential construction | – | – | – | – | – | – | ||||||||||||||||||
Home equity lines | 1 | 46 | 46 | 1 | 46 | 46 | ||||||||||||||||||
Residential lots | – | – | – | – | – | – | ||||||||||||||||||
Raw land | – | – | – | – | – | – | ||||||||||||||||||
Consumer | – | – | – | 1 | 42 | 42 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 2 | 2,003 | 2,003 | 3 | 2,045 | 2,045 | ||||||||||||||||||
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| |||||||||||||
Extended payment terms | ||||||||||||||||||||||||
Commercial real estate | 2 | 414 | 414 | 2 | 414 | 414 | ||||||||||||||||||
Commercial and industrial | 1 | 30 | 30 | 3 | 737 | 737 | ||||||||||||||||||
Commercial line of credit | 1 | 74 | 74 | 1 | 74 | 74 | ||||||||||||||||||
Residential construction | – | – | – | 1 | 902 | 902 | ||||||||||||||||||
Home equity lines | – | – | – | – | – | – | ||||||||||||||||||
Residential lots | 1 | 349 | 349 | 1 | 349 | 349 | ||||||||||||||||||
Raw land | – | – | – | – | – | – | ||||||||||||||||||
Consumer | 3 | 117 | 117 | 3 | 117 | 117 | ||||||||||||||||||
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|
|
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|
|
|
|
|
| |||||||||||||
Total | 8 | 984 | 984 | 11 | 2,593 | 2,593 | ||||||||||||||||||
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| |||||||||||||
Forgiveness of principal | ||||||||||||||||||||||||
Commercial real estate | – | – | – | – | – | – | ||||||||||||||||||
Commercial and industrial | – | – | – | – | – | – | ||||||||||||||||||
Commercial line of credit | – | – | – | – | – | – | ||||||||||||||||||
Residential construction | 1 | 435 | 345 | 1 | 435 | 345 | ||||||||||||||||||
Home equity lines | – | – | – | – | – | – | ||||||||||||||||||
Residential lots | – | – | – | – | – | – | ||||||||||||||||||
Raw land | – | – | – | – | – | – | ||||||||||||||||||
Consumer | – | – | – | 1 | 96 | 27 | ||||||||||||||||||
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| |||||||||||||
Total | 1 | 435 | 345 | 2 | 531 | 372 | ||||||||||||||||||
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|
| |||||||||||||
Total | 11 | $ | 3,422 | $ | 3,332 | 16 | $ | 5,169 | $ | 5,010 | ||||||||||||||
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F-378
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
During the previous twelve months ended June 30, 2012, the Company modified 86 loans in the amount of $36.9 million. Of this total, there were payment defaults (where the modified loan was past due thirty days or more) of $198 thousand, or 0.5%, and $617 thousand, or 1.7%, respectively, during the three and six months ended June 30, 2012.
The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default (past due 30 days or more) during the three and six months ended June 30, 2012.
Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 | |||||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||
Below market interest rate | ||||||||||||||||
Commercial real estate | – | $ | – | – | $ | – | ||||||||||
Commercial and industrial | – | – | – | – | ||||||||||||
Commercial line of credit | – | – | – | – | ||||||||||||
Residential construction | – | – | – | – | ||||||||||||
Home equity lines | – | – | – | – | ||||||||||||
Residential lots | – | – | 1 | 10 | ||||||||||||
Raw land | – | – | – | – | ||||||||||||
Consumer | – | – | – | – | ||||||||||||
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|
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|
| |||||||||
Total | – | – | 1 | 10 | ||||||||||||
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|
| |||||||||
Extended payment terms | ||||||||||||||||
Commercial real estate | 1 | 22 | 2 | 158 | ||||||||||||
Commercial and industrial | 1 | 4 | 1 | 4 | ||||||||||||
Commercial line of credit | – | – | – | – | ||||||||||||
Residential construction | 1 | 46 | 1 | 46 | ||||||||||||
Home equity lines | – | – | – | – | ||||||||||||
Residential lots | 1 | 43 | 1 | 43 | ||||||||||||
Raw land | – | – | – | – | ||||||||||||
Consumer | 2 | 83 | 3 | 356 | ||||||||||||
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|
| |||||||||
Total | 6 | 198 | 8 | 607 | ||||||||||||
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| |||||||||
Forgiveness of principal | ||||||||||||||||
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| |||||||||
Total | – | – | – | – | ||||||||||||
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|
|
| |||||||||
Total | 6 | $ | 198 | 9 | $ | 617 | ||||||||||
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|
|
Of the total of 86 loans for $36.9 million which were modified during the twelve months ended June 30, 2012, the following represents their success or failure for the twelve months ended June 30, 2012:
• | 89.5% are paying as restructured; |
• | 0.3% have been reclassified to nonaccrual; |
• | 5.3% have defaulted and/or foreclosed upon; and |
• | 4.9% has paid in full. |
F-379
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following table presents the successes and failures of the types of modifications within the previous 12 months as of June 30, 2012.
Paid in full | Paying as restructured | Converted to non-accrual | Foreclosure/Default | |||||||||||||||||||||||||||||
Amounts in $ thousands | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | ||||||||||||||||||||||||
Below market interest rate | 1 | $ | 1,500 | 22 | $ | 16,465 | 2 | $ | 94 | – | $ | – | ||||||||||||||||||||
Extended payment terms | 1 | 292 | 49 | 13,670 | 1 | 30 | 5 | 1,969 | ||||||||||||||||||||||||
Forgiveness of principal | – | – | 3 | 1,763 | – | – | – | – | ||||||||||||||||||||||||
Other | – | – | 2 | 1,142 | – | – | – | – | ||||||||||||||||||||||||
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| |||||||||||||||||
Total | 2 | $ | 1,792 | 76 | $ | 33,040 | 3 | $ | 124 | 5 | $ | 1,969 | ||||||||||||||||||||
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The following is a summary of the recorded investment in nonaccrual loans and impaired loans segregated by class of loans at the periods presented:
June 30, 2012 | December 31, 2011 | |||||||||||||||
Nonaccrual Loans | Impaired Loans | Nonaccrual Loans | Impaired Loans | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Commercial real estate | $ | 17,429 | $ | 33,137 | $ | 26,484 | $ | 39,297 | ||||||||
Commercial and industrial | 2,799 | 3,901 | 3,548 | 3,899 | ||||||||||||
Commercial line of credit | 1,429 | 1,337 | 1,429 | 1,004 | ||||||||||||
Residential construction | 12,921 | 16,071 | 11,491 | 16,619 | ||||||||||||
Home equity lines | 2,093 | 1,410 | 2,637 | 1,955 | ||||||||||||
Residential lots | 10,056 | 10,076 | 12,096 | 12,095 | ||||||||||||
Raw land | 241 | 114 | 1,484 | 1,484 | ||||||||||||
Consumer | 8,144 | 8,796 | 8,879 | 10,753 | ||||||||||||
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| |||||||||
Total | $ | 55,112 | $ | 74,842 | $ | 68,048 | $ | 87,106 | ||||||||
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The Company evaluates “impaired” loans, which includes nonperforming loans and accruing troubled debt restructured loans, having risk characteristics that are unique to an individual borrower on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance is calculated based on the credit grade utilizing historical loss experience and other qualitative factors. Included in the table below, $52.4 million out of the total of $55.1 million of nonperforming loans and $22.4 million out of the total of $24.1 million of accruing troubled debt restructured loans were individually evaluated which required a specific allowance of $1.2 million and $526 thousand, respectively, for a total specific ALLL of $1.7 million. The impaired loans with smaller balances ($2.7 million in nonperforming loans and $1.7 million in accruing troubled debt restructured loans) were collectively evaluated for impairment.
F-380
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following is a summary of loans individually or collectively evaluated for impairment, by segment, at June 30, 2012:
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Ending balance: nonperforming loans individually evaluated for impairment | $ | 15,983 | $ | 3,655 | $ | 25,093 | $ | 1,410 | $ | 6,254 | $ | 52,395 | ||||||||||||
Accruing troubled debt restructured loans individually evaluated for impairment | 17,154 | 1,583 | 1,168 | – | 2,542 | 22,447 | ||||||||||||||||||
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Ending balance: total impaired loans individually evaluated for impairment | 33,137 | 5,238 | 26,261 | 1,410 | 8,796 | 74,842 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | 339,602 | 125,586 | 133,431 | 90,490 | 149,640 | 838,749 | ||||||||||||||||||
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| |||||||||||||
Ending Balance | $ | 372,739 | $ | 130,824 | $ | 159,692 | $ | 91,900 | $ | 158,436 | $ | 913,591 | ||||||||||||
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The following is a summary of loans individually or collectively evaluated for impairment, by segment, at December 31, 2011:
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Ending balance: nonperforming loans individually evaluated for impairment | $ | 24,822 | $ | 3,889 | $ | 27,238 | $ | 1,955 | $ | 7,209 | $ | 65,113 | ||||||||||||
Accruing troubled debt restructured loans individually evaluated for impairment | 14,475 | 1,014 | 2,960 | – | 3,544 | 21,993 | ||||||||||||||||||
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| |||||||||||||
Ending balance: total impaired loans individually evaluated for impairment | 39,297 | 4,903 | 30,198 | 1,955 | 10,753 | 87,106 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | 347,978 | 124,993 | 134,399 | 93,180 | 162,366 | 862,916 | ||||||||||||||||||
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| |||||||||||||
Ending Balance | $ | 387,275 | $ | 129,896 | $ | 164,597 | $ | 95,135 | $ | 173,119 | $ | 950,022 | ||||||||||||
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F-381
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following is a breakdown of impaired loans individually evaluated for impairment, by class, with and without related specific allowance at June 30, 2012:
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Quarter Average Recorded Investment | Quarter Interest Income Recognized | Year to Date Average Recorded Investment | Year to Date Interest Income Recognized | |||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | 30,821 | $ | (10,078 | ) | $ | 20,743 | $ | – | $ | 22,270 | $ | 66 | $ | 23,188 | $ | 204 | |||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | 4,034 | (948 | ) | 3,086 | – | 2,860 | 4 | 2,449 | 26 | |||||||||||||||||||||||
Commercial line of credit | 1,070 | (131 | ) | 939 | – | 457 | 3 | 501 | 4 | |||||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||||||
Residential construction | 17,466 | (2,040 | ) | 15,426 | – | 13,567 | 24 | 13,039 | 42 | |||||||||||||||||||||||
Residential lots | 15,075 | (4,999 | ) | 10,076 | – | 7,376 | 12 | 7,680 | 12 | |||||||||||||||||||||||
Raw land | 2,716 | (2,602 | ) | 114 | – | 115 | 1 | 117 | 3 | |||||||||||||||||||||||
Home equity lines | 435 | (32 | ) | 403 | – | 918 | – | 878 | ||||||||||||||||||||||||
Consumer | 7,081 | (567 | ) | 6,514 | – | 7,434 | 10 | 7,254 | 22 | |||||||||||||||||||||||
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| |||||||||||||||||
Subtotal | 78,698 | (21,397 | ) | 57,301 | – | 54,997 | 120 | 55,106 | 313 | |||||||||||||||||||||||
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| |||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||
Commercial real estate | 12,394 | – | 12,394 | 673 | 11,841 | 147 | 12,126 | 294 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | 815 | – | 815 | 524 | 792 | – | 544 | |||||||||||||||||||||||||
Commercial line of credit | 397 | – | 397 | 167 | 695 | – | 571 | |||||||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||||||
Residential construction | 646 | – | 646 | 11 | 2,298 | 4 | 2,751 | 7 | ||||||||||||||||||||||||
Residential lots | – | – | – | – | 5,710 | 5 | 4,825 | 11 | ||||||||||||||||||||||||
Raw land | – | – | – | – | – | – | 272 | |||||||||||||||||||||||||
Home equity lines | 1,007 | 1,007 | 250 | 926 | – | 911 | ||||||||||||||||||||||||||
Consumer | 2,509 | (227 | ) | 2,282 | 74 | 2,130 | 38 | 2,479 | 75 | |||||||||||||||||||||||
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| |||||||||||||||||
Subtotal | 17,768 | (227 | ) | 17,541 | 1,699 | 24,392 | 194 | 24,479 | 387 | |||||||||||||||||||||||
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| |||||||||||||||||
Summary | ||||||||||||||||||||||||||||||||
Commercial real estate | 43,215 | (10,078 | ) | 33,137 | 673 | 34,111 | 213 | 35,314 | 498 | |||||||||||||||||||||||
Commercial | 6,316 | (1,079 | ) | 5,237 | 691 | 4,804 | 7 | 4,065 | 30 | |||||||||||||||||||||||
Residential real estate | 35,903 | (9,641 | ) | 26,262 | 11 | 29,066 | 46 | 28,684 | 75 | |||||||||||||||||||||||
Home equity lines | 1,442 | (32 | ) | 1,410 | 250 | 1,844 | – | 1,789 | – | |||||||||||||||||||||||
Consumer | 9,590 | (794 | ) | 8,796 | 74 | 9,564 | 48 | 9,733 | 97 | |||||||||||||||||||||||
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Grand Totals | $ | 96,466 | $ | (21,624 | ) | $ | 74,842 | $ | 1,699 | $ | 79,389 | $ | 314 | $ | 79,585 | $ | 700 | |||||||||||||||
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F-382
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
As shown in the above table, the Company has previously taken partial charge-offs of $21.6 million on the $74.8 million in loans individually evaluated for impairment. In addition, the Company has set aside $1.7 million in specific allowance for $17.5 million of these loans.
The recorded investment in loans that were considered and collectively evaluated for impairment at June 30, 2012 and December 31, 2011 totaled $838.7 million and $862.9 million, respectively. The recorded investment in loans that were considered individually impaired at June 30, 2012 and December 31, 2011 totaled $74.8 million and $87.1 million, respectively. At June 30, 2012 and December 31, 2011, the recorded investment in impaired loans requiring a valuation allowance based on individual analysis was $17.5 million and $23.0 million, respectively, with a corresponding valuation allowance of $1.7 million and $1.6 million. No valuation allowance for the other impaired loans was considered necessary as a result of previously recognized partial charge-offs or adequate collateral coverage. No loans with deteriorated credit quality have been acquired by the Company to date.
The average recorded investment in impaired loans for the quarter ended June 30, 2012 and year ended December 31, 2011 was approximately $79.4 million and $84.7 million, respectively. For the three months ended June 30, 2012, the interest income recorded on accruing troubled debt restructured loans that were individually evaluated for impairment was $314 thousand. The interest income foregone for loans in a non-accrual status at June 30, 2012 and 2011 was $700 thousand and $2.1 million, respectively.
F-383
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following is a breakdown of impaired loans individually evaluated for impairment, by class, with and without related specific allowance at December 31, 2011:
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Year to Date Average Recorded Investment | Year to Date Interest Income Recognized | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | $ | 36,251 | $ | (7,334 | ) | $ | 28,917 | $ | – | $ | 26,846 | $ | 358 | |||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | 4,742 | (1,341 | ) | 3,401 | – | 2,998 | 76 | |||||||||||||||||
Commercial line of credit | 957 | (52 | ) | 905 | – | 1,427 | – | |||||||||||||||||
Residential real estate | ||||||||||||||||||||||||
Residential construction | 17,874 | (2,443 | ) | 15,431 | – | 15,241 | 190 | |||||||||||||||||
Residential lots | 6,853 | (2,803 | ) | 4,050 | – | 10,387 | 17 | |||||||||||||||||
Raw land | 3,808 | (2,324 | ) | 1,484 | – | 1,467 | – | |||||||||||||||||
Home equity lines | 954 | (32 | ) | 922 | – | 655 | – | |||||||||||||||||
Consumer | 10,501 | (1,501 | ) | 9,000 | – | 5,211 | 81 | |||||||||||||||||
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| |||||||||||||
Subtotal | 81,940 | (17,830 | ) | 64,110 | – | 64,232 | 722 | |||||||||||||||||
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| |||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | 10,710 | (330 | ) | 10,380 | 655 | 8,346 | 420 | |||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | 498 | – | 498 | 114 | 1,067 | 14 | ||||||||||||||||||
Commercial line of credit | 99 | – | 99 | 99 | 482 | – | ||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||
Residential construction | 1,348 | (160 | ) | 1,188 | 102 | 2,602 | 17 | |||||||||||||||||
Residential lots | 9,080 | (1,035 | ) | 8,045 | 161 | 3,843 | 32 | |||||||||||||||||
Raw land | – | – | – | – | 144 | – | ||||||||||||||||||
Home equity lines | 1,033 | – | 1,033 | 387 | 1,027 | – | ||||||||||||||||||
Consumer | 1,839 | (86 | ) | 1,753 | 90 | 2,921 | 80 | |||||||||||||||||
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| |||||||||||||
Subtotal | 24,607 | (1,611 | ) | 22,996 | 1,608 | 20,432 | 563 | |||||||||||||||||
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| |||||||||||||
Summary | ||||||||||||||||||||||||
Commercial real estate | 46,961 | (7,664 | ) | 39,297 | 655 | 35,192 | 778 | |||||||||||||||||
Commercial | 6,296 | (1,393 | ) | 4,903 | 213 | 5,974 | 90 | |||||||||||||||||
Residential real estate | 38,963 | (8,765 | ) | 30,198 | 263 | 33,684 | 256 | |||||||||||||||||
Home equity lines | 1,987 | (32 | ) | 1,955 | 387 | 1,682 | – | |||||||||||||||||
Consumer | 12,340 | (1,587 | ) | 10,753 | 90 | 8,132 | 161 | |||||||||||||||||
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| |||||||||||||
Grand Totals | $ | 106,547 | $ | (19,441 | ) | $ | 87,106 | $ | 1,608 | $ | 84,664 | $ | 1,285 | |||||||||||
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F-384
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Loans (continued)
The following is an aging analysis of past due financing receivables by class at June 30, 2012:
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days (1) | Total Past Due | Current | Total Financing Receivables | Recorded Investment 90 Days or more and Accruing | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Commercial real estate | $ | 902 | $ | – | $ | 17,429 | $ | 18,331 | $ | 354,408 | $ | 372,739 | $ | – | ||||||||||||||
Commercial and industrial | 365 | – | 2,799 | 3,164 | 79,652 | 82,816 | – | |||||||||||||||||||||
Commercial line of credit | 232 | 50 | 1,429 | 1,711 | 46,297 | 48,008 | – | |||||||||||||||||||||
Residential construction | – | – | 12,921 | 12,921 | 92,006 | 104,927 | – | |||||||||||||||||||||
Home equity lines | 324 | – | 2,093 | 2,417 | 89,483 | 91,900 | – | |||||||||||||||||||||
Residential lots | 229 | – | 10,056 | 10,285 | 29,322 | 39,607 | – | |||||||||||||||||||||
Raw land | – | 2,881 | 241 | 3,122 | 12,036 | 15,158 | – | |||||||||||||||||||||
Consumer | 1,180 | 48 | 8,144 | 9,372 | 149,064 | 158,436 | – | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 3,232 | $ | 2,979 | $ | 55,112 | $ | 61,323 | $ | 852,268 | $ | 913,591 | $ | – | ||||||||||||||
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| |||||||||||||||
Percentage of total loans | 0.35 | % | 0.33 | % | 6.03 | % | 6.71 | % | 93.29 | % | ||||||||||||||||||
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The following is an aging analysis of past due financing receivables by class at December 31, 2011:
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days (1) | Total Past Due | Current | Total Financing Receivables | Recorded Investment 90 Days or more and Accruing | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Commercial real estate | $ | 376 | $ | 265 | $ | 26,484 | $ | 27,125 | $ | 360,150 | $ | 387,275 | $ | – | ||||||||||||||
Commercial and industrial | 308 | 7 | 3,548 | 3,863 | 81,458 | 85,321 | – | |||||||||||||||||||||
Commercial line of credit | 50 | 35 | 1,429 | 1,514 | 43,060 | 44,574 | – | |||||||||||||||||||||
Residential construction | – | – | 11,491 | 11,491 | 90,454 | 101,945 | – | |||||||||||||||||||||
Home equity lines | 248 | 171 | 2,637 | 3,056 | 92,080 | 95,136 | – | |||||||||||||||||||||
Residential lots | – | – | 12,096 | 12,096 | 33,068 | 45,164 | – | |||||||||||||||||||||
Raw land | – | – | 1,484 | 1,484 | 16,004 | 17,488 | – | |||||||||||||||||||||
Consumer | 2,839 | 932 | 8,879 | 12,650 | 160,469 | 173,119 | – | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 3,821 | $ | 1,410 | $ | 68,048 | $ | 73,279 | $ | 876,743 | $ | 950,022 | $ | – | ||||||||||||||
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| |||||||||||||||
Percentage of total loans | 0.40 | % | 0.15 | % | 7.16 | % | 7.71 | % | 92.29 | % | ||||||||||||||||||
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(1) | As the Company has no loans past due 90 or more days and still accruing, this category only includes nonaccrual loans. |
F-385
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 5 – Allowance for Loan Losses
The following table shows, an analysis of the allowance for loan losses by loan segment, for the quarter ended June 30, 2012.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 8,925 | $ | 3,092 | $ | 7,861 | $ | 1,266 | $ | 3,037 | $ | 24,181 | ||||||||||||
Provision | 1,410 | 574 | 76 | 34 | 206 | 2,300 | ||||||||||||||||||
Charge-offs | (1,802 | ) | (356 | ) | (1,597 | ) | (139 | ) | (586 | ) | (4,480 | ) | ||||||||||||
Recoveries | 321 | 112 | 433 | 7 | 80 | 953 | ||||||||||||||||||
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| |||||||||||||
Ending balance | $ | 8,854 | $ | 3,422 | $ | 6,773 | $ | 1,168 | $ | 2,737 | $ | 22,954 | ||||||||||||
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The following table shows, an analysis of the allowance for loan losses by loan segment, for the six months ended June 30, 2012.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 9,076 | $ | 3,036 | $ | 7,258 | $ | 1,412 | $ | 3,383 | $ | 24,165 | ||||||||||||
Provision | 2,778 | 1,390 | 1,202 | (103 | ) | (67 | ) | 5,200 | ||||||||||||||||
Charge-offs | (3,529 | ) | (1,256 | ) | (2,169 | ) | (151 | ) | (943 | ) | (8,048 | ) | ||||||||||||
Recoveries | 529 | 252 | 482 | 10 | 364 | 1,637 | ||||||||||||||||||
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Ending balance | $ | 8,854 | $ | 3,422 | $ | 6,773 | $ | 1,168 | $ | 2,737 | $ | 22,954 | ||||||||||||
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For nonperforming loans requiring specific ALLL | 201 | 691 | 9 | 272 | – | $ | 1,173 | |||||||||||||||||
For accruing troubled debt restructured loans requiring specific ALLL | 471 | – | 3 | – | 52 | 526 | ||||||||||||||||||
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Ending balance: requiring specific ALLL | $ | 672 | $ | 691 | $ | 12 | $ | 272 | $ | 52 | $ | 1,699 | ||||||||||||
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Ending balance: general ALLL | $ | 8,182 | $ | 2,731 | $ | 6,761 | $ | 896 | $ | 2,685 | $ | 21,255 | ||||||||||||
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The following table shows the breakdown of the allowance for loan losses by component loan segment, for the quarter ended June 30, 2011.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 6,262 | $ | 3,593 | $ | 13,097 | $ | 1,759 | $ | 2,953 | $ | 27,664 | ||||||||||||
Provision | 2,385 | 940 | 273 | (320 | ) | 422 | 3,700 | |||||||||||||||||
Charge-offs | (2,180 | ) | (1,064 | ) | (1,805 | ) | (100 | ) | (386 | ) | (5,535 | ) | ||||||||||||
Recoveries | 416 | 199 | 752 | 132 | 183 | 1,682 | ||||||||||||||||||
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Ending balance | $ | 6,883 | $ | 3,668 | $ | 12,317 | $ | 1,471 | $ | 3,172 | $ | 27,511 | ||||||||||||
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F-386
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 5 – Allowance for Loan Losses (continued)
The following table shows, an analysis of the allowance for loan losses by loan segment, for the six months ended June 30, 2011.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 6,703 | $ | 4,154 | $ | 13,534 | $ | 1,493 | $ | 3,696 | $ | 29,580 | ||||||||||||
Provision | 3,306 | 1,068 | 1,714 | 484 | 1,228 | 7,800 | ||||||||||||||||||
Charge-offs | (4,077 | ) | (1,829 | ) | (4,008 | ) | (641 | ) | (2,066 | ) | (12,621 | ) | ||||||||||||
Recoveries | 951 | 275 | 1,077 | 135 | 314 | 2,752 | ||||||||||||||||||
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Ending balance | $ | 6,883 | $ | 3,668 | $ | 12,317 | $ | 1,471 | $ | 3,172 | $ | 27,511 | ||||||||||||
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For nonperforming loans requiring specific ALLL | 299 | 348 | 754 | 315 | 438 | 2,154 | ||||||||||||||||||
For accruing troubled debt restructured loans requiring specific ALLL | 118 | 2 | – | – | 42 | 162 | ||||||||||||||||||
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Ending balance: requiring specific ALLL | $ | 417 | $ | 350 | $ | 754 | $ | 315 | $ | 480 | $ | 2,316 | ||||||||||||
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Ending balance: general ALLL | $ | 6,466 | $ | 3,318 | $ | 11,563 | $ | 1,156 | $ | 2,692 | $ | 25,195 | ||||||||||||
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Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans (see details above) and (v) the general economic conditions in its market areas.
The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:
• | Grades 1, 2 and 3 - Better Than Average Risk - Borrowers assigned any one of these ratings would generally be characterized as representing better than average risk. Access to alternate sources of traditional bank financing is evident; secondary repayment sources are sufficient to protect against the risk of principal or income loss. |
• | Grade 4 - Average Risk - Borrowers assigned this rating would generally be characterized as representing average risk. Access to alternate sources of traditional bank financing is evident; secondary repayment sources are sufficient to protect against the risk of principal or income loss. Or, the risk attributable to a marginally sufficient primary repayment source is mitigated by liquid collateral in amounts which, discounted for normal fluctuations in market value, are sufficient to protect against the risk of principal or income loss. |
• | Grade 5 - Acceptable Risk/Watch - Loans where the borrower’s ability to repay from primary (intended) repayment source is not clearly sufficient to ensure performance as contracted; however, the loan is performing as contracted, secondary repayment sources are clearly sufficient to protect against the risk of principal or income loss, and the Bank can reasonably expect that the circumstances causing the repayment concern will be resolved. Access to alternate financing sources exists, but may be limited to institutions specializing in higher risk financing. |
• | Grade 6 - Special Mention - This would include “Other Assets Especially Mentioned” (OAEM). OAEM are currently protected but potentially weak, they are characterized by undue and unwarranted |
F-387
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 5 – Allowance for Loan Losses (continued)
credit risk but not to the point of justifying a classification of substandard. Potential weakness may weaken the asset or inadequately protect the Bank’s credit position at some future date if not corrected. Evidence that the risk is increasing beyond that at which the loan originally would have been granted. Loans, where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do increase the level of risk, may also warrant this rating. |
• | Grade 7 - Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or by the value of the collateral pledged, if any. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. Examples include high debt to net worth ratios, declining or negative earnings trends, declining or inadequate liquidity, improper loan structure and questionable repayment sources. Near term improvement is questionable. |
• | Grade 8 - Doubtful - Loans classified as doubtful have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. Some loss of principal is expected, however, the amount of such loss cannot be fully determined at this time. Factors such as equity injection, alternative financing, liquidation of assets or the pledging of additional collateral can impact the loan. All loans in this category are to immediately be placed on non-accrual with all payments applied to principal until such time as the potential loss exposure is eliminated. |
• | Grade 9 - Loss - Loans classified as loss are considered uncollectable and of such little value that there continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. |
Loan grades for all commercial loans are established at the origination of the loan. Non-commercial loans are graded as a 4 at origination date as these loans are determined to be “pass graded” loans. These non-commercial loans may subsequently require a different risk grade if the credit department has evaluated the credit and determined it necessary to reclassify the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes public. Credit improvements are evidenced by known factors regarding the borrower or the collateral property.
The loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a grade of 1 to 5 are believed to have some inherent losses in the portfolios, but to a lesser extent than the other loan grades. Acceptable or better risk (1 to 5) graded loans might have a zero percent loss based on historical experience and current market trends. The special mention or OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential losses. However, the likelihood of loss is greater than Watch grade because there has been measurable credit deterioration. Loans with a substandard grade are generally loans the Company has individually analyzed for potential impairment. The Doubtful graded loans and the Loss graded loans are to a point that the Company is almost certain of the losses, and the unpaid principal balances are generally charged-off.
The Company’s allowance for loan losses (“ALLL”) is established through charges to earnings in the form of a provision for loan losses. We increase our allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off and we reduce our allowance by loans charged off. In evaluating
F-388
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 5 – Allowance for Loan Losses (continued)
the adequacy of the allowance, we consider the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, trends in past dues and classified assets, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors derived from our history of operations. Management is continuing to closely monitor the value of real estate serving as collateral for our loans, especially lots and land under development, due to continued concern that the low level of real estate sales activity will continue to have a negative impact on the value of real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition and liquidity position of certain of our borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from weak economic conditions and prevailing unemployment levels. The methodology and assumptions used to determine the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. The Company incorporates certain refinements and improvements to its allowance for loan losses methodology from time to time.
The ALLL consists of two major components: specific valuation allowances and a general valuation allowance. The Bank’s format for the calculation of ALLL begins with the evaluation of individual loans considered impaired. For the purpose of evaluating loans for impairment, loans are considered impaired when it is considered probable that all amounts due under the contractual terms of the loan will not be collected when due (minor shortfalls in amount or timing excepted). The Bank has established policies and procedures for identifying loans that should be considered for impairment. Loans are reviewed through multiple means such as delinquency management, credit risk reviews, watch and criticized loan monitoring meetings and general account management. Loans that are outside of the Bank’s established criteria for evaluation may be considered for impairment testing when management deems the risk sufficient to warrant this approach. For loans determined to be impaired, the specific allowance is based on the most appropriate of the three measurement methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Once a loan is considered individually impaired, it is not included in other troubled loan analysis, even if no specific allowance is considered necessary.
In addition to the evaluation of loans for impairment, the Company calculates loan loss exposure on the remaining loans (not evaluated for impairment) by applying the applicable historical loan loss experience of the loan portfolio to provide for probable losses in the loan portfolio through the general valuation allowance. These loss factors are based on an appropriate loss history for each major loan segment more heavily weighted for the most recent twelve months historical loss experience to reflect current market conditions. In addition, the Company assigns additional general allowance requirements utilizing qualitative risk factors related to economic and portfolio trends that are pertinent to the underlying risks in each major loan segment in estimating the general valuation allowance. This methodology allows the Company to focus on the relative risk and the pertinent factors for the major loan segments of the Company.
F-389
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 5 – Allowance for Loan Losses (continued)
The following is a summary of credit exposure segregated by credit risk profile by internally assigned grade by class at June 30, 2012 and December 31, 2011:
Commercial Real Estate | Commercial and Industrial | Commercial Lines of Credit | ||||||||||||||||||||||
June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Acceptable Risk or Better | $ | 273,013 | $ | 261,287 | $ | 58,673 | $ | 57,563 | $ | 39,426 | $ | 37,883 | ||||||||||||
Special Mention | 26,778 | 49,179 | 4,872 | 10,804 | 3,101 | 2,796 | ||||||||||||||||||
Substandard | 64,840 | 76,701 | 19,214 | 16,526 | 5,481 | 3,765 | ||||||||||||||||||
Doubtful | 8,108 | 108 | 57 | 428 | – | 130 | ||||||||||||||||||
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Total | $ | 372,739 | $ | 387,275 | $ | 82,816 | $ | 85,321 | $ | 48,008 | $ | 44,574 | ||||||||||||
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Residential Construction | Home Equity Lines | Consumer | ||||||||||||||||||||||
June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Acceptable Risk or Better | $ | 70,963 | $ | 62,382 | $ | 85,625 | $ | 87,325 | $ | 122,763 | $ | 139,491 | ||||||||||||
Special Mention | 8,106 | 11,212 | 1,251 | 2,362 | 13,698 | 13,147 | ||||||||||||||||||
Substandard | 25,858 | 28,351 | 5,024 | 5,449 | 21,975 | 20,481 | ||||||||||||||||||
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Total | $ | 104,927 | $ | 101,945 | $ | 91,900 | $ | 95,136 | $ | 158,436 | $ | 173,119 | ||||||||||||
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Residential Lots | Raw Land | |||||||||||||||
June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Acceptable Risk or Better | $ | 9,478 | $ | 10,451 | $ | 11,790 | $ | 11,807 | ||||||||
Special Mention | 3,655 | 5,612 | 200 | 976 | ||||||||||||
Substandard | 26,474 | 29,101 | 3,168 | 4,705 | ||||||||||||
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Total | $ | 39,607 | $ | 45,164 | $ | 15,158 | $ | 17,488 | ||||||||
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Note 6 – Borrowings
The following is a summary of our borrowings at June 30, 2012 and December 31, 2011:
June 30, 2012 | December 31, 2011 | |||||||
(Amounts in thousands) | ||||||||
Short-term borrowings | ||||||||
FHLB advances | $ | 35,000 | $ | 5,000 | ||||
Repurchase agreements | 24,268 | 28,629 | ||||||
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$ | 59,268 | $ | 33,629 | |||||
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Long-term borrowings | ||||||||
FHLB advances | $ | 41,549 | $ | 71,637 | ||||
Term repurchase agreements | 60,000 | 60,000 | ||||||
Jr. subordinated debentures | 45,877 | 45,877 | ||||||
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$ | 147,426 | $ | 177,514 | |||||
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See Note 8 for discussion on deferral of interest payments on subordinated debentures.
F-390
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 7 – Non-Interest Income and Other Non-Interest Expense
The major components of other non-interest income are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Increase in cash surrender value of life insurance | $ | 257 | $ | 276 | $ | 511 | $ | 542 | ||||||||
Gain (loss) and net cash settlement on economic hedges | 178 | 181 | 263 | (424 | ) | |||||||||||
Other | 256 | 238 | 519 | 475 | ||||||||||||
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$ | 691 | $ | 695 | $ | 1,293 | $ | 593 | |||||||||
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The major components of other non-interest expense are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Postage, printing and office supplies | $ | 129 | $ | 178 | $ | 294 | $ | 349 | ||||||||
Telephone and communication | 206 | 215 | 422 | 463 | ||||||||||||
Advertising and promotion | 229 | 378 | 457 | 609 | ||||||||||||
Data processing and other outsourced services | 204 | 189 | 461 | 360 | ||||||||||||
Professional services | 508 | 962 | 950 | 1,795 | ||||||||||||
Debit card expense | 218 | 243 | 471 | 459 | ||||||||||||
(Gain) loss on sales of foreclosed assets | (185 | ) | (210 | ) | (258 | ) | (490 | ) | ||||||||
Other | 1,092 | 1,304 | 2,364 | 2,655 | ||||||||||||
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$ | 2,401 | $ | 3,259 | $ | 5,161 | $ | 6,200 | |||||||||
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Note 8 – Regulatory Matters
Regulatory Actions and Management’s Compliance Efforts
On February 25, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commission of Banks (“NCCOB”). Under the terms of the Consent Order among other things, the Bank has agreed to:
• | Strengthen Board oversight of the management and operations of the Bank; |
• | Comply with minimum capital requirements of 8% Tier 1 leverage capital and 11% total risk-based capital; |
• | Formulate and implement a plan to reduce the Bank’s risk exposure in assets classified “Substandard or Doubtful” in the FDIC’s most recent report of examination by 15% in 180 days, 35% in 360 days, 60% in 540 days and 75% in 720 days; |
• | Within 90 days, implement effective lending and collection policies; |
• | Not pay cash dividends without the prior written approval of the FDIC and the Commissioner; and |
• | Neither renew, rollover or accept any brokered deposits without obtaining a waiver from the FDIC. |
F-391
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 8 – Regulatory Matters (continued)
On June 23, 2011, the Company entered into a Written Agreement with the Federal Reserve Bank of Richmond under which the Company agreed to, among other things:
• | Not, directly or indirectly, do the following without the prior approval of the Federal Reserve: |
• | Declare or pay dividends on its, common or preferred stock; |
• | Make any distributions of interest or principal on trust preferred securities; |
• | Incur, increase or guarantee any debt; and |
• | Purchase or redeem any shares of its stock. |
• | Formulate and implement a written plan to maintain sufficient capital at the Company on a consolidated basis. |
As previously reported, the Company suspended the payment of quarterly cash dividends on the preferred stock issued to the US Treasury and the Company elected to defer the payment of quarterly scheduled interest payments on both issues of junior subordinated debentures, relating to its outstanding trust preferred securities. The Company continues to account for the obligation for the preferred dividend to the US Treasury and the interest due on the subordinated debentures. Although the Company has suspended the declaration and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared because of their cumulative nature. As of June 30, 2012, the cumulative amount of dividends owed to the US Treasury and the cumulative amount of interest due on the subordinated debentures were $3.9 million and $4.3 million, respectively.
The Bank has already undertaken the following actions, among others, to comply with the Consent Order:
• | The Bank has exceeded all minimum capital requirements of the Consent Order. |
• | As of June 30, 2012, the Bank reduced its risk exposure to adversely classified assets identified in the Bank’s June 30, 2010 Report of Examination by an amount (60%) exceeding its scheduled reduction of 35% by February 2012 and meeting, in advance, its August 2012 scheduled reduction of 60%. |
The process of responding to the provisions of the Consent Order is well underway. To date, management believes that the Company’s compliance efforts have been satisfactory and within the scheduled time frames. Compliance efforts remain ongoing.
The Consent Order, as set forth above, requires the Bank to achieve and maintain minimum capital requirements of 8% Tier 1 (leverage) capital and total risk-based capital of 11%. As shown in the table below, the Bank had regulatory capital in excess of the Consent Order requirements as of June 30, 2012.
The minimum capital requirements to be characterized as “well capitalized”, as defined by regulatory guidelines, the capital requirements pursuant to the Consent Order and the Bank’s actual capital ratios were as follows for June 30, 2012:
Minimum Regulatory Requirement | ||||||||||||
Captial ratios | Bank | “Well Capitalized” | Pursuant to Consent Order | |||||||||
Total risk-based | 14.62 | % | 10 | % | 11 | % | ||||||
Tier 1 risk-based | 13.36 | % | 6 | % | N/A | |||||||
Tier 1 leverage | 9.66 | % | 5 | % | 8 | % |
F-392
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 8 – Regulatory Matters (continued)
If the Bank fails to comply with the minimum capital levels in the Consent Order, the Bank may be subject to further restrictions, the extent of which is dependent upon the magnitude of noncompliance. A bank may be prohibited from engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank. Therefore, failure to maintain adequate capital could have a material adverse effect on operations.
Failure by the Bank to comply with the requirements set forth in the Consent Order may result in further adverse regulatory actions, sanctions, and restrictions on the Bank’s activities, which could have a material adverse effect on the business, future prospects, financial condition or results of operations of the Bank and the Company.
As a bank holding company subject to regulation by the Federal Reserve, the Company must comply with regulatory capital ratios. Under the June 23, 2011 Written Agreement, there were no minimum regulatory ratios imposed by the Federal Reserve. In the written capital plan submitted to the Federal Reserve in June 2011, the Company set the regulatory well capitalized minimum requirements as its capital targets. As of June 30, 2012, the Company’s capital exceeded the minimum requirements for a “well capitalized” bank holding company. Information regarding the Company’s capital at June 30, 2012 is set forth below:
Actual | Minimum “Well Capitalized” Requirements | |||||||||||
Captial ratios | Amount | Ratio | ||||||||||
Total risk-based | $ | 157,815 | 14.87 | % | 10 | % | ||||||
Tier 1 risk-based | 131,387 | 12.38 | % | 6 | % | |||||||
Tier 1 leverage | 131,387 | 8.95 | % | 5 | % |
Note 9 – Cumulative Perpetual Preferred Stock
Under the United States Treasury’s Capital Purchase Program (CPP), the Company issued $42.75 million to the United States Treasury in Cumulative Perpetual Preferred Stock, Series A, on December 5, 2008. In addition, the Company provided warrants to the Treasury to purchase 1,623,418 shares of the Company’s common stock at an exercise price of $3.95 per share. These warrants are immediately exercisable and expire ten years from the date of issuance. The preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred shares are redeemable at the option of the Company subject to regulatory approval.
In February 2011, the Company suspended the payment of quarterly cash dividends to the US Treasury on this preferred stock. Although the Company has suspended the declaration and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared because of their cumulative nature. As of June 30, 2012, the total amount of cumulative dividends and interest owed to the US Treasury was $3.9 million. The Company has now deferred six quarterly payments. If the Company defers more than six quarterly payments to the US Treasury, then the US Treasury will have the right to elect two new board members. Directors elected by the US Treasury may not have the same interests as other shareholders and may desire the Company to take certain actions not supported by other shareholders. There can be no assurances that directors elected to represent the US Treasury would be supportive of our management’s business plans or the interests of other shareholders. Therefore, the election of directors to represent the US Treasury could have a material adverse effect on our business or the direction of its future prospects. As a part of the merger with Capital Bank, it is expected that the Treasury’s investment in the Company’s preferred stock will be redeemed.
F-393
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 9 – Cumulative Perpetual Preferred Stock (continued)
As a condition of the CPP, the Company must obtain consent from the United States Department of the Treasury to repurchase its common stock or to increase its cash dividend on its common stock from the September 30, 2008 quarterly level of $0.04 per common share. Furthermore, the Company has agreed to certain restrictions on executive compensation. Under the American Recovery and Reinvestment Act of 2009, the Company is limited to using restricted stock as the form of payment to the top five highest compensated executives under any incentive compensation programs.
Note 10 – Derivatives
Derivative Financial Instruments
The Company utilizes stand-alone derivative financial instruments, primarily in the form of interest rate swap and option agreements, in its asset/liability management program. These transactions involve both credit and market risk. The Company uses derivative instruments to mitigate exposure to adverse changes in fair value or cash flows of certain assets and liabilities. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the balance sheet with corresponding offsets recorded in the income statement. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense on the hedged asset or liability. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in accumulated other comprehensive income within stockholders’ equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged transaction affects earnings. Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement.
The Company does not enter into derivative financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest income during the period of change. The net cash settlement on these derivatives is included in non-interest income.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures and agreements that specify collateral levels to be maintained by the Company and the counterparties. These collateral levels are based on the credit rating of the counterparties and the value of the derivatives.
The Company currently has ten derivative instrument contracts consisting of one interest rate cap, seven interest rate swaps and two foreign exchange contracts. The primary objective for each of these contracts is to minimize risk, interest rate risk being the primary risk for the interest rate cap and swaps while foreign exchange risk is the primary risk for the foreign exchange contracts. The Company’s strategy is to use derivative contracts
F-394
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 10 – Derivatives (continued)
to stabilize and improve net interest margin and net interest income currently and in future periods. In order to acquire low cost, long term funding without incurring currency risk, the Company entered into the foreign exchange contract to convert foreign currency denominated certificates of deposit into long term dollar denominated time deposits. The interest rate on the underlying certificates of deposit with an original notional value/amount of $10.0 million is based on a proprietary index (Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays Bank). The currency swap is also based on this proprietary index.
The fair value of the Company’s derivative assets and liabilities and their related notional amounts is summarized below.
June 30, 2012 | December 31, 2011 | |||||||||||||||
Fair Value | Notional Amount | Fair Value | Notional Amount | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Fair value hedges | ||||||||||||||||
Interest rate swaps associated with deposit activities: Certificate of Deposit contracts | $ | 420 | $ | 40,000 | $ | 436 | $ | 65,000 | ||||||||
Currency Exchange contracts | (344 | ) | 10,000 | (457 | ) | 10,000 | ||||||||||
Trust Preferred contracts | (72 | ) | 10,000 | (202 | ) | 10,000 | ||||||||||
Cash flow hedges | ||||||||||||||||
Interest rate swaps associated with borrowing activities: Loan contracts | (895 | ) | 35,000 | – | – | |||||||||||
Interest rate cap contracts | 1 | 12,500 | 9 | 12,500 | ||||||||||||
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$ | (890 | ) | $ | 107,500 | $ | (214 | ) | $ | 97,500 | |||||||
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See Note 11 for additional information on fair values of net derivatives.
The following table further breaks down the derivative positions of the Company:
As of June 30, 2012 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Interest rate cap contracts | Other Assets | $ | 1 | |||||||||||||
Interest rate swap contracts | Other Assets | 420 | Other Liabilities | $ | 967 | |||||||||||
Derivatives not designated as hedging instruments Interest rate swap contracts | – | Other Liabilities | 344 | |||||||||||||
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Total derivatives | $ | 421 | $ | 1,311 | ||||||||||||
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Net Derivative Asset (Liability) | $ | (890 | ) | |||||||||||||
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F-395
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 10 – Derivatives (continued)
As of December 31, 2011 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Interest rate cap contracts | Other Assets | $ | 9 | |||||||||||||
Interest rate swap contracts | Other Assets | 436 | Other Liabilities | $ | 202 | |||||||||||
Derivatives not designated as hedging instruments Interest rate swap contracts | – | Other Liabilities | 457 | |||||||||||||
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Total derivatives | $ | 445 | $ | 659 | ||||||||||||
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Net Derivative Asset (Liability) | $ | (214 | ) | |||||||||||||
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The tables below illustrate the effective portion of the gains (losses) recognized in other comprehensive income and the gains (losses) reclassified from accumulated other comprehensive income into earnings.
For the Three Months Ended June 30, 2012 | ||||||||||
Cash Flow Hedging | Amount of Gain or (Loss) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||
(Amounts in thousands) | ||||||||||
Interest rate contracts | $ (850) | Interest Expense | $– | |||||||
For the Six Months Ended June 30, 2012 | ||||||||||
Cash Flow Hedging | Amount of Gain or (Loss) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||
(Amounts in thousands) | ||||||||||
Interest rate contracts | $ (903) | Interest Expense | $– | |||||||
For the Three Months Ended June 30, 2011 | ||||||||||
Cash Flow Hedging Relationships | Amount of Gain or (Loss) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||
(Amounts in thousands) | ||||||||||
Interest rate contracts | $ (62) | Interest Expense | $ – | |||||||
Ineffective Portion | Ineffective Portion | |||||||||
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$ 42 | $ (75) | |||||||||
For the Six Months Ended June 30, 2011 | ||||||||||
Cash Flow Hedging Relationships | Amount of Gain or (Loss) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||
(Amounts in thousands) | ||||||||||
Interest rate contracts | $ (150) | Interest Expense | $ – | |||||||
Ineffective Portion | Ineffective Portion | |||||||||
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$ 104 | $ 534 |
F-396
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 10 – Derivatives (continued)
Prior to 2011, no gain or loss has been recognized in the income statement due to any ineffective portion of any cash flow hedging relationship. During the first quarter of 2011, the Company recorded a $384 thousand mark to market loss in the income statement on an interest rate swap relating to trust preferred securities. The Company recorded a $70 thousand gain on this swap into non-interest income during the three months ended June 30, 2012. The payment of interest on the trust preferred securities was suspended in February 2011 which resulted in the swap changing its status from effective to ineffective. The change to an ineffective status disqualified the instrument from hedge accounting and required mark to market adjustments to be included in the income statement instead of other comprehensive income as previously recorded.
The tables below show the location and amount of gains (losses) recognized in earnings for fair value hedges, the ineffective portion of cash flow hedges and other economic hedges.
For the Three Months Ended June 30, 2012 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts—Not designated as hedging | Other Income (Expense) | $ | 178 | |||
Interest rate contracts—Fair value hedging | Interest Income/(Expense) | $ | 272 |
For the Six Months Ended June 30, 2012 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts—Not designated as hedging | Other Income (Expense) | $ | 263 | |||
Interest rate contracts—Fair value hedging | Interest Income/(Expense) | $ | 598 |
For the Three Months Ended June 30, 2011 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts—Not designated as hedging | Other Income (Expense) | $ | 181 | |||
Interest rate contracts—Fair value hedging | Interest Income/(Expense) | $ | 465 |
For the Six Months Ended June 30, 2011 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts—Not designated as hedging | Other Income (Expense) | $ | (424 | ) | ||
Interest rate contracts—Fair value hedging | Interest Income/(Expense) | $ | 993 |
F-397
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 10 – Derivatives (continued)
The interest rate swap with borrowing activities on trust preferred securities has a maturity date of September 6, 2012. The maturity date for the interest rate cap contract is February 18, 2014. The currency exchange contracts have maturity dates of November 29, 2013 and December 30, 2013. The interest rate swaps on certificates of deposit have maturity dates of September 30, 2030, October 12, 2040 and December 17, 2040. All of these swaps have the ability to be called by the counterparty prior to their maturity date. One interest rate swap on certificates of deposit has passed its call date (September 30, 2011) and is now callable quarterly. Two others have original call dates of October 14, 2014 and November 28, 2014. On April 28, 2012 and May 29, 2012, interest rate swaps on certificates of deposit with notional amounts totaling $25.0 million were called by the counterparty. The related certificates of deposit were also called.
Certain derivative liabilities were collateralized by securities, which are held by the counterparty or in safekeeping by third parties. The fair value of these securities was $2.4 million and $7.3 million at June 30, 2012 and December 31, 2011, respectively. Collateral calls can be required at any time that the market value exposure of the contracts is less than the collateral pledged. The degree of overcollateralization is dependent on the derivative contracts to which the Company is a party.
As part of our banking activities, the Company originates certain residential loans and commits these loans for sale. The commitments to originate residential loans and the sales commitments are freestanding derivative instruments and are generally funded within 90 days. The fair value of these commitments was not significant at June 30, 2012.
In January 2012, the Company entered into $35.0 million notional forward starting interest rate swaps. The purpose of these swaps is to lock in currently low fixed rate funding costs for intermediate term FHLB advances maturing from July 2012 through November 2013. The maturity dates for these three contracts are July 16, 2017, January 3, 2018, and January 11, 2018. The first of the three FHLB loans was not renewed in July 2012 as scheduled due to higher than anticipated liquidity levels and as part of merger strategy. The result of not renewing the advance is a free standing derivative that will be adjusted to market value through the income statement beginning in the third quarter. The valuation of the derivative at the most recent month end was a loss of $118 thousand. The valuation of the instrument will change at each subsequent reporting period based on several factors, most notably changes in interest rates.
Note 11 – Disclosures About Fair Values of Financial Instruments
Financial instruments include cash and due from banks, federal funds sold, investment securities, loans, bank-owned life insurance, deposit accounts and other borrowings, accrued interest and derivatives. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks, federal funds sold and overnight deposits
The carrying amounts for cash and due from banks, federal funds sold and overnight deposits approximate fair value because of the short maturities of those instruments.
F-398
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 11 – Disclosures About Fair Values of Financial Instruments (continued)
Investment securities
Fair value for investment securities equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Most of these securities are US government agency debt obligations and agency mortgage-backed securities traded in active markets. The third party valuations are determined based on the characteristics of each security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measures as Level 2.
Loans
The fair value of commercial and other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For these loans, internal credit risk methodologies are used to adjust values for expected losses. For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. In addition for residential mortgage loans, internal prepayment risk assumptions are incorporated to adjust contractual cash flows.
Investment in bank-owned life insurance
The carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer. In assessing the fair value of the cash surrender value of this asset, we evaluate quantitative factors such as the level of death claims on the underlying policies and the impact of aging/actuarial factors.
Deposits
The fair value of demand deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated based on discounting expected cash flows using the rates currently offered for deposits of similar remaining maturities.
Borrowings
As it relates to the Company’s subordinated debentures, a portion of this debt is publicly traded on NASDAQ under the ticker “SCMFO”. The remaining fair values on the subordinated debentures are calculated by reference to the market price of the publicly traded comparable trust preferred securities as an indication of the Company’s credit risk. The remaining fair values of the FHLB advances and repurchase agreements are based on discounting expected cash flows at the current interest rate for debt with the same or similar remaining maturities and collateral requirements.
Accrued interest
The carrying amounts of accrued interest receivable and payable approximate fair value.
Derivative financial instruments
Interest rate swaps and the interest rate option are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models run by a third-party on a monthly basis. All future floating
F-399
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 11 – Disclosures About Fair Values of Financial Instruments (continued)
cash flows are projected and both floating and fixed cash flows are discounted to the valuation date using interest rates appropriate for the term structure of the financial instrument hedged and for the counterparty involved. The Company classifies interest rate swaps as Level 2 except for the foreign exchange contracts.
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at June 30, 2012 and December 31, 2011:
June 30, 2012 | ||||||||||||||||
Carrying amount | Estimated fair value | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(Amounts in thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 25,144 | $ | 25,144 | $ | – | $ | – | ||||||||
Federal funds sold and overnight deposits | 101,784 | 101,784 | – | – | ||||||||||||
Investment securities available for sale | 261,944 | – | 261,944 | – | ||||||||||||
Investment securities held to maturity | 51,009 | – | 53,058 | – | ||||||||||||
Loans held for sale and loans, net of allowance | 894,669 | – | – | 875,980 | ||||||||||||
Investment in life insurance | 31,430 | – | – | 31,430 | ||||||||||||
Accrued interest receivable | 5,081 | – | – | 5,081 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | 1,126,701 | – | – | 1,130,200 | ||||||||||||
Short-term borrowings | 59,268 | – | – | 61,319 | ||||||||||||
Long-term borrowings | 147,426 | 35,880 | 9,500 | 110,836 | ||||||||||||
Accrued interest payable | 6,125 | – | – | 6,125 | ||||||||||||
On-balance sheet derivative financial instruments: | ||||||||||||||||
Interest rate swaps | (890 | ) | – | (546 | ) | (344 | ) | |||||||||
Interest rate option | 1 | – | 1 | – |
December 31, 2011 | ||||||||||||||||
Carrying amount | Estimated fair value | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(Amounts in thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 23,356 | $ | 23,356 | $ | – | $ | – | ||||||||
Federal funds sold and overnight deposits | 23,198 | 23,198 | – | – | ||||||||||||
Investment securities available for sale | 362,298 | – | 362,298 | – | ||||||||||||
Investment securities held to maturity | 44,403 | – | 45,514 | – | ||||||||||||
Loans held for sale and loans, net of allowance | 930,316 | – | – | 867,438 | ||||||||||||
Investment in life insurance | 30,919 | – | – | 30,919 | ||||||||||||
Accrued interest receivable | 5,843 | – | – | 5,843 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | 1,183,172 | – | – | 1,177,073 | ||||||||||||
Short-term borrowings | 33,629 | – | – | 35,334 | ||||||||||||
Long-term borrowings | 177,514 | 14,352 | 4,160 | 143,376 | ||||||||||||
Accrued interest payable | 5,219 | – | – | 5,219 | ||||||||||||
On-balance sheet derivative financial instruments: | ||||||||||||||||
Interest rate swaps | (223 | ) | – | 234 | (457 | ) | ||||||||||
Interest rate option | 9 | – | 9 | – |
F-400
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 12 – Fair Values of Assets and Liabilities
Accounting standards establish a framework for measuring fair value according to GAAP and expands disclosures about fair value measurements. Under these standards, there is a three level fair value hierarchy that is fully described below. The Company reports fair value on a recurring basis for certain financial instruments, most notably for available for sale investment securities and certain derivative instruments. The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value which was below cost at the end of the period. Assets subject to nonrecurring use of fair value measurements could include loans held for sale, impaired loans and foreclosed assets. At June 30, 2012 and December 31, 2011, the Company had certain impaired loans and foreclosed assets that are measured at fair value on a nonrecurring basis.
The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
• | Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. There were no investments held with level 1 valuations. |
• | Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Level 2 securities include asset-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Valuations are obtained from third party services for similar or comparable assets or liabilities. |
• | Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or brokered traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
There were no transfers between any of the levels during second quarter 2012. The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
June 30, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US Government agencies | $ | 19,715 | $ | – | $ | 19,715 | $ | – | ||||||||
Asset-backed securities | 207,145 | – | 207,145 | – | ||||||||||||
Municipals | 27,786 | – | 27,786 | – | ||||||||||||
Trust preferred securities | 2,555 | – | 2,555 | – | ||||||||||||
Common stocks and mutual funds | 3,744 | – | 3,744 | – | ||||||||||||
Other | 999 | – | 999 | – | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | (890 | ) | – | (546 | ) | (344 | ) |
F-401
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 12 – Fair Values of Assets and Liabilities (continued)
December 31, 2011 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US government agencies | $ | 34,729 | $ | – | $ | 34,729 | $ | – | ||||||||
Asset-backed securities | 291,368 | – | 291,368 | – | ||||||||||||
Municipals | 29,220 | – | 29,220 | – | ||||||||||||
Trust preferred securities | 2,321 | – | 2,321 | – | ||||||||||||
Corporate bonds | 3,659 | – | 3,659 | – | ||||||||||||
Other | 1,001 | – | 1,001 | – | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | (214 | ) | – | 243 | (457 | ) |
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at June 30, 2012 | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||||
(Amounts in thousands) | ||||||||||||
Recurring measurements: | ||||||||||||
Interest rate swaps | (344 | ) | Discounted cash flow | Discount rate | .5 -3.75% | |||||||
Nonrecurring measurements: | ||||||||||||
Impaired loans | 15,857 | Discounted appraisals | Appraisal Discounts | 15 -50% | ||||||||
Other real estate owned | 19,873 | Discounted appraisals | Appraisal Discounts | 10% -90% |
The unobservable input used in the fair value measurement of the Company’s interest rate swap agreements is the discount rate. A significant change in the discount rate could result in a significantly different fair value measurement. The discount rate is determined by a third-party valuation provider by obtaining publicly available third party quotes. The only level three derivatives held by the Company are two foreign exchange contracts. The Company entered into the foreign exchange contract to convert foreign currency denominated certificates of deposit into long term dollar denominated time deposits. The interest rate on the underlying certificates of deposit with an original notional value/amount of $10.0 million is based on a proprietary index (Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays Bank). The currency swap is also based on this proprietary index. The Company’s asset liability management team periodically reviews the discount rates utilized in determining the fair value of the interest rate swap agreements.
F-402
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 12 – Fair Values of Assets and Liabilities (continued)
The table below presents a reconciliation for the second quarter of 2012, for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Fair Value Measurements Using Significant Unobservable Inputs | ||||
(Amounts in thousands) | ||||
Net Derivatives | ||||
Beginning Balance April 1, 2012 | $ | (458 | ) | |
Total realized and unrealized gains or losses: | ||||
Included in earnings | 114 | |||
Included in other comprehensive income | – | |||
Purchases | – | |||
Issuances | – | |||
Settlements | – | |||
Transfers in and/or out of Level 3 | – | |||
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Ending Balance | $ | (344 | ) | |
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The table below presents a reconciliation for the six months ended 2012, for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Fair Value Measurements Using Significant Unobservable Inputs | ||||
(Amounts in thousands) | ||||
Net Derivatives | ||||
Beginning Balance January 1, 2012 | $ | (457 | ) | |
Total realized and unrealized gains or losses: | ||||
Included in earnings | 113 | |||
Included in other comprehensive income | – | |||
Purchases | – | |||
Issuances | – | |||
Settlements | – | |||
Transfers in and/or out of Level 3 | – | |||
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Ending Balance | $ | (344 | ) | |
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The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Despite most of these securities being US government agency debt obligations, agency mortgage-backed securities and municipal securities traded in active markets, third party valuations are determined based on the characteristics of a security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as level 2. No securities were transferred between level 1 and level 2 for the quarter ended June 30, 2012.
F-403
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 12 – Fair Values of Assets and Liabilities (continued)
The table below presents a reconciliation for the second quarter of 2011, for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||
(Amounts in thousands) | ||||||||
Securities | ||||||||
Available for Sale | Net Derivatives | |||||||
Beginning Balance April 1, 2011 | $ | – | $ | (1,085 | ) | |||
Total realized and unrealized gains or losses: | ||||||||
Included in earnings | – | 516 | ||||||
Included in other comprehensive income | – | – | ||||||
Purchases, issuances and settlements | – | – | ||||||
Transfers in and/or out of Level 3 | – | – | ||||||
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Ending Balance | $ | – | $ | (569 | ) | |||
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The table below presents a reconciliation for the six months ended 2011, for all Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||
(Amounts in thousands) | ||||||||
Securities Available for Sale | Net Derivatives | |||||||
Beginning Balance January 1, 2011 | $ | 3,003 | $ | (679 | ) | |||
Total realized and unrealized gains or losses: | ||||||||
Included in earnings | 537 | 110 | ||||||
Included in other comprehensive income | – | – | ||||||
Purchases, issuances and settlements | (3,540 | ) | – | |||||
Transfers in and/or out of Level 3 | – | – | ||||||
|
|
|
| |||||
Ending Balance | $ | – | $ | (569 | ) | |||
|
|
|
|
The fair value reporting standards allows an entity to make an irrevocable election to measure certain financial instruments at fair value. The changes in fair value from one reporting period to the next period must be reported in the income statement with additional disclosures to identify the effect on net income. The Company continued to account for securities available for sale at fair value as reported in prior years. Derivative activity is also reported at fair value. Securities available for sale and derivative activity are reported on a recurring basis. Upon adoption of the fair value reporting standard, no additional financial assets or liabilities were reported at fair value and there was no material effect on earnings.
The Company records loans in the ordinary course of business and does not record loans at fair value on a recurring basis. Loans are considered impaired when it is determined to be probable that all amounts due under the contractual terms of the loan will not be collected when due. Loans considered individually impaired are evaluated and a specific allowance is established if required based on the most appropriate of the three measurement methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. A specific allowance is required if the fair value of the expected repayments or the fair value of the collateral is less than the recorded investment in the loan. At June 30, 2012, loans with a book value of $74.8 million were evaluated for impairment. Of this total, $17.7 million required a specific allowance totaling $1.7 million for a net fair value of $15.8 million. The methods used to determine the fair value
F-404
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
Note 12 – Fair Values of Assets and Liabilities (continued)
of these loans were considered level 3. At June 30, 2012, the majority of impaired loans were evaluated based on the fair value of the collateral. The Company records impaired loans as nonrecurring level 3. There have been no changes in valuation techniques for the quarter ended June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell on the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management or outside appraisers and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. These valuations generally are based on market comparable sales data for similar type of properties. The range of discounts in these valuations is specific to the nature, type, location, condition and market demand for each property. The methods used to determine the fair value of these foreclosed assets were considered level 3.
The table below presents the balances of assets and liabilities measured at fair value on a nonrecurring basis.
June 30, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Impaired loans | $ | 15,857 | $ | – | $ | – | $ | 15,857 | ||||||||
Foreclosed assets | 19,873 | – | – | 19,873 |
December 31, 2011 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Impaired loans | $ | 21,388 | $ | – | $ | – | $ | 21,388 | ||||||||
Foreclosed assets | 19,812 | – | – | 19,812 |
F-405
Table of Contents
Southern Community Financial
Corporation
Consolidated Financial Statements as of and for the
Years Ended December 31, 2011, 2010 and 2009
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Southern Community Financial Corporation and Subsidiary
Winston-Salem, North Carolina
We have audited the accompanying consolidated statements of financial condition of Southern Community Financial Corporation and Subsidiary as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Community Financial Corporation and Subsidiary at December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
/s/ Dixon Hughes Goodman LLP
Raleigh, North Carolina
March 23, 2012
F-407
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 2011 and 2010
2011 | 2010 | |||||||
(Amounts in thousands, except share data) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 23,356 | $ | 16,584 | ||||
Federal funds sold and overnight deposits | 23,198 | 49,587 | ||||||
Investment securities (Note 3) | ||||||||
Available for sale, at fair value | 362,298 | 310,653 | ||||||
Held to maturity, (fair value of $45,514 and $40,181 at December 31, 2011 and 2010, respectively) | 44,403 | 42,220 | ||||||
Federal Home Loan Bank stock (Note 3) | 6,842 | 8,750 | ||||||
Loans held for sale | 4,459 | 5,991 | ||||||
Loans (Note 4) | 950,022 | 1,130,076 | ||||||
Allowance for loan losses (Note 5) | (24,165 | ) | (29,580 | ) | ||||
|
|
|
| |||||
Net Loans | 925,857 | 1,100,496 | ||||||
Premises and equipment (Note 6) | 38,315 | 40,550 | ||||||
Foreclosed assets | 19,812 | 17,314 | ||||||
Other assets (Notes 7 and 14) | 54,038 | 61,253 | ||||||
|
|
|
| |||||
Total Assets | $ | 1,502,578 | $ | 1,653,398 | ||||
|
|
|
| |||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | ||||||||
Demand | $ | 135,434 | $ | 110,114 | ||||
Money market and NOW | 453,114 | 541,949 | ||||||
Savings | 22,786 | 40,929 | ||||||
Time (Note 8) | 571,838 | 655,427 | ||||||
|
|
|
| |||||
Total Deposits | 1,183,172 | 1,348,419 | ||||||
Short-term borrowings (Note 9) | 33,629 | 22,098 | ||||||
Long-term borrowings (Notes 9 and 10) | 177,514 | 182,686 | ||||||
Other liabilities (Note 12 and 17) | 10,628 | 7,854 | ||||||
|
|
|
| |||||
Total Liabilities | 1,404,943 | 1,561,057 | ||||||
|
|
|
| |||||
Stockholders’ Equity (Notes 10, 11, 12 and 16) Senior Cumulative Perpetual Preferred Stock (Series A), no par value, 1,000,000 shares authorized; 42,750 shares issued and outstanding at December 31, 2011 and 2010 | 41,870 | 41,453 | ||||||
Common stock, no par value, 30,000,000 shares authorized; issued and outstanding 16,827,075 shares and 16,812,625 shares at December 31, 2011 and 2010, respectively | 119,505 | 119,408 | ||||||
Retained earnings (accumulated deficit) | (64,425 | ) | (67,082 | ) | ||||
Accumulated other comprehensive income (loss) | 685 | (1,438 | ) | |||||
|
|
|
| |||||
Total Stockholders’ Equity | 97,635 | 92,341 | ||||||
|
|
|
| |||||
Commitments and contingencies (Notes 13 and 18) | ||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,502,578 | $ | 1,653,398 | ||||
|
|
|
|
See accompanying notes.
F-408
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands, except share and per share data) | ||||||||||||
Interest Income | ||||||||||||
Loans | $ | 58,373 | $ | 68,384 | $ | 74,548 | ||||||
Investment securities available for sale | 9,916 | 11,303 | 14,035 | |||||||||
Investment securities held to maturity | 2,281 | 886 | 877 | |||||||||
Federal funds sold and overnight deposits | 166 | 65 | 13 | |||||||||
|
|
|
|
|
| |||||||
Total Interest Income | 70,736 | 80,638 | 89,473 | |||||||||
|
|
|
|
|
| |||||||
Interest Expense | ||||||||||||
Money market, savings, and NOW deposits | 2,800 | 5,718 | 6,787 | |||||||||
Time deposits | 10,049 | 12,781 | 19,631 | |||||||||
Short-term borrowings | 397 | 1,108 | 1,701 | |||||||||
Long-term borrowings | 8,646 | 8,672 | 9,607 | |||||||||
|
|
|
|
|
| |||||||
Total Interest Expense | 21,892 | 28,279 | 37,726 | |||||||||
|
|
|
|
|
| |||||||
Net Interest Income | 48,844 | 52,359 | 51,747 | |||||||||
Provision for Loan Losses (Note 5) | 15,150 | 39,000 | 34,000 | |||||||||
|
|
|
|
|
| |||||||
Net Interest Income After | ||||||||||||
Provision for Loan Losses | 33,694 | 13,359 | 17,747 | |||||||||
|
|
|
|
|
| |||||||
Non-Interest Income | ||||||||||||
Service charges and fees on deposit accounts | 5,939 | 6,533 | 6,246 | |||||||||
Income from mortgage banking activities | 1,274 | 2,182 | 2,104 | |||||||||
Investment brokerage and trust fees | 1,008 | 1,474 | 1,159 | |||||||||
Gain on sale of investment securities | 3,989 | 3,531 | 1,236 | |||||||||
Net impairment loss recognized in earnings | — | (186 | ) | (404 | ) | |||||||
Other (Note 15) | 1,830 | 2,072 | 2,565 | |||||||||
|
|
|
|
|
| |||||||
Total Non-Interest Income | 14,040 | 15,606 | 12,906 | |||||||||
|
|
|
|
|
| |||||||
Non-Interest Expense | ||||||||||||
Salaries and employee benefits | 18,308 | 20,926 | 22,502 | |||||||||
Occupancy and equipment | 7,168 | 7,428 | 7,903 | |||||||||
FDIC deposit insurance | 3,803 | 2,197 | 3,098 | |||||||||
Foreclosed asset related | 3,832 | 4,914 | 3,376 | |||||||||
Goodwill impairment | — | — | 49,501 | |||||||||
Other (Note 15) | 11,549 | 12,303 | 14,118 | |||||||||
|
|
|
|
|
| |||||||
Total Non-Interest Expense | 44,660 | 47,768 | 100,498 | |||||||||
|
|
|
|
|
| |||||||
Income (Loss) Before Income Taxes | 3,074 | (18,803 | ) | (69,845 | ) | |||||||
Income Tax Expense (Benefit) (Note 14) | — | 4,318 | (6,686 | ) | ||||||||
|
|
|
|
|
| |||||||
Net Income (loss) | 3,074 | (23,121 | ) | (63,159 | ) | |||||||
|
|
|
|
|
| |||||||
Effective dividends on preferred stock (Note 11) | 2,554 | 2,531 | 2,508 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) available to common shareholders | $ | 520 | $ | (25,652 | ) | $ | (65,667 | ) | ||||
|
|
|
|
|
| |||||||
Net Income (loss) Per Common Share | ||||||||||||
Basic | $ | 0.03 | $ | (1.53 | ) | $ | (3.91 | ) | ||||
Diluted | 0.03 | (1.53 | ) | (3.91 | ) | |||||||
Weighted Average Common Shares Outstanding | ||||||||||||
Basic | 16,829,391 | 16,811,439 | 16,787,938 | |||||||||
Diluted | 16,896,692 | 16,811,439 | 16,787,938 |
See accompanying notes.
F-409
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Net income (loss) | $ | 3,074 | $ | (23,121 | ) | $ | (63,159 | ) | ||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss): | ||||||||||||
Securities available for sale: | ||||||||||||
Unrealized holding gains (loss) on available for sale securities | 7,381 | (3,519 | ) | 1,012 | ||||||||
Tax effect | (2,846 | ) | 1,357 | (390 | ) | |||||||
Reclassification of gains recognized in net income | (3,989 | ) | (3,531 | ) | (1,236 | ) | ||||||
Tax effect | 1,538 | 1,361 | 476 | |||||||||
Reclassification of impairment on equity securities | — | 186 | — | |||||||||
Tax effect | — | (72 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net of tax amount | 2,084 | (4,218 | ) | (138 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flow hedging activities: | ||||||||||||
Unrealized holding gains (losses) on cash flow hedging activities | (342 | ) | (738 | ) | 354 | |||||||
Tax effect | 132 | 284 | (137 | ) | ||||||||
Reclassification of gains recognized in net income (loss), net | ||||||||||||
Reclassified into income | 684 | 297 | 233 | |||||||||
Tax effect | (264 | ) | (115 | ) | (90 | ) | ||||||
Other | — | (14 | ) | (315 | ) | |||||||
Tax effect | — | 6 | 121 | |||||||||
|
|
|
|
|
| |||||||
Net of tax amount | 210 | (280 | ) | 166 | ||||||||
|
|
|
|
|
| |||||||
Net postretirement benefit plans adjustment | (279 | ) | (40 | ) | (14 | ) | ||||||
Tax effect | 108 | 15 | 6 | |||||||||
|
|
|
|
|
| |||||||
Net of tax amount | (171 | ) | (25 | ) | (8 | ) | ||||||
|
|
|
|
|
| |||||||
Total other comprehensive income (loss) | 2,123 | (4,523 | ) | 20 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) | $ | 5,197 | $ | (27,644 | ) | $ | (63,139 | ) | ||||
|
|
|
|
|
|
See accompanying notes.
F-410
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2011, 2010 and 2009
Preferred Stock | Common Stock | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholder’s Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
(Amounts in thousands, except share data) | ||||||||||||||||||||||||||||
Balance at December 31, 2008 | 42,750 | $ | 40,690 | 16,769,675 | $ | 119,054 | $ | 24,901 | $ | 3,065 | $ | 187,710 | ||||||||||||||||
Net income (loss) | — | — | — | — | (63,159 | ) | — | (63,159 | ) | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 20 | 20 | |||||||||||||||||||||
Restricted stock issued | — | — | 18,000 | 63 | — | — | 63 | |||||||||||||||||||||
Stock-based compensation | — | — | — | 165 | — | — | 165 | |||||||||||||||||||||
Cash dividends of $0.04 per share | — | — | — | — | (664 | ) | — | (664 | ) | |||||||||||||||||||
Preferred stock transaction: | ||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | (2,138 | ) | — | (2,138 | ) | |||||||||||||||||||
Preferred stock accretion of discount | — | 370 | — | — | (370 | ) | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2009 | 42,750 | 41,060 | 16,787,675 | 119,282 | (41,430 | ) | 3,085 | 121,997 | ||||||||||||||||||||
Net income (loss) | — | — | — | — | (23,121 | ) | — | (23,121 | ) | |||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | (4,523 | ) | (4,523 | ) | |||||||||||||||||||
Stock options exercised including income tax benefit of $0 | — | — | 200 | — | — | — | — | |||||||||||||||||||||
Restricted stock issued | — | — | 24,750 | 74 | — | — | 74 | |||||||||||||||||||||
Stock-based compensation | — | — | — | 52 | — | — | 52 | |||||||||||||||||||||
Preferred stock transaction: | ||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | (2,138 | ) | — | (2,138 | ) | |||||||||||||||||||
Preferred stock accretion of discount | — | 393 | — | — | (393 | ) | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2010 | 42,750 | 41,453 | 16,812,625 | 119,408 | (67,082 | ) | (1,438 | ) | 92,341 | |||||||||||||||||||
Net income | — | — | — | — | 3,074 | — | 3,074 | |||||||||||||||||||||
Other comprehensive income net of tax | — | — | — | — | — | 2,123 | 2,123 | |||||||||||||||||||||
Stock options exercised including income tax benefit of $0 | — | — | 200 | — | — | — | — | |||||||||||||||||||||
Restricted stock issued | — | — | 14,250 | 71 | — | — | 71 | |||||||||||||||||||||
Stock-based compensation | — | — | — | 26 | — | — | 26 | |||||||||||||||||||||
Cash dividends of $0.00 per share | — | — | — | — | — | — | — | |||||||||||||||||||||
Preferred stock transaction: | ||||||||||||||||||||||||||||
Preferred stock accretion of discount | — | 417 | — | — | (417 | ) | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2011 | 42,750 | $ | 41,870 | 16,827,075 | $ | 119,505 | $ | (64,425 | ) | $ | 685 | $ | 97,635 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-411
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Cash Flows from Operating Activities | ||||||||||||
Net income (loss) | $ | 3,074 | $ | (23,121 | ) | $ | (63,159 | ) | ||||
|
|
|
|
|
| |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 4,617 | 4,389 | 4,131 | |||||||||
Provision for loan losses | 15,150 | 39,000 | 34,000 | |||||||||
Net proceeds from sales of loans held for sale | 60,846 | 105,113 | 175,887 | |||||||||
Originations of loans held for sale | (58,040 | ) | (105,897 | ) | (176,492 | ) | ||||||
Gain from mortgage banking | (1,274 | ) | (2,182 | ) | (2,104 | ) | ||||||
Stock-based compensation | 97 | 126 | 228 | |||||||||
Net increase in cash surrender value of life insurance | (1,103 | ) | 1,079 | 1,116 | ||||||||
Realized gain on sales of available for sale securities | (3,989 | ) | (3,531 | ) | (1,236 | ) | ||||||
Realized loss on impairment of investment securities available for sale | — | 186 | — | |||||||||
Realized loss of equity investment in Silverton Bank | — | — | 404 | |||||||||
Realized (gain) loss on sale of premises and equipment | 54 | 24 | (57 | ) | ||||||||
Loss on economic hedges | 129 | 532 | 826 | |||||||||
Deferred income taxes | (869 | ) | 9,710 | (5,836 | ) | |||||||
Realized (gains) loss on sale of foreclosed assets | (689 | ) | (429 | ) | (196 | ) | ||||||
OREO writedown | 2,772 | 3,092 | 2,493 | |||||||||
Goodwill impairment | — | — | 49,501 | |||||||||
Change in assets and liabilities: | ||||||||||||
(Increase) decrease in other assets | 7,923 | (1,964 | ) | (12,886 | ) | |||||||
Increase (decrease) in other liabilities | 2,422 | (638 | ) | (2,608 | ) | |||||||
|
|
|
|
|
| |||||||
Total Adjustments | 28,046 | 48,610 | 67,171 | |||||||||
|
|
|
|
|
| |||||||
Net Cash Provided by Operating Activities | 31,120 | 25,489 | 4,012 | |||||||||
|
|
|
|
|
| |||||||
Cash Flows from Investing Activities | ||||||||||||
(Increase) decrease in federal funds sold | 26,389 | (18,318 | ) | (29,089 | ) | |||||||
Purchases of: | ||||||||||||
Available for sale investment securities | (360,488 | ) | (278,934 | ) | (215,169 | ) | ||||||
Held to maturity investment securities | (7,829 | ) | (36,632 | ) | — | |||||||
Proceeds from maturities and calls of: | ||||||||||||
Available for sale investment securities | 44,496 | 143,570 | 122,115 | |||||||||
Held to maturity investment securities | 1,071 | 5,320 | 24,309 | |||||||||
Proceeds from sale of: | ||||||||||||
Available for sale investment securities | 274,785 | 132,930 | 69,846 | |||||||||
Purchase of Federal Home Loan Bank stock | — | — | (421 | ) | ||||||||
Proceeds from sales of Federal Home Loan Bank stock | 1,908 | 1,044 | 384 | |||||||||
Net (increase) decrease in loans | 139,167 | 49,280 | 35,421 | |||||||||
OREO capitalized cost | (269 | ) | (103 | ) | (758 | ) | ||||||
Purchases of premises and equipment | (827 | ) | (1,154 | ) | (5,962 | ) | ||||||
Proceeds from disposal of premises and equipment | 127 | 92 | 59 | |||||||||
Proceeds from sale of foreclosed assets | 16,010 | 11,401 | 10,699 | |||||||||
|
|
|
|
|
| |||||||
Net Cash Provided by (Used in) Investing Activities | 134,540 | 8,496 | 11,434 | |||||||||
|
|
|
|
|
|
See accompanying notes.
F-412
Table of Contents
SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Cash Flows from Financing Activities | ||||||||||||
Net increase (decrease) in demand deposits and transaction accounts | (81,658 | ) | (4,407 | ) | 119,579 | |||||||
Net increase (decrease) in time deposits | (83,589 | ) | 38,756 | (38,621 | ) | |||||||
Net increase (decrease) in short-term borrowings | (13,469 | ) | (63,379 | ) | (59,720 | ) | ||||||
Proceeds from long-term borrowings | 45,000 | — | 16,250 | |||||||||
Repayment of long-term borrowings | (25,172 | ) | (16,417 | ) | (45,163 | ) | ||||||
Preferred dividends paid | — | (2,138 | ) | (2,138 | ) | |||||||
Cash dividends paid | — | — | (664 | ) | ||||||||
|
|
|
|
|
| |||||||
Net Cash Provided by (Used in) Financing Activities | (158,888 | ) | (47,585 | ) | (10,477 | ) | ||||||
|
|
|
|
|
| |||||||
Net Increase (decrease) in Cash and Cash Equivalents | 6,772 | (13,600 | ) | 4,969 | ||||||||
Cash and Cash Equivalents, Beginning of Year | 16,584 | 30,184 | 25,215 | |||||||||
|
|
|
|
|
| |||||||
Cash and Cash Equivalents, End of Year | $ | 23,356 | $ | 16,584 | $ | 30,184 | ||||||
|
|
|
|
|
| |||||||
Supplemental Disclosures of Cash Flow Information | ||||||||||||
Interest paid on deposits and borrowed funds | $ | 19,452 | $ | 28,818 | $ | 40,835 | ||||||
Income taxes paid | — | 945 | 754 | |||||||||
Supplemental Schedule of Noncash Investing and Financing Activities | ||||||||||||
Transfer of loans to foreclosed assets | $ | 20,322 | $ | 11,861 | $ | 25,902 | ||||||
Transfer of investments from HTM to AFS | 4,463 | — | — | |||||||||
Increase (decrease) in fair value of securities available for sale, net of tax | 2,084 | (4,218 | ) | (138 | ) | |||||||
Increase (decrease) in fair value of cash flow hedges, net of tax | 210 | (280 | ) | 166 | ||||||||
Unrealized gain (loss) on fair value hedges | 266 | (379 | ) | 161 |
See accompanying notes.
F-413
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Southern Community Financial Corporation and its wholly-owned subsidiary, Southern Community Bank and Trust. All material intercompany transactions and balances have been eliminated in consolidation. Southern Community Financial Corporation and its subsidiary are collectively referred to herein as the “Company.”
Nature of Operations
Southern Community Bank and Trust (the “Bank”) was incorporated November 14, 1996 and began banking operations on November 18, 1996. The Bank is engaged in general commercial and retail banking principally in Central and Western North Carolina, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation. In October 2001, Southern Community Financial Corporation (the “Company”) was formed as a financial holding company for the Bank, and is subject to the rules and regulations of the Federal Reserve System. On March 3, 2011, the Company applied to the Federal Reserve to modify its status from a financial holding company to a bank holding company. This was approved by the Federal Reserve Bank on March 14, 2011. The Bank and the Company undergo periodic examinations by those regulatory authorities.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the carrying value of foreclosed assets and the valuation allowance on deferred tax assets.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “Cash and due from banks,” which include cash on hand and amounts due from banks.
Federal regulations require institutions to set aside specified amounts of cash as reserves against transaction and time deposits. As of December 31, 2011, the daily average gross reserve requirement was $6.4 million.
Investment Securities
Available for sale securities are carried at fair value and consist of bonds, asset-backed securities and municipal securities not classified as trading securities or as held to maturity securities. The cost of debt securities available for sale is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization of premiums, accretion of discounts, interest and dividend income are included in investment income. Unrealized holding gains and losses on available for sale securities are reported as a net amount in accumulated other comprehensive income, net of income taxes. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Bonds and asset-backed securities for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using a method that approximates the interest method over the
F-414
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
period to maturity. Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary would result in a permanent write down of the individual securities to their fair value if they are credit related. Such write-downs would be included in earnings as realized losses. Declines in fair value of individual debt securities that are not credit related including securities with below market interest rates are included in other comprehensive income. If the Company intends to sell a security or cannot assert that it is more likely than not to have to sell the security the loss must be included as a realized loss regardless of the reason for impairment. The classification of securities is generally determined at the date of purchase.
Federal Home Loan Bank Stock
The Company has an investment in the Federal Home Loan Bank of Atlanta which does not have readily determinable fair value and we do not exercise significant influence on them. The Company carries its investment in FHLB at its cost which is the par value of the stock.
Loans Held for Sale
The Company originates single family, residential first mortgage loans on a pre-sold basis. Loans held for sale are carried at the lower of cost or fair value in the aggregate as determined by outstanding commitments from investors. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. The Company recognizes certain origination and service release fees upon the sale, which are included in non-interest income in the consolidated statement of operations. The Company does not hold nonmortgage loans for sale and did not reclassify any financing receivables to held for sale during the year.
The Company is exposed to certain risks relating to its ongoing mortgage origination business. The Company enters into interest rate lock commitments and commitments to sell mortgages. The primary risks are related to these interest rate lock commitments and forward-loan-sale commitments, which the Company executes on a “best efforts” basis rather than on a mandatory commitment basis. Under best efforts commitments, the Company is not obligated to deliver the loan for sale if the loan does not close. Using best efforts commitments to sell its mortgage loans, the Company can substantially mitigate the interest rate risk in its mortgage origination business.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment to yield over the life of the related loan. Interest on loans is recorded based on the principal amount outstanding. For all classes, loans are considered delinquent and past due when payment has not been received for a period of 30 days after a scheduled payment due date. The accrual of interest on impaired loans is discontinued when loans are 90 days or more past due or, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Interest income is subsequently recognized only to the extent cash payments are received. Loans are written down or charged off when management has determined the loan to be uncollectible in part or in total. Loans are returned to an accrual status when the borrower makes timely principal and interest payments for a period of six months and has the ability to continue making scheduled payments until the loan is repaid in full. See Note 4 for further discussion of lending practices by loan class. Loans are primarily made in the Bank’s market areas of North Carolina. Real estate loans can be affected by the condition of the local real estate market.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Commercial and installment loans can be affected by the local economic conditions. The Company’s off balance sheet credit exposure is limited to unused lines of credit. An allowance for loan loss has not been established for this exposure. The Company did not enter into any significant purchases or sales of financing receivables during 2011 or 2010.
Allowance for Loan Losses
The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at a level believed adequate to absorb probable losses inherent in the loan portfolio. The Bank’s format for the calculation of ALLL begins with the evaluation of loans under impairment guidelines. For the purposes of evaluating loans for impairment, loans are considered impaired when it is considered probable that all amounts due under the contractual terms of the loan will not be collected when due (minor shortfalls in amount or timing excepted). The Bank has established policies and procedures for identifying loans that should be considered for impairment. Loans are reviewed through multiple means such as delinquency management, credit risk reviews, watch and criticized loan monitoring meetings and general account management. Loans that are outside of the Bank’s established criteria for evaluation may be considered for impairment testing when management deems the risk sufficient to warrant this approach. For loans determined to be impaired, the specific allowance is based on the most appropriate of the three measurement methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. Once a loan is considered impaired, it is not included in the determination of the general loss component of the allowance, even if no specific allowance is considered necessary. In addition to the evaluation of individual loans for impairment, the Bank calculates the loan loss exposure on the remaining loans (not individually evaluated for impairment) by applying the applicable historical loan loss experience factors to each major loan segment.
The Bank also utilizes various other qualitative and quantitative factors to further evaluate the portfolio for risk. The other factors utilized include economic trends (such as the unemployment rate and changes in real estate values) and portfolio trends (such as delinquencies and concentration levels among others) that are pertinent to the underlying risks in each major loan segment. Based on the subjective evaluation of the impact of these qualitative and quantitative other factors, we assign additional general allowance requirements. The appropriate combined factor (historical loss experience adjusted for the qualitative and quantitative factors is applied to only those loans not individually evaluated for impairment. The ALLL calculation for specific loss and general loss exposure are aggregated to arrive at the approximate allowance level for our loan portfolio. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Company believes the allowance for loan losses has been established in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the loan portfolio, will not require adjustments to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets which are 11 to 30 years for buildings and 3 to 7 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
shorter. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations. Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable.
Foreclosed Assets
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Principal and interest losses existing at the time of acquisition of such assets are charged against the allowance for loan losses and interest income, respectively. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Revenue and expenses from operations and the impact of any subsequent changes in the carrying value are included in other expenses.
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. An impairment loss is recorded to the extent that the carrying value of goodwill exceeds its implied fair value.
Intangible assets with finite lives include core deposits and other intangibles. Intangible assets other than goodwill are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Core deposit intangibles are amortized on the straight-line method over a period not to exceed 10 years. Note 7 contains additional information regarding goodwill and other intangible assets.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be fully realized.
Derivative Instruments
The Company utilizes stand-alone derivative financial instruments, primarily in the form of interest rate swap and option agreements, in its asset/liability management program. These transactions involve both credit and market risk. The Company uses derivative instruments to mitigate exposure to adverse changes in fair value or cash flows of certain assets and liabilities which are required to be carried at fair value. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the balance sheet with corresponding
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
offsets recorded in the income statement. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense on the hedged asset or liability. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in accumulated other comprehensive income within stockholders’ equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged transaction affects earnings. Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement.
The Company does not enter into derivative financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest income during the period of change. The net cash settlement on these derivatives is included in non-interest income.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures and agreements that specify collateral levels to be maintained by the Company and the counterparties. These collateral levels are based on the credit rating of the counterparties.
The Company currently has nine derivative instrument contracts consisting of one interest rate cap, six interest rate swaps and two foreign exchange contracts. The primary objective for each of these contracts is to minimize risk, interest rate risk being the primary risk for the interest rate caps and swaps; while foreign exchange risk is the primary risk for the foreign exchange contracts. The Company’s strategy is to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods. In order to acquire low cost, long term fixed rate funding without incurring currency risk, the Company entered into the foreign exchange contract to convert foreign currency denominated certificates of deposit into long term dollar denominated time deposits. The interest rate on the underlying $10.0 million certificates of deposit is based on a proprietary index (Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays Bank). The currency swap is also based on this proprietary index. Note 17 contains additional information regarding derivative financial instruments.
Per Share Data
Basic net income (loss) per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted net income (loss) per common share reflects the potential dilution that could occur if stock options or warrants were exercised resulting in the issuance of common stock that would then share in the net income of the Company. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities using the treasury stock method.
F-418
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Basic and diluted net income (loss) per common share have been computed based upon net income (loss) available to common shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
2011 | 2010 | 2009 | ||||||||||
Weighted average number of common shares used in computing basic net income per common share | 16,829,391 | 16,811,439 | 16,787,938 | |||||||||
Effect of restricted stock | 67,301 | — | — | |||||||||
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Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share | 16,896,692 | 16,811,439 | 16,787,938 | |||||||||
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For the years ended December 31, 2011, 2010 and 2009, net income (loss) for determining earnings per common share was reported net income (loss) less the effective dividends on preferred stock. For the years ended December 31, 2011, 2010 and 2009, there were 531,850, 598,006 and 657,100 exercisable options, respectively. In 2011, 531,850 options were antidilutive since the exercise price exceeded the average market price for the year. In 2010 and 2009, all options were antidilutive due to reported net losses. The outstanding warrants to purchase 1,623,418 shares provided to the US Treasury were antidilutive since the exercise price exceeded the average market price for the year. These antidilutive common stock equivalents have been omitted from the calculation of diluted earnings per common share for their respective years.
Stock-Based Compensation
The Company has certain stock-based employee compensation plans, described more fully in Note 12. Effective January 1, 2006, the Company adopted the modified prospective application method for expensing the value of options and accordingly did not restate prior period amounts. Generally accepted accounting principles require recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). Compensation cost for all awards granted after the date of adoption and any unvested awards that remained outstanding as of the date of adoption are required to be measured based on the fair value of the award on the grant date.
Comprehensive Income
Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and comprises net income and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains and losses that are excluded from earnings under current accounting standards. Components of other comprehensive income (loss) for the Company consist of the unrealized gains and losses, net of taxes, in the Company’s available for sale securities portfolio, unrealized gains and losses, net of taxes, in the Company’s cash flow hedge instruments, and the components of changes in net benefit plan liabilities that are not recognized as benefit costs.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Accumulated other comprehensive income at December 31, 2011 and 2010 consists of the following:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Unrealized holding gain — investment securities available for sale | $ | 1,857 | $ | (1,535 | ) | |||
Deferred income taxes | (715 | ) | 592 | |||||
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Net unrealized holding gain — investment securities available for sale | 1,142 | (943 | ) | |||||
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Unrealized holding gain (loss) — cash flow hedge instruments | 9 | (333 | ) | |||||
Deferred income taxes | (4 | ) | 128 | |||||
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Net unrealized holding gain (loss) — cash flow hedge instruments | 5 | (205 | ) | |||||
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Postretirement benefit plans adjustment | (751 | ) | (473 | ) | ||||
Deferred income taxes | 289 | 183 | ||||||
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Net postretirement benefit plans adjustment | (462 | ) | (290 | ) | ||||
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Total accumulated other comprehensive income | $ | 685 | $ | (1,438 | ) | |||
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Segment Reporting
Management is required to report selected financial and descriptive information about reportable operating segments. Related disclosures about products and services, geographic areas and major customers are also required. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. In all material respects, the Company’s operations are entirely within the commercial banking segment, and the consolidated financial statements presented herein reflect the results of that segment. Also, the Company has no foreign operations or customers.
Risk and Uncertainties
In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. The two primary components of economic risk to the Company are credit risk and market risk. Credit risk is the risk of default on the Bank’s loan portfolio that results from borrowers’ failure to make contractually required payments. Market risk arises principally from interest rate risk inherent in our lending, investing, deposit and borrowing activities.
The Company is subject to the regulations of various government agencies. These regulations may change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances or operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examination.
Effective February 25, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation and the State of North Carolina Office of the Commissioner of Banks with certain requirements, including reducing adversely classified loans and maintaining regulatory capital above specified minimum levels. On June 23, 2011, the Company entered into a Written Agreement with the Federal Reserve with certain restrictions including not paying any distributions of interest or principal on trust preferred securities without prior approval. See Note 2 for further discussion concerning the provisions of the Consent Order and Written Agreement.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to current year presentation. Such reclassifications had no effect on income or equity.
Recent Accounting Pronouncements
The Company has adopted Accounting Standards Update No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This standard requires additional disclosures related to the allowance for loan loss with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality disaggregated by portfolio segment and class of financing receivable. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructurings with their effect on the allowance for loan loss. The provisions of this standard are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This standard was adopted as of December 31, 2010 and during the quarter ended March 31, 2011 through additional disclosures in the notes to the consolidated financial statements.
In April 2011, the FASB has issued Accounting Standards Update No. 2011-02,A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The new standard provides additional guidance on a creditor’s evaluation of when a concession on a loan has been granted and whether a debtor is experiencing financial difficulties. A creditor must conclude that both of these conditions exist for the loan to be considered a troubled debt restructuring. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company adopted the update of this standard during the quarter ending September 30, 2011. The adoption did not have a material impact on the consolidated financial statements.
In May 2011, the FASB has issued Accounting Standards Update No. 2011-04,Fair Value Measurement. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for accounting principles generally accepted in the United States (“US GAAP”) and international financial reporting standards (IFRS). The new standard provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company adopted this statement during the quarter ended March 31, 2011 and its adoption did not have a material impact on the consolidated financial statements.
In June 2011, the FASB has issued Accounting Standards Update No. 2011-05,Comprehensive Income. The new standard provides guidance and new formats for reporting components and total net income and comprehensive income. The guidance allows the presentation of net income and comprehensive income to be in a single continuous statement or two separate but consecutive statements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company adopted this statement in 2011 and continued to use the two consecutive statement formats which is allowed by the pronouncement.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
proposed statements and SEC Staff Accounting Bulletins on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
(2) REGULATORY MATTERS
Regulatory Actions
On February 25, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation and the North Carolina Commission of Banks. Under the terms of the Consent Order among other things, the Bank agreed to:
• | Strengthen Board oversight of the management and operations of the Bank; |
• | Comply with minimum capital requirements of 8% Tier 1 leverage capital and 11% total risk-based capital; |
• | Formulate and implement a plan to reduce the Bank’s risk exposure in assets classified “Substandard or Doubtful” in the FDIC’s most recent report of examination by 15% in 180 days, 35% in 360 days, 60% in 540 days and 75% in 720 days; |
• | Within 90 days, implement effective lending and collection policies; |
• | Not pay cash dividends without the prior written approval of the FDIC and the Commissioner; and |
• | Neither renew, rollover or accept any brokered deposits without obtaining a waiver from the FDIC. |
In connection with the Consent Order executed with the FDIC and the NCCOB, the Company entered into a Written Agreement with the Federal Reserve Bank of Richmond (the “Federal Reserve”) on June 23, 2011. Under the terms of the Written Agreement, among other things, the Company agreed to:
• | Act as a source of strength for the Bank; |
• | Not declare or pay dividends on its, common and preferred, stock or make any distributions of interest or principal on trust preferred securities without the prior approval of the Federal Reserve; |
• | Formulate and implement a written plan to maintain sufficient capital at the Company on a consolidated basis; |
• | Not, directly or indirectly, incur, increase or guarantee any debt without the prior approval of the Federal Reserve; and |
• | Not, directly or indirectly, purchase or redeem any shares of its stock without the prior approval of the Federal Reserve. |
In February 2011, the Company suspended the payment of regular quarterly cash dividends on the preferred stock issued to the US Treasury. As of December 31, 2011, the total amount of cumulative dividends owed to the US Treasury was $2.6 million. In addition, the Company elected to defer the payment of regularly scheduled interest payments on both issues of junior subordinated debentures related to its outstanding trust preferred securities. As of December 31, 2011, the total cumulative interest payments due on the trust preferred securities were $2.9 million. The Company continues to account for the cumulative amounts due on the subordinated debentures and preferred stock. Although the Company has suspended the declaration and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared because of their cumulative nature.
The Consent Order and the Written Agreement each specify certain time frames for meeting these requirements. The Company and the Bank must furnish periodic progress reports to the pertinent supervisory
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
authority regarding its compliance with the Consent Order or Written Agreement. The Consent Order and the Written Agreement will remain in effect until modified or terminated by the pertinent supervisory authority.
Management’s Plans and Compliance Efforts
As of December 31, 2011, the Bank has undertaken the necessary actions to comply with the Consent Order, including the following:
• | The Bank has exceeded all minimum capital requirements of the Consent Order. With respect to the Bank’s regulatory capital ratios as of December 31, 2011, the Tier 1 leverage capital ratio and the total risk-based capital ratios were 9.07% and 13.85%, respectively, compared to requirements of the Consent Order of 8% and 11%, respectively. |
• | As of December 31, 2011, the Bank reduced its risk exposure to adversely classified assets identified in the Bank’s June 30, 2010 Report of Examination by 42% which exceeds its scheduled reduction at its second measurement point (35% reduction by the February 25, 2012). |
• | The Bank retained an independent consultant who prepared a management plan which was approved by the Board. The plan was submitted to, and approved by, the FDIC and the NCCOB. |
• | The Bank has reduced its reliance on brokered deposits which amounted to 12.5% of total deposits at December 31, 2011 and has complied with the applicable restrictions on brokered deposits as stipulated in the Consent Order. |
In addition to utilizing balance sheet shrinkage through net loan run-off and reduction of brokered deposits and undertaking various ways to improve Bank profitability, the Company is continuing to evaluate various strategies such as asset sales and plans for capital injections in order to maintain compliance with the minimum regulatory capital ratios required under the Consent Order provisions. As of December 31, 2011, the parent holding company had $5.6 million in cash available to be invested into the Bank to bolster capital levels. The ability to accomplish some of these goals is significantly constricted by the current economic environment. As has been widely publicized, access to capital markets is extremely limited in the current economic environment, and there can be no assurances that the Company will be able to access any such capital or sell assets.
Failure by the Bank to comply with the requirements set forth in the Consent Order may result in further adverse regulatory actions, sanctions, and restrictions on the Bank’s activities, which could have a material adverse effect on the business, future prospects, financial condition or results of operations of the Bank and the Company.
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(3) INVESTMENT SECURITIES
The following is a summary of the securities portfolio by major classification at December 31, 2011 and 2010:
2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(Amount in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US Government agencies | $ | 34,660 | $ | 69 | $ | — | $ | 34,729 | ||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 185,838 | 1,713 | 245 | 187,306 | ||||||||||||
Collateralized mortgage obligations | 28,089 | 450 | 1,447 | 27,092 | ||||||||||||
Small Business Administration loan pools | 67,507 | 637 | 76 | 68,068 | ||||||||||||
Student loan pools | 8,903 | — | 1 | 8,902 | ||||||||||||
Municipals | 26,981 | 2,239 | — | 29,220 | ||||||||||||
Trust preferred securities | 3,250 | — | 929 | 2,321 | ||||||||||||
Corporate Bonds | 4,213 | — | 554 | 3,659 | ||||||||||||
Other | 1,000 | 1 | — | 1,001 | ||||||||||||
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$ | 360,441 | $ | 5,109 | $ | 3,252 | $ | 362,298 | |||||||||
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Residential mortgage-backed securities | $ | 474 | $ | 34 | $ | — | $ | 508 | ||||||||
Small Business Administration loan pools | 4,928 | 230 | — | 5,158 | ||||||||||||
Municipals | 33,214 | 1,904 | 1 | 35,117 | ||||||||||||
Corporate Bonds | 5,787 | — | 1,056 | 4,731 | ||||||||||||
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$ | 44,403 | $ | 2,168 | $ | 1,057 | $ | 45,514 | |||||||||
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(Amount in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US Government agencies | $ | 100,101 | $ | 198 | $ | 2,059 | $ | 98,240 | ||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 65,452 | 2,001 | 130 | 67,323 | ||||||||||||
Collateralized mortgage obligations | 42,379 | 274 | 422 | 42,231 | ||||||||||||
Small Business Administration loan pools | 40,453 | 74 | 305 | 40,222 | ||||||||||||
Municipals | 55,901 | 404 | 741 | 55,564 | ||||||||||||
Trust preferred securities | 4,252 | 21 | 1,179 | 3,094 | ||||||||||||
Common stocks and mutual funds | 2,650 | 353 | — | 3,003 | ||||||||||||
Other | 1,000 | — | 24 | 976 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 312,188 | $ | 3,325 | $ | 4,860 | $ | 310,653 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | $ | 804 | $ | 48 | $ | — | $ | 852 | ||||||||
Municipals | 31,416 | 104 | 1,631 | 29,889 | ||||||||||||
Corporate bonds | 10,000 | — | 560 | 9,440 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 42,220 | $ | 152 | $ | 2,191 | $ | 40,181 | |||||||||
|
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|
|
|
|
|
|
F-424
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Residential mortgage-backed securities and collateralized mortgage obligations are primarily government sponsored (GSE) agency issued whose underlying collateral are prime residential mortgage loans. The Company’s municipal securities are composed of geographic concentrations of 94.0% North Carolina, 3.0% of Texas independent school districts and less than 3.0% in other states. As the Company’s investment policy limits the purchase of municipal securities to “A” rated or better, the municipal investment portfolio segment has 98.4% of this portfolio rated “A” or better.
Proceeds from sales of available for sale securities during 2011, 2010 and 2009 were $274.8 million, $132.9 million and $69.8 million respectively, at an aggregate gain of $4.0 million, $3.5 million and $1.2 million respectively. These sales were part of the Company’s asset liability management.
On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, N.A. and appointed the FDIC as the receiver to conduct an orderly liquidation of Silverton through the use of a bridge bank. The Company recorded a loss of $404 thousand in the first quarter of 2009 to write-off its equity investment in Silverton which was classified as other securities available for sale. The impairment loss on the Company’s equity investment in Silverton Bank was recorded as a component of non-interest income on the consolidated statements of operations for the period ended December 31, 2009. The Company determined one marketable equitable security was “other-than-temporarily” impaired during the first quarter of 2010 and recognized a $186 thousand write-down on the investment. The investment was sold during the fourth quarter of 2010 and the loss on the sale is included in securities gains and losses.
The following tables show the gross unrealized losses and fair values for our investments aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2011 and December 31, 2010. For available for sale securities, the unrealized losses relate to thirty-one issues of residential mortgage-backed securities, one issue of student loan pools, two municipal issues and three issues of other securities. For held to maturity securities, the unrealized losses relate to one municipal security issue and one corporate bond. All investment securities with unrealized losses are considered by management to be temporarily impaired given the credit ratings on these investment securities and management’s intent and ability to hold these securities until recovery. Should the Company decide in the future to sell securities in an unrealized loss position, or determine that impairment of any securities is other than temporary, irrespective of a decision to sell, an impairment loss would be recognized in the period such determination is made.
During the second half of 2011, management determined that (while possessing an A-credit rating as of December 31, 2011) the issuer’s creditworthiness appeared to be weakening, its intentions related to holding a specific corporate bond to maturity had changed. Based on this, management transferred this issue of corporate bonds from the held-to-maturity classification to available-for-sale. The pre-transfer carrying amount of this security was $4.2 million amortized cost and its post-transfer carrying value was $4.0 million at the date of the transfer, resulting in a $241 thousand unrealized loss.
F-425
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
2011 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||||||||
(Amount in thousands) | ||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 54,446 | $ | 245 | $ | — | $ | — | $ | 54,446 | $ | 245 | ||||||||||||
Collateralized mortgage obligations | 12,248 | 1,447 | — | — | 12,248 | 1,447 | ||||||||||||||||||
Small Business Administration loan pools | 12,309 | 74 | 686 | 2 | 12,995 | 76 | ||||||||||||||||||
Student loan pools | 8,902 | 1 | — | — | 8,902 | 1 | ||||||||||||||||||
Municipals | 6 | — | — | — | 6 | — | ||||||||||||||||||
Trust preferred securities | — | — | 2,321 | 929 | 2,321 | 929 | ||||||||||||||||||
Corporate bonds | — | — | 3,659 | 554 | 3,659 | 554 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 87,911 | $ | 1,767 | $ | 6,666 | $ | 1,485 | $ | 94,577 | $ | 3,252 | ||||||||||||
|
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|
|
|
|
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|
| |||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Municipals | $ | — | $ | — | $ | 967 | $ | 1 | $ | 967 | $ | 1 | ||||||||||||
Corporate bonds | — | — | 4,731 | 1,056 | 4,731 | 1,056 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | — | $ | — | $ | 5,698 | $ | 1,057 | $ | 5,698 | $ | 1,057 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||||||||
(Amount in thousands) | ||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
US Government agencies | $ | 75,252 | $ | 2,059 | $ | — | $ | — | $ | 75,252 | $ | 2,059 | ||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
Residential mortgage-backed securities | 29,315 | 130 | — | — | 29,315 | 130 | ||||||||||||||||||
Collateralized mortgage obligations | 15,055 | 422 | — | — | 15,055 | 422 | ||||||||||||||||||
Small Business Administration loan pools | 25,680 | 305 | — | — | 25,680 | 305 | ||||||||||||||||||
Municipals | 31,513 | 737 | 719 | 4 | 32,232 | 741 | ||||||||||||||||||
Trust preferred securities | — | — | 2,192 | 1,179 | 2,192 | 1,179 | ||||||||||||||||||
Common stocks and mutual funds | — | — | — | — | — | — | ||||||||||||||||||
Other | 976 | 24 | — | — | 976 | 24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 177,791 | $ | 3,677 | $ | 2,911 | $ | 1,183 | $ | 180,702 | $ | 4,860 | ||||||||||||
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|
|
|
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|
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| |||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Municipals | $ | 22,507 | $ | 1,631 | $ | — | $ | — | $ | 22,507 | $ | 1,631 | ||||||||||||
Corporate bonds | 9,440 | 560 | — | — | 9,440 | 560 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 31,947 | $ | 2,191 | $ | — | $ | — | $ | 31,947 | $ | 2,191 | ||||||||||||
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F-426
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
In evaluating investment securities for “other than temporary impairment” losses, management considers, among other things, (i) the length of time and the extent to which the investment is in an unrealized loss position, (ii) the financial condition and near term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a sufficient period of time to allow for any anticipated recovery of unrealized loss. At December 31, 2011, there were six investment securities with aggregate fair values of $12.4 million in an unrealized loss position for at least twelve months. Based on the nature of these securities, we believe the decline in value to be solely due to changes in interest rates and the general economic conditions and not deterioration in their credit quality. Of the securities in an unrealized loss position for at least twelve months at December 31, 2011, two issues of corporate bonds amounted to $8.4 million in fair value (of the total $12.4 million in fair value) with unrealized loss positions of $1.6 million (of the total $2.5 million). The trust preferred securities had two issues in an unrealized loss position for 12 months or more due to changes in the level of market interest rates and a less active market in these securities. One of these securities has a variable rate based on LIBOR which has remained low throughout 2011. Based on the nature of these securities, we believe the decline in value to be solely due to changes in interest rates and the general economic conditions and not deterioration in their credit quality. We have the intention and ability to hold these securities for a period of time sufficient to allow for their recovery in value or maturity. The unrealized losses are reflected in other comprehensive income.
The amortized cost and fair values of securities available for sale and held to maturity at December 31, 2011 by contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation.
Securities Available for Sale | Securities Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(Amount in thousands) | ||||||||||||||||
US Government Agencies | ||||||||||||||||
Due after one but through five years | $ | 11,000 | $ | 11,005 | $ | — | $ | — | ||||||||
Due after five but through ten years | 1,319 | 1,333 | — | — | ||||||||||||
Due after ten years | 22,341 | 22,391 | — | — | ||||||||||||
Municipals | ||||||||||||||||
Due within one year | 850 | 850 | 568 | 577 | ||||||||||||
Due after one but through five years | 445 | 449 | 1,319 | 1,397 | ||||||||||||
Due after five but through ten years | 457 | 474 | 4,215 | 4,416 | ||||||||||||
Due after ten years | 25,229 | 27,447 | 27,112 | 28,727 | ||||||||||||
Trust preferred securities | ||||||||||||||||
Due after ten years | 3,250 | 2,321 | — | — | ||||||||||||
Corporate bonds | ||||||||||||||||
Due after ten years | 4,213 | 3,659 | 5,787 | 4,731 | ||||||||||||
Other | ||||||||||||||||
Due after five but through ten years | 1,000 | 1,001 | — | — | ||||||||||||
Asset-backed securities | ||||||||||||||||
Residential mortgage-backed securities | 185,838 | 187,306 | 474 | 508 | ||||||||||||
Collateralized mortgage obligations | 28,089 | 27,092 | — | — | ||||||||||||
Small Business Administration loan pools | 67,507 | 68,068 | 4,928 | 5,158 | ||||||||||||
Student loan pools | 8,903 | 8,902 | — | — | ||||||||||||
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|
|
|
|
|
| |||||||||
$ | 360,441 | $ | 362,298 | $ | 44,403 | $ | 45,514 | |||||||||
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F-427
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Securities with carrying values of $76.8 million and $81.6 million and fair values of $80.5 million and $80.5 million at December 31, 2011 and 2010, respectively, were pledged to secure public deposits as required by law. Additionally, at December 31, 2011, securities with carrying values and fair values of $48.6 million and $49.1 million were pledged to secure the Company’s borrowings from the FHLB. Securities with carrying values of $113.9 million and fair values of $115.5 million were pledged for other purposes, primarily to secure repurchase agreements and derivative positions.
For the years ended December 31, 2011, 2010 and 2009, income from taxable and nontaxable securities were $10.1 million and $2.1 million, $9.6 million and $2.6 million, and $31.1 million and $1.8 million, respectively.
Federal Home Loan Bank Stock
As disclosed separately on our statements of financial condition, the Company has an investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock of $6.8 million at December 31, 2011 and $8.8 million at December 31, 2010. The Company carries its investment in FHLB at its cost which is the par value of the stock. In prior years, member institutions of the FHLB system have been able to redeem shares in excess of their required investment level at par on a voluntary basis daily. On March 6, 2009, FHLB announced changes in the calculation of member stock requirements (that had the impact of requiring increased member stock ownership) and changes in its policy toward the repurchase of excess stock held by members. These steps were taken as capital preservation measures reflecting a conservative financial management approach in the face of continued volatility in the financial markets and regulatory pressures. Prior to the announcement, the FHLB automatically repurchased excess stock on a daily basis. During 2011, the Company received a total of $1.9 million as its portion of repurchases of excess stock. The FHLB paid a quarterly cash dividend to its members since the second quarter of 2009. Management believes that our investment in FHLB stock was not impaired as of December 31, 2011 or December 31, 2010.
(4) LOANS
Following is a summary of loans by loan class:
At December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Commercial real estate | $ | 387,275 | 40.8 | % | $ | 455,705 | 40.3 | % | ||||||||
Commercial | ||||||||||||||||
Commercial and industrial | 85,321 | 9.0 | % | 92,307 | 8.2 | % | ||||||||||
Commercial line of credit | 44,574 | 4.7 | % | 64,660 | 5.7 | % | ||||||||||
Residential real estate | ||||||||||||||||
Residential construction | 101,945 | 10.7 | % | 137,644 | 12.2 | % | ||||||||||
Residential lots | 45,164 | 4.8 | % | 62,552 | 5.5 | % | ||||||||||
Raw land | 17,488 | 1.8 | % | 20,171 | 1.8 | % | ||||||||||
Home equity lines | 95,136 | 10.0 | % | 104,833 | 9.3 | % | ||||||||||
Consumer | 173,119 | 18.2 | % | 192,204 | 17.0 | % | ||||||||||
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|
|
|
|
|
|
| |||||||||
Subtotal | 950,022 | 100.0 | % | 1,130,076 | 100.0 | % | ||||||||||
|
|
|
| |||||||||||||
Less: Allowance for loan losses | (24,165 | ) | (29,580 | ) | ||||||||||||
|
|
|
| |||||||||||||
Net Loans | $ | 925,857 | $ | 1,100,496 | ||||||||||||
|
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|
|
F-428
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Construction loans are non-revolving extensions of credit secured by real property, the proceeds of which will be used to a) finance the preparation of land for construction of industrial, commercial, residential, or farm buildings; or b) finance the on-site construction of such buildings. Construction loans are approved based on a set of projections regarding cost, time to completion, time to stabilization or sale, and availability of permanent financing. Any one of these projections may vary from actual results. Therefore, construction loans are considered based not only on the expected merits of the project itself, but also on secondary and tertiary repayment sources of the project sponsor, project sponsor expertise and experience and independent evaluation of project viability. Personal guarantees are typically required. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections to ensure that loan commitments remain in-balance with work completed to date and that adequate funds remain available to ensure completion.
Commercial real estate loans are underwritten by evaluating and understanding the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan amounts relative to equity sources of capitalization and higher debt service requirements relative to available cash flow. This heightened degree of financial and operating leverage can expose commercial real estate loans to increased sensitivity to changes in market and economic conditions. Repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Management monitors and evaluates commercial real estate loans based on collateral, geography, and secondary/tertiary sources of repayment of the property sponsors. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Loans secured by owner-occupied properties are generally considered to be less sensitive to real estate market conditions, since the profitability and cash flow of the occupying business are aligned via common ownership.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Underwriting processes include thorough examination of the borrower’s market, operating environment, and business model, to assess whether current and projected cash flows can reasonably be expected to present an acceptable source of repayment. Such repayments are generally sensitized with variances of growth/decline, profitability, and operating cycle changes. Secondary repayment sources, including collateral, are assessed. The level of control and monitoring over such secondary repayment sources may be impacted by the strength of the primary repayment source and the financial position of the borrower.
Residential lot loans are extensions of credit secured by developed tracts of land with appropriate entitlements to support construction of single family or multifamily residential buildings. Such loans were historically structured as time or term loans to finance the holding of the lot for future construction. Because the property is neither generating current income nor providing shelter, these loans have proven to be subject to a higher-than-average risk of abandonment. Extensions of credit for acquisition of finished lots are generally assessed based on the outside repayment sources readily available to the borrower in the current underwriting for such loans.
Consumer loans are originated utilizing a centralized approval process staffed by experienced consumer loan administration personnel. Policies and procedures are developed and maintained to ensure compliance with the Company’s risk management objectives and regulatory compliance requirements. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk. Additionally, trend and
F-429
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
outlook reports are reviewed by management on a periodic basis, along with periodic review activity of particular regions and individual lenders. Loans are concentrated in home equity lines of credit and term loans secured by first or second liens on owner-occupied residential real estate.
Home Equity loans are consumer-purpose revolving or term loans secured by 1st or 2nd liens on owner-occupied residential real estate. Such loans are underwritten and approved on the same centralized basis as other consumer loans. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established tolerances. The degree of utilization of revolving commitments within this asset class is reviewed monthly to identify changes in the behavior of this borrowing group.
Commercial lines of credit are underwritten according to the same standards applied to other commercial and industrial loans; with particular focus on the cash flow impact of the borrower’s operating cycle. Based on the risk profile of each borrower, an appropriate level of monitoring and servicing can be applied, such that higher risk categories involve more frequent monitoring and more involved control over the cash proceeds of asset conversion. Lower risk profiles may involve less restrictive controls and lighter servicing intensity.
Raw land loans are those secured by tracts of undeveloped raw land held for personal use or investment. Such properties are expected to be held for a period of not less than twenty-four months with no active development plan. Given the raw nature of the land, these loans are underwritten based on the ability of the borrower to service the indebtedness with sources of income unrelated to the property. Higher cash down payment and lower loan-to-value expectations are applied to such loans.
Loan origination fees and certain direct origination are capitalized and recognized as an adjustment to yield over the life of the related loan. Net unamortized deferred fees less related cost included in the above were $136 thousand and $128 thousand for 2011 and 2010.
Loans are placed in a non-accrual status for all classes of loans when, in management’s opinion, the borrower may be unable to meet payments as they become due or 90 days past due. Loans are returned to an accrual status when the borrower makes timely principal and interest payments for a period of six months and has the ability to continue making scheduled payments until the loan is repaid in full. The following is a summary of nonperforming loans and nonperforming assets at December 31, 2011 and 2010:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Non-accrual loans | $ | 38,715 | $ | 63,178 | ||||
Restructured loans — nonaccruing | 29,333 | 28,599 | ||||||
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| |||||
Total nonperforming loans | 68,048 | 91,777 | ||||||
Foreclosed assets | 19,812 | 17,314 | ||||||
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| |||||
Total nonperforming assets | $ | 87,860 | $ | 109,091 | ||||
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| |||||
Restructured loans in accrual status not included above | $ | 24,202 | $ | 12,117 | ||||
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|
|
For loan modifications and in particular, troubled debt restructurings (TDRs), the Company generally utilizes its own loan modification programs whereby the borrower is provided one or more of the following concessions: interest rate reduction, extension of payment terms, forgiveness of principal or other modifications. The Company has a small residential mortgage portfolio without the need to utilize government sponsored loan modification programs. The primary factor in the pre-modification evaluation of a troubled debt restructuring is whether such an action will increase the likelihood of achieving a better result in terms of collecting the amount owed to the Bank.
F-430
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Loans on non-accrual status at the date of modification are initially classified as non-accrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as non-accrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
As illustrated in the table below, during the year ended December 31, 2011, the following concessions were made on 117 loans for $47.9 million (measured as a percentage of loan balances on TDRs):
• | Reduced interest rate for 37% (24 loans for $17.7 million); |
• | Extension of payment terms for 57% (90 loans for $27.4 million); |
• | Forgiveness of principal for 4% (1 loan for $1.9 million); and |
• | Other for 2% (2 loans for $938 thousand). |
In cases where there was more than one concession granted, the modification was classified by the more dominant concession.
F-431
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following table presents a breakdown of the types of concessions made by loan class for the twelve months ended December 31, 2011.
Twelve Months ended December 31, 2011 | ||||||||||||
Amounts in $ thousands | Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | |||||||||
Below market interest rate | ||||||||||||
Commercial real estate | 5 | $ | 6,303 | $ | 6,303 | |||||||
Commercial and industrial | 1 | 68 | 68 | |||||||||
Commercial line of credit | 2 | 247 | 247 | |||||||||
Residential construction | 3 | 6,331 | 6,331 | |||||||||
Residential lots | 10 | 4,578 | 4,578 | |||||||||
Raw land | — | — | — | |||||||||
Consumer | 3 | 117 | 117 | |||||||||
|
|
|
|
|
| |||||||
Subtotals | 24 | 17,644 | 17,644 | |||||||||
|
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|
|
|
| |||||||
Extended payment terms | ||||||||||||
Commercial real estate | 26 | 13,397 | 13,397 | |||||||||
Commercial and industrial | 15 | 2,071 | 2,071 | |||||||||
Commercial line of credit | 3 | 296 | 296 | |||||||||
Residential construction | 5 | 2,682 | 2,682 | |||||||||
Home equity lines | 3 | 393 | 393 | |||||||||
Residential lots | 4 | 384 | 384 | |||||||||
Raw land | 2 | 59 | 59 | |||||||||
Consumer | 32 | 8,134 | 8,134 | |||||||||
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|
|
|
| |||||||
Subtotals | 90 | 27,416 | 27,416 | |||||||||
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|
|
|
| |||||||
Forgiveness of principal | ||||||||||||
Commercial real estate | 1 | 1,931 | 1,391 | |||||||||
|
|
|
|
|
| |||||||
Subtotals | 1 | 1,931 | 1,391 | |||||||||
|
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|
|
|
| |||||||
Other | ||||||||||||
Residential lots | 1 | 910 | 1,113 | |||||||||
Consumer | 1 | 28 | 28 | |||||||||
|
|
|
|
|
| |||||||
Subtotals | 2 | 938 | 1,141 | |||||||||
|
|
|
|
|
| |||||||
Grand Totals | 117 | $ | 47,929 | $ | 47,592 | |||||||
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|
|
The twenty-four loans for which an interest rate concession was granted during 2011 were collateral dependent. These loans are evaluated individually for impairment using the fair value of collateral method. Prior to the modifications shown above, these loans had partial charge-offs of $ 1.4 million. Because this recorded investment of these loans had already been charged down to the fair value of their collateral prior to the date of the modification, the recorded investment of these loans has not changed post-modification. The largest loan modification for $910 thousand in the other category involved the Bank advancing additional funds to further develop lots; such funds would not generally be advanced given the borrower’s financial condition. At December 31, 2011, this loan was adequately collateralized and no specific reserve was recorded.
F-432
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
During the twelve months ended December 31, 2011, the Company modified 117 loans in the amount of $47.9 million. Of this total, there were payment defaults (where the modified loan was past due thirty days or more) of $7.0 million, or 14.7%, respectively, during the twelve months ended December 31, 2011.
The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the three and twelve months ended December 31, 2011.
Year ended December 31, 2011 | ||||||||
Amounts in $ thousands | Number of Loans | Recorded Investment | ||||||
Below market interest rate | ||||||||
Commercial real estate | — | $ | — | |||||
Residential construction | 1 | 942 | ||||||
Home equity lines | — | — | ||||||
Residential lots | — | — | ||||||
Consumer | — | — | ||||||
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|
|
| |||||
Subtotals | 1 | 942 | ||||||
|
|
|
| |||||
Extended payment terms | ||||||||
Commercial real estate | 7 | 3,170 | ||||||
Commercial and industrial | 5 | 555 | ||||||
Commercial line of credit | 1 | 38 | ||||||
Residential construction | 2 | 244 | ||||||
Home equity lines | 2 | 392 | ||||||
Residential lots | 1 | 43 | ||||||
Consumer | 10 | 1,655 | ||||||
|
|
|
| |||||
Subtotals | 28 | 6,097 | ||||||
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|
|
| |||||
Forgiveness of principal | ||||||||
Commercial real estate | — | — | ||||||
Consumer | — | — | ||||||
|
|
|
| |||||
Subtotals | — | — | ||||||
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|
|
| |||||
Other | ||||||||
Consumer | — | — | ||||||
|
|
|
| |||||
Subtotals | — | — | ||||||
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|
|
| |||||
Grand Totals | 29 | $ | 7,039 | |||||
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|
|
Of the total of 117 loans for $47.9 million which were modified during the twelve months ended December 31, 2011, the following represents their success or failure during the year ended December 31, 2011:
• | 63.1% are paying as restructured; |
• | 24.9% have been reclassified to non-accrual; |
• | 6.8% have defaulted and/or foreclosed upon; and |
• | 5.2% have paid in full. |
F-433
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following table presents the successes and failures of the types of modifications within the previous 12 months as of December 31, 2011.
Paid in full | Paying as restructured | Converted to non-accrual | Foreclosure/Default | |||||||||||||||||||||||||||||
Amounts in $ thousands | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | ||||||||||||||||||||||||
Below market interest rate | 1 | $ | 942 | 12 | $ | 6,778 | 11 | $ | 9,924 | — | $ | — | ||||||||||||||||||||
Extended payment terms | 5 | 1,550 | 69 | 20,612 | 7 | 1,989 | 9 | 3,265 | ||||||||||||||||||||||||
Forgiveness of principal | — | — | 1 | 1,931 | — | — | — | — | ||||||||||||||||||||||||
Other | — | — | 2 | 938 | — | — | — | — | ||||||||||||||||||||||||
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| |||||||||||||||||
Total | 6 | $ | 2,492 | 84 | $ | 30,259 | 18 | $ | 11,913 | 9 | $ | 3,265 | ||||||||||||||||||||
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The following is a summary of the recorded investment in non-accrual loans and impaired loans segregated by class of loans:
December 31, 2011 | December 31, 2010 | |||||||||||||||
Non-accrual Loans | Impaired Loans | Non-accrual Loans | Impaired Loans | |||||||||||||
Commercial real estate | $ | 26,484 | $ | 39,297 | $ | 22,085 | $ | 21,251 | ||||||||
Commercial and industrial | 3,548 | 3,899 | 7,324 | 6,359 | ||||||||||||
Commercial line of credit | 1,429 | 1,004 | 3,381 | 3,233 | ||||||||||||
Residential construction | 11,491 | 16,619 | 26,257 | 25,676 | ||||||||||||
Home equity lines | 2,637 | 1,955 | 1,031 | 433 | ||||||||||||
Residential lots | 12,096 | 12,095 | 19,192 | 19,336 | ||||||||||||
Raw land | 1,484 | 1,484 | 1,963 | 1,962 | ||||||||||||
Consumer | 8,879 | 10,753 | 10,544 | 8,872 | ||||||||||||
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| |||||||||
Total | $ | 68,048 | $ | 87,106 | $ | 91,777 | $ | 87,122 | ||||||||
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The Company evaluates “impaired” loans, which includes nonperforming loans and accruing troubled debt restructured loans, having risk characteristics that are unique to an individual borrower on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance is calculated based on historical loss experience and other qualitative factors. Included in the table below, $65.1 million out of the total of $68.0 million of nonperforming loans and $22.0 million out of the total of $24.2 million of accruing troubled debt restructured loans were individually evaluated which required a reserve of $1.2 million and $392 thousand, respectively, for a total specific ALLL of $1.6 million. The impaired loans with smaller balances ($2.9 million in nonperforming loans and $2.2 million in accruing troubled debt restructured loans) were collectively evaluated for impairment.
F-434
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following is a summary of loans individually or collectively evaluated for impairment, by segment, at December 31, 2011:
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Ending balance: nonperforming loans individually evaluated for impairment | $ | 24,822 | $ | 3,889 | $ | 27,238 | $ | 1,955 | $ | 7,209 | $ | 65,113 | ||||||||||||
Accruing troubled debt restructured loans individually evaluated for impairment | 14,475 | 1,014 | 2,960 | — | 3,544 | 21,993 | ||||||||||||||||||
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Ending balance: total impaired loans individually evaluated for impairment | 39,297 | 4,903 | 30,198 | 1,955 | 10,753 | 87,106 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | 347,978 | 124,993 | 134,399 | 93,180 | 162,366 | 862,916 | ||||||||||||||||||
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Ending Balance | $ | 387,275 | $ | 129,896 | $ | 164,597 | $ | 95,135 | $ | 173,119 | $ | 950,022 | ||||||||||||
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The following is a breakdown of impaired loans individually evaluated for impairment, by class, with and without related specific allowance at December 31, 2011:
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Year to Date Average Recorded Investment | Year to Date Interest Income Recognized | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | $ | 36,251 | $ | (7,334 | ) | $ | 28,917 | $ | — | $ | 26,846 | $ | 358 | |||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | 4,742 | (1,341 | ) | 3,401 | — | 2,998 | 76 | |||||||||||||||||
Commercial line of credit | 957 | (52 | ) | 905 | — | 1,427 | — | |||||||||||||||||
Residential real estate | ||||||||||||||||||||||||
Residential construction | 17,874 | (2,443 | ) | 15,431 | — | 15,241 | 190 | |||||||||||||||||
Residential lots | 6,853 | (2,803 | ) | 4,050 | — | 10,387 | 17 | |||||||||||||||||
Raw land | 3,808 | (2,324 | ) | 1,484 | — | 1,467 | — | |||||||||||||||||
Home equity lines | 954 | (32 | ) | 922 | — | 655 | — | |||||||||||||||||
Consumer | 10,501 | (1,501 | ) | 9,000 | — | 5,211 | 81 | |||||||||||||||||
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|
| |||||||||||||
Subtotal | $ | 81,940 | $ | (17,830 | ) | $ | 64,110 | $ | — | $ | 64,232 | $ | 722 | |||||||||||
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| |||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | 10,710 | (330 | ) | 10,380 | 655 | 8,346 | 420 | |||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | 498 | — | 498 | 114 | 1,067 | 14 | ||||||||||||||||||
Commercial line of credit | 99 | — | 99 | 99 | 482 | — | ||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||
Residential construction | 1,348 | (160 | ) | 1,188 | 102 | 2,602 | 17 | |||||||||||||||||
Residential lots | 9,080 | (1,035 | ) | 8,045 | 161 | 3,843 | 32 | |||||||||||||||||
Raw land | — | — | — | — | 144 | — | ||||||||||||||||||
Home equity lines | 1,033 | — | 1,033 | 387 | 1,027 | — | ||||||||||||||||||
Consumer | 1,839 | (86 | ) | 1,753 | 90 | 2,921 | 80 | |||||||||||||||||
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|
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|
|
|
|
|
|
| |||||||||||||
Subtotal | 24,607 | (1,611 | ) | 22,996 | 1,608 | 20,432 | 563 | |||||||||||||||||
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F-435
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Year to Date Average Recorded Investment | Year to Date Interest Income Recognized | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Summary | ||||||||||||||||||||||||
Commercial real estate | 46,961 | (7,664 | ) | 39,297 | 655 | 35,192 | 778 | |||||||||||||||||
Commercial | 6,296 | (1,393 | ) | 4,903 | 213 | 5,974 | 90 | |||||||||||||||||
Residential real estate | 38,963 | (8,765 | ) | 30,198 | 263 | 33,684 | 256 | |||||||||||||||||
Home equity lines | 1,987 | (32 | ) | 1,955 | 387 | 1,682 | — | |||||||||||||||||
Consumer | 12,340 | (1,587 | ) | 10,753 | 90 | 8,132 | 161 | |||||||||||||||||
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|
|
|
|
|
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| |||||||||||||
Grand Totals | $ | 106,547 | $ | (19,441 | ) | $ | 87,106 | $ | 1,608 | $ | 84,664 | $ | 1,285 | |||||||||||
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As shown in the above table, the Company has previously taken partial charge-offs of $19.4 million on the $87.1 million in loans individually evaluated for impairment. In addition, the Company has set aside $1.6 million in specific allowance for these $23.0 million in loans.
The following is a summary of loans by segment at December 31, 2010:
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||
individually evaluated for impairment | $ | 21,252 | $ | 9,592 | $ | 46,974 | $ | 432 | $ | 8,872 | $ | 87,122 | ||||||||||||
Ending balance: | ||||||||||||||||||||||||
collectively evaluated for impairment | 437,186 | 147,375 | 173,393 | 104,401 | 180,599 | 1,042,954 | ||||||||||||||||||
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|
| |||||||||||||
Ending Balance | $ | 458,438 | $ | 156,967 | $ | 220,367 | $ | 104,833 | $ | 189,471 | $ | 1,130,076 | ||||||||||||
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The following is a breakdown of impaired loans individually evaluated for impairment, by class, with and without related specific allowance at December 31, 2010:
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Average Recorded Investment | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | $ | 23,114 | $ | (5,761 | ) | $ | 17,353 | $ | — | $ | 12,065 | |||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | 7,398 | (1,923 | ) | 5,475 | — | 5,593 | ||||||||||||||
Commercial line of credit | 2,530 | (105 | ) | 2,425 | — | 1,620 | ||||||||||||||
Residential real estate | ||||||||||||||||||||
Residential construction | 23,230 | (4,554 | ) | 18,676 | — | 14,254 | ||||||||||||||
Residential lots | 15,449 | (6,511 | ) | 8,938 | — | 8,621 | ||||||||||||||
Raw land | 3,989 | (2,277 | ) | 1,712 | — | 1,450 | ||||||||||||||
Home equity lines | 457 | (123 | ) | 334 | — | 208 | ||||||||||||||
Consumer | 5,904 | (1,524 | ) | 4,380 | — | 2,992 | ||||||||||||||
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|
|
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| |||||||||||
Subtotal | 82,071 | (22,778 | ) | 59,293 | — | 46,803 | ||||||||||||||
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F-436
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Unpaid Principal Balance | Partial Charge Offs To Date | Recorded Investment | Related Allowance | Average Recorded Investment | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | 3,958 | (60 | ) | 3,898 | 775 | 9,041 | ||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | 990 | (106 | ) | 884 | 510 | 1,583 | ||||||||||||||
Commercial line of credit | 834 | (26 | ) | 808 | 583 | 2,084 | ||||||||||||||
Residential real estate | ||||||||||||||||||||
Residential construction | 7,114 | (114 | ) | 7,000 | 860 | 15,352 | ||||||||||||||
Residential lots | 10,484 | (86 | ) | 10,398 | 841 | 11,251 | ||||||||||||||
Raw land | 251 | (1 | ) | 250 | 53 | 251 | ||||||||||||||
Home equity lines | 100 | (1 | ) | 99 | 91 | 83 | ||||||||||||||
Consumer | 4,516 | (24 | ) | 4,492 | 1,417 | 1,755 | ||||||||||||||
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| |||||||||||
Subtotal | 28,247 | (418 | ) | 27,829 | 5,130 | 41,400 | ||||||||||||||
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| |||||||||||
Summary | ||||||||||||||||||||
Commercial real estate | 27,072 | (5,821 | ) | 21,251 | 775 | 21,106 | ||||||||||||||
Commercial | 11,752 | (2,160 | ) | 9,592 | 1,093 | 10,880 | ||||||||||||||
Residential real estate | 60,517 | (13,543 | ) | 46,974 | 1,754 | 51,179 | ||||||||||||||
Home equity lines | 557 | (124 | ) | 433 | 91 | 291 | ||||||||||||||
Consumer | 10,420 | (1,548 | ) | 8,872 | 1,417 | 4,747 | ||||||||||||||
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| |||||||||||
Grand Totals | $ | 110,318 | $ | (23,196 | ) | $ | 87,122 | $ | 5,130 | $ | 88,203 | |||||||||
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The amount of interest income recognized on impaired loans during the portion of the year they were considered impaired for 2010 and 2009 was $59 thousand and $312 thousand, respectively. The interest income foregone for loans in a non-accrual status for 2010 and 2009 was $2.9 million and $1.2 million, respectively.
The recorded investment in loans that were considered and collectively evaluated for impairment at December 31, 2011 and 2010 totaled $862.9 million and $1.04 billion, respectively. The recorded investment in loans that were considered individually impaired at December 31, 2011 and 2010 totaled $87.1 million and $87.1 million, respectively. At December 31, 2011 and 2010, the recorded investment in impaired loans requiring a valuation allowance based on individual analysis were $23.0 million and $27.8 million, respectively, with a corresponding valuation allowance of $1.6 million and $5.1 million. No valuation allowance for the other impaired loans was considered necessary. No loans with deteriorated credit quality were acquired during the years ended December 31, 2011 or 2010.
The average recorded investment in impaired loans for the years ended December 31, 2011, 2010, and 2009 was approximately $84.7 million, $88.2 million and $26.8 million, respectively. The amount of interest income recognized on impaired loans during the portion of the year they were considered impaired for 2011, 2010 and 2009 was $1.3 million, $723 thousand and $312 thousand, respectively. The interest income foregone for loans in a non-accrual status for 2011, 2010 and 2009 was $3.8 million, $2.9 million and $1.2 million, respectively.
F-437
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following is an age analysis of past due financing receivables by class at December 31, 2011:
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days (1) | Total Past Due | Current | Total Financing Receivables | Recorded Investment 90 Days or more and Accruing | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Commercial real estate | $ | 376 | $ | 265 | $ | 26,484 | $ | 27,125 | $ | 360,150 | $ | 387,275 | $ | — | ||||||||||||||
Commercial and industrial | 308 | 7 | 3,548 | 3,863 | 81,458 | 85,321 | — | |||||||||||||||||||||
Commercial line of credit | 50 | 35 | 1,429 | 1,514 | 43,060 | 44,574 | — | |||||||||||||||||||||
Residential construction | — | — | 11,491 | 11,491 | 90,454 | 101,945 | — | |||||||||||||||||||||
Home equity lines | 248 | 171 | 2,637 | 3,056 | 92,080 | 95,136 | — | |||||||||||||||||||||
Residential lots | — | — | 12,096 | 12,096 | 33,068 | 45,164 | — | |||||||||||||||||||||
Raw land | — | — | 1,484 | 1,484 | 16,004 | 17,488 | — | |||||||||||||||||||||
Consumer | 2,839 | 932 | 8,879 | 12,650 | 160,469 | 173,119 | — | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 3,821 | $ | 1,410 | $ | 68,048 | $ | 73,279 | $ | 876,743 | $ | 950,022 | $ | — | ||||||||||||||
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| |||||||||||||||
Percentage of total loans | 0.40 | % | 0.15 | % | 7.16 | % | 7.71 | % | 92.29 | % | ||||||||||||||||||
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The following is an age analysis of past due financing receivables by class at December 31, 2010:
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days (1) | Total Past Due | Current | Total Financing Receivables | Recorded Investment 90 Days or more and Accruing | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Commercial real estate | $ | 43 | $ | 114 | $ | 22,085 | $ | 22,242 | $ | 433,463 | $ | 455,705 | $ | — | ||||||||||||||
Commercial and industrial | 53 | 2 | 7,324 | 7,379 | 84,928 | 92,307 | — | |||||||||||||||||||||
Commercial line of credit | 103 | 19 | 3,381 | 3,503 | 61,157 | 64,660 | — | |||||||||||||||||||||
Residential construction | 92 | 721 | 26,257 | 27,070 | 110,574 | 137,644 | — | |||||||||||||||||||||
Home equity lines | 415 | 222 | 1,031 | 1,668 | 103,165 | 104,833 | — | |||||||||||||||||||||
Residential lots | 34 | — | 19,192 | 19,226 | 43,326 | 62,552 | — | |||||||||||||||||||||
Raw land | 24 | — | 1,963 | 1,987 | 18,184 | 20,171 | — | |||||||||||||||||||||
Consumer | 3,165 | 468 | 10,544 | 14,177 | 178,027 | 192,204 | — | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 3,929 | $ | 1,546 | $ | 91,777 | $ | 97,252 | $ | 1,032,824 | $ | 1,130,076 | $ | — | ||||||||||||||
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| |||||||||||||||
Percentage of total loans | 0.35 | % | 0.14 | % | 8.12 | % | 8.61 | % | 91.39 | % | ||||||||||||||||||
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(1) | As the Company has no loans past due 90 or more days and still accruing, this category only includes non-accrual loans. |
F-438
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The Company has granted loans to certain directors and executive officers of the Company and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors and their interests follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Balance at beginning of year | $ | 21,961 | $ | 24,433 | $ | 25,585 | ||||||
Disbursements | 9,093 | 11,032 | 13,110 | |||||||||
Repayments | (14,623 | ) | (13,504 | ) | (14,262 | ) | ||||||
Other increases (decreases) in exposure due to: Other | (170 | ) | — | — | ||||||||
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| |||||||
Balance at end of year | $ | 16,261 | $ | 21,961 | $ | 24,433 | ||||||
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|
|
At December 31, 2011, the Company had pre-approved but unused lines of credit totaling $2.7 million to executive officers, directors and their affiliates.
(5) ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Balance at beginning of year | $ | 29,580 | $ | 29,638 | $ | 18,851 | ||||||
Provision for loan losses | 15,150 | 39,000 | 34,000 | |||||||||
Charge-offs | (24,885 | ) | (42,489 | ) | (24,633 | ) | ||||||
Recoveries | 4,320 | 3,431 | 1,420 | |||||||||
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| |||||||
Net charge-offs | (20,565 | ) | (39,058 | ) | (23,213 | ) | ||||||
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| |||||||
Balance at end of year | $ | 24,165 | $ | 29,580 | $ | 29,638 | ||||||
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|
The following table shows, by loan segment, an analysis of the allowance for loan losses at December 31, 2011.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 6,703 | $ | 4,154 | $ | 13,534 | $ | 1,493 | $ | 3,696 | $ | 29,580 | ||||||||||||
Provision | 9,102 | 1,757 | 40 | 749 | 3,502 | 15,150 | ||||||||||||||||||
Charge-offs | (7,988 | ) | (3,400 | ) | (8,132 | ) | (977 | ) | (4,388 | ) | (24,885 | ) | ||||||||||||
Recoveries | 1,259 | 525 | 1,816 | 147 | 573 | 4,320 | ||||||||||||||||||
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| |||||||||||||
Ending balance | $ | 9,076 | $ | 3,036 | $ | 7,258 | $ | 1,412 | $ | 3,383 | $ | 24,165 | ||||||||||||
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| |||||||||||||
For nonperforming loans requiring specific ALLL | $ | 309 | $ | 213 | $ | 262 | $ | 387 | $ | 45 | $ | 1,216 | ||||||||||||
For accruing troubled debt restructured loans requiring specific ALLL | 346 | — | 1 | — | 45 | 392 | ||||||||||||||||||
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Ending balance: requiring specific ALLL | $ | 655 | $ | 213 | $ | 263 | $ | 387 | $ | 90 | $ | 1,608 | ||||||||||||
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Ending balance: general ALLL | $ | 8,421 | $ | 2,823 | $ | 6,995 | $ | 1,025 | $ | 3,293 | $ | 22,557 | ||||||||||||
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F-439
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following table shows, by loan segment, an analysis of the allowance for loan losses at December 31, 2010.
Commercial Real Estate | Commercial | Residential Real Estate | HELOC | Consumer | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance | $ | 9,356 | $ | 3,079 | $ | 13,272 | $ | 1,187 | $ | 2,744 | $ | 29,638 | ||||||||||||
Provision | 5,237 | 5,520 | 22,597 | 1,933 | 3,713 | 39,000 | ||||||||||||||||||
Charge-offs | (8,200 | ) | (5,610 | ) | (23,944 | ) | (1,799 | ) | (2,935 | ) | (42,488 | ) | ||||||||||||
Recoveries | 310 | 1,165 | 1,609 | 172 | 174 | 3,430 | ||||||||||||||||||
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Ending balance | $ | 6,703 | $ | 4,154 | $ | 13,534 | $ | 1,493 | $ | 3,696 | $ | 29,580 | ||||||||||||
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Ending balance: requiring specific ALLL | $ | 775 | $ | 1,093 | $ | 1,754 | $ | 91 | $ | 1,417 | $ | 5,130 | ||||||||||||
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Ending balance: general ALLL | $ | 5,928 | $ | 3,061 | $ | 11,780 | $ | 1,402 | $ | 2,279 | $ | 24,450 | ||||||||||||
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Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans (see details above) and (v) the general economic conditions in its market areas.
The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:
• | Grades 1, 2 and 3 - Better Than Average Risk - Borrowers assigned any one of these ratings would generally be characterized as representing better than average risk. Access to alternate sources of traditional bank financing is evident; secondary repayment sources are sufficient to protect against the risk of principal or income loss. |
• | Grade 4 - Average Risk - Borrowers assigned this rating would generally be characterized as representing average risk. Access to alternate sources of traditional bank financing is evident; secondary repayment sources are sufficient to protect against the risk of principal or income loss. Or, the risk attributable to a marginally sufficient primary repayment source is mitigated by liquid collateral in amounts which, discounted for normal fluctuations in market value, are sufficient to protect against the risk of principal or income loss. |
• | Grade 5 - Acceptable Risk/Watch - Loans where the borrower’s ability to repay from primary (intended) repayment source is not clearly sufficient to ensure performance as contracted; however, the loan is performing as contracted, secondary repayment sources are clearly sufficient to protect against the risk of principal or income loss, and the Bank can reasonably expect that the circumstances causing the repayment concern will be resolved. Access to alternate financing sources exists, but may be limited to institutions specializing in higher risk financing. |
• | Grade 6 - Special Mention - This would include “Other Assets Especially Mentioned” (OAEM). OAEM are currently protected but potentially weak, they are characterized by: undue and unwarranted credit risk but not to the point of justifying a classification of substandard. Potential weakness may weaken the asset or inadequately protect the Bank’s credit position at some future date if not corrected. Evidence that the risk is increasing beyond that at which the loan originally would have been granted. Loans, where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do increase the level of risk, may also warrant this rating. |
F-440
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
• | Grade 7 - Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or by the value of the collateral pledged, if any. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. Examples include high debt to worth ratios, declining or negative earnings trends, declining or inadequate liquidity, improper loan structure and questionable repayment sources. Near term improvement is questionable. |
• | Grade 8 - Doubtful - Loans classified as doubtful have all the weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. Some loss of principal is expected, however, the amount of such loss cannot be fully determined at this time. Factors such as equity injection, alternative financing, liquidation of assets or the pledging of additional collateral can impact the loan. All loans in this category are immediately placed on non-accrual with all payments applied to principal until such time as the potential loss exposure is eliminated. |
• | Grade 9 - Loss - Loans classified as loss are considered uncollectable and of such little value that there continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. |
Loan grades for all commercial loans are established at the origination of the loan. Non-commercial loans are graded as a 4 at origination date as these loans are determined to be “pass graded” loans. These non-commercial loans may subsequently require a different risk grade if the credit department has evaluated the credit and determined it necessary to reclassify the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes public. Credit improvements are evidenced by known factors regarding the borrower or the collateral property.
The loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a grade of 1 to 5 are believed to have some inherent losses in the portfolios, but to a lesser extent than the other loan grades. The special mention or OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential losses. However, the likelihood of loss is greater than Watch grade because there has been measurable credit deterioration. Loans with a substandard grade are generally loans the Company has individually analyzed for potential impairment. The Doubtful graded loans and the Loss graded loans are to a point that the Company is almost certain of the losses, and the unpaid principal balances are generally charged-off.
The Company’s allowance for loan losses (“ALLL”) is established through charges to earnings in the form of a provision for loan losses. We increase our allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off and we reduce our allowance by loans charged off. In evaluating the adequacy of the allowance, we consider the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, trends in past dues and classified assets, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors derived from our history of operations. Management is continuing to closely monitor the value of real estate serving as collateral for our loans, especially lots and land under development, due to continued concern that the low level of real estate sales activity will continue to have a negative impact on the value of real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition and liquidity position of certain of our
F-441
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from weak economic conditions and prevailing unemployment levels. The methodology and assumptions used to determine the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. The Company incorporates certain refinements and improvements to its allowance for loan losses methodology from time to time. During 2011, the Company made the following refinements in its allowance methodology. First, the Company individually evaluated accruing TDR loans for impairment which at December 31, 2011 amounted to $22.0 million in accruing TDR loans requiring a specific allowance of $392 thousand. Second, the use of a loan migration factor by risk grade as an increment to historical loss experience was discontinued in the general (FAS 5) loss allowance calculation because of the lack of statistically meaningful supporting data. Third, we enhanced the use of qualitative and quantitative factors to further evaluate the portfolio risk. Except for the impact of the first refinement noted above, the effects of these refinements were offsetting and minimally affected the total allowance.
The ALLL consists of two major components: specific valuation allowances and a general valuation allowance. The Bank’s format for the calculation of ALLL begins with the evaluation of individual loans considered impaired. For the purpose of evaluating loans for impairment, loans are considered impaired when it is considered probable that all amounts due under the contractual terms of the loan will not be collected when due (minor shortfalls in amount or timing excepted). The Bank has established policies and procedures for identifying loans that should be considered for impairment. Loans are reviewed through multiple means such as delinquency management, credit risk reviews, watch and criticized loan monitoring meetings and general account management. Loans that are outside of the Bank’s established criteria for evaluation may be considered for impairment testing when management deems the risk sufficient to warrant this approach. For loans determined to be impaired, the specific allowance is based on the most appropriate of the three measurement methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Once a loan is considered individually impaired, it is not included in the population of loans collectively evaluated for impairment, even if no specific allowance is considered necessary.
In addition to the evaluation of loans for impairment, the Company calculates loan loss exposure on the remaining loans (not evaluated for impairment) by applying the applicable historical loan loss experience of the loan portfolio to provide for probable losses in the loan portfolio through the general valuation allowance. These loss factors are based on an appropriate loss history for each major loan segment more heavily weighted for the most recent twelve months historical loss experience to reflect current market conditions. In addition, the Company assigns additional general allowance requirements utilizing qualitative risk factors related to economic and portfolio trends that are pertinent to the underlying risks in each major loan segment in estimating the general valuation allowance. This methodology allows the Company to focus on the relative risk and the pertinent factors for the major loan segments of the Company.
F-442
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The following is a summary of credit exposure segregated by credit risk profile by internally assigned grade by class at December 31, 2011 and December 31, 2010:
Commercial Real Estate | Commercial and Industrial | Commercial Lines of Credit | ||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Acceptable Risk or Better | $ | 261,287 | $ | 309,215 | $ | 57,563 | $ | 64,362 | $ | 37,883 | $ | 54,276 | ||||||||||||
Special Mention | 49,179 | 54,923 | 10,804 | 13,295 | 2,796 | 4,000 | ||||||||||||||||||
Substandard | 76,701 | 89,355 | 16,526 | 13,656 | 3,765 | 4,592 | ||||||||||||||||||
Doubtful | 108 | 2,212 | 428 | 994 | 130 | 1,792 | ||||||||||||||||||
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Total | $ | 387,275 | $ | 455,705 | $ | 85,321 | $ | 92,307 | $ | 44,574 | $ | 64,660 | ||||||||||||
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Residential Construction | Home Equity Lines | Consumer | ||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Acceptable Risk or Better | $ | 62,382 | $ | 62,529 | $ | 87,325 | $ | 96,904 | $ | 139,491 | $ | 154,628 | ||||||||||||
Special Mention | 11,212 | 35,543 | 2,362 | 3,024 | 13,147 | 17,489 | ||||||||||||||||||
Substandard | 28,351 | 39,572 | 5,449 | 4,905 | 20,481 | 20,087 | ||||||||||||||||||
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Total | $ | 101,945 | $ | 137,644 | $ | 95,136 | $ | 104,833 | $ | 173,119 | $ | 192,204 | ||||||||||||
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Residential Lots | Raw Land | |||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Acceptable Risk or Better | $ | 10,451 | $ | 16,125 | $ | 11,807 | $ | 13,138 | ||||||||
Special Mention | 5,612 | 10,503 | 976 | 209 | ||||||||||||
Substandard | 29,101 | 35,924 | 4,705 | 6,824 | ||||||||||||
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Total | $ | 45,164 | $ | 62,552 | $ | 17,488 | $ | 20,171 | ||||||||
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(6) PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31, 2011 and 2010:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Land | $ | 10,409 | $ | 10,590 | ||||
Buildings and leasehold improvements | 35,560 | 35,545 | ||||||
Furniture and equipment | 18,512 | 17,832 | ||||||
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64,481 | 63,967 | |||||||
Less accumulated depreciation | (26,166 | ) | (23,417 | ) | ||||
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Total | $ | 38,315 | $ | 40,550 | ||||
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Depreciation and amortization amounting to $2.9 million in 2011, $3.1 million in 2010 and $3.4 million in 2009, is included in occupancy and equipment expenses.
F-443
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(7) GOODWILL AND OTHER INTANGIBLES
The following is a summary of goodwill and other intangible assets at December 31, 2011 and 2010. Other intangible assets are included in other assets in the consolidated balance sheet.
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Core deposit intangibles - gross | $ | 2,177 | $ | 2,177 | ||||
Less accumulated amortization | 1,724 | 1,506 | ||||||
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Core deposit intangibles - net | $ | 453 | $ | 671 | ||||
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Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. An impairment loss is recorded to the extent that the carrying value of goodwill exceeds its implied fair value.
In performing the first step (“Step 1”) of the goodwill impairment testing and measurement process to identify possible impairment, the estimated fair value of the reporting unit (determined to be Company-level) was developed using both the income and market approaches to value the Company. The income approach consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the Company. The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and the discount rate, which is determined utilizing the Company’s cost of capital adjusted for a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management. Under one market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions. Another market valuation approach utilizes the current stock price adjusted by an appropriate control premium as an indicator of fair market value. Our annual goodwill testing in May 2008, which was updated as of December 31, 2008, indicated that the goodwill booked at the time of the acquisition of The Community Bank continued to properly value the acquired company and had not been impaired as of December 31, 2008. No impairment was recorded as a result of goodwill testing performed during 2008.
We updated our Step 1 goodwill impairment testing as of March 31, 2009. Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of this Step 1 process indicated that the Company’s estimated fair value was less than book value, thus requiring a second step (“Step 2”) of the goodwill impairment test. Based on the Step 2 analysis, it was determined that the Company’s fair value did not support the goodwill recorded at the time of the acquisition of The Community Bank in January 2004; therefore, the Company recorded a $49.5 million goodwill impairment charge to write-off the entire amount of goodwill as of March 31, 2009. This non-cash goodwill impairment charge to earnings was recorded as a component of non-interest expense on the consolidated statement of operations.
F-444
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Amortization expense associated with acquired intangibles amounted to $218 thousand for 2011 and 2010 and $265 thousand for 2009. The following table presents estimated future amortization expense for other intangibles.
Estimated Amortization Expense | ||||
(Amounts in thousands) | ||||
For the Years Ended December 31: | ||||
2012 | $ | 218 | ||
2013 | 218 | |||
2014 | 17 | |||
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$ | 453 | |||
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(8) DEPOSITS
Time deposits in denominations of $100,000 or more were approximately $217.1 million and $207.1 million at December 31, 2011 and 2010, respectively. At December 31, 2011, the scheduled maturities of certificates of deposit are as follows:
$100,000 and Over | Under $100,000 | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
2012 | $ | 121,545 | $ | 170,034 | $ | 291,579 | ||||||
2013 | 65,951 | 80,484 | 146,435 | |||||||||
2014 | 20,984 | 33,452 | 54,436 | |||||||||
2015 | 7,545 | 7,268 | 14,813 | |||||||||
2016 | 1,111 | 664 | 1,775 | |||||||||
Thereafter | — | 62,800 | 62,800 | |||||||||
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Total | �� | $ | 217,136 | $ | 354,702 | $ | 571,838 | |||||
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Under the Consent Order, the Bank agreed that it will not accept, renew or rollover any brokered deposits without obtaining a waiver from the FDIC.
The following table presents the amounts and maturities of brokered deposits at December 31, 2011:
At December 31, 2011 Brokered CDs | ||||
(Amounts in thousands) | ||||
Remaining Maturity | ||||
Less than three months | $ | 20,000 | ||
Three to six months | 15,005 | |||
Six to twelve months | 12,973 | |||
Over twelve months | 99,581 | |||
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Total | $ | 147,559 | ||
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F-445
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(9) BORROWINGS
The following is a summary of the Company’s borrowings at December 31, 2011 and 2010:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Short-term borrowings | ||||||||
FHLB advances | $ | 5,000 | $ | 16,250 | ||||
Repurchase agreements | 28,629 | 4,808 | ||||||
Other borrowed funds | — | 1,040 | ||||||
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$ | 33,629 | $ | 22,098 | |||||
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Long-term borrowings | ||||||||
FHLB advances | $ | 71,637 | $ | 56,809 | ||||
Term repurchase agreements | 60,000 | 80,000 | ||||||
Junior subordinated debentures | 45,877 | 45,877 | ||||||
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$ | 177,514 | $ | 182,686 | |||||
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See Note 2 for discussion on deferral of interest payments on subordinated debentures.
At December 31, 2011, the interest rates on the Federal Home Loan Bank advances ranged from 0.00% to 4.60% with a weighted average rate of 2.64%. At the prior year end, the rates ranged from 0.00% to 4.63% with a weighted average rate of 3.24%. The Company has an available line of credit of $309.2 million with the Federal Home Loan Bank of Atlanta for advances. These advances are secured by both loans with a carrying value of $73.9 million and pledged investment securities with a market value of $45.6 million and lendable collateral value of $44.2 million.
The Company has also entered into long-term financing through term repurchase agreements with various parties. At December 31, 2011, the interest rates on these term repurchase agreements, which are variable rate agreements based upon LIBOR, range from 2.9% to 4.5%.
Certain of the FHLB advances and the term repurchase agreements contain embedded interest rate options. Some of the options are exercisable by the holder and relate to converting a floating rate to a fixed rate. Other options are held by the Bank and relate to reducing the interest rate charged should the reference rate fall below a rate specified in the agreement. Several of the FHLB advances and term repurchase agreements contain options which allow them to be called prior to their contractual maturity.
Under the caption “Other borrowed funds,” the Company has entered into overnight unsecured borrowing arrangements with various parties at an interest rate slightly higher than repurchase agreements. These arrangements are the obligations of the parent holding company, not the Bank, and are not FDIC insured.
F-446
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The contractual maturities of the Federal Home Loan Bank advances and term repurchase agreements at December 31, 2011 are as follows:
FHLB Advances | Term Repurchase Agreements | |||||||
(Amounts in thousands) | ||||||||
Due in 2012 | $ | 5,000 | $ | 20,000 | ||||
Due in 2013 | 30,000 | — | ||||||
Due in 2015 | 10,000 | — | ||||||
Due in 2016 | 25,000 | 30,000 | ||||||
Thereafter | 6,637 | 30,000 | ||||||
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$ | 76,637 | $ | 80,000 | |||||
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In addition to the above advances and term repurchase agreements, the Company also had repurchase agreements with outstanding balances of $8.6 million and $4.8 million at December 31, 2011 and 2010, respectively, which were for customer accommodations. Securities sold under agreements to repurchase generally mature within ninety days from the transaction date and are collateralized by US Government Agency obligations. The Company has repurchase lines of credit of $120.0 million from various institutions, which must be adequately collateralized.
As of December 31, 2011, the Company also had a line of credit of $15.0 million from a correspondent bank to purchase federal funds on a short-term basis. As a result of the Bank’s February 25, 2011 Consent Order, we have let some federal funds lines expire rather than secure them with collateral. The Company had no outstanding balances of federal funds purchased as of December 31, 2011.
(10) JUNIOR SUBORDINATED DEBENTURES
In November of 2003, Southern Community Capital Trust II (“Trust II”), wholly owned by the Company, issued 3,450,000 shares of Trust Preferred Securities (“Trust II Securities”), generating total proceeds of $34.5 million. The Trust II Securities pay distributions at an annual rate of 7.95% and mature on December 31, 2033. The Trust II Securities began paying quarterly distributions on December 31, 2003. The Company has fully and unconditionally guaranteed the obligations of Trust II. The Trust II Securities are redeemable in whole or in part at any time after December 31, 2008. The proceeds from the Trust II Securities were utilized to purchase junior subordinated debentures from the Company under the same terms and conditions as the Trust II Securities. We have the right to defer payment of interest on the debentures at any time and from time to time for a period not exceeding five years, provided that no deferral period extends beyond the stated maturities of the debentures. Such deferral of interest payments by the Company will result in a deferral of distribution payments on the related Trust II Securities. Whenever we defer the payment of interest on the debentures, the Company will be precluded from the payment of cash dividends to shareholders. The principal uses of the net proceeds from the sale of the debentures were to provide cash for the acquisition of The Community Bank, to increase our regulatory capital, and to support the growth and operations of our subsidiary bank.
At December 31, 2011 and 2010, the Company had outstanding 3.45 million shares of the trust preferred securities from Trust II used to purchase related junior subordinated debentures from the Bank, with a carrying amount of $35.1 million at both year ends.
In June 2007, $10.0 million of trust preferred securities were placed through Southern Community Capital Trust III (“Trust III”), as part of a pooled trust preferred security. The Trust issuer invested the total proceeds
F-447
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
from the sale of the trust preferred securities in junior subordinated deferrable interest debentures (the “Junior Subordinated Debentures”) issued by the Company. The terms of the trust preferred securities require payment of cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to LIBOR plus 1.43%. During 2008, the Company entered into an interest rate swap derivative contract with a counterparty that shifted this debt service from a variable rate to a fixed rate of 4.7% per annum. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities are redeemable in 30 years with a five year call provision. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The principal use of the net proceeds from the sale of the debentures was to provide additional capital into the Company to fund its operations and continued expansion, and to maintain the Company’s and the Bank’s regulatory capital status.
The amount of the proceeds generated from the above offerings of trust preferred securities was $44.5 million. The amount of proceeds the company counts as Tier 1 capital cannot comprise more than 25% of our core capital elements. For the Company, this Tier 1 limit was $32.2 million at December 31, 2011. The $12.3 million in excess of that 25% limitation qualifies as Tier 2 supplementary capital for regulatory reporting.
In February 2011, the Company elected to defer the regularly scheduled interest payments on both issues of junior subordinated debentures to our outstanding trust preferred securities. As of December 31, 2011, the total amount of suspended interest payments on trust preferred securities was $2.9 million.
(11) CUMULATIVE PERPETUAL PREFERRED STOCK
Under the United States Treasury’s Capital Purchase Program (CPP), the Company issued $42.75 million in Cumulative Perpetual Preferred Stock, Series A, on December 5, 2008. In addition, the Company provided warrants to the Treasury to purchase 1,623,418 shares of the Company’s common stock at an exercise price of $3.95 per share. These warrants are immediately exercisable and expire ten years from the date of issuance. The preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred shares are redeemable at the option of the Company subject to regulatory approval.
On February 14, 2011, the Company announced that it had notified the US Department of the Treasury that it was suspending the payment of regular quarterly cash dividends on the preferred stock issued to the US Treasury. As of December 31, 2011, the total amount of cumulative dividends suspended in payment to the US Treasury was $2.6 million. If the Company defers more than six quarterly payments to the US Treasury, then the US Treasury will have the right to elect two new board members. Directors elected by the US Treasury may not have the same interests as other shareholders and may desire the Company to take certain actions not supported by other shareholders. There can be no assurances that directors elected to represent the US Treasury would be supportive of our management’s business plans or the interests of other shareholders. Therefore, the election of directors to represent the US Treasury could have a material adverse effect on our business or the direction of its future prospects.
As a condition of the CPP, the Company must obtain approval from the United States Department of the Treasury to repurchase its common stock or to increase its cash dividend on its common stock from the September 30, 2008 quarterly level of $0.04 per common share. Furthermore, the Company has agreed to certain restrictions on executive compensation. Under the American Recovery and Reinvestment Act of 2009, the Company is limited to using restricted stock as a form of payment to the top five highest compensated executives under any incentive compensation programs.
F-448
Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(12) EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Retirement Plan
The Company maintains a qualified profit sharing 401(k) Plan for employees of age 21 years or over with at least three months of service. Under the plan, employees may contribute up to an annual maximum as determined under the Internal Revenue Code. Through July 2009, the Bank matched 100% of employee contributions not exceeding 6% of the participants’ compensation. Beginning August of 2009, the match was decreased to 50% and has been further reduced to zero effective January 1, 2011 as a cost reduction measure. The Board of Directors can authorize discretionary contributions to the plan. The plan provides that employees’ contributions are 100% vested at all times and the Company’s contributions vest at 20% each year of participation in the plan. The expense related to this plan for the years ended December 31, 2011, 2010 and 2009 totaled approximately none, $373 thousand and $716 thousand, respectively.
Deferred Compensation
The Company during 2007 implemented a non-qualifying deferred compensation plan for certain key executive and senior officers whose participation in the Company’s 401(k) plan is limited by Internal Revenue Service regulations. Under the plan, participants are entitled to elect to defer from 1% to 25% of current compensation until their normal retirement date. Through July 1, 2009, the Bank matched 100% of such contributions not exceeding 6% of the participants’ compensation. Beginning August 2009, the employer match was decreased to 50% and has been further reduced to zero effective January 1, 2011 as a cost reduction measure. The plan provides that employees’ contributions are 100% vested at all times and the Company’s contributions vest at 20% for each year of service. The expense related to this plan totaled approximately none, $4 thousand and $6 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.
Employment Agreements
The Company has entered into employment agreements with its chief executive officer and certain other executive officers to ensure a stable and competent management base. The agreements provide for a two or three-year term, but the agreements may annually be extended for an additional year. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers’ rights to receive certain vested benefits, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound by the terms of the contracts. As a condition to the purchase of the Company’s preferred stock by the United States Treasury Department under the CPP, the Company agreed to certain restrictions on executive compensation, including limitations on amounts payable to certain executives under severance arrangements and change in control provisions of employment contracts and clawback provisions in compensation plans. During 2009, Congress and the United States Treasury Department imposed additional restrictions on executive compensation paid by participants in the CPP, including a prohibition on severance arrangements with certain executive officers and limitations on incentive compensation.
Termination Agreements
Prior to 2005, the Company entered into termination agreements with substantially all other employees, which provide for severance pay benefits in the event of a change in control of the Company which results in the termination of such employee or diminished compensation, duties or benefits. As of December 31, 2011, approximately 30% of the Company’s employees were covered under such agreements. As a condition of the Company’s participation in the United States Treasury’s Capital Purchase Program, the Company agreed to modify these agreements for the five senior executive officers (SEOs) to restrict the severance pay benefit the
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
SEOs would receive in the event of a change in control while the Treasury maintains a preferred stock investment in the Company. During 2009, Congress and the United States Treasury Department imposed additional restrictions on executive compensation paid by participants in the CPP, including a prohibition on severance arrangements with certain executive officers.
Defined Benefit Pension Plan
The Company also has a non-contributory Defined Benefit Pension Plan covering substantially all employees of an acquired bank, The Community Bank. This plan was assumed as part of the purchase of The Community Bank in January 2004. Benefits under the plan are based on length of service and qualifying compensation during the final years of employment. Contributions to the plan are based upon the projected unit credit actuarial funding method to comply with the funding requirements of the Employee Retirement Income Security Act. The plan was frozen effective May 1, 2004. No contribution was required for the years ended December 31, 2011, 2010 or 2009. The changes in benefit obligations and plan assets, as well as the funded status, actuarial assumptions and components of net periodic pension cost of the plan at December 31 were:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Change in Benefit Obligation | ||||||||||||
Beginning of year | $ | 1,045 | $ | 987 | $ | 890 | ||||||
Actuarial loss | 156 | 47 | 85 | |||||||||
Service cost | — | — | — | |||||||||
Interest cost | 58 | 56 | 56 | |||||||||
Settlement | — | — | — | |||||||||
Benefits paid | (44 | ) | (45 | ) | (44 | ) | ||||||
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End of year — Benefit obligations | $ | 1,215 | $ | 1,045 | $ | 987 | ||||||
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Change in Fair Value of Plan Assets | ||||||||||||
Beginning of year | $ | 1,053 | $ | 997 | $ | 873 | ||||||
Benefits paid | (44 | ) | (45 | ) | (44 | ) | ||||||
Return on assets | (16 | ) | 101 | 168 | ||||||||
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End of year — Fair value | $ | 993 | $ | 1,053 | $ | 997 | ||||||
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Amounts recognized in the consolidated statement of financial condition consist of: | ||||||||||||
Noncurrent Asset | $ | — | $ | 8 | $ | 10 | ||||||
Noncurrent Liability | 222 | — | — | |||||||||
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Funded status | $ | (222 | ) | $ | 8 | $ | 10 | |||||
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Because the total unrecognized net gain or loss exceeds the greater of 10 percent of the projected benefit obligation or 10 percent of the pension plan assets, the excess will be amortized over the average expected future working life of active plan participants. As of January 1, 2011, the average expected future working life of active plan participants was 12.2 years. The components of accumulated other comprehensive income relating to pension adjustments are entirely comprised of actuarial losses, which amount to $584 thousand, excluding income taxes.
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Actuarial assumptions used in accounting for net periodic pension cost were:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Weighted average discount rate | 4.70 | % | 5.40 | % | 5.80 | % | ||||||
Weighted average rate of increase in compensation level | N/A | N/A | N/A | |||||||||
Weighted average expected long-term rate of return on plan assets | 7.50 | % | 7.50 | % | 7.50 | % | ||||||
Components of Net Periodic Pension Cost (Benefit) | ||||||||||||
Service cost | $ | — | $ | — | $ | — | ||||||
Interest cost | 58 | 56 | 56 | |||||||||
Expected return on plan assets | (77 | ) | (73 | ) | (64 | ) | ||||||
Loss | — | — | — | |||||||||
Amortization of prior service cost | — | — | — | |||||||||
Amortization of net (gain) loss | 24 | 19 | 24 | |||||||||
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Net periodic pension cost (benefit) | $ | 5 | $ | 2 | $ | 16 | ||||||
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The measurement date used for the plan was December 31, 2011. As of that date, the pension plan had a funded status with the fair value of plan assets of $993 thousand compared to an accumulated projected benefit obligation of $1.21 million. The actual minimum required contribution for the 2012 plan year has not yet been determined, but no employer contribution is expected to be made during 2012.
The overall expected long-term rate of return on assets assumption is based on: (1) the target asset allocation for plan assets, (2) long-term capital markets forecasts for asset classes employed and (3) active management excess return expectations to the extent asset classes are actively managed.
Plan assets are invested using allocation guidelines as established by the Plan. The primary objective is to provide long-term capital appreciation through investments in equities and fixed income securities. These guidelines ensure risk control by maintaining minimum and maximum exposure in equity and fixed income/cash equivalents portfolios. The minimum equity and fixed income/cash equivalents investment exposure is 35% and 25%, respectively. The maximum equity and fixed income/cash equivalents investment exposure is 75% and 65%, respectively. The current asset allocation is 62% equity securities and 38% fixed income securities/cash equivalents, which meets the criteria established by the Plan.
The fair values and allocations of pension plan assets at December 31, 2011 and 2010 are as follows:
2011 | 2010 | |||||||||||||||
Percent Market Value | Percent of Plan Assets | Market Value | Percent of Plan Assets | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Cash and equivalents | $ | 2 | — | $ | 2 | — | ||||||||||
Fixed income: | ||||||||||||||||
Bond Funds | 379 | 38 | % | 398 | 38 | % | ||||||||||
Equity Securities: | ||||||||||||||||
Mutual Funds | 612 | 62 | % | 653 | 62 | % | ||||||||||
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Total | $ | 993 | 100 | % | $ | 1,053 | 100 | % | ||||||||
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All plan assets, except the money market account, are traded on the open market. At December 31, 2011 market values were determined using quoted prices and current shares owned. Bond funds currently held in the
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
plan include long-duration and high yield bond funds and emerging market debt funds. Equity securities include large, medium and small sized companies and equity securities of foreign companies. The value of all assets are considered level 1 within the fair value hierarchy as they are valued with quoted prices for identical assets. The highest percentage of any one investment at year end 2011 was 10.5% which does not represent a concentration of risk.
Allowable investment types include both US and international equity and fixed income funds. The equity component is composed of common stocks, convertible notes and bonds, convertible preferred stocks and ADRs of non-US companies as well as various mutual funds, including government and corporate bonds, large to mid-cap value, growth and world/international equity funds and index funds. The fixed income/cash equivalents component is composed of money market funds, commercial paper, certificates of deposit, US Government and agency securities, corporate notes and bonds, preferred stock and fixed income securities of foreign governments and corporations.
The plan’s weighted-average asset allocations at December 31, 2011, by asset category are as follows.
U.S. equity | 57 | % | ||
International blend | 5 | |||
Fixed income and cash equivalents | 38 |
Estimated future benefits payments are shown below (in thousands):
Year | Pension Benefits | |
2012 | 44 | |
2013 | 46 | |
2014 | 55 | |
2015 | 56 | |
2016 | 56 | |
2017 - 2021 | 317 |
Supplemental Retirement
The Company during 2001 implemented a non-qualifying supplemental retirement plan for certain key executive and senior officers. The Company has purchased life insurance policies on the participating officers in order to provide future funding of benefit payments. Benefits under the plan are intended to provide the executive officers with approximately 60% of final base pay when combined with Social Security benefits and 401(k) Plan deferral payments. Such benefits will continue to accrue and be paid throughout each participant’s life. The plan also provides for payment of death or disability benefits in the event a participating officer becomes permanently disabled or dies prior to attainment of retirement age. Provisions of $115 thousand, $426 thousand and $446 thousand in 2011, 2010 and 2009, respectively, were expensed for future benefits to be provided under this plan. The accrued liability related to this plan was approximately $2.5 million and $2.5 million as of December 31, 2011 and 2010, respectively. Payouts for this plan were $50 thousand and $62 thousand for years ended December 31, 2011 and 2010 respectively.
Effective January 1, 2011, the Company elected to freeze the accrued liability related to currently employed executive and senior officers at the December 31, 2010 level for the foreseeable future. This annual cost savings is estimated to be $350 thousand.
During 1994, The Community Bank had established an unfunded Supplemental Executive Retirement Plan, which is a nonqualified plan that provides additional retirement benefits to certain key management personnel.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
The accrued liability related to this plan was approximately $789 thousand and $786 thousand at December 31, 2011 and 2010, respectively. Total expense for this plan aggregated $44 thousand for the year ended December 31, 2011 and $44 thousand for the year ended 2010 and $46 thousand for the year ended 2009. Payouts for this plan were $95 thousand for years ended December 31, 2011 and 2010 and are expected to continue at this level until the plan is terminated.
Employee Stock Purchase Plan
On December 19, 2002, the Board approved the creation of, and on February 20, 2003 the Board adopted, the 2002 Employee Stock Purchase Plan (the “2002 ESPP”). An aggregate of 1,000,000 shares of common stock of the Company has been reserved for issuance by the Company upon exercise of options to be granted from time to time under the 2002 ESPP. The purpose of the 2002 ESPP is to provide employees of the Company with an opportunity to purchase shares of the common stock of the Company in order to encourage employee participation in the ownership and economic success of the Company.
The 2002 ESPP as originally adopted provides employees of the Company the right to purchase, annually, shares of the Company’s common stock at 95% of fair market value. The plan was amended during 2009 to allow employees the right to purchase these shares monthly. The number of shares that can be purchased in any calendar year by any individual is limited to the lesser of: (1) shares with a fair market value of $25 thousand or (2) shares with a fair market value of 20% of the individual’s annual compensation. Shares purchased through the 2002 ESPP must be held by the employee for one year, after which time the employee is free to dispose of the stock.
For the years ended December 31, 2011, 2010 and 2009, employees of the Company purchased 24,500, 32,379 and 47,942 shares, respectively, under the ESPP. During 2011, the shares purchased for the ESPP were purchased on the open market.
Stock Option Plans
During 1997 the Company adopted, with stockholder approval, the 1997 Incentive Stock Option Plan and the 1997 Nonstatutory Stock Option Plan. Both plans were amended in 2000 and in 2001, with stockholder approval, to increase the number of shares available for grant. Each of these plans makes available options to purchase 875,253 shares of the Company’s common stock. Both of these plans have now terminated by their terms. During 2002 the Company adopted, with stockholder approval in 2003, the 2002 Incentive Stock Option Plan with 350,000 options available and the 2002 Nonstatutory Stock Option Plan with 150,000 options available. During 2006 the Company adopted, with shareholder approval, the 2006 Nonstatutory Stock Option Plan with 150,000 options available. The exercise price of all options granted to date is the fair value of the Company’s common shares on the date of grant.
All options had an initial vesting period of five years. During the first quarter 2005, the Company vested all unvested stock options. As a result of this decision 623,725 non-vested options were accelerated from their established vesting over a five-year period from date of grant to being fully vested. Stock options granted after December 31, 2005 and stock options granted to advisory board members generally vest over a five-year period. All unexercised options expire ten years after the date of grant.
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
A summary of the Company’s option plans as of and for the year ended December 31, 2011 is as follows:
Outstanding Options | Exercisable Options | |||||||||||||||||||
Shares Available for Future Grants | Number Outstanding | Weighted Average Exercise Price | Number Outstanding | Weighted Average Exercise Price | ||||||||||||||||
At December 31, 2010 | 612,605 | 619,606 | $ | 9.57 | 598,006 | $ | 9.71 | |||||||||||||
Options authorized | — | — | — | — | — | |||||||||||||||
Options granted/vested | — | — | — | — | — | |||||||||||||||
Options exercised | — | (200 | ) | 2.67 | (200 | ) | 2.67 | |||||||||||||
Options forfeited | 28,500 | (28,500 | ) | 10.04 | (16,700 | ) | 10.04 | |||||||||||||
Options expired | 49,256 | (49,256 | ) | 6.46 | (49,256 | ) | 6.46 | |||||||||||||
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At December 31, 2011 | 690,361 | 541,650 | $ | 9.57 | 531,850 | $ | 9.71 | |||||||||||||
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The weighted average remaining life of options outstanding and options exercisable at December 31, 2011 and 2010 is 2.80 years and 3.50 years, respectively. Information pertaining to options outstanding at December 31, 2011 is as follows:
Range of Exercise Prices | Number of Options Outstanding | Number of Options Exercisable | ||||||
$2.67 - $7.15 | 93,600 | 83,800 | ||||||
$7.16 - $10.10 | 181,050 | 181,050 | ||||||
$10.11 - $12.00 | 267,000 | 267,000 | ||||||
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Outstanding at end of year | 541,650 | 531,850 | ||||||
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The estimated average per share fair value of options granted, using the Black-Scholes methodology, together with the assumptions used in estimating those fair values, are displayed below. Because no options were granted in 2011, this is not applicable for 2011.
2011 | 2010 | 2009 | ||||||||||
Estimated fair value of options granted | N/A | N/A | $ | 0.97 | ||||||||
Assumptions in estimating average option values: | ||||||||||||
Risk-free interest rate | N/A | N/A | 2.28 | % | ||||||||
Dividend yield | N/A | N/A | 1.76 | % | ||||||||
Volatility | N/A | N/A | 36 | % | ||||||||
Expected life | N/A | N/A | 5 years |
As there were a minor number of options exercised in 2011 and 2010, the total intrinsic value of options exercised during the years ended December 31, 2011, and 2010 was none. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2011 and 2010 were zero. As of December 31, 2011, there was $9 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted average period of 1.41 years.
Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2011, 2010 and 2009 was $1 thousand, $1 thousand and none, respectively. The tax benefit realized for tax deductions from option exercise of the share-based payment arrangements for the years ended December 31, 2011, 2010 and 2009 were none, respectively. Under this plan, the Company expensed $26 thousand, $52 thousand and $165 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Restricted Stock
During 2007 the Company adopted the Southern Community Financial Corporation Restricted Stock Plan. The plan initially made 300,000 shares available to be issued as restricted stock. The plan is administered by the Compensation Committee of the Board of Directors who may authorize the grant of restricted stock to certain current directors, officers and employees of the Corporation. The shares vest over a five year period and are taxable to the recipient at their option either when received or after the vesting period at the current fair market value. The recipient must be employed with the Company at the end of the five year period or the shares are forfeited. For the year ended December 31, 2011, 26,750 shares were granted and 12,500 shares were forfeited. During the period from the inception of the plan through December 31, 2011, a total of 128,750 shares have now been issued and 25,250 shares have been forfeited, leaving 196,500 shares available for future grants. Under this plan, the Company expensed $71 thousand, $74 thousand and $63 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.
(13) LEASES
The Company leases office space and equipment under non-cancelable operating leases. Future minimum lease payments under these leases for the years ending December 31 are as follows (amounts in thousands):
2012 | $ | 810 | ||
2013 | 774 | |||
2014 | 623 | |||
2015 | 353 | |||
2016 | 326 | |||
Thereafter | 2,488 | |||
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$ | 5,374 | |||
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Total rental expense for office space and equipment under operating leases are as follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Office Space | $ | 620 | $ | 620 | $ | 730 | ||||||
Equipment | 223 | 365 | 444 | |||||||||
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$ | 843 | $ | 985 | $ | 1,174 | |||||||
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(14) INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31, 2011, 2010 and 2009 are as follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Current tax provision (benefit) | ||||||||||||
Federal | $ | 869 | $ | (5,380 | ) | $ | (693 | ) | ||||
State | — | (12 | ) | (157 | ) | |||||||
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869 | (5,392 | ) | (850 | ) | ||||||||
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Deferred tax provision (benefit) | ||||||||||||
Federal | (1,290 | ) | 8,497 | (4,760 | ) | |||||||
State | 421 | 1,213 | (1,076 | ) | ||||||||
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(869 | ) | 9,710 | (5,836 | ) | ||||||||
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Net provision (benefit) for income taxes | $ | — | $ | 4,318 | $ | (6,686 | ) | |||||
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The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
2011 | 2010 | 2009 | ||||||||||
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Tax computed at the statutory federal rate | $ | 1,045 | $ | (6,393 | ) | $ | (23,747 | ) | ||||
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Increase (decrease) resulting from: | ||||||||||||
Goodwill impairment | — | — | 16,830 | |||||||||
Valuation allowance on deferred tax assets | (218 | ) | 12,600 | 2,000 | ||||||||
State income taxes, net of federal benefit | 278 | 793 | (814 | ) | ||||||||
Tax-exempt income | (1,153 | ) | (1,275 | ) | (1,071 | ) | ||||||
Other permanent differences | 48 | (1,407 | ) | 116 | ||||||||
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(1,045 | ) | 10,711 | 17,061 | |||||||||
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Provision (benefit) for income taxes | $ | — | $ | 4,318 | $ | (6,686 | ) | |||||
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2011 and 2010 are as follows:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Deferred tax assets relating to: | ||||||||
Allowance for loan losses | $ | 9,317 | $ | 11,404 | ||||
Net operating loss carry forward | 4,669 | 2,994 | ||||||
Deferred compensation | 1,560 | 1,613 | ||||||
OREO writedowns | 1,830 | 1,228 | ||||||
Accumulated other comprehensive income | — | 903 | ||||||
Other | 800 | 721 | ||||||
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Gross deferred tax assets | 18,176 | 18,863 | ||||||
Valuation allowance | (14,382 | ) | (14,600 | ) | ||||
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Net total deferred tax assets | 3,794 | 4,263 | ||||||
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Deferred tax liabilities relating to: | ||||||||
Property and equipment | (2 | ) | (333 | ) | ||||
Loan fees and costs | (639 | ) | (633 | ) | ||||
Core deposit intangible | (175 | ) | (259 | ) | ||||
Prepaid expenses | (365 | ) | (390 | ) | ||||
Other | (63 | ) | (65 | ) | ||||
Accumulated other comprehensive income | (430 | ) | — | |||||
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Total deferred tax liabilities | (1,674 | ) | (1,680 | ) | ||||
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Net recorded deferred tax asset | $ | 2,120 | $ | 2,583 | ||||
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We calculate income taxes in accordance with US GAAP, which requires the use of the asset and liability method. The largest component of our net deferred tax asset at December 31, 2011 was related to the activity in our allowance for loan losses. In accordance with US GAAP, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. Based upon our analysis of our tax position, including taxes paid in prior years available through carryback and the use of tax planning strategies, we maintained the valuation allowance of $14.4 million at December 31, 2011 to properly state our ability to realize this deferred tax asset. The total valuation allowance resulted in a net deferred tax asset of $2.1 million. Our analysis of our tax position included future taxable earnings based on current earnings for 2011. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it may require the future occurrence of circumstances that cannot be predicted with certainty. The realizability of the net deferred tax asset of $2.1 million at December 31, 2011 is based on the offset of deferred tax liabilities, tax planning strategies and future operating earnings.
As a result of the net operating loss carry forward of $3.0 million expiring in 2020 and $1.7 million expiring in 2021 at December 31, 2011 and the $14.4 million deferred tax asset valuation allowance, the Company will not record tax expense or tax benefit until positive operating earnings utilize all existing tax loss carry forwards and support the partial or full reinstatement of deferred tax assets.
The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Most recent tax year examined by Internal Revenue Service was 2009, leaving 2010 and subsequent years subject to IRS examination. The Company has approximately $32 thousand accrued for payment of interest and penalties as of December 31, 2011.
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Table of Contents
Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
A reconciliation of the beginning and ending balance of unrecognized tax benefit is as follows:
2011 | 2010 | |||||||
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Balance at January 1, 2011 | $ | 153 | $ | 162 | ||||
Additions based on tax positions related to the current year | 27 | 38 | ||||||
Additions for tax positions of prior years | — | — | ||||||
Reductions for tax positions of prior years | (17 | ) | (47 | ) | ||||
Settlements | — | — | ||||||
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Balance at December 31, 2011 | $ | 163 | $ | 153 | ||||
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(15) NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
The major components of non-interest income for the years ended December 31, 2011, 2010 and 2009 are as follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
SBIC income (loss) and management fees | $ | (88 | ) | $ | 631 | $ | 148 | |||||
Increase in cash surrender value of life insurance | 1,103 | 1,079 | 1,116 | |||||||||
Gain (loss) and net cash settlement on economic hedges | (129 | ) | (532 | ) | 234 | |||||||
Other | 944 | 894 | 1,067 | |||||||||
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Total | $ | 1,830 | $ | 2,072 | $ | 2,565 | ||||||
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The major components of other non-interest expense for the years ended December 31, 2011, 2010 and 2009 are as follows:
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Postage, printing and office supplies | $ | 658 | $ | 753 | $ | 921 | ||||||
Telephone and communication | 881 | 880 | 927 | |||||||||
Advertising and promotion | 871 | 925 | 1,103 | |||||||||
Data processing and other outsourced services | 750 | 857 | 746 | |||||||||
Professional services | 2,959 | 2,972 | 2,215 | |||||||||
Debit card expense | 934 | 917 | 780 | |||||||||
Buyer incentive plan | — | 413 | 1,320 | |||||||||
Loss on early extinguishment of debt | — | — | 472 | |||||||||
Gain on sales of foreclosed assets | (689 | ) | (429 | ) | (196 | ) | ||||||
Other | 5,185 | 5,015 | 5,830 | |||||||||
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Total | $ | 11,549 | $ | 12,303 | $ | 14,118 | ||||||
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(16) REGULATORY CAPITAL
The Bank, as a North Carolina banking corporation, may pay cash dividends to the Company only out of retained earnings as determined pursuant to North Carolina banking laws. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such limitation is in the public interest and is necessary to ensure financial soundness of the bank. The Consent Order restricts the Bank from paying cash
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dividends without prior regulatory approval. The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. On February 25, 2011, the Bank entered into a Consent Order with the FDIC and the NCCOB. Under the terms of the Consent Order, the Bank has agreed, among other things, to comply with minimum capital requirements of 8% Tier 1 leverage capital and 11% total risk-based capital. See Note 2 for a discussion of management’s compliance with these minimum capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as prescribed by regulations, of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Information regarding the Bank’s capital and capital ratios is set forth below:
Actual | Minimum For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
As of December 31, 2011 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 151,336 | 13.85% | $ | 87,400 | 8.00% | $ | 109,200 | 10.00% | |||||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | 137,552 | 12.59% | 43,700 | 4.00% | 65,500 | 6.00% | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | 137,552 | 9.07% | 43,700 | 4.00% | 75,900 | 5.00% | ||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 147,983 | 11.14% | $ | 107,000 | 8.00% | $ | 133,700 | 10.00% | |||||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | 131,217 | 9.88% | 53,500 | 4.00% | 80,200 | 6.00% | ||||||||||||||||||
Tier 1 Capital (to Average Assets) | 131,217 | 7.83% | 67,000 | 4.00% | 83,800 | 5.00% |
As a bank holding company subject to regulation by the Federal Reserve, the Company must comply with the above mentioned regulatory capital requirements. Information regarding the Company’s capital and capital ratios is set forth below:
At December 31, 2011 | At December 31, 2010 | |||||||||||||||
Actual | Actual | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Total risk-based capital ratio | $ | 156,186 | 14.26% | $ | 156,503 | 11.75% | ||||||||||
Tier 1 risk-based capital ratio | 128,661 | 11.75% | 124,615 | 9.35% | ||||||||||||
Leverage ratio | 128,661 | 8.47% | 124,615 | 7.42% |
(17) DERIVATIVES
Derivative Financial Instruments
The Company utilizes stand-alone derivative financial instruments, primarily in the form of interest rate swap and option agreements, in its asset/liability management program. These transactions involve both credit and market risk. The Company uses derivative instruments to mitigate exposure to adverse changes in fair value
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Notes to Consolidated Financial Statements—(Continued)
or cash flows of certain assets and liabilities. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the balance sheet with corresponding offsets recorded in the income statement. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense on the hedged asset or liability. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in accumulated other comprehensive income within stockholders’ equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged transaction affects earnings. Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement.
The Company does not enter into derivative financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest income during the period of change. The net cash settlement on these derivatives is included in non-interest income.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures and agreements that specify collateral levels to be maintained by the Company and the counterparties. These collateral levels are based on the credit rating of the counterparties and the value of the derivatives.
The Company currently has nine derivative instrument contracts consisting of six interest rate swaps, one interest rate cap and two foreign exchange contracts. The primary objective for each of these contracts is to minimize risk, interest rate risk being the primary risk for the interest rate caps and swaps while foreign exchange risk is the primary risk for the foreign exchange contracts. The Company’s strategy is to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods. In order to acquire low cost, long term fixed rate funding without incurring currency risk, the Company entered into the foreign exchange contract to convert foreign currency denominated certificates of deposit into long term dollar denominated time deposits. The interest rate on the underlying $10.0 million certificates of deposit is based on a proprietary index (Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays Bank). The currency swap is also based on this proprietary index.
Risk Management Policies - Hedging Instruments
The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned for a period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period. Based upon the outcome of the simulation analysis, the
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Notes to Consolidated Financial Statements—(Continued)
Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.
The fair value of the Company’s derivative assets and liabilities and their related notional amounts is summarized below.
December 31, 2011 | December 31, 2010 | |||||||||||||||
Fair Value | Notional Amount | Fair Value | Notional Amount | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Fair value hedges | ||||||||||||||||
Interest rate swaps associated with deposit activities: Certificate of Deposit contracts | $ | 436 | $ | 65,000 | $ | 392 | $ | 75,000 | ||||||||
Currency Exchange contracts | (457 | ) | 10,000 | (679 | ) | 10,000 | ||||||||||
Cash flow hedges | ||||||||||||||||
Interest rate swaps associated with borrowing activities: Trust Preferred contracts | (202 | ) | 10,000 | (468 | ) | 10,000 | ||||||||||
Interest rate cap contracts | 9 | 12,500 | 113 | 12,500 | ||||||||||||
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$ | (214 | ) | $ | 97,500 | $ | (642 | ) | $ | 107,500 | |||||||
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See Note 20 for additional information on fair values of net derivatives.
Certain derivative liabilities were collateralized by securities, which are held by the counterparty or in safekeeping by third parties. The fair value of these securities at December 31, 2011 was $7.3 million.
The following table further breaks down the derivative positions of the Company:
For the Year Ended December 31, 2011 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
2011 | 2011 | |||||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Interest rate cap contracts | Other Assets | $ | 9 | |||||||||||||
Interest rate swap contracts | Other Assets | 436 | Other Liabilities | $ | 202 | |||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||
Interest rate swap contracts | Other Assets | — | Other Liabilities | 457 | ||||||||||||
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Total derivatives | $ | 445 | $ | 659 | ||||||||||||
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Net Derivative Asset (Liability) | $ | (214 | ) | |||||||||||||
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For the Year Ended December 31, 2010 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
2010 | 2010 | |||||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Interest rate cap contracts | Other Assets | $ | 113 | |||||||||||||
Interest rate swap contracts | Other Assets | 392 | Other Liabilities | $ | 468 | |||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||
Interest rate swap contracts | Other Assets | — | Other Liabilities | 679 | ||||||||||||
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Total derivatives | $ | 505 | $ | 1,147 | ||||||||||||
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Net Derivative Asset (Liability) | $ | (642 | ) | |||||||||||||
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The tables below illustrate the effective portion of the gains (losses) recognized in other comprehensive income and the gains (losses) reclassified from accumulated other comprehensive income into earnings for the years ended December 31, 2011 and 2010.
For the Year Ended December 31, 2011 | ||||||||||
Cash Flow Hedging | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||
(Amounts in thousands) | ||||||||||
Interest rate contracts | $(104) | Interest expense | $— | |||||||
Ineffective Portion | Ineffective Portion | |||||||||
$264 | $300 |
In prior years, no gain or loss has been recognized in the income statement due to any ineffective portion of any cash flow hedging relationship. In February 2011, the payment of interest on the trust preferred securities was suspended which resulted in the swap changing its status from effective to ineffective. The change to an ineffective status disqualified the instrument from hedge accounting and required mark to market adjustments to be included in the income statement instead of other comprehensive income as previously recorded. Upon recognizing this ineffective status in the first quarter of 2011, the Company recorded a $384 thousand mark to market loss in the income statement on this interest rate swap relating to trust preferred securities. The Company recorded a $264 thousand gain on this swap into non-interest income during the year ended December 31, 2011.
For the Year Ended December 31, 2010 | ||||||||
Cash Flow Hedging Relationships | Amount of Gain or (Loss) | Location of Gain or (Loss) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||
(Amounts in thousands) | ||||||||
Interest rate contracts | $(738) | Interest expense | $(283) |
There was no gain or loss recognized in the income statement due to any ineffective portion of any cash flow hedging relationship for the year ended December 31, 2010.
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For the Year Ended December 31, 2009 | ||||||||||||
Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||||
(Amounts in thousands) | ||||||||||||
Interest rate contracts | $ | 354 | Interest expense | $ | (233 | ) |
There was no gain or loss recognized in the income statement due to any ineffective portion of any cash flow hedging relationship for the year ended December 31, 2009.
The tables below show the location and amount of gains (losses) recognized in earnings for fair value hedges and other economic hedges for the years ended December 31, 2011 and 2010.
For the Year Ended December 31, 2011 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts — Not designated as hedging instruments | Other income (expense) | $ | (129 | ) | ||
Interest Rate Contracts — Fair value hedging relationships | Interest income/(expense) | $ | 1,766 |
For the Year Ended December 31, 2010 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts — Not designated as hedging instruments | Other income (expense) | $ | (532 | ) | ||
Interest Rate Contracts — Fair value hedging relationships | Interest income/(expense) | $ | 1,954 |
For the Year Ended December 31, 2009 | ||||||
Description | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||
(Amounts in thousands) | ||||||
Interest rate contracts — Not designated as hedging instruments | Other income (expense) | $ | 234 | |||
Interest Rate Contracts — Fair value hedging relationships | Interest income/(expense) | $ | 1,499 |
The interest rate swap with borrowing activities on trust preferred securities has a maturity of September 6, 2012. The maturity date for the interest rate cap contract is February 18, 2014. The currency exchange contracts have maturity dates of November 29, 2013 and December 30, 2013. The interest rate swaps with deposit taking activities on certificates of deposit have maturity dates of July 28, 2025, August 27, 2030, September 30, 2030, October 12, 2040 and December 17, 2040. The interest rate swaps on certificates of deposit have original call dates of July 28, 2011, May 27, 2011, September 30, 2011, October 12, 2014 and November 28, 2014 and quarterly thereafter. All of these swaps have the ability to be called by the counterparty prior to their maturity date. No new derivative contracts were entered into during 2011.
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Notes to Consolidated Financial Statements—(Continued)
Certain derivative liabilities were collateralized by securities, which are held by the counterparty or in safekeeping by third parties. The fair value of these securities was $7.3 million and $9.7 million at December 31, 2011 and December 31, 2010, respectively. Collateral calls can be required at any time that the market value exposure of the contracts is less than the collateral pledged. The degree of overcollateralization is dependent on the derivative contracts to which the Company is a party.
As part of our banking activities, the Company originates certain residential loans and commits these loans for sale. The commitments to originate residential loans and the sales commitments are freestanding derivative instruments and are generally funded within 90 days. The fair value of these commitments was not significant at December 31, 2011.
In January 2012, the Company entered into $35.0 million notional forward starting interest rate swaps. The purpose of these swaps is to lock in currently low fixed rate funding costs for intermediate term FHLB advances maturing from July 2012 through November 2013.
Interest Rate Risk Management—Cash Flow Hedging Instruments
To mitigate exposure to variability in expected future cash flows resulting from changes in interest rates, management may enter into interest rate swap and option agreements. At December 31, 2011 and 2010, the Company had an interest rate swap agreement related to a variable-rate obligation that provides for the Company to pay fixed and receive floating payments related to the variable rate Trust Preferred Securities (the Trust III Securities). The Company also had an interest rate option agreement that provides payments to the Company in the event interest rates increase or decrease above or below levels provided in the agreements. The gains and losses from such hedges not designated as cash flow hedges are recognized in non-interest income in the line item net cash settlement and change in fair value of economic hedges.
Interest Rate Risk Management—Fair Value Hedging Instruments
As part of interest rate risk management, the Company from time to time has entered into interest rate swap agreements to convert certain fixed-rate obligations to floating rates. At December 31, 2011 and 2010, the Company had interest rate swap agreements related to fixed-rate obligations that provide for the Company to pay floating and receive fixed interest payments, certain of which had been designated as fair value hedges, others of which were not designated as fair value hedges. The gains (losses) from such interest rate swaps that were not designated as accounting hedges are recognized in non-interest income in the line item net cash settlement and change in fair value of economic hedges. Prior to designation as fair value hedges, the change in the fair value of the interest rate swap agreements were included in noninterest income. Subsequent to the designation as fair value hedges, the changes in the fair value of the interest rate swap and the changes to the fair value of the hedged CD are included in noninterest income. The difference between the changes in the fair values of the interest rate swaps and the related CDs represents hedge ineffectiveness. The Company currently has no fair value hedges for which hedge effectiveness is evaluated using the “short-cut” method.
(18) OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
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Notes to Consolidated Financial Statements—(Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds and certificates of deposit.
A summary of the contract amount of the Company’s exposure to off-balance sheet risk as of December 31, 2011 and 2010 is as follows:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Financial instruments whose contract amounts represent credit risk: | ||||||||
Loan commitments and undisbursed lines of credit | $ | 192,036 | $ | 188,549 | ||||
Undisbursed standby letters of credit | 6,910 | 8,280 | ||||||
Undisbursed portion of construction loans | 28,123 | 27,321 | ||||||
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$ | 227,069 | $ | 224,150 | |||||
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The Company is a party to legal proceedings and potential claims arising in the normal conduct of business. Management believes that this litigation is not material to the financial position or results of operations of the Company.
(19) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments include cash and due from banks, federal funds sold, investment securities, loans, bank-owned life insurance, deposit accounts and other borrowings, accrued interest and derivatives. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks, federal funds sold and other interest-bearing deposits
The carrying amounts for cash and due from banks, federal funds sold and other interest-bearing deposits approximate fair value because of the short maturities of those instruments.
Investment securities
Fair value for investment securities equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Most of these
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Notes to Consolidated Financial Statements—(Continued)
securities are US government agency debt obligations and agency mortgage-backed securities traded in active markets. The third party valuations are determined based on the characteristics of each security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as Level 2.
Loans
For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Investment in bank-owned life insurance
The carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.
Deposits
The fair value of demand deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated based on discounting expected cash flows using the rates currently offered for deposits of similar remaining maturities.
Borrowings
The fair values are based on discounting expected cash flows at the current interest rate for debt with the same or similar remaining maturities and collateral requirements. As it relates to the Company’s subordinated debentures, the fair values are calculated by reference to the market price of the publicly traded trust preferred securities as an indication of the Company’s credit risk.
Accrued interest
The carrying amounts of accrued interest approximate fair value.
Derivative financial instruments
Fair values for interest rate swap and option agreements are based upon the amounts required to settle the contracts. Fair values for commitments to originate loans held for sale are based on fees currently charged to enter into similar agreements. Fair values for fixed-rate commitments also consider the difference between current levels of interest rates and the committed rates.
Financial instruments with off-balance sheet risk
With regard to financial instruments with off-balance sheet risk discussed in Note 18, it is not practicable to estimate the fair value of future financing commitments.
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Notes to Consolidated Financial Statements—(Continued)
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at December 31, 2011 and 2010:
2011 | 2010 | |||||||||||||||
Carrying amount | Estimated fair value | Carrying amount | Estimated fair value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 23,356 | $ | 23,356 | $ | 16,584 | $ | 16,584 | ||||||||
Federal funds sold and overnight deposits | 23,198 | 23,198 | 49,587 | 49,587 | ||||||||||||
Investment securities available for sale | 362,298 | 362,298 | 310,653 | 310,653 | ||||||||||||
Investment securities held to maturity | 44,403 | 45,514 | 42,220 | 40,181 | ||||||||||||
Loans | 925,857 | 904,302 | 1,100,496 | 1,119,189 | ||||||||||||
Market risk/liquidity adjustment | — | (41,323 | ) | — | (50,272 | ) | ||||||||||
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Net loans | 925,857 | 862,979 | 1,100,496 | 1,068,917 | ||||||||||||
Investment in life insurance | 30,919 | 30,919 | 29,831 | 29,831 | ||||||||||||
Accrued interest receivable | 5,843 | 5,843 | 6,782 | 6,782 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | 1,183,172 | 1,177,073 | 1,348,419 | 1,349,501 | ||||||||||||
Short-term borrowings | 33,629 | 35,334 | 22,098 | 22,098 | ||||||||||||
Long-term borrowings | 177,514 | 161,888 | 182,686 | 155,967 | ||||||||||||
Accrued interest payable | 5,219 | 5,219 | 2,779 | 2,779 | ||||||||||||
On-balance sheet derivative financial instruments: | ||||||||||||||||
Interest rate swap and option agreements: | ||||||||||||||||
(Assets) Liabilities, net | 214 | 214 | 642 | 642 |
(20) FAIR VALUES OF ASSETS AND LIABILITIES
Accounting standards establish a framework for measuring fair value according to generally accepted accounting principles and expands disclosures about fair value measurements. Under these standards, there is a three level fair value hierarchy that is fully described below. The Company reports fair value on a recurring basis for certain financial instruments, most notably for available for sale investment securities and certain derivative instruments. The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value which was below cost at the end of the period. Assets subject to nonrecurring use of fair value measurements could include loans held for sale, goodwill, impaired loans and foreclosed assets. At December 31, 2011 and December 31, 2010, the Company had certain impaired loans that are measured at fair value on a nonrecurring basis.
The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
• | Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. There were no investments held with level 1 valuations. |
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• | Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Level 2 securities include asset-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Valuations are obtained from third party services for similar or comparable assets or liabilities. |
• | Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or brokered traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
There were no transfers between any of the levels during 2011. The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
December 31, 2011 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US government agencies | $ | 34,729 | $ | — | $ | 34,729 | $ | — | ||||||||
Asset-backed securities | 291,368 | — | 291,368 | — | ||||||||||||
Municipals | 29,220 | — | 29,220 | — | ||||||||||||
Trust preferred securities | 2,321 | — | 2,321 | — | ||||||||||||
Corporate bonds | 3,659 | — | 3,659 | — | ||||||||||||
Other | 1,001 | — | 1,001 | — | ||||||||||||
Net Derivatives | (214 | ) | — | 243 | (457 | ) |
December 31, 2010 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
US government agencies | $ | 98,240 | $ | — | $ | 98,240 | $ | — | ||||||||
Asset-backed securities | 149,776 | — | 149,776 | — | ||||||||||||
Municipals | 55,564 | — | 55,564 | — | ||||||||||||
Trust preferred securities | 3,094 | — | 3,094 | — | ||||||||||||
Corporate bonds | 3,003 | — | — | 3,003 | ||||||||||||
Other | 976 | — | 976 | — | ||||||||||||
Net Derivatives | (642 | ) | — | 37 | (679 | ) |
There were no transfers between any levels during 2010. The table below presents reconciliation for the period of January 1, 2011 to December 31, 2011, for all level 3 assets and liabilities that are measured at fair value on a recurring basis.
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||
Securities Available for sale | Net Derivatives | |||||||
(Amounts in thousands) | ||||||||
Beginning Balance January 1, 2011 | $ | 3,003 | $ | (679 | ) | |||
Total realized and unrealized gains or losses: | ||||||||
Included in earnings | 537 | 222 | ||||||
Included in other comprehensive income | — | — | ||||||
Purchases, issuances and settlements | (3,540 | ) | — | |||||
Transfers in and/or out of Level 3 | — | — | ||||||
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Ending Balance | $ | — | $ | (457 | ) | |||
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
During 2011, the Company sold the available for sale securities which were measured for fair value as level 3 assets.
The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Most of these securities are US Government agency debt obligations and agency asset-backed securities traded in active markets. The third party valuations are determined based on the characteristics of each security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as level 2.
The fair value reporting standards allows an entity to make an irrevocable election to measure certain financial instruments at fair value. The changes in fair value from one reporting period to the next period must be reported in the income statement with additional disclosures to identify the effect on net income. The Company continued to account for securities available for sale at fair value as reported in prior years. Derivative activity is also reported at fair value. Securities available for sale and derivative activity are reported on a recurring basis. Upon adoption of the fair value reporting standard, no additional financial assets or liabilities were reported at fair value and there was no material effect on earnings.
The Company records loans in the ordinary course of business and does not record loans at fair value on a recurring basis. Loans are considered impaired when it is determined to be probable that all amounts due under the contractual terms of the loan will not be collected when due. Loans considered individually impaired are evaluated and a specific allowance is established if required based on the most appropriate of the three measurement methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. A specific allowance is required if the fair value of the expected repayments or the collateral is less than the recorded investment in the loan. At December 31, 2011, loans with a book value of $87.1 million were evaluated for impairment. Of this total, $23.0 million required a specific allowance totaling $1.6 million for a net fair value of $21.4 million. At December 31, 2010, loans with a book value of $87.1 million were evaluated for impairment. Of this total, $27.8 million required a specific allowance totaling $5.1 million for a net fair value of $22.7 million. The methods used to determine the fair value of these loans were generally either the present value of expected future cash flows or fair value of collateral and were considered level 3.
The table below presents the balances of assets and liabilities measured at fair value on a nonrecurring basis.
December 31, 2011 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Impaired loans | $ | 21,388 | $ | — | $ | — | $ | 21,388 | ||||||||
Foreclosed assets | 19,812 | — | — | 19,812 |
December 31, 2010 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Impaired loans | $ | 22,699 | $ | — | $ | — | $ | 22,699 | ||||||||
Foreclosed assets | 17,314 | — | — | 17,314 |
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell on the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management or outside appraisers and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. These valuations generally are based on market comparable sales data for similar type of properties. The range of discounts in these valuations is specific to the nature, type, location, condition and market demand for each property. The methods used to determine the fair value of these foreclosed assets were considered level 3.
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
(21) PARENT COMPANY FINANCIAL DATA
Southern Community Financial Corporation’s condensed balance sheets as of December 31, 2011 and 2010 and its related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2011 are as follows:
Condensed Balance Sheets
December 31, 2011 and 2010
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 5,602 | $ | 5,559 | ||||
Investment in subsidiary | 140,068 | 131,610 | ||||||
Investment securities available for sale | — | 1,352 | ||||||
Other assets | 1,244 | 1,035 | ||||||
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Total assets | $ | 146,914 | $ | 139,556 | ||||
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Liabilities: | ||||||||
Junior subordinated debentures | $ | 45,877 | $ | 45,877 | ||||
Other liabilities | 3,402 | 1,338 | ||||||
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Total liabilities | 49,279 | 47,215 | ||||||
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Stockholders’ equity | ||||||||
Preferred stock | 41,870 | 41,453 | ||||||
Common stock | 119,505 | 119,408 | ||||||
Retained earnings (accumulated deficit) | (64,425 | ) | (67,082 | ) | ||||
Accumulated other comprehensive income (loss) | 685 | (1,438 | ) | |||||
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Total stockholders’ equity | 97,635 | 92,341 | ||||||
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Total liabilities and stockholders’ equity | $ | 146,914 | $ | 139,556 | ||||
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Condensed Statements of Operations
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Equity in income (loss) of subsidiaries | $ | 6,022 | $ | (20,530 | ) | $ | (60,729 | ) | ||||
Interest income | 110 | 301 | 433 | |||||||||
Other income | 540 | (220 | ) | 104 | ||||||||
Interest expense | (3,513 | ) | (3,559 | ) | (3,723 | ) | ||||||
Other expense | (85 | ) | (435 | ) | (485 | ) | ||||||
Income tax benefit | — | 1,322 | 1,241 | |||||||||
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Net income (loss) | 3,074 | (23,121 | ) | (63,159 | ) | |||||||
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Effective dividend on preferred stock | 2,554 | 2,531 | 2,508 | |||||||||
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Net income (loss) available to common shareholders | $ | 520 | $ | (25,652 | ) | $ | (65,667 | ) | ||||
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Southern Community Financial Corporation
Notes to Consolidated Financial Statements—(Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||
(Amounts in thousands) | ||||||||||||
Operating activities: | ||||||||||||
Net income (loss) | $ | 3,074 | $ | (23,121 | ) | $ | (63,159 | ) | ||||
Equity in (income) loss of subsidiaries | (6,022 | ) | 20,530 | 60,729 | ||||||||
Amortization of debt issuance costs | 51 | 443 | 421 | |||||||||
Amortization of preferred stock warrants | — | (393 | ) | (370 | ) | |||||||
Realized (gain) loss on sale of available for sale securities | (537 | ) | 35 | — | ||||||||
Realized loss on impairment of investment securities available for sale | — | 186 | — | |||||||||
(Increase) decrease in other assets | (122 | ) | 10 | (1 | ) | |||||||
Increase (decrease) in other liabilities | 2,062 | — | (2,307 | ) | ||||||||
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Net cash provided (used) by operating activities | (1,494 | ) | (2,310 | ) | (4,687 | ) | ||||||
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Investing activities: | ||||||||||||
Investment in bank subsidiary | — | (6,000 | ) | (9,000 | ) | |||||||
Proceeds from sale of available for sale investment securities | 1,537 | 48 | — | |||||||||
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Net cash provided (used) by investing activities | 1,537 | (5,952 | ) | (9,000 | ) | |||||||
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Financing activities: | ||||||||||||
Increase (decrease) in short term debt | — | (38,327 | ) | 39,366 | ||||||||
Dividends paid preferred stock | — | (2,138 | ) | (2,138 | ) | |||||||
Dividends paid common shareholders | — | — | (664 | ) | ||||||||
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Net cash provided (used) by financing activities | — | (40,465 | ) | 36,564 | ||||||||
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Net increase (decrease) in cash | 43 | (48,727 | ) | 22,877 | ||||||||
Cash, beginning of year | 5,559 | 54,286 | 31,409 | |||||||||
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Cash, end of year | $ | 5,602 | $ | 5,559 | $ | 54,286 | ||||||
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(22) SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date the financial statements were issued and there have been no material subsequent events.
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of September 1, 2011, by and between North American Financial Holdings, Inc., a Delaware corporation (“NAFH”) and Capital Bank Corporation, a North Carolina Company (“CBKN”).
RECITALS
WHEREAS, as of the date hereof, NAFH owns approximately 83.1% of the outstanding shares of CBKN;
WHEREAS, subject to the terms and conditions of this Agreement, CBKN shall be merged with and into NAFH (the “Merger”), and NAFH shall be the surviving corporation in the Merger and shall continue to be governed by the laws of the State of Delaware; and
WHEREAS, the respective Boards of Directors of NAFH and CBKN have each adopted and approved this Agreement and the transactions contemplated hereby, including the Merger, and declared it advisable for NAFH and CBKN, respectively, to enter into this Agreement, in each case on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the agreements, covenants and provisions hereinafter contained, and intending to be legally bound, NAFH and CBKN hereby agree as follows:
ARTICLE I
The Merger
SECTION 1.1.Merger. Subject to the terms and conditions of this Agreement, and in accordance with the General Corporation Law of Delaware (the “DGCL”) and the Business Corporation Act of North Carolina (the “NCBCA”), at the Effective Time (as defined in Section 1.3), CBKN shall be merged with and into NAFH. The separate corporate existence of CBKN shall thereupon cease and NAFH shall be the surviving corporation (the “Surviving Corporation”). The Merger shall have the effects set forth in Section 259 of DGCL and Section 11-06 of the NCBCA.
SECTION 1.2.Closing. The closing (the “Closing”) of the Merger shall take place at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York City, at such time following the effectiveness of the Form S-4 (as defined below) and the receipt of the CBKN Shareholder Approval (as defined below) as designated by NAFH. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.”
SECTION 1.3. The Merger shall become effective at the time specified in the Articles of Merger that will be filed with the North Carolina Secretary of State and in the Certificate of Merger to be filed with the Secretary of State of the State of Delaware on the Closing Date (such time, the “Effective Time”)
SECTION 1.4.Directors; Officers. The directors of NAFH immediately prior to the Effective Time shall be the directors of the Surviving Corporation as of the Effective Time until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, or their earlier death, resignation or removal, in accordance with the certificate of incorporation of the Surviving Corporation, the bylaws of the Surviving Corporation and the DGCL. The officers of NAFH immediately prior to the Effective Time shall be the officers of the Surviving Corporation as of the Effective Time until the earlier of their resignation or removal
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or until their respective successors are duly elected and qualified, or their earlier death, resignation or removal, in accordance with the certificate of incorporation of the Surviving Corporation, the bylaws of the Surviving Corporation and the DGCL.
SECTION 1.5.Certificate of Incorporation; Bylaws. The certificate of incorporation of NAFH, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation, until thereafter amended as provided therein and in accordance with the DGCL. The bylaws of NAFH, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation, until thereafter amended in accordance the DGCL, the certificate of incorporation of the Surviving Corporation and such bylaws.
ARTICLE II
Effect of the Merger; Exchange of Certificates
SECTION 2.1.Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of NAFH, CBKN or the holders of any shares of capital stock of NAFH or CBKN:
(a)Common Shares of NAFH. Each share of Class A Common Stock, par value $0.01 per share, of NAFH (“NAFH Class A Common Stock”) and Class B Non-Voting Common Stock, par value $0.01 per share, of NAFH issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding.
(b)Common Shares of CBKN.
(i) Each share of common stock, no par value per share, of CBKN (“CBKN Common Stock”) issued and outstanding immediately prior to the Effective Time (other than (A) shares of CBKN Common Stock held by holders who duly exercise the appraisal rights described in Section 2.2(c) and (B) shares of CBKN Common Stock cancelled pursuant to clause (ii) of this Section 2.1(b)) shall be cancelled and, except as set forth in Section 2.1(c), converted automatically into, and each certificate previously representing any shares of CBKN Common Stock (each, a “Certificate”) shall thereafter only represent the right to receive, 0.1354 (the “Exchange Ratio”) fully paid and nonassessable shares of NAFH Class A Common Stock per share of CBKN Common Stock (the “Merger Consideration”); and
(ii) each share of CBKN Common Stock held in the treasury of CBKN or owned, directly or indirectly, by NAFH (or its affiliates, and other than any such shares so held in a fiduciary capacity) immediately prior to the Effective Time shall automatically be cancelled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.
(c)Fractional Shares. Holders of CBKN Common Stock prior to the Merger who would otherwise be entitled to receive a fraction of a share of NAFH Class A Common Stock as a result of the Merger will receive cash in lieu of such fractional shares. NAFH shall pay to each former shareholder of CBKN who otherwise would be entitled to receive such fractional share an amount in cash (rounded to the nearest cent) determined by multiplying (i) the average, rounded to the nearest one ten thousandth, of the closing sale prices of NAFH Class A Common Stock on the NASDAQ Stock Market as reported by The Wall Street Journal for the three trading days immediately following the Effective Time by (ii) the fraction of a share (after taking into account all shares of NAFH Class A Common Stock held by such holder at the Effective Time and rounded to the nearest thousandth when expressed in decimal form) of NAFH Class A Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 2.1(b).
(d)CBKN Stock Options. At the Effective Time, each then outstanding stock option award granted under an existing stock option or stock-based compensation plan of CBKN (a “CBKN Option”) shall be assumed by NAFH and converted into an option to purchase a number of shares of NAFH Class A Common Stock (an “Assumed Stock Option”) equal to the product (rounded down to the nearest whole share) determined by
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multiplying (i) the number of shares of CBKN Common Stock subject to such CBKN Option immediately prior to the Effective Time by (ii) the Exchange Ratio; and the per share exercise price for CBKN Common Stock issuable upon the exercise of such Assumed Stock Option shall be equal to the quotient (rounded up to the nearest whole cent) determined by dividing (x) the exercise price per share of CBKN Common Stock at which such CBKN Option was exercisable immediately prior to the Effective Time by (y) the Exchange Ratio; provided, however, that NAFH and CBKN shall effect such conversion (A) with respect to any CBKN Option to which Section 421 of the Internal Revenue Code of 1986, as amended (the “Code”), applies by reason of its qualification under Section 422 of the Code, in a manner consistent with Section 424(a) of the Code and (B) in all events, in a manner satisfying the requirements of Section 409A of the Code and the Treasury Regulations thereunder. The Assumed Stock Options shall be subject to the same terms and conditions (including expiration date and exercise provisions) as were applicable to the corresponding CBKN Options immediately prior to the Effective Time.
SECTION 2.2.Delivery of Merger Consideration.
(a)Deposit of Merger Consideration. NAFH will (i) at or prior to the Effective Time, authorize the exchange agent chosen by NAFH pursuant to an agreement (the “Exchange Agent Agreement”) to act as exchange agent for the Merger (the “Exchange Agent”) to issue an aggregate number of shares of NAFH Class A Common Stock equal to the aggregate Merger Consideration and (ii) deposit, or cause to be deposited with, the Exchange Agent, on the fourth trading day immediately following the Effective Time (or as soon as reasonably practicable thereafter) (the “Fractional Share Deposit Date”), any cash payable in lieu of fractional shares pursuant to Section 2.1(c) (the “Exchange Fund”).
(b)Delivery of Merger Consideration.
(i) As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of Certificate(s) which immediately prior to the Effective Time represented outstanding shares of CBKN Common Stock whose shares were converted into the right to receive the Merger Consideration pursuant to Section 1 and any cash in lieu of fractional shares of NAFH Class A Common Stock to be issued or paid in consideration therefor (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to Certificate(s) shall pass, only upon delivery of Certificate(s) (or affidavits of loss in lieu of such Certificates)) to the Exchange Agent and shall be substantially in such form and have such other provisions as shall be prescribed by the Exchange Agent Agreement (the “Letter of Transmittal”), (ii) instructions for use in surrendering Certificate(s) in exchange for the Merger Consideration and (iii) on the Fractional Share Deposit Date (or as soon as reasonably practicable thereafter), any cash in lieu of fractional shares of NAFH Class A Common Stock to be issued or paid in consideration therefor.
(ii) Upon surrender to the Exchange Agent of its Certificate or Certificates, accompanied by a properly completed Letter of Transmittal, a holder of CBKN Common Stock will be entitled to receive promptly after the Effective Time the Merger Consideration and any cash in lieu of fractional shares of NAFH Class A Common Stock to be issued or paid in consideration therefor in respect of the shares of CBKN Common Stock represented by its Certificate or Certificates. Until so surrendered, each such Certificate shall represent after the Effective Time, for all purposes, only the right to receive, without interest, the Merger Consideration and any cash in lieu of fractional shares of NAFH Class A Common Stock to be issued or paid in consideration therefor upon surrender of such Certificate in accordance with this Section 2.2.
(iii) In the event of a transfer of ownership of a Certificate representing CBKN Common Stock that is not registered in the stock transfer records of CBKN, the shares of NAFH Class A Common Stock and cash in lieu of fractional shares of NAFH Class A Common Stock comprising the Merger Consideration shall be issued or paid in exchange therefor to a person other than the person in whose name the Certificate so surrendered is registered if the Certificate formerly representing such CBKN Common Stock shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment or issuance shall pay any transfer or other similar taxes required by reason of the payment or issuance to a
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person other than the registered holder of the Certificate or establish to the satisfaction of NAFH that the tax has been paid or is not applicable. The Exchange Agent (or, subsequent to the earlier of (x) the one-year anniversary of the Effective Time and (y) the expiration or termination of the Exchange Agent Agreement, NAFH) shall be entitled to deduct and withhold from any cash in lieu of fractional shares of NAFH Class A Common Stock otherwise payable pursuant to this Agreement to any holder of CBKN Common Stock such amounts as the Exchange Agent or NAFH, as the case may be, is required to deduct and withhold under the Code, or any provision of state, local or foreign tax law, with respect to the making of such payment. To the extent the amounts are so withheld by the Exchange Agent or NAFH, as the case may be, and timely paid over to the appropriate governmental authority, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of shares of CBKN Common Stock in respect of whom such deduction and withholding was made by the Exchange Agent or NAFH, as the case may be.
(iv) After the Effective Time, there shall be no transfers on the stock transfer books of CBKN of the shares of CBKN Common Stock that were issued and outstanding immediately prior to the Effective Time other than to settle transfers of CBKN Common Stock that occurred prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented for transfer to the Exchange Agent, they shall be cancelled and exchanged for the Merger Consideration and any cash in lieu of fractional shares of NAFH Class A Common Stock to be issued or paid in consideration therefor in accordance with the procedures set forth in this Section 2.2.
(v) Any portion of the Exchange Fund that remains unclaimed by the stockholders of CBKN as of the first anniversary of the Effective Time may be paid to NAFH. In such event, any former stockholders of CBKN who have not theretofore complied with this Section 2.2 shall thereafter look only to NAFH with respect to the Merger Consideration and any cash in lieu of any fractional shares, in each case, without any interest thereon. Notwithstanding the foregoing, none of NAFH, CBKN, the Exchange Agent or any other person shall be liable to any former holder of shares of CBKN Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws.
(vi) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by NAFH or the Exchange Agent, the posting by such person of a bond in such amount as NAFH may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement.
(c)Dissenters’ Rights.Holders of CBKN Common Stock, who dissent from the Merger pursuant to section 13-21 of the NCBCA, may be entitled, if they comply with the provisions of Article 13 of the NCBCA regarding appraisal rights of dissenting shareholders, to be paid the fair value of their shares of CBKN Common Stock (the “Dissenting Shares”). If a holder of Dissenting Shares shall fail to perfect or shall otherwise waive, withdraw or lose its dissenters’ rights under the NCBA under the NCBCA, such that dissenters’ rights can no longer be legally perfected or exercised under the NCBCA with respect to such shares, then the right of such holder to receive such consideration for Dissenting Shares as determined under the NCBCA shall cease and such Dissenting Shares shall become exchangeable solely for the right to receive the applicable consideration as provided in Section 2.1(b)(i).
ARTICLE III
Additional Agreements
SECTION 3.1.Preparation of the Form S-4 and Joint Proxy Statement/Prospectus. NAFH and CBKN shall use their commercially reasonable efforts to prepare and file with the Securities and Exchange Commission (the “SEC”) the joint proxy statement/prospectus, which shall be included in the registration statement (together with any amendments thereto) filed with the SEC to register the shares of NAFH Class A Stock to be issued as Merger
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Consideration pursuant to this Agreement (the “Form S-4”), for the purpose of calling a special meeting of CBKN Shareholders (the “CBKN Shareholders’ Meeting”) to be held to consider adoption of this Agreement.
SECTION 3.2.Special Meeting of CBKN Shareholders. CBKN shall duly call, give notice of, convene and hold a meeting of its shareholders following the effectiveness of the Form S-4 for the purpose of seeking the affirmative vote of a majority of the holders of CBKN Common Stock (the “CBKN Shareholder Approval”).
SECTION 3.3.Further Assurances. If at any time NAFH, as the surviving corporation, shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to carry out any of the provisions of this Agreement, the proper representatives of CBKN as of the Effective Time shall do all things necessary or proper to do so.
SECTION 3.4.Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after the receipt of the CBKN Shareholder Approval, by the mutual consent of NAFH and CBKN.
ARTICLE IV
General Provisions
SECTION 4.1.Descriptive Headings. The descriptive headings of the several articles and paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
SECTION 4.2.No Third-Party Beneficiaries. This Agreement is not intended to and does not confer upon any person other than NAFH and CBKN any rights or remedies.
SECTION 4.3.Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law.
SECTION 4.4.Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart.
[Remainder of Page Left Blank Intentionally.]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above.
NORTH AMERICAN FINANCIAL HOLDINGS, INC. | ||
By: | /s/ Christopher G. Marshall | |
Name: | Christopher G. Marshall | |
Title: | Chief Financial Officer | |
CAPITAL BANK CORPORATION | ||
By: | /s/ Christopher G. Marshall | |
Name: | Christopher G. Marshall | |
Title: | Chief Financial Officer |
Signature Page to Agreement and Plan of Merger
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August 31, 2011
Board of Directors
Capital Bank Corporation
333 Fayetteville Street
Suite 700
Raleigh, NC 27601
Members of the Board of Directors:
North American Financial Holdings, Inc. (“NAFH”) and Capital Bank Corporation (“CBKN”) intend to enter into an Agreement and Plan of Merger (the “Agreement”) which provides for, among other things, the merger of CBKN with and into NAFH (the “Merger”). As set forth more fully in the Agreement, as a result of the Merger, each outstanding share of CBKN’s common stock, no par value (other than dissenting shares and shares owned directly or indirectly by NAFH or CBKN), will be converted into the right to receive 0.1354 shares (the “Exchange Ratio”) of the common stock of NAFH, par value $0.01 per share. NAFH also intends to adopt a plan of merger with respect to TIB Financial Corp. (“TIBB”) and a plan of merger with respect to Green Bankshares, Inc. (“GRNB”) (collectively, the “Other Agreements”) which provide for, among other things, the mergers of TIBB and GRNB with and into NAFH (the “Other Transactions”). As set forth more fully in the Other Agreements, as a result of the Other Transactions, each outstanding share of TIBB’s and GRNB’s common stock will be converted into the right to receive common stock of NAFH. On May 5, 2011, NAFH agreed to acquire approximately 90.0% of the common stock of GRNB (the “GRNB Investment”). The GRNB Investment is subject to, among other things, approval by the shareholders of GRNB, and a special meeting of GRNB shareholders is scheduled for September 7, 2011.
You have requested our opinion as to the fairness, from a financial point of view, of the Exchange Ratio to the shareholders of CBKN.
In arriving at our opinion, we have, among other things:
1. | Reviewed a draft of the Agreement, provided to us on or before August 30, 2011; |
2. | Reviewed drafts of the Other Agreements, provided to us on August 30, 2011; |
3. | Reviewed certain publicly-available financial statements of NAFH, CBKN, TIBB and GRNB; |
4. | Reviewed certain internal financial analyses and pro forma financial information for NAFH, CBKN, TIBB and GRNB, as applicable; |
5. | Reviewed certain materials detailing the Merger, the GRNB Investment and the Other Transactions prepared by NAFH or its affiliates or legal and accounting advisors; |
6. | Conducted conversations with employees of NAFH or its affiliates or legal and accounting advisors regarding the matters described in clauses 1-5 above and regarding the structure and rationale for the Merger; |
7. | Compared certain financial metrics of NAFH, CBKN, TIBB and GRNB; |
8. | Reviewed the overall environment for depository institutions in the United States; and |
9. | Conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of this opinion. |
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In preparing our opinion, we assumed, with your consent, and relied upon, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information reviewed by us or provided to, or discussed with, us by NAFH and its affiliates for the purposes of this opinion. In addition, where appropriate, we relied upon publicly available information, without independent verification, that we believe to be reliable, accurate, and complete; however, we cannot guarantee the reliability, accuracy, or completeness of any such publicly available information. With respect to the pro forma financial information supplied to us by NAFH and its affiliates, we have assumed with your consent that it was reasonably prepared on the basis reflecting the best currently available estimates and judgments of such parties. In rendering our opinion, we express no view as to the reasonableness of such information or the assumptions on which it is based. We also relied upon the materials provided to us, and our studies, analyses and investigations, in connection with our previous engagement by the CBKN Board of Directors in April 2011 with respect to the merger of Capital Bank, with and into NAFH National Bank. We were not engaged to act as financial advisor to any of NAFH, CBKN, TIBB or GRNB in connection with, and did not participate in the negotiations leading to, the Merger, the GRNB Investment or the Other Transactions. Except as noted in the last sentence of the sixth paragraph of this opinion, we were not engaged to express, and are not expressing, any opinion with respect to any other transactions or alternative proposed transactions, if any, between or among any of NAFH, CBKN, TIBB or GRNB. In addition, we have assumed, with your consent, that (i) the Agreement is a valid, binding and enforceable agreement upon the parties and their affiliates and will not be terminated or breached by any party; (ii) there have been no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of NAFH, CBKN, TIBB or GRNB and their respective affiliates since either (1) the date of the last financial statements made available to us and (2) the dates of the drafts of the Agreement and the Other Agreements; (iii) no legal, political, economic, regulatory or other developments have occurred or will occur that will adversely affect these entities; (iv) all required governmental, regulatory, shareholder and third party approvals have been or will be received in a timely fashion and without any conditions or requirements that could adversely affect the Merger; and (v) the GRNB Investment and the subsequent merger of GreenBank with and into Capital Bank, N.A. will be completed prior to the consummation of the Merger. We did not make an independent evaluation of the assets or liabilities of any of NAFH, CBKN, TIBB or GRNB or their respective affiliates, including, but not limited to, any derivative or off-balance sheet assets or liabilities, nor have we evaluated the solvency or fair value of any of NAFH, CBKN, TIBB or GRNB under any state or federal law relating to bankruptcy, insolvency or similar matters. We are not legal, regulatory, tax or accounting experts and have relied on the assessments made by NAFH, its affiliates and their respective advisors with respect to such issues.
Our opinion is subject to the assumptions, limitations, qualifications and other conditions contained herein, is necessarily based on economic, market, and other conditions as existed on, and could be evaluated as of, the date hereof, and on the information made available to us as of, the date hereof. Events and developments occurring after the date hereof could materially affect the assumptions used in preparing this opinion and we expressly disclaim any undertaking or obligation to update, revise or reaffirm this opinion.
Sterne, Agee & Leach, Inc. (“Sterne Agee”) as part of its investment banking business, is regularly involved in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, secondary distributions of listed and unlisted securities, securities trading, private placements and valuations for estate, corporate and other purposes. In the ordinary course of our business as a broker-dealer, we may, from time to time, purchase securities from, and sell securities to CBKN. We may trade the equity securities of CBKN for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. We will receive a fee for rendering our opinion, and CBKN has agreed to reimburse our expenses and to indemnify us against certain liabilities arising out of our engagement. Other than our proposed engagement with GRNB with respect to the Other Transactions and our recent engagements with TIBB with respect to the Other Transactions, with CBKN as to the fairness of the consideration to CBKN in connection with the merger of Capital Bank with and into NAFH National Bank and with TIBB as to the fairness of the consideration to TIBB in connection with the merger of TIBB Bank with and into NAFH National Bank, we have not provided investment banking services to any of NAFH, CBKN, TIBB or GRNB or their respective affiliates over the past two years; however, we may do so in the future.
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This opinion is for the use and benefit of the Board of Directors of CBKN and is not a recommendation to the shareholders of CBKN to approve the Merger or any related matters. Our opinion is limited to the fairness, from a financial point of view to the shareholders of CBKN of the Exchange Ratio. You have not asked us to, and our opinion does not address, the fairness of the Merger, or any consideration received in connection therewith, to the holders of any other class of securities, creditors or other constituencies of CBKN, nor does it address the fairness of the contemplated benefits of the Merger. We express no opinion as to the merits of the underlying business decision of CBKN to engage in the Merger, or the relative merits of the Merger as compared to any strategic alternative that may be available to CBKN. In rendering this opinion, we express no view or opinion with respect to the fairness (financial or otherwise) of the amount or nature or any other aspect of any compensation payable to or to be received by any officers, directors, or employees of any of the parties to the Merger relative to the Exchange Ratio. The issuance of this opinion has been approved by the Fairness Committee of Sterne Agee.
Based upon and subject to the foregoing assumptions, limitations, qualifications and conditions, it is our opinion as investment bankers that, as of the date hereof, the Exchange Ratio is fair, from a financial point of view, to the shareholders of CBKN.
This opinion may not be disclosed, summarized, referred to or communicated (in whole or in part) to any other person for any purpose whatsoever except with our prior written approval, provided that this opinion may be reproduced in full in any proxy or information statement required by the Securities and Exchange Commission to be mailed by CBKN to its shareholders in connection with the Merger.
Very truly yours,
/s/ Sterne, Agee & Leach, Inc.
STERNE, AGEE & LEACH, INC.
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Sections of the North Carolina Business Corporation Act
Part 1. Right to Appraisal and Payment for Shares.
§ 55-13-01. Definitions.
In this Article, the following definitions apply:
(1) Affiliate. – A person that directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person or is a senior executive thereof. For purposes of G.S. 55-13-01(7), a person is deemed to be an affiliate of its senior executives.
(2) Beneficial shareholder. – A person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner’s behalf.
(3) Corporation. – The issuer of the shares held by a shareholder demanding appraisal and, for matters covered in G.S. 55-13-22 through G.S. 55-13-31, the term includes the surviving entity in a merger.
(4) Expenses. – Reasonable expenses of every kind that are incurred in connection with a matter, including counsel fees.
(5) Fair value. – The value of the corporation’s shares (i) immediately before the effectuation of the corporate action as to which the shareholder asserts appraisal rights, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable, (ii) using customary and current valuation concepts and techniques generally employed for similar business in the context of the transaction requiring appraisal, and (iii) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles pursuant to G.S. 55-13-02(a)(5).
(6) Interest. – Interest from the effective date of the corporate action until the date of payment, at the rate of interest on judgments in this State on the effective date of the corporate action.
(7) Interested transaction. – A corporate action described in G.S. 55-13-02(a), other than a merger pursuant to G.S. 55-11-04, involving an interested person and in which any of the shares or assets of the corporation are being acquired or converted. As used in this definition, the following definitions apply:
a. Interested person. – A person, or an affiliate of a person, who at any time during the one-year period immediately preceding approval by the board of directors of the corporate action met any of the following conditions:
1. Was the beneficial owner of twenty percent (20%) or more of the voting power of the corporation, other than as owner of excluded shares.
2. Had the power, contractually or otherwise, other than as owner of excluded shares, to cause the appointment or election of twenty-five percent (25%) or more of the directors to the board of directors of the corporation.
3. Was a senior executive or director of the corporation or a senior executive of any affiliate thereof, and that senior executive or director will receive, as a result of the corporate action, a financial benefit not generally available to other shareholders as such, other than any of the following:
I. Employment, consulting, retirement, or similar benefits established separately and not as part of or in contemplation of the corporate action.
II. Employment, consulting, retirement, or similar benefits established in contemplation of, or as part of, the corporate action that are not more favorable than those existing before the corporate action or, if more favorable, that have been approved on behalf of the corporation in the same manner as is provided in G.S. 55-8-31(a)(1) and (c).
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III. In the case of a director of the corporation who will, in the corporate action, become a director of the acquiring entity, or one of its affiliates, rights and benefits as a director that are provided on the same basis as those afforded by the acquiring entity generally to other directors of the acquiring entity or such affiliate of the acquiring entity.
b. Beneficial owner. – Any person who, directly or indirectly, through any contract, arrangement, or understanding, other than a revocable proxy, has or shares the power to vote, or to direct the voting of, shares. If a member of a national securities exchange is precluded by the rules of the exchange from voting without instruction on contested matters or matters that may affect substantially the rights or privileges of the holders of the securities to be voted, then that member of a national securities exchange shall not be deemed a “beneficial owner” of any securities held directly or indirectly by the member on behalf of another person solely because the member is the record holder of the securities. When two or more persons agree to act together for the purpose of voting their shares of the corporation, each member of the group formed thereby is deemed to have acquired beneficial ownership, as of the date of the agreement, of all voting shares of the corporation beneficially owned by any member of the group.
c. Excluded shares. – Shares acquired pursuant to an offer for all shares having voting power if the offer was made within one year prior to the corporate action for consideration of the same kind and of a value equal to or less than that paid in connection with the corporate action.
(8) Preferred shares. – A class or series of shares the holders of which have preference over any other class or series with respect to distributions.
(9) Record shareholder. – The person in whose name shares are registered in the records of the corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with the corporation.
(10) Senior executive. – The chief executive officer, chief operating officer, chief financial officer, or anyone in charge of a principal business unit or function.
(11) Shareholder. – Both a record shareholder and a beneficial shareholder.
§ 55-13-02. Right to appraisal.
(a) In addition to any rights granted under Article 9, a shareholder is entitled to appraisal rights and to obtain payment of the fair value of that shareholder’s shares, in the event of any of the following corporate actions:
(1) Consummation of a merger to which the corporation is a party if either (i) shareholder approval is required for the merger by G.S. 55-11-03 and the shareholder is entitled to vote on the merger, except that appraisal rights shall not be available to any shareholder of the corporation with respect to shares of any class or series that remain outstanding after consummation of the merger or (ii) the corporation is a subsidiary and the merger is governed by G.S. 55-11-04.
(2) Consummation of a share exchange to which the corporation is a party as the corporation whose shares will be acquired if the shareholder is entitled to vote on the exchange, except that appraisal rights shall not be available to any shareholder of the corporation with respect to any class or series of shares of the corporation that is not exchanged.
(3) Consummation of a disposition of assets pursuant to G.S. 55-12-02 if the shareholder is entitled to vote on the disposition.
(4) An amendment of the articles of incorporation (i) with respect to a class or series of shares that reduces the number of shares of a class or series owned by the shareholder to a fraction of a share if the corporation has an obligation or right to repurchase the fractional share so created or (ii) changes the corporation into a nonprofit corporation or cooperative organization.
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(5) Any other amendment to the articles of incorporation, merger, share exchange, or disposition of assets to the extent provided by the articles of incorporation, bylaws, or a resolution of the board of directors.
(6) Consummation of a conversion to a foreign corporation pursuant to Part 2 of Article 11A of this Chapter if the shareholder does not receive shares in the foreign corporation resulting from the conversion that (i) have terms as favorable to the shareholder in all material respects and (ii) represent at least the same percentage interest of the total voting rights of the outstanding shares of the corporation as the shares held by the shareholder before the conversion.
(7) Consummation of a conversion of the corporation to nonprofit status pursuant to Part 2 of Article 11A of this Chapter.
(8) Consummation of a conversion of the corporation to an unincorporated entity pursuant to Part 2 of Article 11A of this Chapter.
(b) Notwithstanding subsection (a) of this section, the availability of appraisal rights under subdivisions (1), (2), (3), (4), (6), and (8) of subsection (a) of this section shall be limited in accordance with the following provisions:
(1) Appraisal rights shall not be available for the holders of shares of any class or series of shares that are any of the following:
a. A covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933, as amended.
b. Traded in an organized market and has at least 2,000 shareholders and a market value of at least twenty million dollars ($20,000,000) (exclusive of the value of shares held by the corporation’s subsidiaries, senior executives, directors, and beneficial shareholders owning more than ten percent (10%) of such shares).
c. Issued by an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, and may be redeemed at the option of the holder at net asset value.
(2) The applicability of subdivision (1) of this subsection shall be determined as of (i) the record date fixed to determine the shareholders entitled to receive notice of, and to vote at, the meeting of shareholders to act upon the corporate action requiring appraisal rights or (ii) the day before the effective date of such corporate action if there is no meeting of shareholders.
(3) Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares who are required by the terms of the corporate action requiring appraisal rights to accept for such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary interest of any other entity, that satisfies the standards set forth in subdivision (1) of this subsection at the time the corporate action becomes effective.
(4) Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares where the corporate action is an interested transaction.
Notwithstanding any other provision of this section, the articles of incorporation as originally filed or any amendment to the articles may limit or eliminate appraisal rights for any class or series of preferred shares. Any amendment to the articles that limits or eliminates appraisal rights for any shares that are outstanding immediately prior to the effective date of the amendment or that the corporation is or may be required to issue or sell thereafter pursuant to any conversion, exchange, or other right existing immediately before the effective date of the amendment, however, shall not apply to any corporate action that becomes effective within one year of that date if the corporate action would otherwise afford appraisal rights.
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(c) A shareholder holding shares of a class or series that were issued and outstanding as of the effective date of this act but that did not as of that date entitle the shareholder to vote on a corporate action described in subdivision (a)(1), (2), or (3) of this section shall be entitled to appraisal rights, and to obtain payment of the fair value of the shareholder’s shares of such class or series, to the same extent as if such shares did entitle the shareholder to vote on such corporate action.
§ 55-13-03. Assertion of rights by nominees and beneficial owners.
(a) A record shareholder may assert appraisal rights as to fewer than all the shares registered in the record shareholder’s name but owned by a beneficial shareholder only if the record shareholder (i) objects with respect to all shares of the class or series owned by the beneficial shareholder and (ii) notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted. The rights of a record shareholder who asserts appraisal rights for only part of the shares held of record in the record shareholder’s name under this subsection shall be determined as if the shares as to which the record shareholder objects and the record shareholder’s other shares were registered in the names of different record shareholders.
(b) A beneficial shareholder may assert appraisal rights as to shares of any class or series held on behalf of the shareholder only if the shareholder does both of the following:
(1) Submits to the corporation the record shareholder’s written consent to the assertion of rights no later than the date referred to in G.S. 55-13-22(b)(2)b.
(2) Submits written consent under subdivision (1) of this subsection with respect to all shares of the class or series that are beneficially owned by the beneficial shareholder.
§§ 55-13-04 through 55-13-19. Reserved for future codification purposes.
Part 2. Procedure for Exercise of Appraisal Rights.
§ 55-13-20. Notice of appraisal rights.
(a) If any corporate action specified in G.S. 55-13-02(a) is to be submitted to a vote at a shareholders’ meeting, the meeting notice must state that the corporation has concluded that shareholders are, are not, or may be entitled to assert appraisal rights under this Article. If the corporation concludes that appraisal rights are or may be available, a copy of this Article must accompany the meeting notice sent to those record shareholders entitled to exercise appraisal rights.
(b) In a merger pursuant to G.S. 55-11-04, the parent corporation must notify in writing all record shareholders of the subsidiary who are entitled to assert appraisal rights that the corporate action became effective. In the case of any other corporate action specified in G.S. 55-13-02(a) with respect to which shareholders of a class or series do not have the right to vote, but with respect to which those shareholders are entitled to assert appraisal rights, the corporation must notify in writing all record shareholders of such class or series that the corporate action became effective. Notice required under this subsection must be sent within 10 days after the corporate action became effective and include the materials described in G.S. 55-13-22.
(c) If any corporate action specified in G.S. 55-13-02(a) is to be approved by written consent of the shareholders pursuant to G.S. 55-7-04, then the following must occur:
(1) Written notice that appraisal rights are, are not, or may be available must be given to each record shareholder from whom a consent is solicited at the time consent of each shareholder is first solicited and, if the corporation has concluded that appraisal rights are or may be available, must be accompanied by a copy of this Article.
(2) Written notice that appraisal rights are, are not, or may be available must be delivered together with the notice to the applicable shareholders required by subsections (d) and (e) of G.S. 55-7-04, may include the materials described in G.S. 55-13-22, and, if the corporation has concluded that appraisal rights are or may be available, must be accompanied by a copy of this Article.
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(d) If any corporate action described in G.S. 55-13-02(a) is proposed, or a merger pursuant to G.S. 55-11-04 is effected, then the notice referred to in subsection (a) or (c) of this section, if the corporation concludes that appraisal rights are or may be available, and in subsection (b) of this section shall be accompanied by the following:
(1) The annual financial statements specified in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of the notice and shall comply with G.S. 55-16-20(b). If annual financial statements that meet the requirements of this subdivision are not reasonably available, then the corporation shall provide reasonably equivalent financial information.
(2) The latest available quarterly financial statements of the corporation, if any.
The right to receive the information described in this subsection may be waived in writing by a shareholder before or after the corporate action.
§ 55-13-21. Notice of intent to demand payment and consequences of voting or consenting.
(a) If a corporate action specified in G.S. 55-13-02(a) is submitted to a vote at a shareholders’ meeting, a shareholder who is entitled to vote on the corporate action and who wishes to assert appraisal rights with respect to any class or series of shares must do the following:
(1) Deliver to the corporation, before the vote is taken, written notice of the shareholder’s intent to demand payment if the proposed action is effectuated.
(2) Not vote, or cause or permit to be voted, any shares of any class or series in favor of the proposed action.
(b) If a corporate action specified in G.S. 55-13-02(a) is to be approved by less than unanimous written consent, a shareholder who is entitled to vote on the corporate action and who wishes to assert appraisal rights with respect to any class or series of shares must not execute a consent in favor of the proposed action with respect to that class or series of shares.
(c) A shareholder who fails to satisfy the requirements of subsection (a) or (b) of this section is not entitled to payment under this Article.
§ 55-13-22. Appraisal notice and form.
(a) If corporate action requiring appraisal rights under G.S. 55-13-02(a) becomes effective, the corporation must deliver a written appraisal notice and form required by subdivision (b)(1) of this section to all shareholders who satisfied the requirements of G.S. 55-13-21. In the case of a merger under G.S. 55-11-04, the parent corporation must deliver a written appraisal notice and form to all record shareholders of the subsidiary who may be entitled to assert appraisal rights. In the case of any other corporate action specified in G.S. 55-13-02(a) that becomes effective and with respect to which shareholders of a class or series do not have the right to vote but with respect to which such shareholders are entitled to assert appraisal rights, the corporation must deliver a written appraisal notice and form to all record shareholders of such class or series who may be entitled to assert appraisal rights.
(b) The appraisal notice must be sent no earlier than the date the corporate action specified in G.S. 55-13-02(a) became effective and no later than 10 days after that date. The appraisal notice must include the following:
(1) A form that specifies the first date of any announcement to shareholders, made prior to the date the corporate action became effective, of the principal terms of the proposed corporate action. If such an announcement was made, the form shall require a shareholder asserting appraisal rights to certify whether beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date. The form shall require a shareholder asserting appraisal rights to certify that the shareholder did not vote for or consent to the transaction.
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(2) Disclosure of the following:
a. Where the form must be sent and where certificates for certificated shares must be deposited, as well as the date by which those certificates must be deposited. The certificate deposit date must not be earlier than the date for receiving the required form under sub-subdivision b. of this subdivision.
b. A date by which the corporation must receive the payment demand, which date may not be fewer than 40 nor more than 60 days after the date the appraisal notice required under subsection (a) of this section and form are sent. The form shall also state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by the corporation by the specified date.
c. The corporation’s estimate of the fair value of the shares.
d. That, if requested in writing, the corporation will provide, to the shareholder so requesting, within 10 days after the date specified in sub-subdivision b. of this subdivision, the number of shareholders who return the forms by the specified date and the total number of shares owned by them.
e. The date by which the notice to withdraw under G.S. 55-13-23 must be received, which date must be within 20 days after the date specified in sub-subdivision b. of this subdivision.
(3) Be accompanied by a copy of this Article.
§ 55-13-23. Perfection of rights; right to withdraw.
(a) A shareholder who receives notice pursuant to G.S. 55-13-22 and who wishes to exercise appraisal rights must sign and return the form sent by the corporation and, in the case of certificated shares, deposit the shareholder’s certificates in accordance with the terms of the notice by the date referred to in the notice pursuant to G.S. 55-13-22(b)(2). In addition, if applicable, the shareholder must certify on the form whether the beneficial owner of such shares acquired beneficial ownership of the shares before the date required to be set forth in the notice pursuant to G.S. 55-13-22(b)(1). If a shareholder fails to make this certification, the corporation may elect to treat the shareholder’s shares as after-acquired shares under G.S. 55-13-27. Once a shareholder deposits that shareholder’s certificates or, in the case of uncertificated shares, returns the signed forms, that shareholder loses all rights as a shareholder, unless the shareholder withdraws pursuant to subsection (b) of this section.
(b) A shareholder who has complied with subsection (a) of this section may nevertheless decline to exercise appraisal rights and withdraw from the appraisal process by so notifying the corporation in writing by the date set forth in the appraisal notice pursuant to G.S. 55-13-22(b)(2)e. A shareholder who fails to so withdraw from the appraisal process may not thereafter withdraw without the corporation’s written consent.
(c) A shareholder who does not sign and return the form and, in the case of certificated shares, deposit that shareholder’s share certificates where required, each by the date set forth in the notice described in G.S. 55-13-22(b) shall not be entitled to payment under this Article.
§ 55-13-24. Reserved for future codification purposes.
§ 55-13-25. Payment.
(a) Except as provided in G.S. 55-13-27, within 30 days after the form required by G.S. 55-13-22(b) is due, the corporation shall pay in cash to the shareholders who complied with G.S. 55-13-23(a) the amount the corporation estimates to be the fair value of their shares, plus interest.
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(b) The payment to each shareholder pursuant to subsection (a) of this section must be accompanied by the following:
(1) The following financial information:
a. The annual financial statements specified in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of payment and shall comply with G.S. 55-16-20(b). If annual financial statements that meet the requirements of this sub-subdivision are not reasonably available, the corporation shall provide reasonably equivalent financial information.
b. The latest available quarterly financial statements, if any.
(2) A statement of the corporation’s estimate of the fair value of the shares. The estimate must equal or exceed the corporation’s estimate given pursuant to G.S. 55-13-22(b)(2)c.
(3) A statement that the shareholders described in subsection (a) of this section have the right to demand further payment under G.S. 55-13-28 and that if a shareholder does not do so within the time period specified therein, then the shareholder shall be deemed to have accepted such payment in full satisfaction of the corporation’s obligations under this Article.
§ 55-13-26. Reserved for future codification purposes.
§ 55-13-27. After-acquired shares.
(a) A corporation may elect to withhold payment required by G.S. 55-13-25 from any shareholder who was required to but did not certify that beneficial ownership of all of the shareholder’s shares for which appraisal rights are asserted was acquired before the date set forth in the appraisal notice sent pursuant to G.S. 55-13-22(b)(1).
(b) If the corporation elected to withhold payment under subsection (a) of this section, it must, within 30 days after the form required by G.S. 55-13-22(b) is due, notify all shareholders who are described in subsection (a) of this section of the following:
(1) The information required by G.S. 55-13-25(b)(1).
(2) The corporation’s estimate of fair value pursuant to G.S. 55-13-25(b)(2).
(3) That they may accept the corporation’s estimate of fair value, plus interest, in full satisfaction of their demands or demand appraisal under G.S. 55-13-28.
(4) That those shareholders who wish to accept such offer must so notify the corporation of their acceptance of the corporation’s offer within 30 days after receiving the offer.
(5) That those shareholders who do not satisfy the requirements for demanding appraisal under G.S. 55-13-28 shall be deemed to have accepted the corporation’s offer.
(c) Within 10 days after receiving the shareholder’s acceptance pursuant to subsection (b) of this section, the corporation must pay in cash the amount it offered under subdivision (b)(2) of this section to each shareholder who agreed to accept the corporation’s offer in full satisfaction of the shareholder’s demand.
(d) Within 40 days after sending the notice described in subsection (b) of this section, the corporation must pay in cash the amount it offered to pay under subdivision (b)(2) of this section to each shareholder described in subdivision (b)(5) of this section.
§ 55-13-28. Procedure if shareholder dissatisfied with payment or offer.
(a) A shareholder paid pursuant to G.S. 55-13-25 who is dissatisfied with the amount of the payment must notify the corporation in writing of that shareholder’s estimate of the fair value of the shares and demand
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payment of that estimate plus interest (less any payment under G.S. 55-13-25). A shareholder offered payment under G.S. 55-13-27 who is dissatisfied with that offer must reject the offer and demand payment of the shareholder’s stated estimate of the fair value of the shares, plus interest.
(b) A shareholder who fails to notify the corporation in writing of that shareholder’s demand to be paid the shareholder’s stated estimate of the fair value, plus interest, under subsection (a) of this section within 30 days after receiving the corporation’s payment or offer of payment under G.S. 55-13-25 or G.S. 55-13-27, respectively, waives the right to demand payment under this section and shall be entitled only to the payment made or offered pursuant to those respective sections.
§ 55-13-29. Reserved for future codification purposes.
Part 3. Judicial Appraisal of Shares.
§ 55-13-30. Court action.
(a) If a shareholder makes a demand for payment under G.S. 55-13-28 which remains unsettled, the corporation shall commence a proceeding within 60 days after receiving the payment demand by filing a complaint with the Superior Court Division of the General Court of Justice to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the 60-day period, the corporation shall pay in cash to each shareholder the amount the shareholder demanded pursuant to G.S. 55-13-28, plus interest.
(a1) Repealed by Session Laws 1997-202, s. 4.
(b) The corporation shall commence the proceeding in the appropriate court of the county where the corporation’s principal office (or, if none, its registered office) in this State is located. If the corporation is a foreign corporation without a registered office in this State, it shall commence the proceeding in the county in this State where the principal office or registered office of the domestic corporation merged with the foreign corporation was located at the time of the transaction.
(c) The corporation shall make all shareholders (whether or not residents of this State) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the complaint. Nonresidents may be served by registered or certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is commenced under subsection (b) of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have the powers described in the order appointing them, or in any amendment to it. The shareholders demanding appraisal rights are entitled to the same discovery rights as parties in other civil proceedings. There shall be no right to a trial by jury.
(e) Each shareholder made a party to the proceeding is entitled to judgment either (i) for the amount, if any, by which the court finds the fair value of the shareholder’s shares, plus interest, exceeds the amount paid by the corporation to the shareholder for the shareholder’s shares or (ii) for the fair value, plus interest, of the shareholder’s shares for which the corporation elected to withhold payment under G.S. 55-13-27.
§ 55-13-31. Court costs and expenses.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall determine all court costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the shareholders demanding appraisal, in amounts the court finds equitable, to the extent the court finds such shareholders acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.
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(b) The court in an appraisal proceeding may also assess the expenses for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all shareholders demanding appraisal if the court finds the corporation did not substantially comply with the requirements of G.S. 55-13-20, 55-13-22, 55-13-25, or 55-13-27.
(2) Against either the corporation or a shareholder demanding appraisal, in favor of any other party, if the court finds that the party against whom expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.
(c) If the court in an appraisal proceeding finds that the expenses incurred by any shareholder were of substantial benefit to other shareholders similarly situated and that these expenses should not be assessed against the corporation, the court may direct that the expenses be paid out of the amounts awarded the shareholders who were benefited.
(d) To the extent the corporation fails to make a required payment pursuant to G.S. 55-13-25, 55-13-27, or 55-13-28, the shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled to recover from the corporation all expenses of the suit.
Part 4. Other Remedies.
§ 55-13-40. Other remedies limited.
(a) The legality of a proposed or completed corporate action described in G.S. 55-13-02(a) may not be contested, nor may the corporate action be enjoined, set aside, or rescinded, in a legal or equitable proceeding by a shareholder after the shareholders have approved the corporate action.
(b) Subsection (a) of this section does not apply to a corporate action that:
(1) Was not authorized and approved in accordance with the applicable provisions of any of the following:
a. Article 9, 9A, 10, 11, 11A, or 12 of this Chapter.
b. The articles of incorporation or bylaws.
c. The resolution of the board of directors authorizing the corporate action.
(2) Was procured as a result of fraud, a material misrepresentation, or an omission of a material fact necessary to make statements made, in light of the circumstances in which they were made, not misleading.
(3) Constitutes an interested transaction, unless it has been authorized, approved, or ratified by either (i) the board of directors or a committee of the board or (ii) the shareholders, in the same manner as is provided in G.S. 55-8-31(a)(1) and (c) or in G.S. 55-8-31(a)(2) and (d), as if the interested transaction were a director’s conflict of interest transaction.
(4) Was approved by less than unanimous consent of the voting shareholders pursuant to G.S. 55-7-04, provided that both of the following are true:
a. The challenge to the corporate action is brought by a shareholder who did not consent and as to whom notice of the approval of the corporate action was not effective at least 10 days before the corporate action was effected.
b. The proceeding challenging the corporate action is commenced within 10 days after notice of the approval of the corporate action is effective as to the shareholder bringing the proceeding.
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APPENDIX D
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the “Selected Historical Consolidated Financial Data of Capital Bank Corp.,” and financial statements of Capital Bank Corp. and related notes thereto included elsewhere in this document. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” Neither CBF (formerly known as North American Financial Holdings, Inc.) nor Capital Bank Corp. assumes any obligation to update any of these forward-looking statements.
Overview
Capital Bank Corporation (the “Company”) is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Capital Bank (“Old Capital Bank”), which was a state-chartered banking corporation that was incorporated under the laws of the State of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. As of December 31, 2011 (Successor), the Company had a 26% equity method investment in Capital Bank, N.A., a national banking association with approximately $6.5 billion in total assets and 143 full-service banking offices throughout Florida, North Carolina, South Carolina, Tennessee, and Virginia. The Company also has interests in three trusts, Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the “Trusts”).
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million (the “CBF Investment”). In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).
Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor
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Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Bank Mergers
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity (the “Bank Merger”). In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, N.A.” or the “Bank”). On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, N.A. Following the GreenBank merger, Capital Bank, N.A. is now owned by the Company, CBF, TIB Financial and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
Capital Bank, N.A. (formerly NAFH Bank) was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks—Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina)—from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, N.A. merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, N.A., dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, N.A. common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, N.A., with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, N.A. operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.
Potential Merger of the Company and CBF
On September 1, 2011, the Boards of Directors of CBF and the Company approved and adopted a merger agreement. The merger agreement provides for the merger, following the receipt of shareholder approval by the Company’s shareholders (including CBF), of the Company with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and
certain shares held by CBF or the Company, will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of the Company’s common stock will be entitled to receive cash in lieu thereof.
Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.
Critical Accounting Policies and Estimates
The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial
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statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, other-than-temporary impairment on investment securities, income taxes, and impairment of long-lived assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.
The Company’s significant accounting policies are discussed below and in Note 1 to the financial statements of Capital Bank Corporation included in this document. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. Due to the CBF Investment, the Company has added an accounting policy related to purchased credit-impaired loans, and due to the Bank Merger, the Company has added an accounting policy related to its equity method investment in Capital Bank, N.A.
• | Allowance for Loan Losses—The allowance for loan losses represents management’s estimate of probable credit losses that are inherent in the existing loan portfolio. Management’s calculation of the allowance for loan losses consists of reserves on loans individually evaluated for impairment and reserves on loans collectively evaluated for impairment. Specific reserves, or charge-offs, are applied to individually impaired loans based on estimated fair value. Reserves on collectively evaluated loans are determined by applying loss rates to pools of loans that are grouped according to loan type and internal risk ratings. Loss rates are based on historical loss experience in each pool and management’s consideration of certain environmental factors such as levels of and trends in delinquencies, impaired loans and classified assets; levels of and trends in charge-offs and recoveries; trends in nature, volume and terms of loans; existence of and changes in portfolio concentrations; changes in national, regional and local economic conditions; changes in the experience, ability and depth of lending management; changes in the quality of the loan review system; and the effect of other external factors such as legal and regulatory requirements. If economic conditions were to decline significantly or the financial conditions of the Bank’s customers were to deteriorate, additional increases to the allowance for loan losses may be required. |
• | Other-Than-Temporary Impairment on Investment Securities—Management evaluates each held-to-maturity and available-for-sale investment security in an unrealized loss position for other-than-temporary impairment based on an analysis of the facts and circumstances of each individual investment, which includes consideration of changes in general market conditions and changes in the financial strength |
of specific bond issuers. For debt securities determined to be other-than-temporarily impaired, the impairment is separated into the following: (1) the amount representing credit loss and (2) the amount related to all other factors. The amount representing credit loss is calculated based on management’s estimate of future cash flows and recoverability of the investment and is recorded in current earnings. Future adverse changes in market conditions or adverse changes in the financial strength of bond issuers could result in an other-than-temporary impairment charge that may impact earnings. |
• | Income Tax Valuation Allowance—A valuation allowance is recorded for deferred tax assets if management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers recent and anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need, if any, for a valuation allowance. |
• | Impairment of Long-Lived Assets—Long-lived assets, including identified intangible assets other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the |
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carrying value may not be recoverable. An impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Assets to be disposed of are transferred to other real estate owned and are reported at the lower of the carrying amount or fair value less costs to sell. Future events or circumstances indicating that the carrying value of long-lived assets is not recoverable may require an impairment charge to earnings. |
• | Equity Method Investment—Noncontrolling investments that give the Company the ability to influence the operating or financial decisions of the investee are accounted for as equity method investments. An investment (direct or indirect) of 20 percent or more of the voting stock of an investee generally indicates that the ability to exercise significant influence over an investee. The carrying amount of an equity method investment is adjusted based on the Company’s share of the earnings or losses of the investee after the date of investment and those recognized earnings or losses are reported as a component of noninterest income. In addition, the Company’s proportionate share of the investee’s equity adjustments for other comprehensive income are recorded as increases or decreases to the investment account with corresponding adjustments in equity. |
• | Purchased Credit-Impaired Loans—Loans acquired in a transfer, including business combinations and transactions similar to the CBF Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. |
Executive Summary
The following is a summary of the Company’s results of operations and significant events occurring in 2011:
• | Net income totaled $5.3 million, or $0.06 per share, in the successor period from January 29 to December 31, 2011; |
• | Following the merger of GreenBank, the wholly-owned subsidiary of Green Bankshares, Inc. (“Green Bankshares”), into Capital Bank, N.A., the Company held a 26% ownership interest in Capital Bank, N.A., which has $6.5 billion in assets and operates 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia. |
Results of Operations
Period from January 29, 2011 to December 31, 2011 (Successor), Period from January 1, 2011 to January 28, 2011 (Predecessor), and Year Ended December 31, 2010 (Predecessor)
In the successor period, net income totaled $5.3 million, or $0.06 per share, in the period from January 29 to December 31, 2011. In the predecessor periods, net loss attributable to common shareholders totaled ($265) thousand, or ($0.02) per share, in the period from January 1 to January 28, 2011, and totaled ($63.8) million, or ($4.98) per share for the year ended December 31, 2010.
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Net Interest Income
Net interest income for the period of January 29 to December, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $24.9 million, $4.0 million and $51.0 million, respectively. Net interest margin decreased from 3.27% in the year ended December 31, 2010 (Predecessor) to 3.09% for the period of January 1 to January 28, 2011 (Predecessor), and increased to 4.13% for the period of January 29 to December 31, 2011 (Successor) primarily due to a decline in funding costs. Average earning assets decreased from $1.60 billion in the year ended December 31, 2010 (Predecessor) to $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $670.7 million in the period of January 29 to December 31, 2011 (Successor). The decline in average earning assets in the successor period was primarily related to the Bank Merger, upon which Old Capital Bank’s earning assets and interest-bearing liabilities were deconsolidated from the Company.
The following tables (Average Balances, Interest Earned or Paid, and Interest Yields/Rates) reflect the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from period to period can be explained in terms of fluctuations in volume and rate.
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Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Tax Equivalent Basis 1
Successor Company | Predecessor Company | |||||||||||||||||||||||||
(Dollars in thousands) | Period of Jan. 29 to Dec. 31, 2011 | Period of Jan. 1 to Jan. 28, 2011 | ||||||||||||||||||||||||
Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Loans2 | $ | 495,129 | $ | 27,734 | 6.12 | % | $ | 1,253,296 | $ | 5,530 | 5.20 | % | ||||||||||||||
Investment securities3 | 133,960 | 3,893 | 3.17 | 225,971 | 504 | 2.68 | ||||||||||||||||||||
Interest-bearing deposits | 39,730 | 87 | 0.24 | 63,350 | 11 | 0.20 | ||||||||||||||||||||
Advance to Capital Bank, N.A. | 1,869 | 170 | 9.94 | – | – | – | ||||||||||||||||||||
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Total interest-earning assets | 670,688 | $ | 31,884 | 5.20 | % | 1,542,617 | $ | 6,045 | 4.61 | % | ||||||||||||||||
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Cash and due from banks | 10,603 | 16,112 | ||||||||||||||||||||||||
Other assets | 214,626 | 34,021 | ||||||||||||||||||||||||
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Total assets | $ | 895,917 | $ | 1,592,750 | ||||||||||||||||||||||
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Liabilities and Equity | ||||||||||||||||||||||||||
NOW and money market accounts | $ | 154,880 | $ | 1,084 | 0.76 | % | $ | 334,668 | $ | 211 | 0.74 | % | ||||||||||||||
Savings accounts | 14,352 | 16 | 0.12 | 30,862 | 3 | 0.11 | ||||||||||||||||||||
Time deposits | 380,278 | 3,460 | 0.99 | 870,146 | 1,337 | 1.81 | ||||||||||||||||||||
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Total interest-bearing deposits | 549,510 | 4,560 | 0.91 | 1,235,676 | 1,551 | 1.48 | ||||||||||||||||||||
Borrowings | 42,851 | 664 | 1.69 | 120,032 | 343 | 3.36 | ||||||||||||||||||||
Subordinated debentures | 19,248 | 1,304 | 7.40 | 34,323 | 102 | 3.50 | ||||||||||||||||||||
Total interest-bearing liabilities | 611,609 | $ | 6,528 | 1.17 | % | 1,390,031 | $ | 1,996 | 1.69 | % | ||||||||||||||||
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Noninterest-bearing deposits | 53,397 | 114,660 | ||||||||||||||||||||||||
Other liabilities | 4,922 | 9,635 | ||||||||||||||||||||||||
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Total liabilities | 669,928 | 1,514,326 | ||||||||||||||||||||||||
Shareholders’ equity | 225,989 | 78,424 | ||||||||||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 895,917 | $ | 1,592,750 | ||||||||||||||||||||||
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Net interest spread4 | 4.03 | % | 2.92 | % | ||||||||||||||||||||||
Tax equivalent adjustment | $ | 443 | $ | 90 | ||||||||||||||||||||||
Net interest income and net interest margin 5 | $ | 25,356 | 4.13 | % | $ | 4,049 | 3.09 | % | ||||||||||||||||||
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(continued on next page)
1 | The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities. |
2 | Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded. |
3 | The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any. |
4 | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
5 | Net interest margin represents net interest income divided by average interest-earning assets. |
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Average Balances, Interest Earned or Paid, and Interest Yields/Rates (Continued)
Tax Equivalent Basis1
Predecessor Company | ||||||||||||||||||||||||
(Dollars in thousands) | Year Ended Dec. 31, 2010 | Year Ended Dec. 31, 2009 | ||||||||||||||||||||||
Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans2 | $ | 1,353,191 | $ | 69,084 | 5.11 | % | $ | 1,316,737 | $ | 70,412 | 5.35 | % | ||||||||||||
Investment securities3 | 213,402 | 9,986 | 4.68 | 269,240 | 14,483 | 5.38 | ||||||||||||||||||
Interest-bearing deposits | 38,003 | 89 | 0.23 | 25,312 | 42 | 0.17 | ||||||||||||||||||
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Total interest-earning assets | 1,604,596 | $ | 79,159 | 4.93 | % | 1,611,289 | $ | 84,937 | 5.27 | % | ||||||||||||||
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Cash and due from banks | 18,149 | 15,927 | ||||||||||||||||||||||
Other assets | 68,910 | 64,748 | ||||||||||||||||||||||
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Total assets | $ | 1,691,655 | $ | 1,691,964 | ||||||||||||||||||||
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Liabilities and Equity | ||||||||||||||||||||||||
NOW and money market accounts | $ | 327,811 | $ | 2,794 | 0.85 | % | $ | 363,522 | $ | 4,527 | 1.25 | % | ||||||||||||
Savings accounts | 30,555 | 41 | 0.13 | 29,171 | 47 | 0.16 | ||||||||||||||||||
Time deposits | 878,068 | 18,247 | 2.08 | 822,003 | 23,463 | 2.85 | ||||||||||||||||||
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Total interest-bearing deposits | 1,236,434 | 21,082 | 1.71 | 1,214,696 | 28,037 | 2.31 | ||||||||||||||||||
Borrowings | 150,207 | 4,541 | 3.02 | 143,241 | 5,147 | 3.59 | ||||||||||||||||||
Subordinated debentures | 33,550 | 1,131 | 3.37 | 30,930 | 1,055 | 3.41 | ||||||||||||||||||
Repurchase agreements | 1,564 | 5 | 0.32 | 10,919 | 24 | 0.22 | ||||||||||||||||||
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Total interest-bearing liabilities | 1,421,755 | $ | 26,759 | 1.88 | % | 1,399,786 | $ | 34,263 | 2.45 | % | ||||||||||||||
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Noninterest-bearing deposits | 130,944 | 132,535 | ||||||||||||||||||||||
Other liabilities | 10,519 | 12,148 | ||||||||||||||||||||||
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Total liabilities | 1,563,218 | 1,544,469 | ||||||||||||||||||||||
Shareholders’ equity | 128,437 | 147,495 | ||||||||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 1,691,655 | $ | 1,691,964 | ||||||||||||||||||||
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Net interest spread 4 | 3.05 | % | 2.82 | % | ||||||||||||||||||||
Tax equivalent adjustment | $ | 1,437 | $ | 1,796 | ||||||||||||||||||||
Net interest income and net interest margin 5 | $ | 52,400 | 3.27 | % | $ | 50,674 | 3.14 | % | ||||||||||||||||
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1 | The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities. |
2 | Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded. |
3 | The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any. |
4 | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
5 | Net interest margin represents net interest income divided by average interest-earning assets. |
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Provision for Loan Losses
Provision for loan losses for the period of January 29 to December 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $1.5 million, $40 thousand and $58.5 million, respectively. The loan loss provision in the successor period reflects $752 thousand of estimated losses inherent in loans originated subsequent to the CBF Investment date, $359 thousand of impairment related to probable decreases in cash flows expected to be collected on certain PCI loan pools, and $339 thousand of losses on acquired non-PCI loans.
Loans acquired in the CBF Investment, prior to the Bank Merger, where there was evidence of credit deterioration since origination and where it was probable that the Company would not collect all contractually required principal and interest payments were accounted for as PCI loans. The Company identified approximately 93% of its acquisition-date loan portfolio as PCI. Subsequent to acquisition, estimates of cash flows expected to be collected were refreshed each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that were reflective of current market conditions. If the Company had probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charged the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company had probable and significant increases in cash flows expected to be collected, the Company would first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans.
Noninterest Income
The following table presents the detail of noninterest income for each period presented:
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | |||||||||||
Service charges and other fees | $ | 1,355 | $ | 291 | $ | 3,311 | ||||||||
Bank card services | 847 | 174 | 2,020 | |||||||||||
Mortgage origination and other loan fees | 518 | 210 | 1,861 | |||||||||||
Brokerage fees | 308 | 78 | 963 | |||||||||||
Bank-owned life insurance | 134 | 10 | 699 | |||||||||||
Equity income from investment in Capital Bank, N.A. | 4,045 | – | – | |||||||||||
Net gain on sale of investment securities | – | – | 5,855 | |||||||||||
Other | 155 | 69 | 840 | |||||||||||
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Total noninterest income | $ | 7,362 | $ | 832 | $ | 15,549 | ||||||||
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Noninterest income for the period of January 29 to December 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $7.4 million, $832 thousand and $15.5 million, respectively. Noninterest income in the successor period was significantly impacted by the Company’s $4.0 million of equity income from its investment in Capital Bank, N.A. Additionally, noninterest income in the year ended December 31, 2010 (Predecessor) benefited from $5.9 million of gains recorded on the sale of investment securities while no gains or losses were recognized in the period from January 29 to December 31, 2011 (Successor) or the period from January 1 to January 28, 2011 (Predecessor). The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, N.A.:
Capital Bank, N.A. | Jun. 30, 2011 to Dec. 31, 2011 | |||
(Dollars in thousands) | ||||
Interest income | $ | 137,508 | ||
Interest expense | 17,810 | |||
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| |||
Net interest income | 119,698 | |||
Provision for loan losses | 28,636 | |||
Noninterest income | 28,710 | |||
Noninterest expense | 97,754 | |||
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| |||
Net income | $ | 13,984 | ||
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Noninterest Expense
The following table presents the detail of noninterest expense for each period presented:
Successor Company | Predecessor Company | |||||||||||||
(Dollars in thousands) | Jan. 29, 2011 to Dec. 31, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | Year Ended Dec. 31, 2010 | |||||||||||
Salaries and employee benefits | $ | 9,525 | $ | 1,977 | $ | 22,675 | ||||||||
Occupancy | 2,970 | 548 | 5,906 | |||||||||||
Furniture and equipment | 1,401 | 275 | 3,183 | |||||||||||
Data processing and telecommunications | 911 | 180 | 2,092 | |||||||||||
Advertising and public relations | 325 | 131 | 1,887 | |||||||||||
Office expenses | 498 | 93 | 1,260 | |||||||||||
Professional fees | 543 | 190 | 2,514 | |||||||||||
Business development and travel | 550 | 87 | 1,350 | |||||||||||
Amortization of other intangible assets | 478 | 62 | 937 | |||||||||||
ORE losses and miscellaneous loan costs | 1,608 | 176 | 5,006 | |||||||||||
Directors’ fees | 93 | 68 | 1,061 | |||||||||||
FDIC deposit insurance | 1,076 | 266 | 3,846 | |||||||||||
Contract termination fees | 3,955 | – | – | |||||||||||
Other | 1,344 | 102 | 2,592 | |||||||||||
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Total noninterest expense | $ | 25,277 | $ | 4,155 | $ | 54,309 | ||||||||
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Noninterest expense for the period from January 29 to December 31, 2011 (Successor), the period from January 1 to January 28, 2011 (Predecessor) and the year ended December 31, 2010 (Predecessor) totaled $25.3 million, $4.2 million and $54.3 million, respectively. Additionally, expenses in the year ended December 31, 2011 were significantly reduced by the Bank Merger and related deconsolidation of Old Capital Bank. Expenses
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in the period from January 29 to December 31, 2011 (Successor) were impacted by a $4.0 million contract termination fee related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the CBF enterprise. This system conversion is intended to create operating efficiencies and better position the Company for future growth.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009 (Predecessor Company)
Net loss attributable to common shareholders was ($63.8) million, or ($4.98) per diluted share, in 2010 compared to net loss attributable to common shareholders of ($9.2) million, or ($0.80) per diluted share, in 2009. Results of operations for 2010 primarily reflect higher net interest income of $2.1 million on an improved net interest margin, an increase of $35.5 million in provision for loan losses, an increase in noninterest expense by $4.5 million, an increase of $5.4 million in noninterest income primarily due to gains on sales of certain investment securities, and higher tax expense resulting from a full valuation allowance on deferred tax assets.
Net Interest Income (Predecessor Company)
Net interest income is the difference between total interest income and total interest expense and is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of supporting funds. Net interest income increased from $48.9 million for the year ended December 31, 2009 to $51.0 million for the year ended December 31, 2010. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and other borrowed funds. Net interest margin is the total of net interest income divided by average earning assets. Average interest-earning assets for the year ended December 31, 2010 were $1.60 billion compared to $1.61 billion for the year ended December 31, 2009, a decrease of 0.4%. On a fully taxable equivalent (“TE”) basis, net interest spread was 3.05% and 2.82% for the years ended December 31, 2010 and 2009, respectively. The net interest margin on a fully TE basis increased to 3.27% for the year ended December 31, 2010 from 3.14% for the year ended December 31, 2009. The yield on average interest-earning assets was 4.93% and 5.27% for the years ended December 31, 2010 and 2009, respectively, while the interest rate on average interest-bearing liabilities for those periods was 1.88% and 2.45%, respectively.
The improvement in net interest margin was primarily due to the significant decline in funding costs through disciplined pricing controls and a declining interest rate environment. Partially offsetting declining funding costs was a significant increase in loans on nonaccrual status and the expiration of an interest rate swap on prime-indexed commercial loans which benefited income in 2009.
Interest income on loans decreased from $70.2 million in 2009 to $68.5 million in 2010, a decline of $1.7 million, or 2.4%. This decrease was primarily due to declining yields on the Company’s loan portfolio, partially offset by growth in average loan balances over the same period. Declining yields on the loan portfolio reduced interest income by $3.2 million in 2010 compared to 2009, and the increase in average loan balances generated $1.9 million in additional interest income. Average loan balances, which yielded 5.11% and 5.35% for the years ended December 31, 2010 and 2009, respectively, increased from $1.32 billion in 2009 to $1.35 billion in 2010. The Company’s interest rate swap on prime-indexed commercial loans, which expired in October 2009, increased loan interest income by $3.5 million for the year ended December 31, 2009, representing a benefit to net interest margin of 0.22%. The Company received no such benefit in 2010.
Interest income on investment securities decreased from $12.9 million in 2009 to $9.2 million in 2010, a decrease of $3.8 million, or 29.1%. This decrease was due to a decline in the size of the investment portfolio coupled with lower fixed income investment yields. Average investment balances, at book value, decreased from $269.2 million for the year ended December 31, 2009 to $213.4 million for the year ended December 31, 2010, and the tax equivalent yield on investment securities decreased from 5.38% to 4.68% over the same period. Average investment balances declined as management sold certain municipal bonds to reduce the duration of its fixed income portfolio earlier in the year and then repositioned its portfolio later in the year to execute certain interest rate risk, liquidity, and tax strategies. Additionally, yields have fallen as prepayments on higher yielding
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mortgage-backed securities and proceeds from sales of certain long-dated municipal bonds have been re-invested generally at lower rates in shorter-dated U.S. government agency debt and other high quality mortgage bonds issued by U.S. government sponsored entities.
Interest expense decreased from $34.3 million in 2009 to $26.8 million in 2010, a decline of $7.5 million, or 21.9%. This decrease is primarily due to declining interest rates, partially offset by growth in average interest-bearing liability balances. Declining interest rates reduced interest expense by $8.6 million in 2010 compared to 2009, and the increase in average balances resulted in $1.1 million of higher interest expense. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits, increased from $1.21 billion for the year ended December 31, 2009 to $1.24 billion for the year ended December 31, 2010. The average rate paid on interest-bearing deposits decreased from 2.31% in 2009 to 1.71% in 2010, reflecting disciplined pricing controls and re-pricing of maturing time deposits in a lower interest rate environment. The interest rate on time deposits, which comprised 65.0% of total deposits as of December 31, 2010 and 61.6% of total deposits as of December 31, 2009, decreased from 2.85% in 2009 to 2.08% in 2010.
Average borrowings, including repurchase agreements and subordinated debt, increased from $185.1 million for the year ended December 31, 2009 to $185.3 million for the year ended December 31, 2009. The average rate paid on borrowings decreased from 3.36% in 2009 to 3.06% in 2010.
Provision for Loan Losses (Predecessor Company)
Provision for loan losses totaled $58.5 million for the year ended December 31, 2010 compared with $23.1 million for the year ended December 31, 2009. The loan loss provision increased significantly in 2010 due to higher levels of nonperforming assets, increased charge-offs, and downgrades to risk ratings of certain loans in the portfolio. Net charge-offs increased from $11.8 million, or 0.89% of average loans, in 2009 to $48.6 million, or 3.60% of average loans, in 2010. In the fourth quarter of 2010, net charge-offs totaled $20.2 million, or 6.24% of average loans (annualized), which was an increase from $5.3 million, or 1.52% of average loans (annualized), in the fourth quarter of 2009. Of the fourth quarter 2010 charge-offs, $9.5 million was related to one residential development project in the Company’s Triangle region.
Nonperforming assets, which include nonperforming loans and other real estate, totaled 5.69% of total assets as of December 31, 2010, an increase from 2.90% as of December 31, 2009. Nonperforming assets, including accruing restructured loans, totaled 5.98% of total assets as of December 31, 2010, an increase from 4.87% as of December 31, 2009. Loans past due more than 30 days, excluding nonperforming loans, increased to 1.08% of total loans as of December 31, 2010 compared to 0.67% as of December 31, 2009. The allowance for loan losses increased to 2.87% of total loans as of December 31, 2010 compared with 1.88% as of December 31, 2009. The allowance for loan losses covered 50% of nonperforming loans as of December 31, 2010, which was a decrease from 66% as of December 31, 2009.
Prior to the fourth quarter of 2010, the Company provided specific reserves on many of its impaired loans as part of the allowance for loan losses and charged down impaired loans to estimated fair value only if legal action had begun against a borrower in default or where a “confirmed loss” existed. However, during the fourth quarter of 2010, the Company began charging down all impaired loans to current fair value. This change in practice has not impacted the amount of loan loss provision, since impaired loans are valued the same under both methods, but the change does increase the amount of net charge-offs recorded and decreases the level of allowance for loan losses. As of December 31, 2010 and 2009, the Company had recorded cumulative charge-offs of $17.9 million and $6.7 million, respectively, on impaired loans. If these cumulative charge-offs had instead been recorded as specific reserves, the allowance for loan losses would have increased from 2.87% of total loans to 4.24% of total loans as of December 31, 2010 and would have increased from 1.88% of total loans to 2.35% of total loans as of December 31, 2009.
The elevated provision for loan losses, net charge-offs and nonperforming assets reflect the economic climate in the Company’s primary markets and consistent application of the Company’s policy to recognize losses as they occur.
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Noninterest Income (Predecessor Company)
Noninterest income increased from $10.2 million in 2009 to $15.5 million in 2010, an increase of 52.9%. The following table presents the detail of noninterest income and related changes for the years ended December 31, 2010 and 2009:
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Service charges and other fees | $ | 3,311 | $ | 3,883 | $ | (572 | ) | (14.7 | )% | |||||||
Bank card services | 2,020 | 1,539 | 481 | 31.3 | ||||||||||||
Mortgage origination and other loan fees | 1,861 | 1,935 | (74 | ) | (3.8 | ) | ||||||||||
Brokerage fees | 963 | 698 | 265 | 38.0 | ||||||||||||
Bank-owned life insurance | 699 | 1,830 | (1,131 | ) | (61.8 | ) | ||||||||||
Net gain on sale of investment securities | 5,855 | 173 | 5,682 | NM | ||||||||||||
Net other-than-temporary impairment losses on securities | – | (498 | ) | 498 | (100.0 | ) | ||||||||||
Other | 840 | 607 | 233 | 38.4 | ||||||||||||
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Total noninterest income | $ | 15,549 | $ | 10,167 | $ | 5,382 | 52.9 | % | ||||||||
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The increase in noninterest income was primarily related to net gains of $5.9 million recorded on the sale of investment securities in 2010 as compared to net gains of $173 thousand recorded in 2009. The Company sold a significant portion of its U.S. government agency bond and mortgage-backed securities portfolio and reinvested the proceeds in an effort to reposition the investment portfolio to execute certain interest rate risk management, liquidity, and tax strategies. During the years ended December 31, 2010 and 2009, proceeds received from these sales totaled $202.2 million and $23.5 million, respectively. Included as a reduction to net gain on sale of investment securities in 2009 was a $320 thousand loss on an equity investment in Silverton Bank. Additionally, noninterest income was decreased in 2009 as an other-than-temporary impairment loss was recorded on an investment in trust preferred securities issued by a financial institution.
Also contributing to increased noninterest income, bank card services, which includes interchange fees related to debit card and credit card transactions, increased primarily due to higher debit card usage on consumer products where debit card issuance is optional. Brokerage fees increased as a result of improved sales efforts and market conditions.
Partially offsetting the increase in noninterest income was a nonrecurring BOLI gain of $913 thousand recorded in 2009. Service charge income decreased due to a reduction in the volume of overdrafts and non-sufficient funds transactions. Mortgage origination and other loan fees declined by $74 thousand due to fewer prepayment penalties recognized on business loans, partially offset by increased residential mortgage refinancing activity.
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Noninterest Expense (Predecessor Company)
Noninterest expense increased from $49.8 million in 2009 to $54.3 million in 2010, an increase of 9.0%. The following table presents the detail of noninterest expense and related changes for the years ended December 31, 2010 and 2009:
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Salaries and employee benefits | $ | 22,675 | $ | 22,112 | $ | 563 | 2.5 | % | ||||||||
Occupancy | 5,906 | 5,630 | 276 | 4.9 | ||||||||||||
Furniture and equipment | 3,183 | 3,155 | 28 | 0.9 | ||||||||||||
Data processing and telecommunications | 2,092 | 2,317 | (225 | ) | (9.7 | ) | ||||||||||
Advertising and public relations | 1,887 | 1,610 | 277 | 17.2 | ||||||||||||
Office expenses | 1,260 | 1,383 | (123 | ) | (8.9 | ) | ||||||||||
Professional fees | 2,514 | 1,488 | 1,026 | 69.0 | ||||||||||||
Business development and travel | 1,350 | 1,244 | 106 | 8.5 | ||||||||||||
Amortization of other intangible assets | 937 | 1,146 | (209 | ) | (18.2 | ) | ||||||||||
ORE losses and miscellaneous loan costs | 5,006 | 1,646 | 3,360 | 204.1 | ||||||||||||
Directors’ fees | 1,061 | 1,418 | (357 | ) | (25.2 | ) | ||||||||||
FDIC deposit insurance | 3,846 | 2,721 | 1,125 | 41.3 | ||||||||||||
Other | 2,592 | 3,940 | (1,348 | ) | (34.2 | ) | ||||||||||
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Total noninterest expense | $ | 54,309 | $ | 49,810 | $ | 4,499 | 9.0 | % | ||||||||
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The increase in noninterest expense was primarily due to a $3.4 million increase in other real estate and miscellaneous loan costs, of which $2.2 million was related to increased valuation adjustments to and losses on the sale of other real estate with the remaining increase representing higher loan workout, appraisal and foreclosure costs to resolve problem assets. FDIC deposit insurance expense rose by $1.1 million with a higher deposit insurance assessment rate and a change in risk category as determined by the FDIC.
Further, salaries and employee benefits expense increased by $563 thousand due to lower deferred loan costs, which decrease expense, and increased employee health insurance expense. Occupancy expense increased primarily due to additional overhead costs incurred as new branches were opened in the Triangle region late in 2009. Advertising and public relations expense increased by $277 thousand due in part from radio and television ads promoting the Company’s special financing program for home buyers. Professional fees increased by $1.0 million due to higher legal and consulting expense. Business development and travel expenses increased primarily due to marketing efforts associated with the Company’s withdrawn public stock offering in 2010. While slightly higher, furniture and equipment expense remained relatively consistent.
Partially offsetting the increase in noninterest expense, data processing and telecommunications costs dropped by $225 thousand as the Company realized cost savings through renegotiation of certain vendor contracts. Office expense decreased by $123 thousand primarily due to cost savings initiatives within the Company’s branch network and operations areas. Core deposit intangible amortization decreased by $209 thousand as intangible assets acquired in previous acquisitions are amortized on an accelerated method over the expected benefit of the core deposit premium. Directors’ fees decreased by $357 thousand due to acceleration of benefit payments on a retirement plan upon the death of a former director in 2009 and in part due to the board reduction and reorganization in late 2009. Lastly, other expenses declined as the Company incurred $1.9 million of direct nonrecurring expenses related to its proposed stock offering in 2009. These expenses were recorded in other noninterest expense and primarily represented investment banking, legal and accounting costs related to the proposed offering. The Company also incurred direct nonrecurring expenses related to a separate proposed public stock offering in 2010 that was later withdrawn.
Income Taxes (Predecessor Company)
Income tax expense recorded in the year ended December 31, 2010 was primarily impacted by the valuation allowance recorded against deferred tax assets in 2010. Due to a cumulative three-year, pre-tax loss position,
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significant net operating losses in 2010, and ongoing stress on the Company’s financial performance from elevated credit losses, the Company fully reserved its deferred tax assets as of December 31, 2010 with a valuation allowance of $31.8 million. A cumulative loss position makes it more difficult for management to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.
Analysis of Financial Condition
Overview
The Company’s financial condition was significantly impacted by the controlling investment in the Company by CBF on January 28, 2011. CBF owns approximately 83% of the Company’s outstanding common stock. Because of the CBF Investment, the Company’s assets and liabilities were adjusted to estimated preliminary fair value at the acquisition date, and the allowance for loan losses was eliminated at that date.
Due to the Bank Merger on June 30, 2011, the Company deconsolidated the assets and liabilities of Old Capital Bank and began reporting its ownership of Capital Bank, N.A. on the Consolidated Balance Sheet as an equity method investment. This transaction resulted in the Company’s total assets decreasing from $1.6 billion as of December 31, 2010 (Predecessor) to $249.7 million as of December 31, 2011 (Successor). As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, N.A. totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity at that date.
The Company also had an advance to Capital Bank, N.A. totaling $3.4 million as of December 31, 2011 (Successor). In the period from June 30, 2011 to December 31, 2011 (Successor), the Company increased the equity investment balance by $4.0 million based on its equity in Capital Bank, N.A.’s net income and increased the equity investment balance by $771 thousand based on its equity in Capital Bank, N.A.’s other comprehensive income. In addition to the investment in and advance to Capital Bank, N.A., the Company also had $2.2 million of cash on deposit with Capital Bank, N.A. and $458 thousand of other assets as of December 31, 2011 (Successor).
The Company’s subordinated debentures had a carrying value of $19.2 million and a notional value of $33.4 million as of December 31, 2011 (Successor). The decline in the carrying value of these debt instruments since December 31, 2010 (Predecessor) was primarily due to acquisition accounting adjustments resulting from the CBF Investment and accretion of the fair value discount in the successor period.
Total shareholders’ equity was $224.9 million as of December 31, 2011 (Successor) and represented a significant increase from the $76.7 million balance as of December 31, 2010 (Predecessor). This increase was primarily due to the CBF Investment on January 28, 2011. Common stock, no par value, totaled $218.8 million as of December 31, 2011 (Successor). This amount represents the fair value of net assets acquired of $224.1 million at the CBF Investment date, which includes the non-controlling interest at fair value, in addition to net proceeds of $3.8 million from the issuance of approximately 1.6 million shares of the Company’s common stock
in the Rights Offering on March 11, 2011. Common stock then decreased by a net of $9.1 million due to the Bank Merger and GreenBank merger. The Company’s retained earnings totaled $5.3 million as of December 31, 2011 (Successor), which represents the Company’s net income in the successor period. Accumulated other comprehensive income totaled $771 thousand as of December 31, 2011 (Successor) and represented the Company’s equity in Capital Bank, N.A.’s other comprehensive income in the period subsequent to the Bank Merger.
Investment Securities
Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, investment securities represented the second
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largest component of earning assets and were used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for FHLB advances, public funds and repurchase agreements, as necessary. The Company’s securities portfolio consisted primarily of debt securities issued by U.S. government agencies, mortgage-backed securities issued by Fannie Mae and Freddie Mac, non-agency mortgage-backed securities, municipal bonds, and corporate bonds.
As securities were purchased, they were designated as available for sale or held to maturity based upon management’s intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies and capital requirements. Management generally identified new securities purchased as available for sale. Investment securities available for sale were carried at their fair value and were in a net unrealized loss position of $2.0 million as of December 31, 2010 (Predecessor). Changes to the fair value of available-for-sale investment securities were recorded to other comprehensive income. Investment securities held to maturity were carried at amortized cost. The Company had no investment securities designated as held to maturity as of December 31, 2010 (Predecessor).
As of December 31, 2010 (Predecessor), the recorded value of investments securities totaled $223.3 million, with $215.0 million classified as available for sale and recorded at fair value. In addition, the Company owned other investments which totaled $8.3 million as of December 31, 2010 (Predecessor). Other investments primarily included the Company’s investment in FHLB stock which does not have a readily determinable fair value and was recorded at cost and reviewed periodically for impairment. Prior to the Bank Merger, factors affecting changes in the investment portfolio balance included loan growth, funding levels, interest rates available for reinvestment of maturing securities, and changes to the interest rate yield curve.
The following table reflects the carrying value of the Company’s investment portfolio as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Available for sale: | ||||
U.S. agency obligations | $ | 18,934 | ||
Municipal bonds | 21,009 | |||
Mortgage-backed securities issued by GSEs | 165,423 | |||
Non-agency mortgage-backed securities | 6,587 | |||
Other securities | 3,038 | |||
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214,991 | ||||
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Other investments | 8,301 | |||
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Total | $ | 223,292 | ||
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Prior to the Bank Merger, on at least a quarterly basis, the Company completed an OTTI assessment of its investment portfolio. The Company considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.
In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, 2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million
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and ($202,000), respectively, as of both December 31, 2010 and 2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, 2009 (Predecessor).
The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position not recognized in earnings, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||
December 31, 2010 | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||
U.S. agency obligations | $ | 8,916 | $ | 87 | $ | – | $ | – | $ | 8,916 | $ | 87 | ||||||||||||
Municipal bonds | 14,886 | 1,134 | 2,453 | 387 | 17,339 | 1,521 | ||||||||||||||||||
Mortgage-backed securities issued by GSEs | 14,473 | 195 | – | – | 14,473 | 195 | ||||||||||||||||||
Non-agency mortgage-backed securities | – | – | 4,183 | 242 | 4,183 | 242 | ||||||||||||||||||
Other securities | – | – | 2,536 | 214 | 2,536 | 214 | ||||||||||||||||||
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Total | $ | 38,275 | $ | 1,416 | $ | 9,172 | $ | 843 | $ | 47,447 | $ | 2,259 | ||||||||||||
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As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, were related to 4 different securities. These losses were due to a combination of changes in credit spreads and other market factors. These mortgage securities were not issued or guaranteed by an agency of the federal government but were instead issued by private financial institutions and therefore carry an element of credit risk. Prior to the Bank Merger, management closely monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of collateral, remaining terms, interest rates, loan types, etc. The Company engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.
Unrealized losses on the Company’s investments in municipal bonds were related to 30 different securities as of December 31, 2010 (Predecessor). These losses were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities related to an investment in subordinated debt of one corporate financial institution. Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and considered its capital, liquidity and earnings in this review.
D-16
Table of Contents
The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI continued to perform and were expected to perform through maturity, and the issuers had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company did not intend to sell these investments and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider unrealized losses on such securities to represent OTTI as of December 31, 2010 (Predecessor).
The table below reflects the carrying value and weighted average yield on debt securities by final contractual maturities as of December 31, 2010 (Predecessor). Expected maturities differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Predecessor Company | ||||||||||||||||||||||||||||||||||||||||||||
Less Than 1 Year | 1–5 Years | 5–10 Years | More Than 10 Years | Total | ||||||||||||||||||||||||||||||||||||||||
December 31, 2010 | Amount | Yield | Amount | �� | Yield | Amount | Yield | Amount | Yield | Other | Amount | Yield | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Available for Sale: | ||||||||||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | – | – | % | $ | 15,962 | 1.07 | % | $ | 2,972 | 2.14 | % | $ | – | – | % | $ | – | $ | 18,934 | 1.24 | % | ||||||||||||||||||||||
Municipal bonds 1 | 301 | 4.52 | 1,880 | 5.14 | 555 | 6.29 | 18,273 | 6.09 | – | 21,009 | 6.00 | |||||||||||||||||||||||||||||||||
MBSs issued by GSEs | – | – | 62 | 5.16 | 43,707 | 2.00 | 121,654 | 2.89 | – | 165,423 | 2.66 | |||||||||||||||||||||||||||||||||
Non-agency MBSs | – | – | – | – | 1,369 | 4.79 | 5,218 | 4.98 | – | 6,587 | 4.94 | |||||||||||||||||||||||||||||||||
Corporate bonds2 | – | – | – | – | 798 | 3.80 | 502 | – | – | 1,300 | 2.53 | |||||||||||||||||||||||||||||||||
Other securities | – | – | – | – | – | – | – | – | 1,738 | 1,738 | – | |||||||||||||||||||||||||||||||||
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Total | $ | 301 | 4.52 | % | $ | 17,904 | 1.51 | % | $ | 49,401 | 2.16 | % | $ | 145,647 | 3.36 | % | $ | 1,738 | $ | 214,991 | 2.90 | % | ||||||||||||||||||||||
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1 | Municipal bonds shown at tax equivalent yield computed using a federal tax rate of 34%. |
2 | Corporate bond due after ten years is an other-than-temporarily impaired corporate bond for which the Company is no longer accruing interest. |
As of December 31, 2010 (Predecessor), the projected weighted average life of the Company’s U.S. agency bonds, municipal bonds and mortgage-backed securities was 2.1 years, 10.7 years and 4.4 years, respectively, assuming a flat interest rate environment.
Loans
Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Total loans were $1.25 billion as of December 31, 2010 (Predecessor). During the year ended December 31, 2010 (Predecessor), the Company made an effort to deleverage its balance sheet to preserve capital and reduce its exposure to certain sectors of the commercial real estate market. As of December 31, 2010 (Predecessor), commercial real estate (non-owner occupied), consumer real estate, commercial owner occupied, commercial and industrial, consumer non-real estate and other loans (including agriculture and municipal loans) amounted to $634.5 million, $263.0 million, $170.5 million, $145.4 million, $6.2 million, and $33.7 million, respectively.
Prior to the Bank Merger, the loan portfolio was comprised primarily of loans to small- and mid-sized businesses as well as individuals primarily located in the central and western regions of North Carolina. The economic trends of the areas in North Carolina served by the Company were influenced by the significant businesses and industries within these regions. The ultimate collectability of the Company’s loan portfolio was highly susceptible to changes in the market conditions of these geographic regions.
D-17
Table of Contents
The following table reflects contractual maturities and weighted average yields by maturity category as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||||||||||
Less Than 1 Year | 1–5 Years | More Than 5 Years | Total | |||||||||||||||||||||||||||||
December 31, 2010 | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Commercial real estate—non-owner occupied | $ | 298,681 | 5.25 | % | $ | 312,998 | 5.70 | % | $ | 22,851 | 6.47 | % | $ | 634,530 | 5.52 | % | ||||||||||||||||
Consumer real estate | 25,360 | 5.57 | 65,772 | 6.20 | 171,823 | 4.39 | 262,955 | 4.96 | ||||||||||||||||||||||||
Commercial real estate—owner occupied | 24,414 | 5.99 | 125,998 | 6.07 | 20,058 | 6.36 | 170,470 | 6.09 | ||||||||||||||||||||||||
Commercial and industrial | 70,124 | 5.29 | 70,586 | 5.32 | 4,725 | 6.25 | 145,435 | 5.34 | ||||||||||||||||||||||||
Consumer | 1,814 | 6.24 | 2,863 | 7.46 | 1,486 | 9.24 | 6,163 | 7.53 | ||||||||||||||||||||||||
Other | 5,380 | 5.56 | 4,401 | 6.13 | 23,961 | 4.70 | 33,742 | 5.02 | ||||||||||||||||||||||||
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Total | $ | 425,773 | 5.32 | % | $ | 582,618 | 5.80 | % | $ | 244,904 | 4.84 | % | $ | 1,253,295 | 5.45 | % | ||||||||||||||||
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The following table reflects the mixture of commercial loans and weighted average yields by rate type for notes with contractual maturities greater than one year as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||||||||||||||
Fixed Rate | Floating Rate | Adjustable Rate | Total | |||||||||||||||||||||||||||||
December 31, 2010 | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Due after 1 year: | ||||||||||||||||||||||||||||||||
Commercial real estate—non-owner occupied | $ | 169,117 | 6.42 | % | $ | 164,304 | 5.07 | % | $ | 2,428 | 5.27 | % | $ | 335,849 | 5.75 | % | ||||||||||||||||
Commercial real estate—owner occupied | 126,773 | 6.42 | 16,258 | 4.06 | 3,025 | 3.86 | 146,056 | 6.11 | ||||||||||||||||||||||||
Commercial and industrial | 26,652 | 6.56 | 42,106 | 4.89 | 6,553 | 3.72 | 75,311 | 5.38 | ||||||||||||||||||||||||
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Total | $ | 322,542 | 6.43 | % | $ | 222,668 | 4.96 | % | $ | 12,006 | 4.07 | % | $ | 557,216 | 5.79 | % | ||||||||||||||||
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Prior to the Bank Merger, the Company had loans funded by an interest reserve. To mitigate risks related to the use of interest reserves, the Company followed an interest reserve policy approved by its Board of Directors which set underwriting standards for loans with interest reserves. These policies included loan-to-value, or LTV, limits as well as guarantor strength and equity requirements. Additionally, strict monitoring requirements were followed. LTV limits were established based on regulatory guidelines for each loan type, and interest reserve loans with an LTV (using an updated independent appraisal) exceeding those limits were generally placed on nonaccrual status.
D-18
Table of Contents
As of December 31, 2010 (Predecessor), the Company had a total of 28 loans funded by an interest reserve with total outstanding balances of $48.0 million, representing approximately 4% of total outstanding loans. Total commitments on these loans equaled $55.2 million with total remaining interest reserves of $1.3 million, representing a weighted average term of approximately 7 months of remaining interest coverage. The following table summarizes the Company’s residential and commercial acquisition, development and construction, or ADC, loans with active interest reserves as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||||||
December 31, 2010 | Outstanding Balance | Unfunded Commitments | Number of Loans | Remaining Interest Reserves | Balance on Nonaccrual | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Residential ADC | $ | 12,702 | $ | 1,009 | 14 | $ | 351 | $ | 3,311 | |||||||||||
Commercial ADC | 35,281 | 6,174 | 14 | 974 | – | |||||||||||||||
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Total1 | $ | 47,983 | $ | 7,183 | 28 | $ | 1,325 | 3,311 | ||||||||||||
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1 | Excludes loans where interest reserves have previously been depleted and the borrower is paying from other sources. |
Nonperforming Assets and Impaired Loans
As discussed above, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, loans were generally classified as nonaccrual if they were past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans were well secured and in the process of collection. If a loan or a portion of a loan was classified as doubtful or as partially charged off, the loan was generally classified as nonaccrual. Loans that were on a current payment status or past due less than 90 days may also have been classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans were returned to accrual status when all principal and interest amounts contractually due (including arrearages) were reasonably assured of repayment within an acceptable period of time, and there was a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.
D-19
Table of Contents
The following table presents an analysis of nonperforming assets as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Nonperforming assets: | ||||
Nonperforming loans: | ||||
Commercial real estate | $ | 53,371 | ||
Consumer real estate | 3,758 | |||
Commercial owner occupied | 8,198 | |||
Commercial and industrial | 5,830 | |||
Consumer | 6 | |||
Other loans | 781 | |||
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Total nonperforming loans | 71,944 | |||
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Other real estate: | ||||
Construction, land development, and other land | 10,797 | |||
1-4 family residential properties | 4,529 | |||
1-4 family residential properties sold with 100% financing | 1,004 | |||
Commercial properties | 1,086 | |||
Closed branch office | 918 | |||
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Total other real estate | 18,334 | |||
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Total nonperforming assets | 90,278 | |||
Performing restructured loans | 4,463 | |||
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Total nonperforming assets and restructured loans | $ | 94,741 | ||
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Asset quality ratios: | ||||
Nonperforming loans to total loans | 5.73 | % | ||
Nonperforming assets to total assets | 5.69 | |||
Nonperforming assets and restructured loans to total assets | 5.98 | |||
Allowance for loan losses to total loans | 2.87 | |||
Allowance for loan losses to nonperforming loans | 50.12 |
Due to the Bank Merger, Company reported no other real estate on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, other real estate included foreclosed assets and other real property held for sale. Other real estate totaled $18.3 million as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), other real estate included $918 thousand of real estate from a closed branch office held for sale and included $1.0 million of residential properties sold to individuals prior to December 31, 2010 where the Company financed 100% of the purchase price of the home at closing. These financed properties would remain in other real estate until regular payments were made by the borrowers that total at least 5% of the original purchase price, at which time the properties would be moved out of other real estate and into the performing mortgage loan portfolio.
The Company actively marketed all of its foreclosed properties. Such properties were adjusted to fair value upon transfer of the loans or premises to other real estate. Subsequently, these properties were carried at the lower of carrying value or updated fair value. The Company obtained updated appraisals and/or internal evaluations for all other real estate. The Company considered all other real estate to be classified as Level 2 fair value estimates based on current appraised values as of December 31, 2010 (Predecessor).
D-20
Table of Contents
Prior to the Bank Merger, individually impaired loans primarily consisted of nonperforming loans and troubled debt restructurings (“TDRs”) but could have included other loans identified by management as being impaired. Individually impaired loans totaled $76.5 million as of December 31, 2010 (Predecessor). The following table summarizes the Company’s individually impaired loans and performing TDRs as of December 31, 2010 (Predecessor):
Predecessor Company | ||||
(Dollars in thousands) | Dec. 31, 2010 | |||
Impaired loans: | ||||
Impaired loans with related allowance for loan losses | $ | 2,378 | ||
Impaired loans for which the full loss has been charged off | 74,141 | |||
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Total impaired loans | 76,519 | |||
Allowance for loan losses related to impaired loans | (529 | ) | ||
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Net carrying value of impaired loans | $ | 75,990 | ||
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Performing TDRs: | ||||
Commercial real estate | $ | 3,856 | ||
Consumer real estate | 121 | |||
Commercial owner occupied | 421 | |||
Commercial and industrial | 65 | |||
Consumer | – | |||
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Total performing TDRs | $ | 4,463 | ||
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Prior to the Bank Merger, loans were classified as TDRs by the Company when certain modifications were made to the loan terms and concessions were granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructured loans for borrowers in financial difficulty that had designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans were restructured to provide the borrower additional time to execute upon their plans. The Company granted concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company did not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession had been granted through extension of the maturity date generally included extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms were also combined with a reduction of the stated interest rate in certain cases. Success in restructuring loan terms was mixed but had proven to be a useful tool in certain situations to protect collateral values and to allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR was unsuccessful and the borrower was unable to follow through with terms of the restructured agreement, the loan was placed on nonaccrual status and continued to be written down to the underlying collateral value.
The Company’s policy with respect to accrual of interest on loans restructured in a TDR followed relevant supervisory guidance. That is, if a borrower had demonstrated performance under the previous loan terms and showed capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate was likely. If a borrower was materially delinquent on payments prior to the restructuring but showed the capacity to meet the restructured loan terms, the loan would likely continue as nonaccrual going forward. Lastly, if the borrower did not perform under the restructured terms, the loan was placed on nonaccrual
D-21
Table of Contents
status. The Company closely monitored these loans and ceased accruing interest on them if management believed that the borrowers did not continue performing based on the restructured note terms. If a loan was restructured a second time, after previously being classified as a TDR, that loan was automatically placed on nonaccrual status. The Company’s policy with respect to nonperforming loans required the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan could be placed back on accrual status. Further, the borrower must have shown the capacity to continue performing into the future prior to restoration of accrual status.
Prior to the Bank Merger, all TDRs were considered to be individually impaired and were evaluated as such in the quarterly allowance calculation. As of December 31, 2010 (Predecessor), there was no allowance for loan loss allocated to TDRs as all of these loans were charged down to estimated fair value. Outstanding nonperforming TDRs totaled $14.0 million as of December 31, 2010 (Predecessor).
Allowance for Loan Losses
The Company’s allowance for loan losses was significantly impacted by the controlling investment by CBF on January 28, 2011. CBF owns approximately 83% of the Company’s outstanding common stock. Because of the CBF Investment, the Company’s assets and liabilities were adjusted to estimated preliminary fair value at the acquisition date, and the allowance for loan losses was eliminated at that date.
Further, the company recorded no allowance for loan losses on its Consolidated Balance Sheet as of December 31, 2011 (Successor) due to the Bank Merger and related deconsolidation of Old Capital Bank. In the successor period prior to the Bank Merger, allowance for loans losses were established through a provision for loan losses charged to expense, and reflected estimated losses inherent in loans originated subsequent to the CBF investment date and estimated impairment related to probable decreases in cash flows expected to be collected on certain purchase credit-impaired loan pools.
Prior to the Bank Merger, the allowance for loan losses represented management’s best estimate of probable credit losses that were inherent in the loan portfolio at the balance sheet date and was determined by management through at least quarterly evaluations of the loan portfolio. The allowance calculation consisted of reserves on loans individually evaluated for impairment and reserves on loans collectively evaluated for impairment.
The evaluation of the allowance for loan losses was inherently subjective, and management used the best information available to establish this estimate. However, if factors such as economic conditions differ substantially from assumptions, or if amounts and timing of future cash flows expected to be received on impaired loans vary substantially from the estimates, future adjustments to the allowance for loan losses may have been necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically reviewed the Company’s allowance for loan losses. Such agencies may have required the Company to recognize additions to the allowance for loan losses based on their judgments of all relevant information available to them at the time of their examination. Any adjustments to original estimates were made in the period in which the factors and other considerations indicated that adjustments to the allowance for loan losses were necessary.
D-22
Table of Contents
Management has allocated the allowance for loan losses by loan purpose for the past five years ended December 31, as shown in the following table:
Successor Company |
| Predecessor Company | ||||||||||||||||||||||||||||||||||||||||
2011 |
| 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | % of Total Allowance |
| Amount | % of Total Allowance | Amount | % of Total Allowance | Amount | % of Total Allowance | Amount | % of Total Allowance | |||||||||||||||||||||||||||||||
Commercial | $ | – | – | % | $ | 21,734 | 60 | % | $ | 14,187 | 54 | % | $ | 9,749 | 66 | % | $ | 10,231 | 75 | % | ||||||||||||||||||||||
Construction | – | – | 11,499 | 32 | 10,343 | 40 | 3,548 | 24 | 1,812 | 13 | ||||||||||||||||||||||||||||||||
Consumer | – | – | 614 | 2 | 481 | 2 | 620 | 4 | 631 | 5 | ||||||||||||||||||||||||||||||||
Home equity lines | – | – | 1,003 | 3 | 491 | 2 | 570 | 4 | 419 | 3 | ||||||||||||||||||||||||||||||||
Mortgage | – | – | 1,211 | 3 | 579 | 2 | 308 | 2 | 478 | 4 | ||||||||||||||||||||||||||||||||
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Total | $ | – | – | % | $ | 36,061 | 100 | % | $ | 26,081 | 100 | % | $ | 14,795 | 100 | % | $ | 13,571 | 100 | % | ||||||||||||||||||||||
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The following table presents the allowance for loan losses, allocated according to collateral risk within the loan portfolio consistent with other loan-related disclosures, for the past four years ended December 31:
Successor Company |
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(Dollars in thousands) | 2011 |
| 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||
Amount | % of Total Allowance |
| Amount | % of Total Allowance | Amount | % of Total Allowance | Amount | % of Total Allowance | ||||||||||||||||||||||||||
Commercial real estate | $ | – | – | % | $ | 20,995 | 58 | % | $ | 14,987 | 58 | % | $ | 6,825 | 46 | % | ||||||||||||||||||
Consumer real estate | – | – | 4,732 | 13 | 2,383 | 9 | 2,360 | 16 | ||||||||||||||||||||||||||
Commercial owner occupied | – | – | 3,395 | 9 | 2,650 | 10 | 1,878 | 13 | ||||||||||||||||||||||||||
Commercial and industrial | – | – | 6,432 | 18 | 5,536 | 21 | 3,233 | 22 | ||||||||||||||||||||||||||
Consumer | – | – | 354 | 1 | 326 | 1 | 316 | 2 | ||||||||||||||||||||||||||
Other loans | – | – | 153 | 1 | 199 | 1 | 183 | 1 | ||||||||||||||||||||||||||
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Total | $ | – | – | % | $ | 36,061 | 100 | % | $ | 26,081 | 100 | % | $ | 14,795 | 100 | % | ||||||||||||||||||
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D-23
Table of Contents
Prior to the Bank Merger, the allowance was established through a provision for loan losses charged to expense. Loans were charged against the allowance for loan losses when management believed that the collectability of the principal was unlikely. The following table presents an analysis of changes in the allowance for loan losses for each period presented:
Successor Company |
| Predecessor Company | ||||||||||||||||||||||||
(Dollars in thousands) | Jan. 29 to Dec. 31, 2011 |
| Jan. 1 to Jan. 28, 2011 | Year Ended 2010 | Year Ended 2009 | Year Ended 2008 | Year Ended 2007 | |||||||||||||||||||
Balance at beginning of period, predecessor | $ | – | $ | 36,061 | $ | 26,081 | $ | 14,795 | $ | 13,571 | $ | 13,347 | ||||||||||||||
Adjustment for loans acquired in acquisition | – | – | – | 845 | – | |||||||||||||||||||||
Net charge-offs: | ||||||||||||||||||||||||||
Loans charged off: | ||||||||||||||||||||||||||
Commercial real estate | – | – | 38,220 | 8,026 | 1,991 | 1,292 | ||||||||||||||||||||
Consumer real estate | 337 | 26 | 3,923 | 2,016 | 125 | 2,264 | ||||||||||||||||||||
Commercial and industrial | – | 12 | 6,639 | 1,903 | 1,658 | 1,265 | ||||||||||||||||||||
Consumer | 2 | 11 | 429 | 252 | 794 | 403 | ||||||||||||||||||||
Other loans | – | 209 | – | – | 28 | |||||||||||||||||||||
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Total charge-offs | 339 | 49 | 49,420 | 12,197 | 4,568 | 5,252 | ||||||||||||||||||||
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Recoveries of loans previously charged off: | ||||||||||||||||||||||||||
Commercial real estate | – | 4 | 664 | 200 | 650 | 455 | ||||||||||||||||||||
Consumer real estate | – | 3 | 54 | 107 | 28 | 1,295 | ||||||||||||||||||||
Commercial and industrial | – | 1 | 115 | 63 | 316 | 9 | ||||||||||||||||||||
Consumer | – | 1 | 22 | 49 | 77 | 111 | ||||||||||||||||||||
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Total recoveries | – | 9 | 855 | 419 | 1,071 | 1,870 | ||||||||||||||||||||
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Total net charge-offs | 339 | 40 | 48,565 | 11,778 | 3,497 | 3,382 | ||||||||||||||||||||
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Provision for loan losses | 1,450 | 40 | 58,545 | 23,064 | 3,876 | 3,606 | ||||||||||||||||||||
Merger of Old Capital Bank into Capital Bank, N.A. | (1,111 | ) | – | – | – | – | – | |||||||||||||||||||
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Balance at end of period, predecessor | – | 36,061 | 36,061 | 26,081 | 14,795 | 13,571 | ||||||||||||||||||||
Acquisition accounting adjustment | – | (36,061 | ) | – | – | – | – | |||||||||||||||||||
Balance at end of period, successor | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||
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Net charge-offs to average loans during the year | NA | NA | 3.60 | % | 0.89 | % | 0.30 | % | 0.32 | % | ||||||||||||||||
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Loans Individually Evaluated for Impairment
Prior to the Bank Merger, a loan was considered individually impaired, based on current information and events, if it was probable that the Company would be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Reserves, or charge-offs, on individually impaired loans that were collateral dependent were based on the fair value of the underlying collateral while reserves, or charge-offs, on loans that were not collateral dependent were based on either an observable market price, if available, or the present value of expected future cash flows discounted at the historical effective interest rate. For certain individually impaired loans on borrower relationships less than $500 thousand, management aggregated the loans based on common risk characteristics and used historical loss statistics as a means of measuring impairment, or reserves, on those loans. Management evaluated loans that were classified as doubtful, substandard or special mention to determine whether they were individually impaired. This evaluation included several factors, including review of the loan payment status and the borrower’s financial condition and operating results such as cash flows, operating income or loss, etc.
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As of December 31, 2010 (Predecessor), the recorded investment in impaired loans for which the full loss was charged-off totaled $74.1 million and the aggregate unpaid principal balances of these loans totaled $92.1 million. The difference between the recorded investment and unpaid principal balance represented cumulative charge-offs over the life of these impaired loans. As of December 31, 2010 (Predecessor), the recorded investment in impaired loans with a related allowance totaled $2.4 million with related reserves of $529 thousand. In 2010, the Company changed its practice to charge down all individually impaired loans to estimated fair value except for the small group of individually impaired loans on borrower relationships less than $500 thousand that were aggregated for impairment measurement purposes. Given the Company’s concentration in real estate lending, the vast majority of individually impaired loans were collateral dependent and were therefore valued based on underlying collateral values. In the case of unsecured loans that became impaired, unpaid principal balances were fully charged off.
The Company employed a dedicated Special Assets Group that monitored problem loans and formulated collection and/or resolution plans for those borrowers. Special Assets and the lender who underwrote the problem loan remained updated on market conditions and inspected the collateral on a regular basis. If there was a reason to believe that collateral values had been negatively affected by market or other forces, an updated appraisal was ordered to assess the change in value. The Company’s management would generally seek to ensure that appraisals were not more than twelve months old for all individually impaired loans.
For most individually impaired loans, the fair value of underlying collateral was estimated based on a current independent appraised value, adjusted for estimated costs to sell. These were considered Level 2 fair value estimates. For certain impaired loans where appraisals were aged or where market conditions had significantly changed since the appraisal date, a further reduction was made to appraised value to arrive at the fair value of collateral. These were considered Level 3 fair value estimates. In other situations, management used broker price opinions, internal valuations or other valuation sources. These were also considered Level 3 fair value estimates. Estimated fair value on impaired loans totaled $76.0 million as of December 31, 2010 (Predecessor). Of this amount, $61.0 million of impaired loans were valued based on current independent appraisals, and $15.0 million of impaired loans were valued based on a combination of adjusted appraised values, internal valuations, and other valuation sources or methods. Internal valuations were used primarily for equipment valuations or for certain real estate valuations where recent home sales data was used to estimate value for similar fully or partially built houses. For any impaired loan where a reserve had previously been established, or where a partial charge-off had been recorded, an updated appraisal that reflected a further decline in value will result in an additional reserve or partial charge-off during the period.
Loans Collectively Evaluated for Impairment
Prior to the Bank Merger, reserves on loans collectively evaluated for impairment were determined by applying loss rates to pools of loans that were grouped according to the Company’s two-dimensional risk rating system. The first digit of the risk rating represented the credit quality of the borrower and was used to calculate the probability of default used in the “pooled” reserve calculation, while the second digit represented the loan collateral type and was used to calculate the loss given default also used in the “pooled” reserve calculation. The first digit ranged from 1 to 9, where a higher rating represented higher credit risk, and was selected on the financial strength and overall resources of the borrower, and the second digit was chosen by the type of primary collateral securing the loan.
At the origination of each commercial loan, the loan officer evaluated the relative risk of the loan and assigned a corresponding risk rating based upon completion of a standardized risk rating worksheet that was reviewed by management. To ensure that loans were properly risk rated after origination, loan officers were required to re-evaluate assigned risk ratings whenever the borrower’s financial condition or ability to repay their loan changes. At a minimum, risk ratings were reassigned whenever a loan was renewed or modified. Additionally, the Bank employed a loan review department that audits loans based on a defined scope. Loans were reviewed for credit quality, sufficiency of credit and collateral documentation, proper loan approval,
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covenant, policy and procedure adherence, and continuing accuracy of the loan’s risk rating. The loan review department reported its findings to senior management and the Audit Committee of the Company’s Board of Directors.
In addition to using historical default and charge-off experience for each pool to calculate loss rates on loans collectively evaluated for impairment, management also considered the following environmental factors in establishing these loss rates:
• | Levels of and trends in delinquencies, impaired loans and classified assets; |
• | Levels of and trends in charge-offs and recoveries; |
• | Trends in nature, volume and terms of loans; |
• | Existence of and changes in portfolio concentrations by product type and geographical location; |
• | Changes in national, regional and local economic conditions; |
• | Changes in the experience, ability and depth of lending management; |
• | Changes in the quality of the loan review system; and |
• | The effect of other external factors such as legal and regulatory requirements. |
As of December 31, 2010 (Predecessor), the Company used two years of default and charge-off history for purposes of calculating reserves on loans evaluated collectively. Nonperforming loans and net charge-offs had significantly increased over the two year period, particularly in the commercial real estate portfolio, and such increases directly impacted loss rates and the resulting allowance for loan losses for each loan pool.
Commercial Real Estate Analysis
Residential Construction & Development
Loan Analysis by Type:
Residential Land / Development | Residential Construction | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
December 31, 2010 (Predecessor Company) | ||||||||||||
Loans outstanding | $ | 102,797 | $ | 77,120 | $ | 179,917 | ||||||
Nonaccrual loans | 35,934 | 3,180 | 39,114 | |||||||||
Allowance for loan losses | 4,975 | 3,996 | 8,971 | |||||||||
YTD net charge-offs | 27,096 | 3,382 | 30,478 | |||||||||
Loans outstanding to total loans | 8.19 | % | 6.15 | % | 14.34 | % | ||||||
Nonaccrual loans to loans in category | 34.96 | 4.12 | 21.74 | |||||||||
Allowance to loans in category | 4.84 | 5.18 | 4.99 | |||||||||
YTD net charge-offs to average loans in category (annualized) | 20.41 | 3.80 | 13.75 |
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Residential Construction & Development
Loan Analysis by Region:
Loans Outstanding | Percent of Total Loans Outstanding | Nonaccrual Loans | Nonaccrual Loans to Loans Outstanding | Allowance for Loan Losses | Allowance to Loans Outstanding | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
December 31, 2010 (Predecessor Company) | ||||||||||||||||||||||||
Triangle | $ | 134,858 | 74.96 | % | $ | 30,310 | 22.48 | % | $ | 6,898 | 5.12 | % | ||||||||||||
Sandhills | 24,816 | 13.79 | 979 | 3.95 | 1,080 | 4.35 | ||||||||||||||||||
Triad | 4,584 | 2.55 | – | – | 417 | 9.10 | ||||||||||||||||||
Western | 15,659 | 8.70 | 7,825 | 49.97 | 576 | 3.68 | ||||||||||||||||||
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Total | $ | 179,917 | 100.00 | % | $ | 39,114 | 21.74 | % | $ | 8,971 | 4.99 | % | ||||||||||||
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Commercial Construction & Development
and Other CRE
Loan Analysis by Type:
Commercial Land / Development | Commercial Construction | Multifamily | Other Non- Residential CRE | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
December 31, 2010 (Predecessor Company) | ||||||||||||||||||||
Loans outstanding | $ | 121,415 | $ | 49,255 | $ | 39,831 | $ | 244,112 | $ | 454,613 | ||||||||||
Nonaccrual loans | 11,579 | – | – | 2,678 | 14,257 | |||||||||||||||
Allowance for loan losses | 5,122 | 1,268 | 668 | 4,966 | 12,024 | |||||||||||||||
YTD net charge-offs | 1,641 | (3 | ) | 10 | 1,061 | 2,709 | ||||||||||||||
Loans outstanding to total loans | 9.68 | % | 3.93 | % | 3.18 | % | 19.46 | % | 36.24 | % | ||||||||||
Nonaccrual loans to loans in category | 9.54 | – | – | 1.10 | 3.14 | |||||||||||||||
Allowance to loans in category | 4.22 | 2.57 | 1.68 | 2.03 | 2.64 | |||||||||||||||
YTD net charge-offs to average loans in category (annualized) | 1.31 | (0.01 | ) | 0.02 | 0.48 | 0.61 |
Commercial Construction & Development
and Other CRE
Loan Analysis by Region:
Loans Outstanding | Percent of Total Loans Outstanding | Nonaccrual Loans | Nonaccrual Loans to Loans Outstanding | Allowance for Loan Losses | Allowance to Loans Outstanding | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
December 31, 2010 (Predecessor Company) | ||||||||||||||||||||||||
Triangle | $ | 291,377 | 64.09 | % | $ | 13,364 | 4.59 | % | $ | 7,240 | 2.48 | % | ||||||||||||
Sandhills | 66,292 | 14.58 | 815 | 1.23 | 2,504 | 3.78 | ||||||||||||||||||
Triad | 41,441 | 9.12 | – | – | 1,122 | 2.71 | ||||||||||||||||||
Western | 55,503 | 12.21 | 78 | 0.14 | 1,158 | 2.09 | ||||||||||||||||||
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Total | $ | 454,613 | 100.00 | % | $ | 14,257 | 3.14 | % | $ | 12,024 | 2.64 | % | ||||||||||||
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Deposits
Due to the Bank Merger, the Company reported no deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Total deposits totaled $1.34 billion as of December 31, 2010 (Predecessor). Of this amount, $116.1 million represented noninterest-bearing demand deposits as of December 31, 2010 (Predecessor), and $1.23 billion interest-bearing deposits as of December 31, 2010 (Predecessor). Time deposit balances of $100,000 and greater totaled $327.5 million with an average interest rate of 1.97% as of December 31, 2010 (Predecessor).
The following table reflects the scheduled maturities and average rates of time deposits as of December 31, 2010 (Predecessor):
Predecessor Company | ||||||||||||||||
December 31, 2010 | Time Deposits $100,000 or Greater | Time Deposits Less than $100,000 | ||||||||||||||
(Dollars in thousands) | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||||
Three months or less | $ | 13,952 | 1.11 | % | $ | 77,004 | 0.64 | % | ||||||||
Over three months to one year | 28,930 | 1.76 | 114,686 | 1.15 | ||||||||||||
Over one year to three years | 253,107 | 1.95 | 315,341 | 1.87 | ||||||||||||
Over three years | 31,463 | 2.73 | 38,847 | 2.71 | ||||||||||||
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$ | 327,452 | 1.97 | % | $ | 545,878 | 1.61 | % | |||||||||
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Borrowings and Subordinated Debt
Due to the Bank Merger, the Company reported no outstanding borrowings on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, advances from the FHLB totaled $51.0 million and had a weighted average rate of 4.22% as of December 31, 2010 (Predecessor). In addition, overnight borrowings on the Company’s credit line at the FHLB totaled $20.0 million as of December 31, 2010 (Predecessor). These fixed rate advances as well as the Company’s credit line with the FHLB were collateralized by eligible 1–4 family mortgages, home equity loans and commercial loans.
Outstanding structured repurchase agreements totaled $50.0 million as of December 31, 2010 (Predecessor). These repurchase agreements had a weighted average rate of 4.06% as of December 31, 2010 (Predecessor) and were collateralized by certain U.S. agency and mortgage-backed securities.
Prior to the Bank Merger, the Company maintained a credit line at the Federal Reserve Bank’s (“FRB”) discount window that was used for short-term funding needs and as an additional source of liquidity. Primary credit borrowings as well as the Company’s credit line at the discount window were collateralized by eligible commercial construction as well as commercial and industrial loans. The Company had total average outstanding borrowings of $150.2 million with effective borrowing costs of 3.02% in the year ended December 31, 2010 (Predecessor).
The Company had $19.2 million and $34.3 million of subordinated debentures outstanding as of December 31, 2011 (Successor) and December 31, 2010 (Predecessor), respectively. The decline in the carrying value of these debt instruments since December 31, 2010 (Predecessor) was primarily due to acquisition accounting adjustments resulting from the CBF Investment and accretion of the fair value discount in the successor period.
Capital Resources
Total shareholders’ equity was $224.9 million as of December 31, 2011 (Successor) and represented a significant increase from the $76.7 million balance as of December 31, 2010 (Predecessor). This increase was primarily due to the CBF Investment on January 28, 2011. Common stock, no par value, totaled $218.8 million as
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of December 31, 2011 (Successor). This amount represents the fair value of net assets acquired of $224.1 million at the CBF Investment date, which includes the non-controlling interest at fair value, in addition to net proceeds of $3.8 million from the issuance of approximately 1.6 million shares of the Company’s common stock in the Rights Offering on March 11, 2011. Common stock then decreased by a net of $9.1 million due to the Bank Merger and GreenBank merger. The Company’s retained earnings totaled $5.3 million as of December 31, 2011 (Successor), which represents the Company’s net income in the successor period. Accumulated other comprehensive income totaled $771 thousand as of December 31, 2011 (Successor) and represented the Company’s equity in Capital Bank, N.A.’s other comprehensive income in the period subsequent to the Bank Merger.
Capital Bank Corporation’s and Capital Bank, N.A.’s capital amounts and ratios as of December 31, 2011 (Successor) are presented in the following table:
Successor Company | ||||||||||||||||||||||||
Minimum Requirements To Be: | ||||||||||||||||||||||||
December 31, 2011 | Actual | Adequately Capitalized | Well Capitalized | |||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Capital Bank Corporation: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 244,027 | 98.39 | % | $ | 19,841 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier I capital (to risk-weighted assets) | 240,437 | 96.95 | 9,920 | 4.00 | N/A | N/A | ||||||||||||||||||
Tier I capital (to average assets) | 240,437 | 96.56 | 9,960 | 4.00 | N/A | N/A | ||||||||||||||||||
Capital Bank, N.A.: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 687,971 | 16.67 | % | $ | 330,201 | 8.00 | % | $ | 412,752 | 10.00 | % | ||||||||||||
Tier I capital (to risk-weighted assets) | 649,523 | 15.74 | 165,101 | 4.00 | 247,651 | 6.00 | % | |||||||||||||||||
Tier I capital (to average assets) | 649,523 | 10.38 | 250,180 | 4.00 | 312,725 | 5.00 | % |
Recent Items Impacting Capital Resources
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of the Bank’s existing loan portfolio. Also in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Private Placement Offering of Investment Units
On March 18, 2010, the Company sold 849 investment units (the “Units”) for gross proceeds of $8.5 million. Each Unit was priced at $10,000 and consisted of a $3,996.90 subordinated promissory note and a number of shares of the Company’s common stock valued at $6,003.10. The offering and sale of the Units was limited to accredited investors. As a result of the sale of the Units, the Company sold $3.4 million in aggregate principal amount of subordinated promissory notes due March 18, 2020 (the “Notes”) and 1,468,770 shares of the Company’s common stock valued at $5.1 million. The Company is obligated to pay interest on the Notes at
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10% per annum payable in quarterly installments commencing on the third month anniversary of the date of issuance of the Notes. The Company may prepay the Notes at any time after March 18, 2015 subject to approval by the Federal Reserve and compliance with applicable law.
Informal Regulatory Agreement
On October 28, 2010, Old Capital Bank entered into an informal Memorandum of Understanding (“MOU”) with the Federal Depository Insurance Corporation and the North Carolina Commissioner of Banks. An MOU is characterized by regulatory authorities as an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory action, such as a formal written agreement or order. In accordance with the terms of the MOU, Old Capital Bank agreed to, among other things, (i) increase regulatory capital to achieve and maintain a minimum Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 12%, (ii) monitor and reduce its commercial real estate concentration, (iii) timely identify and reduce its overall level of problem loans, (iv) establish and maintain an adequate allowance for loan losses, and (v) ensure adherence to loan policy guidelines. In addition, Old Capital Bank must obtain regulatory approval prior to paying any dividends to the Company. The MOU will remain in effect until modified, terminated, lifted, suspended or set aside by the regulatory authorities. In addition, the Company consults with the Federal Reserve prior to payment of any dividends or interest on debt.
The FDIC’s Atlanta Regional Office terminated its involvement in the MOU effective October 29, 2011, between its Board of Directors of Old Capital Bank, the FDIC and NC Commissioner of Banks. The termination was effective at close of business June 30, 2011, upon the merger of Old Capital Bank with and into NAFH Bank, which was subsequently renamed Capital Bank, National Association.
Liquidity Management
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, N.A. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares and merged its banking subsidiary, GreenBank, with and into Capital Bank, N.A. Following the GreenBank merger, Capital Bank, N.A. is now owned by the Company, CBF, TIB Financial Corp. and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, N.A., dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, N.A. common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, N.A., with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, N.A. operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.
The Company reports its investment in Capital Bank, N.A. on the Consolidated Balance Sheet as an equity method investment in that entity. As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, N.A. totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, N.A.’s total shareholders’ equity. The Company also had an advance to Capital Bank, N.A. totaling $3.4 million as of December 31, 2011 (Successor). The Bank Merger resulted in a significant decrease in the total assets and total liabilities of the Company. As of December 31, 2011 (Successor), the Company had cash on deposit with Capital Bank, N.A. of approximately $2.2 million. This cash is available for providing additional capital support to Capital Bank, N.A. and for other general corporate purposes.
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Off-Balance Sheet Arrangement and Contractual Obligations
Due to the Bank Merger, the Company had no outstanding borrowings or operating lease obligations as of December 31, 2011 (Successor). Subsequent to the Bank Merger, the only outstanding obligations are subordinated debentures issued by the Company. See Note 10 ( Subordinated Debentures ) to the financial statements of Capital Bank Corporation, included in this document, for more details.
The following table reflects maturities of contractual obligations as of December 31, 2011 (Successor):
Successor Company | ||||||||||||||||||||
December 31, 2011 | Payments Due by Period | |||||||||||||||||||
(Dollars in thousands) | Less Than 1 Year | 1–3 Years | 3–5 Years | More Than 5 Years | Total Committed | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Borrowings | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
Subordinated debentures | – | – | – | 19,163 | 19,163 | |||||||||||||||
Operating leases | – | – | – | – | – | |||||||||||||||
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$ | – | $ | – | $ | – | $ | 19,163 | $ | 19,163 | |||||||||||
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Due to the Bank Merger, the Company had no off-balance sheet commitments as of December 31, 2011 (Successor).
Impact of Inflation
The Company’s financial statements have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historic dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The rate of inflation has been relatively moderate over the past few years and has not materially impacted the Company’s results of operations; however, the effect of inflation on interest rates may in the future materially impact the Company’s operations, which rely on the spread between the yield on earning assets and rates paid on deposits and borrowings as the major source of earnings. Operating costs, such as salaries and wages, occupancy and equipment costs, can also be negatively impacted by inflation.
Recent Accounting Developments
Refer to Note 1 of the financial statements of Capital Bank Corporation included in this document for a discussion of recent accounting developments.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk. As of December 31, 2011 (Successor), the Company’s only earning asset was a $3.4 million advance to Capital Bank, N.A. which is earning interest at a fixed 10% annual rate. The Company’s interest-bearing liabilities consisted of subordinated debentures with notional amounts totaling $33.4 million. Accordingly, the Company’s net interest income and net interest margin are sensitive to changes in interest rates.
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The most significant component of the Company’s future operating results will be derived from its investment in Capital Bank, N.A. Thus, net interest income has become a less significant measure of operating results for the Company. As $30.0 million of notional value of the Company’s subordinated debentures are trust preferred securities with interest rates tied to 90-day LIBOR, changes in net interest income would be directly correlated to changes in this rate. Accordingly, 100 and 200 basis point changes in this rate would result in $300 thousand and $600 thousand changes in interest expense, respectively.
Dismissal of Elliott Davis, PLLC
Effective April 12, 2011, the Company dismissed Elliott Davis, PLLC (“Elliott Davis”) as the Company’s independent registered public accounting firm. The decision to change independent registered public accounting firms was recommended and approved by the Audit Committee of the Board of Directors.
During the fiscal year ended December 31, 2010 and during the period from January 1, 2011 through April 12, 2011, the Company had (i) no disagreements with Elliott Davis on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which that, if not resolved to Elliott Davis’s satisfaction, would have caused it to make reference to the subject matter of any such disagreement in connection with its reports for such year and interim periods and (ii) no reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K during the most recent fiscal year or the subsequent interim period.
Elliott Davis’s reports on the Company’s consolidated financial statements for the fiscal year ended December 31, 2010 do not contain any adverse opinion or disclaimer of opinion, nor are qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal year ended December 31, 2010 and during the period from January 1, 2011 through April 12, 2011, neither the Company nor anyone on its behalf has consulted with PricewaterhouseCoopers, LLP, the Company’s current independent registered public accounting firm, regarding (i) the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv), or any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
In accordance with Item 304(a)(3) of Regulation S-K, the Company provided Elliott Davis with a copy of the disclosures and requested that Elliott Davis furnish the Company with a letter addressed to the SEC stating whether or not Elliott Davis agrees with the above statements. A copy of such letter, dated April 15, 2011, is filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on April 15, 2011.
Dismissal of Grant Thornton LLP
Effective March 12, 2010, the Company dismissed Grant Thornton LLP (“Grant Thornton”) as the Company’s independent registered public accounting firm. The decision to change independent registered public accounting firms was recommended and approved by the Audit Committee of the Board of Directors.
During the fiscal year ended December 31, 2009 and during the period from January 1, 2010 through March 12, 2010, the Company had (i) no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which that, if not resolved to Grant Thornton’s satisfaction, would have caused it to make reference to the subject matter of any such disagreement in connection with its reports for such years and interim periods and (ii) no reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K during the two most recent fiscal years or the subsequent interim period.
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Grant Thornton’s reports on the Company’s consolidated financial statements for the fiscal year ended December 31, 2009 do not contain any adverse opinion or disclaimer of opinion, nor are qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal year ended December 31, 2009 and during the period from January 1, 2010 through March 12, 2010, neither the Company nor anyone on its behalf has consulted with Elliott Davis regarding (i) the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv), or any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
In accordance with Item 304(a)(3) of Regulation S-K, the Company provided Grant Thornton with a copy of the disclosures and requested that Grant Thornton furnish the Company with a letter addressed to the SEC stating whether or not Grant Thornton agrees with the above statements. A copy of such letter, dated March 16, 2010, is filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on March 16, 2010.
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APPENDIX E
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the “Selected Historical Consolidated Financial Data of Capital Bank Corp.,” and financial statements of Capital Bank Corp. and related notes thereto included elsewhere in this document. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” Neither CBF nor Capital Bank Corp. assumes any obligation to update any of these forward-looking statements.
The following discussion presents an overview of the unaudited financial statements for the three months ended June 30, 2012 (Successor) and June 30, 2011 (Successor) as well as the six months ended June 30, 2012 (Successor), the period of January 29 to June 30, 2011 (Successor) and the period of January 1 to January 28, 2011 (Predecessor) for Capital Bank Corporation (“Capital Bank Corp.” or the “Company”). This discussion and analysis is intended to provide pertinent information concerning financial condition, results of operations, liquidity, and capital resources for the periods covered and should be read in conjunction with the unaudited financial statements and related footnotes contained in this document.
Overview
Capital Bank Corporation is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Old Capital Bank, which was a state-chartered banking corporation that was incorporated under the laws of the State of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. As of June 30, 2012 (Successor), the Company had a 26% equity method investment in Capital Bank, NA, a national banking association with approximately $6.3 billion in total assets and 143 full-service banking offices throughout Florida, North Carolina, South Carolina, Tennessee and Virginia. The Company also has interests in three trusts: Capital Bank Statutory Trust I, II, and III.
CBF Investment
On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program were repurchased.
Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.
Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of two existing members
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(Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).
Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Bank Mergers
On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.
Capital Bank, NA was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks – Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina) – from the FDIC and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.
The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of June 30, 2012, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.3 billion, total deposits of $5.1 billion and shareholders’ equity of $966.5 million.
Potential Merger of the Company and CBF
On September 1, 2011, the Boards of Directors of CBF and the Company approved and adopted a merger agreement. The merger agreement provides for the merger, following the receipt of shareholder approval by the Company’s shareholders (including CBF), of the Company with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or the Company, will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of the Company’s common stock will be entitled to receive cash in lieu thereof.
Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.
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Critical Accounting Policies and Estimates
The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.
Prior to the Bank Merger, the Company had identified the following accounting policies as being critical in terms of significant judgments and the extent to which estimates were used: (1) allowance for loan losses, (2) other-than-temporary impairment on investment securities, (3) valuation allowance on deferred income tax assets, and (4) impairment of goodwill and long-lived assets. Due to the CBF Investment, the Company added an accounting policy related to purchased credit-impaired loans, and due to the Bank Merger, the Company added an accounting policy related to its equity method investment in Capital Bank, NA. These policies are important in understanding management’s discussion and analysis. For more information on the Company’s critical accounting policies, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in Annex D to this document.
Executive Summary
The following is a summary of the Company’s results of operations and changes in financial condition for the three and six months ended June 30, 2012:
• | Net income totaled $2.6 million, or $0.03 per share, in the second quarter of 2012 and totaled $5.4 million, or $0.06 per share, in the six months ended June 30, 2012; |
• | The Company held a 26% ownership interest in Capital Bank, NA, which has $6.3 billion in assets and operates 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia; and |
• | The Company increased the equity investment balance in Capital Bank, NA by $2.9 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $1.5 million based on its equity in Capital Bank, NA’s other comprehensive income in the second quarter of 2012. |
Results of Operations
Financial results for the first quarter of 2011 were significantly impacted by the controlling investment in the Company by CBF. The Company used push-down accounting, and as such, has applied the acquisition method of accounting to the CBF Investment. Accordingly, the Company’s assets and liabilities were adjusted to estimated fair value at the acquisition date, and the allowance for loan losses was eliminated at that date. The Company’s operating results in the periods subsequent to the acquisition date were impacted by these fair value adjustments as the underlying assets and liabilities were converted in the normal course of business. Further, in connection with the Bank Merger on June 30, 2011, the Company deconsolidated the assets and liabilities of Old Capital Bank and began reporting its ownership of Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment.
In the successor periods, net income totaled $2.6 million, or $0.03 per share, for the three months ended June 30, 2012, and totaled $2.3 million, or $0.03 per share, for the three months ended June, 30 2011. Further, net
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income totaled $5.4 million, or $0.06 per share, for the six months ended June 30, 2012, and totaled $1.7 million, or $0.02 per share, for the period of January 29 to June 30, 2011. In the predecessor period, net loss to common shareholders totaled $265 thousand, or ($0.02) per share, for the period of January 1 to January 28, 2011.
Net Interest Income
Net interest income in the second quarter of 2012 was significantly impacted by the Bank Merger, upon which Old Capital Bank’s interest-earning assets and interest-bearing liabilities were deconsolidated from the Company. Following the Bank Merger on June 30, 2011, the Company’s interest-bearing liabilities, which consisted of subordinated debentures, significantly exceeded interest-earning assets, thus creating net interest loss and a negative net interest margin. Net interest income (loss) for the three months ended June 30, 2012 (Successor) and the three months ended June 30, 2011 (Successor) totaled ($284) thousand and $15.4 million, respectively. Net interest margin decreased from 4.23% in the three months ended June 30, 2011 (Successor) to (33.57)% in the three months ended June 30, 2012 (Successor).
Further, net interest income (loss) for the six months ended June 30, 2012 (Successor), the period of January 29 to June 30, 2011 (Successor) and the period of January 1 to January 28, 2011 (Predecessor) totaled ($561) thousand, $25.5 million and $4.0 million, respectively. The Company’s net interest margin increased from 3.09% in the period of January 1 to January 28, 2011 (Predecessor) to 4.23% for the period of January 29 to June 30, 2011 (Successor), and decreased to (33.16)% for the six months ended June 30, 2012 (Successor) primarily due to the CBF Investment and Bank Merger, respectively. Average interest-earning assets decreased from $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $1.49 billion in the period of January 29 to June 30, 2011 (Successor) to $3.4 million in the six months ended June 30, 2012 (Successor). The decline in average interest-earning assets in the successor period was primarily related to the Bank Merger, upon which Old Capital Bank’s interest-earning assets and interest-bearing liabilities were deconsolidated from the Company. As of June 30, 2012 (Successor), the Company’s only interest-earning asset was a $3.4 million advance to Capital Bank, NA.
The following tables (Average Balances, Interest Earned or Paid, and Interest Yields/Rates) reflect the Company’s effective yield on interest-earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the period by the respective daily average asset or liability balance. Changes in net interest income cannot be explained in terms of fluctuations in volume and rate due to the different lengths of the periods presented in the following tables.
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Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Tax Equivalent Basis 1
Successor Company | ||||||||||||||||||||||||||||||||||||
Three Months Ended Jun. 30, 2012 | Three Months Ended Mar. 31, 2012 | Three Months Ended Jun. 30, 2011 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Loans 2 | $ | — | $ | — | — | % | $ | — | $ | — | — | % | $ | 1,098,266 | $ | 16,579 | 6.05 | % | ||||||||||||||||||
Investment securities 3 | — | — | — | — | — | — | 334,230 | 2,639 | 3.16 | |||||||||||||||||||||||||||
Interest-bearing deposits | — | — | — | — | — | — | 56,149 | 40 | 0.29 | |||||||||||||||||||||||||||
Advance to Capital Bank, NA | 3,393 | 85 | 10.00 | 3,393 | 85 | 10.00 | — | — | — | |||||||||||||||||||||||||||
Total interest-earning assets | 3,393 | $ | 85 | 10.00 | % | 3,393 | $ | 85 | 10.00 | % | 1,488,645 | $ | 19,258 | 5.19 | % | |||||||||||||||||||||
Cash and due from banks | 1,239 | 1,950 | 16,587 | |||||||||||||||||||||||||||||||||
Other assets | 250,003 | 245,961 | 195,839 | |||||||||||||||||||||||||||||||||
Total assets | $ | 254,635 | $ | 251,304 | $ | 1,701,071 | ||||||||||||||||||||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||||||||||||||
NOW and money market accounts | $ | — | $ | — | — | % | $ | — | $ | — | — | % | $ | 345,307 | $ | 666 | 0.77 | % | ||||||||||||||||||
Savings accounts | — | — | — | — | — | — | 32,241 | 10 | 0.12 | |||||||||||||||||||||||||||
Time deposits | — | — | — | — | — | — | 843,725 | 2,110 | 1.00 | |||||||||||||||||||||||||||
Total interest-bearing deposits | — | — | — | — | — | — | 1,221,273 | 2,786 | 0.91 | |||||||||||||||||||||||||||
Borrowings | — | — | — | — | — | — | 93,349 | 410 | 1.76 | |||||||||||||||||||||||||||
Subordinated debentures | 19,253 | 369 | 7.58 | 19,191 | 362 | 7.46 | 19,323 | 355 | 7.27 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 19,253 | $ | 369 | 7.58 | % | 19,191 | $ | 362 | 7.46 | % | 1,333,945 | $ | 3,551 | 1.07 | % | |||||||||||||||||||||
Noninterest-bearing deposits | — | — | 122,326 | |||||||||||||||||||||||||||||||||
Other liabilities | 5,515 | 5,754 | 13,058 | |||||||||||||||||||||||||||||||||
Total liabilities | 24,768 | 24,945 | 1,469,329 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 229,867 | 226,359 | 231,742 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 254,635 | $ | 251,304 | $ | 1,701,071 | ||||||||||||||||||||||||||||||
Net interest spread 4 | 2.42 | % | 2.54 | % | 4.12 | % | ||||||||||||||||||||||||||||||
Tax equivalent adjustment | $ | — | $ | — | $ | 268 | ||||||||||||||||||||||||||||||
Net interest income and net interest margin 5 | $ | (284 | ) | (33.57 | )% | $ | (277 | ) | (32.75 | )% | $ | 15,707 | 4.23 | % |
1 | The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities. |
2 | Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded. |
3 | The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any. |
4 | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
5 | Net interest margin represents net interest income divided by average interest-earning assets. |
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Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Tax Equivalent Basis 1
Successor Company | Predecessor Company | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Six Months Ended Jun. 30, 2012 | Period of Jan. 29 to Jun. 30, 2011 | Period of Jan. 1 to Jan. 28, 2011 | |||||||||||||||||||||||||||||||||||
Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | Average Balance | Amount Earned | Average Rate | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||
Loans 2 | $ | — | $ | — | — | % | $ | 1,102,487 | $ | 27,734 | 6.12 | % | $ | 1,253,296 | $ | 5,530 | 5.20 | % | ||||||||||||||||||||
Investment securities 3 | — | — | — | 298,283 | 3,893 | 3.13 | 225,971 | 504 | 2.68 | |||||||||||||||||||||||||||||
Interest-bearing deposits | — | — | — | 88,465 | 87 | 0.24 | 63,350 | 11 | 0.20 | |||||||||||||||||||||||||||||
Advance to Capital Bank, NA | 3,393 | 170 | 10.00 | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total interest-earning assets | 3,393 | $ | 170 | 10.00 | % | 1,489,235 | $ | 31,714 | 5.18 | % | 1,542,617 | $ | 6,045 | 4.61 | % | |||||||||||||||||||||||
Cash and due from banks | 1,594 | 16,503 | 16,112 | |||||||||||||||||||||||||||||||||||
Other assets | 247,983 | 191,902 | 34,021 | |||||||||||||||||||||||||||||||||||
Total assets | $ | 252,970 | $ | 1,697,640 | $ | 1,592,750 | ||||||||||||||||||||||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||||||||||||||||
NOW and money market accounts | $ | — | $ | — | — | % | $ | 344,867 | $ | 1,084 | 0.76 | % | $ | 334,668 | $ | 211 | 0.74 | % | ||||||||||||||||||||
Savings accounts | — | — | — | 31,958 | 16 | 0.12 | 30,862 | 3 | 0.11 | |||||||||||||||||||||||||||||
Time deposits | — | — | — | 846,753 | 3,460 | 0.99 | 870,146 | 1,337 | 1.81 | |||||||||||||||||||||||||||||
Total interest-bearing deposits | — | — | — | 1,223,578 | 4,560 | 0.91 | 1,235,676 | 1,551 | 1.48 | |||||||||||||||||||||||||||||
Borrowings | — | — | — | 95,414 | 664 | 1.69 | 120,032 | 343 | 3.36 | |||||||||||||||||||||||||||||
Subordinated debentures | 19,222 | 731 | 7.52 | 19,417 | 587 | 7.26 | 34,323 | 102 | 3.50 | |||||||||||||||||||||||||||||
Total interest-bearing liabilities | 19,222 | $ | 731 | 7.52 | % | 1,338,410 | $ | 5,811 | 1.06 | % | 1,390,031 | $ | 1,996 | 1.69 | % | |||||||||||||||||||||||
Noninterest-bearing deposits | — | 118,897 | 114,660 | |||||||||||||||||||||||||||||||||||
Other liabilities | 5,635 | 10,683 | 9,635 | |||||||||||||||||||||||||||||||||||
Total liabilities | 24,857 | 1,467,990 | 1,514,326 | |||||||||||||||||||||||||||||||||||
Shareholders’ equity | 228,113 | 229,650 | 78,424 | |||||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 252,970 | $ | 1,697,640 | $ | 1,592,750 | ||||||||||||||||||||||||||||||||
Net interest spread 4 | 2.48 | % | 4.13 | % | 2.92 | % | ||||||||||||||||||||||||||||||||
Tax equivalent adjustment | $ | — | $ | 443 | $ | 90 | ||||||||||||||||||||||||||||||||
Net interest income and net interest margin 5 | $ | (561 | ) | (33.16 | )% | $ | 25,903 | 4.23 | % | $ | 4,049 | 3.09 | % |
1 | The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities. |
2 | Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded. |
3 | The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any. |
4 | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
5 | Net interest margin represents net interest income divided by average interest-earning assets. |
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Noninterest Income
The following table presents the detail of noninterest income for each period presented:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||||||
(Dollars in thousands except per share data) | Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||||||||
Equity income from investment in Capital Bank, NA | $ | 2,937 | $ | — | $ | 6,025 | $ | — | $ | — | ||||||||||||
Service charges and other fees | — | 807 | — | 1,355 | 291 | |||||||||||||||||
Bank card services | — | 547 | — | 847 | 174 | |||||||||||||||||
Mortgage origination and other loan fees | — | 255 | — | 518 | 210 | |||||||||||||||||
Brokerage fees | — | 212 | — | 308 | 78 | |||||||||||||||||
Bank-owned life insurance | — | 114 | — | 134 | 10 | |||||||||||||||||
Other | — | 130 | — | 155 | 69 | |||||||||||||||||
Total noninterest income | $ | 2,937 | $ | 2,065 | $ | 6,025 | $ | 3,317 | $ | 832 |
Noninterest income for the three months ended June 30, 2012 (Successor) and the three months ended June 30, 2011 (Successor) totaled $2.9 million and $2.1 million, respectively. Noninterest income in the second quarter of 2012 was solely related to the Company’s equity income from its investment in Capital Bank, NA.
Further, noninterest income for the six months ended June 30, 2012 (Successor), the period of January 29 to June 30, 2011 (Successor) and the period of January 1 to January 28, 2011 (Predecessor) totaled $6.0 million, $3.3 million and $832 thousand, respectively. Noninterest income in the first half of 2012 was solely related to the Company’s equity income from its investment in Capital Bank, NA. The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA. Prior to the Bank Merger on June 30, 2011, there was no equity method investment in Capital Bank, NA. As the equity interest includes the operations of the Company’s previously consolidated subsidiary bank, the operations of the equity method investee prior to the Bank Merger is not meaningful and comparable since they do not reflect the subsequent combined operations.
Capital Bank, NA | Three Months Ended Jun. 30, 2012 | Six Months Ended Jun. 30, 2012 | ||||||
(Dollars in thousands) | ||||||||
Interest income | $ | 72,893 | $ | 147,025 | ||||
Interest expense | 8,000 | 16,725 | ||||||
Net interest income | 64,893 | 130,300 | ||||||
Provision for loan losses | 6,608 | 11,984 | ||||||
Noninterest income | 12,298 | 26,912 | ||||||
Noninterest expense | 52,799 | 108,017 | ||||||
Net income | 11,326 | 23,234 |
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Noninterest Expense
The following table presents the detail of noninterest expense for each period presented:
Successor Company | Successor Company | Predecessor Company | ||||||||||||||||||||
(Dollars in thousands except per share data) | Three Months Ended Jun. 30, 2012 | Three Months Ended Jun. 30, 2011 | Six Months Ended Jun. 30, 2012 | Jan. 29, 2011 to Jun. 30, 2011 | Jan. 1, 2011 to Jan. 28, 2011 | |||||||||||||||||
Salaries and employee benefits | $ | — | $ | 5,568 | $ | — | $ | 9,525 | $ | 1,977 | ||||||||||||
Occupancy | — | 1,830 | — | 2,970 | 548 | |||||||||||||||||
Furniture and equipment | — | 857 | — | 1,401 | 275 | |||||||||||||||||
Data processing and telecommunications | — | 635 | — | 911 | 180 | |||||||||||||||||
Advertising and public relations | — | 144 | — | 325 | 131 | |||||||||||||||||
Office expenses | — | 269 | — | 498 | 93 | |||||||||||||||||
Professional fees | — | 208 | — | 543 | 190 | |||||||||||||||||
Business development and travel | — | 304 | — | 550 | 87 | |||||||||||||||||
Amortization of other intangible assets | — | 287 | — | 478 | 62 | |||||||||||||||||
ORE losses and miscellaneous loan costs | — | 1,085 | — | 1,608 | 176 | |||||||||||||||||
Directors’ fees | — | 53 | — | 93 | 68 | |||||||||||||||||
FDIC deposit insurance | — | 513 | — | 1,076 | 266 | |||||||||||||||||
Contract termination fees | — | 374 | — | 3,955 | — | |||||||||||||||||
Other | 257 | 670 | 414 | 1,093 | 102 | |||||||||||||||||
Total noninterest expense | $ | 257 | $ | 12,797 | $ | 414 | $ | 25,026 | $ | 4,155 |
Noninterest expense for the three months ended June 30, 2012 (Successor) and the three months ended June 30, 2011 (Successor) totaled $257 thousand and $12.8 million, respectively. Expenses in the second quarter of 2012 were significantly reduced by the Bank Merger and related deconsolidation of Old Capital Bank.
Further, noninterest expense for the six months ended June 30, 2012 (Successor), the period from January 29 to June 30, 2011 (Successor) and the period from January 1 to January 28, 2011 (Predecessor) totaled $414 thousand, $25.0 million and $4.2 million, respectively. Expenses in the first half of 2012 were significantly reduced by the Bank Merger and related deconsolidation of Old Capital Bank. Additionally, expenses in the period from January 29 to June 30, 2011 (Successor) were impacted by $4.0 million of contract termination fees related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the CBF enterprise. Salaries and benefits expense increased in the period from January 29 to June 30, 2011 (Successor) from the accelerated vesting of stock options and restricted shares at closing of the CBF Investment.
Analysis of Financial Condition
The Company’s financial condition was significantly impacted by the controlling investment in the Company by CBF on January 28, 2011. CBF owns approximately 83% of the Company’s outstanding common stock. Because of the CBF Investment, the Company’s assets and liabilities were adjusted to estimated fair value at the acquisition date, and the allowance for loan losses was eliminated at that date.
Due to the Bank Merger on June 30, 2011, the Company deconsolidated the assets and liabilities of Old Capital Bank and began reporting its ownership of Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment. As of June 30, 2012 (Successor) and December 31, 2011 (Successor), the Company’s investment in Capital Bank, NA totaled $250.6 million and $243.7 million, respectively, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of June 30, 2012 (Successor) and December 31, 2011 (Successor). In the three months ended June 30, 2012 (Successor), the Company increased the equity investment balance by $2.9 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $1.5 million based on its equity in Capital Bank, NA’s other comprehensive income.
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In addition to the investment in and advance to Capital Bank, NA, the Company also had $985 thousand of cash on deposit with Capital Bank, NA and $772 thousand of other assets as of June 30, 2012 (Successor). As of December 31, 2011 (Successor), the Company had $2.2 million of cash on deposit with the Bank and $458 thousand of other assets.
The Company’s subordinated debentures had a carrying value of $19.3 million and $19.2 million, respectively, and a notional value of $33.4 million as of June 30, 2012 (Successor) and December 31, 2011 (Successor). The small increase in the carrying value of these debt instruments since December 31, 2011 (Successor) was due to the accretion of the fair value discount in first half of 2012.
Total shareholders’ equity increased from $224.8 million as of December 31, 2011 (Successor) to $231.1 million as of June 30, 2012 (Successor). Common stock, no par value, totaled $218.8 million as of June 30, 2012 (Successor) and December 31, 2011 (Successor). The Company’s retained earnings increased by $5.4 million in the six months ended June 30, 2012 (Successor), which represents the Company’s net income in the first half of 2012. Accumulated other comprehensive income totaled $1.7 million as of June 30, 2012 (Successor) compared to $771 thousand as of December 31, 2011 (Successor), and represented the Company’s equity in Capital Bank, NA’s other comprehensive income in the period subsequent to the Bank Merger.
Capital
The Company’s actual capital amounts and ratios as of June 30, 2012 (Successor) and the minimum requirements are presented in the following table:
Successor Company | ||||||||||||||||||||||||
Minimum Requirements To Be: | ||||||||||||||||||||||||
Actual | Adequately Capitalized | Well Capitalized | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
June 30, 2012 | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 250,404 | 98.20 | % | $ | 20,400 | 8.00 | % | n/a | n/a | ||||||||||||||
Tier I capital (to risk-weighted assets) | 246,822 | 96.79 | 10,200 | 4.00 | n/a | n/a | ||||||||||||||||||
Tier I capital (to average assets) | 246,822 | 97.22 | 10,155 | 4.00 | n/a | n/a |
Liquidity
The Bank Merger resulted in a significant decrease in the total assets and total liabilities of the Company. As of June 30, 2012 (Successor) and December 31, 2011 (Successor), the Company had cash on deposit with Capital Bank, NA of approximately $985 thousand and $2.2 million, respectively. This cash is available for providing additional capital support to Capital Bank, NA and for other general corporate purposes.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk. As of June 30, 2012 (Successor), the Company’s only interest-earning asset was a $3.4 million advance to Capital Bank, NA which is earning interest at a fixed 10% annual rate. The Company’s interest-bearing liabilities consisted of subordinated debentures with notional amounts totaling $33.4 million. Accordingly, the Company’s net interest income and net interest margin are sensitive to changes in interest rates.
The most significant component of the Company’s future operating results will be derived from its investment in Capital Bank, NA. Thus, net interest income has become a less significant measure of operating results for the Company. As $30.0 million of notional value of the Company’s subordinated debentures are trust preferred securities with interest rates tied to 90-day LIBOR, changes in net interest income would be directly correlated to changes in this rate. Accordingly, 100 and 200 basis point changes in this rate would result in $300 thousand and $600 thousand changes in interest expense, respectively.
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Through and including October 6, 2012 (25 days after the date of this document) all dealers that buy, sell or trade our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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REVOCABLE PROXY
CAPITAL BANK CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 24, 2012 – 8:30 a.m.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints R. Eugene Taylor and Christopher G. Marshall, and each or any of them, proxies of the undersigned with full power of substitution to vote all of the shares of Capital Bank Corporation that the undersigned may be entitled to vote at Capital Bank Corporation’s Special Meeting of Shareholders to be held at Capital Bank Financial Corp., located at 4725 Piedmont Row Drive, Suite 110, Charlotte, North Carolina 28210 on September 24, 2012, at 8:30 a.m. Eastern Time, and any adjournments or postponements thereof (1) as hereinafter specified upon the proposals listed below and as more particularly described in the Company’s Proxy Statement, receipt of which is hereby acknowledged, and (2) in their discretion upon such other matters as may properly come before the meeting and any adjournment or postponement thereof.
PLEASE COMPLETE, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE OR PROVIDE YOUR INSTRUCTIONS TO VOTE VIA
THE INTERNET OR BY TELEPHONE.
(Continued, and to be marked, dated and signed, on the other side)
À FOLD AND DETACH HERE À
CAPITAL BANK CORPORATION – SPECIAL MEETING, SEPTEMBER 24, 2012
YOUR VOTE IS IMPORTANT!
Special Meeting materials are available on line at
www.capitalbank-us.com/proxy.
You can vote in one of three ways:
1. | Call toll free 1-866-804-3335 on a Touch-Tone Phone. There is NO CHARGE to you for this call. |
or
2. | Via the Internet at www.capitalbank-us.com/proxy and follow the instructions. |
or
3. | Mark, sign and date your proxy card and return it promptly in the enclosed envelope. |
PLEASE SEE REVERSE SIDE FOR VOTING INSTRUCTIONS
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z | REVOCABLE PROXY CAPITAL BANK CORPORATION | { | ||||||||||||||
X | PLEASE MARK VOTES AS IN THIS EXAMPLE | Special Meeting of Shareholders | ||||||||||||||
September 24, 2012 | ||||||||||||||||
For | Against | Abstain | For | Against | Abstain | |||||||||||||||
1. Proposal to approve the plan of merger contained in the Agreement and Plan of Merger, dated as of September 1, 2011, by and between Capital Bank Financial Corp. (formerly known as North American Financial Holdings, Inc.) and Capital Bank Corporation: | ¨ | ¨ | ¨ | 2. Proposal to approve, on a (non-binding) advisory basis, the compensation to be paid to Capital Bank Corporation’s named executive officers that is based on or otherwise relates to the merger of Capital Bank Corporation with and into Capital Bank Financial Corp.: | ¨ | ¨ | ¨ | |||||||||||||
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE PROPOSALS LISTED.
DISCRETIONARY AUTHORITY IS CONFERRED BY THIS PROXY WITH RESPECT TOCERTAIN MATTERS, AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES AREHELD BY JOINT TENANTS, BOTH SHOULD SIGN.
WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE ORGUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF SIGNER IS A CORPORATION,PLEASE SIGN THE FULL CORPORATE NAME BY THE PRESIDENT OR OTHERAUTHORIZED OFFICER. IF SIGNER IS A PARTNERSHIP, PLEASE SIGN IN THEPARTNERSHIP NAME BY AN AUTHORIZED PERSON. | ||||||||||||||||||||
| ||||||||||||||||||||
Please be sure to date and sign this proxy card in the box below. | Date | |||||||||||||||||||
Sign above | Co-holder (if any) sign above | |||||||||||||||||||
When shares are held by joint tenants, both should sign. Executors, administrators, trustees, etc. should give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer. | ||||||||||||||||||||
x | IF YOU WISH TO PROVIDE YOUR INSTRUCTIONS TO VOTE BY TELEPHONE OR INTERNET, PLEASE READ THE INSTRUCTIONS BELOW | y | ||||||||||||||||||
FOLD AND DETACH HERE IF YOU ARE VOTING BY MAIL
¿ ¿
PROXY VOTING INSTRUCTIONS
Special Meeting materials are available on line at www.capitalbank-us.com/proxy.
A telephone or Internet vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed, dated and returned this proxy. Please note that telephone and Internet votes must be cast prior to 12:01 a.m. Eastern Time, September 24, 2012. It is not necessary to return this proxy if you vote by telephone or Internet.
Vote by Telephone | Vote by Internet | |||
Call Toll-Free on a Touch-Tone Phone |
Anytime prior to 12:01 a.m., | |||
anytime prior to 12:01 a.m., | September 24, 2012, go to | |||
September 24, 2012 | ||||
1-866-804-3335
| www.capitalbank-us.com/proxy
|
Please note that the last vote received, whether by telephone, Internet or by mail, will be the vote counted.
Your vote is important! | ||||||||||