Capital Bank Corporation Announces Financial Results for First Quarter of 2011

RALEIGH, N.C., May 12, 2011 /PRNewswire/ -- Capital Bank Corporation (Nasdaq: CBKN), the parent company of Capital Bank, today reported unaudited financial results for the first quarter of 2011.

Highlights for the quarter include the following:

• North American Financial Holdings, Inc. ("NAFH") completed its investment of approximately $181 million in the Company through the purchase of 71,000,000 shares of the Company's common stock on January 28, 2011 (the "NAFH Investment");
• In connection with the NAFH Investment, the Company's Series A Preferred Stock and warrant to purchase shares of the Company's common stock issued to the U.S. Treasury through the TARP were repurchased in full;
• The Company raised an additional $4.1 million of common equity through completion of a rights offering to shareholders of record as of January 27, 2011;
• As a result of the NAFH Investment, the Company's Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio increased to 9.99%, 13.18% and 13.57%, respectively, as of March 31, 2011; and
• Net loss to common shareholders for the period of January 29 to March 31, 2011 (Successor) totaled ($574) thousand, or ($0.01) per share, and after dividends and accretion on preferred stock of $861 thousand, net loss to common shareholders for the period of January 1 to January 28, 2011 (Predecessor) totaled ($265) thousand, or ($0.02) per share.

"With the investment from North American Financial Holdings, Inc., Capital Bank is one of the most strongly capitalized banks in the Southeast and has the financial resources to do business with customers across North Carolina. We are working diligently to generate growth in core deposits and high quality loans, provide first-class service to our customers, and improve the bank's profitability to levels expected of a high performing financial institution," stated Gene Taylor, Chairman and CEO of the Company and NAFH.

Chris Marshall, CFO of the Company and NAFH commented, "We have received regulatory permission to combine the Company's bank subsidiary with NAFH National Bank, which we believe will improve efficiency and profitability across the entire enterprise, and which we expect to accomplish in June. In July, we plan to convert Capital Bank to NAFH's technology platform. Capital Bank employees will continue to serve their North Carolina customers, and over time they will have new and enhanced products to offer."  

Discussion of Financial Results

NAFH Investment

On January 28, 2011, the Company completed the issuance and sale of 71,000,000 shares of its common stock to NAFH for approximately $181 million in cash. As a result of the NAFH Investment and the Rights Offering on March 11, 2011, NAFH currently owns approximately 83% of the Company's common stock. Also in connection with the NAFH Investment, the Company's Series A Preferred Stock and warrant to purchase shares of common stock issued to the U.S. Treasury through the TARP were repurchased. Following the TARP Repurchase, the Series A Preferred Stock and warrant are no longer outstanding, and accordingly, the Company is no longer subject to the restrictions imposed by the terms of the Series A Preferred Stock or certain regulatory provisions that are imposed on TARP recipients.

Financial results for the first quarter of 2011 were significantly impacted by the controlling investment in the Company by NAFH. The Company is required to apply push-down accounting rules to the NAFH 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. Further, the Company's operating results in periods subsequent to the acquisition date have been and will continue to be impacted by these fair value adjustments as the underlying assets and liabilities are converted in the normal course of business. The Company is still in the process of completing its fair value analysis of assets and liabilities, and final fair value adjustments may differ significantly from the preliminary estimates recorded to date.

Net Interest Income

Net interest income for the period of January 29 to March 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the quarter ended March 31, 2010 (Predecessor) totaled $10.0 million, $4.0 million and $12.6 million, respectively. Average earning assets decreased from $1.64 billion in the quarter ended March 31, 2010 (Predecessor) to $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $1.52 billion in the period of January 29 to March 31, 2011 (Successor), while net interest margin was 3.22%, 3.09% and 4.15%, respectively. Among other things, fair value adjustments, principal paydowns and charge-offs on the loan portfolio contributed to the reduction in earning assets over these periods.

Net interest margin for the period of January 1 to January 28, 2011 (Predecessor) was negatively affected by a decline in asset yields, partially offset by a decline in funding costs. Yields on earning assets fell from 5.08% for the quarter ended March 31, 2010 (Predecessor) to 4.61% for the period of January 1 to January 28, 2011 (Predecessor), and rates on total interest-bearing liabilities fell from 2.10% for the quarter ended March 31, 2010 (Predecessor) to 1.69% for the period of January 1 to January 28, 2011 (Predecessor). Net interest margin for the period of January 29 to March 31, 2011 (Successor) was primarily affected by fair value adjustments to earning assets and liabilities at acquisition. Yields and rates in the successor period reflect prevailing market yields and rates on the acquisition date in addition to subsequent activity.

Provision for Loan Losses and Asset Quality

Provision for loan losses for the period of January 29 to March 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the quarter ended March 31, 2010 (Predecessor) totaled $167 thousand, $40 thousand and $11.7 million, respectively. The loan loss provision in the successor period reflects estimated losses inherent in loans originated subsequent to the NAFH Investment date. Acquired loans were marked to fair value, and no provision was recorded on those loans during the successor period. As of January 28, 2011, the total fair value discount recorded exceeded 8% of outstanding loan balances at acquisition.

There were no net charge-offs recorded in the period of January 29 to March 31, 2011 (Successor). Net charge-offs totaled $40 thousand, or 0.01% of average loans, in the period of January 1 to January 28, 2011 (Predecessor) and $8.7 million, or 2.48% of average loans, in the quarter ended March 31, 2010 (Predecessor).

Loans acquired in the NAFH Investment where there was evidence of credit deterioration since origination and where it is probable that the Company will not collect all contractually required principal and interest payments are accounted for as purchased credit-impaired ("PCI") loans. For these loans, 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 PCI loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The Company identified approximately 93% of its acquisition-date loan portfolio as PCI.

Noninterest Income

Noninterest income for the period of January 29 to March 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the quarter ended March 31, 2010 (Predecessor) totaled $1.3 million, $832 thousand and $2.5 million, respectively. Noninterest income in the first quarter of 2010 (Predecessor) benefited from $263 thousand of gains recorded on the sale of investment securities, while no such gains were recorded in either the successor or predecessor period in the first quarter of 2011. Additionally, income from bank-owned life insurance ("BOLI") in the first quarter of 2010 (Predecessor) was elevated due to a higher balance and number of BOLI contracts owned during that period. The Company surrendered certain BOLI contracts on former employees and directors late in 2010. Other noninterest income for the successor period of January 29 to March 31, 2011 was negatively impacted by a $63 thousand loss recorded from a decline in stock price of an equity security that the Company marks to market through noninterest income, while the Company recorded a gain of $65 thousand from appreciation in value of this security in the first quarter of 2010 (Predecessor). Mortgage origination and other loan fees in the predecessor period of January 1 to January 28, 2011 benefited from strong demand and favorable interest rates for residential mortgage refinancing late in 2010.

Noninterest Expense

Noninterest expense for the period of January 29 to March 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the quarter ended March 31, 2010 (Predecessor) totaled $12.2 million, $4.2 million and $12.6 million, respectively. Expenses in the successor period were significantly impacted by a nonrecurring $3.6 million charge for contract termination fees related to the conversion and integration of the Company's operations into a common technology platform utilized by all NAFH-owned banks. This system conversion is intended to create operating efficiencies and better position the Company for future growth.

Additionally, salaries and benefits expense increased in the successor period from the accelerated vesting of stock options and restricted shares at closing of the NAFH Investment. Salaries expense also increased in the successor period and period of January 1 to January 28, 2011 (Predecessor) from declining deferred loan costs due to lower loan origination volume. Occupancy expense was impacted in the successor period and period of January 1 to January 28, 2011 (Predecessor) from the relocation of two previously existing branch offices into larger facilities that were opened early in the first quarter of 2011. Other real estate losses and miscellaneous loan costs in the successor period were decreased by an adjustment to reduce the value of certain bank-owned properties at the NAFH Investment date. Directors' fees were reduced significantly in the successor period as the Company's board of directors was reconstituted post-acquisition and the Capital Bank Corporation Deferred Compensation Plan for Outside Directors was terminated. FDIC deposit insurance expense increased in the successor period and period of January 1 to January 28, 2011 (Predecessor) as Capital Bank's assessment rate was raised in the third quarter of 2010.

Income Taxes

The income tax benefit recorded in the period of January 29 to March 31, 2011 (Successor) totaled $549 thousand and represented a 48.89% effective tax rate based on the Company's pre-tax loss. The effective tax rate is higher than the Company's blended federal and state statutory rates due primarily to the impact of nontaxable income from BOLI earnings and municipal bond interest. No income tax expense was recorded in the period of January 1 to January 28, 2011 (Predecessor) as prior net operating losses with a full valuation allowance were carried forward and used to offset income in the predecessor period.

Capital Bank Corporation, headquartered in Raleigh, N.C., with approximately $1.7 billion in total assets, offers a broad range of financial services. Capital Bank operates 32 banking offices in Asheville (4), Burlington (3), Cary (2), Clayton, Fayetteville (4), Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Pittsboro, Raleigh (5), Sanford (3), Siler City, Wake Forest and Zebulon. The Company's website is http://www.capitalbank-us.com.

Forward-looking Statements

Information in this press release contains forward-looking statements. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," or "continue," or the negative thereof or other variations thereof or comparable terminology.  These statements involve risks and uncertainties that could cause actual results to differ materially, including without limitation, market and economic conditions, the management of our growth, the risks associated with Capital Bank's loan portfolio and real estate holdings, the inability to comply with the requirements in our informal memorandum of understanding with the FDIC and the North Carolina Office of the Commissioner of Banks, local economic conditions affecting retail and commercial real estate, ability to integrate our new management and directors without encountering potential difficulties, competition within the industry, dependence on key personnel, government legislation and regulation, the risks associated with identification, completion and integration of any future acquisitions, risks related to Capital Bank's technology and information systems, the fact that the Company has experienced net losses during the last three fiscal years, risks associated with the controlling interest of NAFH in the Company, and risks associated with the limited liquidity of the Company's common stock. Additional factors that could cause actual results to differ materially are discussed in Capital Bank Corporation's filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K. Capital Bank Corporation does not undertake a duty to update any forward-looking statements in this press release.