Capital Bank Financial (CBF) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

OR

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

For the Transition period from            to            

Commission File Number 001-35655

(Exact name of registrant as specified in its charter)

Delaware	27-1454759
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

121 Alhambra Plaza Suite 1601 Coral Gables, Florida 33134

(Address of principal executive offices) (Zip Code)

(305) 670-0200

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

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

Class A Common Stock, $0.01 Par Value	30,669,525
Class B Non-Voting Common, $0.01 Par Value	18,224,977
Class	Outstanding as of July 31, 2014

Table of Contents

CAPITAL BANK FINANCIAL CORP.

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
CONSOLIDATED BALANCE SHEETS	3
CONSOLIDATED STATEMENTS OF INCOME	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	6
CONSOLIDATED STATEMENTS OF CASH FLOWS	7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65
ITEM 4. CONTROLS AND PROCEDURES	66
PART II. OTHER INFORMATION	66
ITEM 1. LEGAL PROCEEDINGS	66
ITEM 1A. RISK FACTORS	67
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	67
ITEM 4. MINE SAFETY DISCLOSURES	67
ITEM 5. OTHER INFORMATION	67
ITEM 6. EXHIBITS	68

2

Capital Bank Financial Corp.

Consolidated Balance Sheets

(Unaudited)

(Dollars and shares in thousands)	June 30, 2014			December 31, 2013
Assets
Cash and due from banks	$	109,963		$	118,937
Interest-bearing deposits with banks		31,070			45,504
Total cash and cash equivalents		141,033			164,441
Trading securities		6,515			6,348
Investment securities available-for-sale at fair value (amortized cost $591,668 and $688,717, respectively)		594,745			685,441
Investment securities held-to-maturity at amortized cost (fair value $480,971 and $459,693, respectively)		475,167			465,098
Loans held for sale		9,926			8,012
Loans, net of deferred loan costs and fees		4,712,249			4,544,017
Less: Allowance for loan losses		55,307			56,851
Loans, net		4,656,942			4,487,166
Other real estate owned		96,283			129,396
FDIC indemnification asset		25,529			33,610
Receivable from FDIC		4,578			7,624
Premises and equipment, net		177,568			179,855
Goodwill		134,522			131,987
Intangible assets, net		20,876			23,365
Deferred income tax asset, net		148,432			166,762
Other assets		131,890			128,456
Total Assets	$	6,624,006		$	6,617,561
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing demand	$	1,000,049		$	923,993
Negotiable order of withdrawal accounts		1,319,667			1,321,903
Money market		953,446			961,526
Savings		528,567			530,144
Time deposits		1,359,727			1,447,497
Total deposits		5,161,456			5,185,063
Federal Home Loan Bank advances		161,185			96,278
Short-term borrowings		32,814			24,850
Long-term borrowings		139,116			138,561
Accrued expenses and other liabilities		55,877			60,021
Total liabilities		5,550,448			5,504,773
Shareholders’ equity
Preferred stock $0.01 par value: 50,000 shares authorized, 0 shares issued		—			—
Common stock-Class A $0.01 par value: 200,000 shares authorized, 36,653 issued and 30,925 outstanding and 36,212 issued and 33,051 outstanding, respectively.		367			362
Common stock-Class B $0.01 par value: 200,000 shares authorized, 19,025 issued and 18,225 outstanding and 19,647 issued and 19,047 outstanding, respectively.		190			196
Additional paid in capital		1,080,735			1,082,235
Retained earnings		131,324			107,485
Accumulated other comprehensive loss		(3,212	)		(7,528	)
Treasury stock, at cost, 6,528 and 3,761 shares, respectively		(135,846	)		(69,962	)
Total shareholders’ equity		1,073,558			1,112,788
Total Liabilities and Shareholders’ Equity	$	6,624,006		$	6,617,561

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

3

Capital Bank Financial Corp.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Interest and dividend income
Loans, including fees	$	61,667		$	68,188		$	124,886		$	139,972
Investment securities:
Taxable interest income		4,393			4,263			8,940			7,542
Tax-exempt interest income		155			160			311			326
Dividends		15			15			30			30
Interest-bearing deposits in other banks		38			101			63			473
Other earning assets		578			462			1,159			952
Total interest and dividend income		66,846			73,189			135,389			149,295
Interest expense
Deposits		4,245			5,928			8,561			12,406
Long-term borrowings		1,719			1,894			3,423			4,394
Federal Home Loan Bank advances		41			1			102			2
Other borrowings		10			14			19			27
Total interest expense		6,015			7,837			12,105			16,829
Net Interest Income		60,831			65,352			123,284			132,466
Provision for loan losses		1,404			4,467			1,380			9,869
Net interest income after provision for loan losses		59,427			60,885			121,904			122,597
Non-Interest Income
Service charges on deposit accounts		5,672			6,335			11,108			12,677
Debit card income		3,103			2,979			5,947			5,815
Fees on mortgage loans originated and sold		1,123			1,601			1,882			2,842
Investment advisory and trust fees		910			357			2,171			640
FDIC indemnification asset expense		(2,064	)		(1,108	)		(4,229	)		(3,277	)
Investment securities (losses) gains, net		(28	)		205			146			205
Other income		3,171			3,137			6,231			5,513
Total non-interest income		11,887			13,506			23,256			24,415
Non-Interest Expense
Salaries and employee benefits		23,449			22,638			46,947			43,422
Stock-based compensation expense		1,020			1,364			1,748			2,941
Net occupancy and equipment expense		8,723			8,686			17,322			17,593
Computer services		3,389			3,541			6,642			6,641
Software expense		1,940			1,817			3,808			3,640
Telecomunication expense		1,628			1,631			3,236			3,385
OREO valuation expense		3,022			6,209			6,595			12,799
Gain on sales of OREO		(3,192	)		(2,205	)		(3,913	)		(3,392	)
Foreclosed asset related expense		991			2,225			2,450			3,644
Loan workout expense		1,117			2,236			2,294			4,300
Conversion and merger related expense		—			140			—			253
Professional fees		2,038			2,344			4,042			4,992
Loss on extinguishment of debt		—			—			—			308
Contingent value right expense		327			428			1,094			3,311
FDIC assessments		1,648			1,763			3,277			3,566
Other expense		5,173			6,565			10,955			13,292
Total non-interest expense		51,273			59,382			106,497			120,695
Income before income taxes		20,041			15,009			38,663			26,317
Income tax expense		7,616			5,580			14,824			11,123
Net income	$	12,425		$	9,429		$	23,839		$	15,194
Basic earnings per share	$	0.25		$	0.18		$	0.48		$	0.28
Diluted earnings per share	$	0.25		$	0.17		$	0.47		$	0.28

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

4

Capital Bank Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Net Income	$	12,425		$	9,429		$	23,839		$	15,194
Other comprehensive income before tax:
Unrealized holding gains (losses) on investment securities available-for-sale		4,286			(34,590	)		6,674			(33,518	)
Reclassification adjustment for gains realized in net income on securities available-for-sale		(26	)		(205	)		(322	)		(205	)
Reclassification adjustment for losses amortized in net income on securities held-to-maturity		367			—			705			—
Other comprehensive income (loss), before tax:		4,627			(34,795	)		7,057			(33,723	)
Tax effect		(1,797	)		13,415			(2,741	)		12,982
Other comprehensive income (loss), net of tax:		2,830			(21,380	)		4,316			(20,741	)
Comprehensive income (loss)	$	15,255		$	(11,951	)	$	28,155		$	(5,547	)

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

5

Capital Bank Financial Corp.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Dollars and shares in thousands)
	Shares Common Stock Class A Outstanding			Class A Stock			Shares Common Stock Class B Outstanding			Class B Stock			Additional Paid in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholder’s Equity
Balance, December 31, 2013		33,051		$	362			19,047		$	196		$	1,082,235		$	107,485	$	(7,528	)	$	(69,962	)	$	1,112,788
Net income		—			—			—			—			—			23,839		—			—			23,839
Other comprehensive income, net of tax expense of $2,741		—			—			—			—			—			—		4,316			—			4,316
Stock-based compensation		—			—			—			—			1,748			—		—			—			1,748
Full value stock awards		11			—			—			—			—			—		—			—			—
Excess tax benefit from share-based payment		—			—			—			—			1,603											1,603
Restricted stock cancelled		(192	)		(1	)		—			—			(4,851	)		—		—			—			(4,852	)
Purchase of treasury stock		(2,567	)		—			(200	)		—			—			—		—			(65,884	)		(65,884	)
Conversion of shares		622			6			(622	)		(6	)		—			—		—			—			—
Balance, June 30, 2014		30,925		$	367			18,225		$	190		$	1,080,735		$	131,324	$	(3,212	)	$	(135,846	)	$	1,073,558
Balance, December 31, 2012		33,025			330			22,821			228			1,076,797			68,641		9,347			—			1,155,343
Net income		—			—			—			—			—			15,194		—			—			15,194
Other comprehensive income, net of tax benefit of $12,982		—			—			—			—			—			—		(20,741	)		—			(20,741	)
Stock-based compensation		—			—			—			—			2,941			—		—			—			2,941
Fractional shares		—			—			8			—			(2	)		—		—			—			(2	)
Restricted stock grants		4			—			—			—			—			—		—			—			—
Purchase of treasury stock		(2,839	)		—			—			—			—			—		—			(49,984	)		(49,984	)
Conversion of shares		3,046			30			(3,046	)		(30	)		—			—		—			—			—
Balance, June 30, 2013		33,236		$	360			19,783		$	198		$	1,079,736		$	83,835	$	(11,394	)	$	(49,984	)	$	1,102,751

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

6

Capital Bank Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	Six Months Ended
	June 30, 2014			June 30, 2013
Cash flows from operating activities
Net income	$	23,839		$	15,194
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of purchased credit impaired loans		(64,183	)		(87,009	)
Depreciation and amortization		9,664			10,577
Provision for loan losses		1,380			9,869
Deferred income tax		13,054			8,725
Net amortization of investment securities premium/discount		4,272			6,720
Net realized gains on sales of investment securities		(146	)		(205	)
Stock-based compensation expense		1,748			2,941
Gain on sales of OREO		(3,913	)		(3,392	)
OREO valuation expenses		6,595			12,799
Other		21			(46	)
Net deferred loan origination fees		(3,022	)		(1,293	)
Loss on extinguishment of debt		—			308
Mortgage loans originated for sale		(68,141	)		(98,748	)
Proceeds from sales of mortgage loans originated for sale		68,109			92,164
Fees on mortgage loans originated and sold		(1,882	)		(2,842	)
FDIC indemnification asset expense		4,229			3,277
Gain on sale/disposal of premises and equipment		(44	)		(407	)
Proceeds from FDIC loss share agreements		7,327			8,358
Change in other assets		(3,364	)		4,959
Change in accrued expenses and other liabilities		(8,919	)		1,618
Net cash used in operating activities		(13,376	)		(16,433	)
Cash flows from investing activities
Purchases of investment securities available-for-sale		(108,257	)		(436,272	)
Purchases of investment securities held-to-maturity		(44,143	)		—
Sales of investment securities available-for-sale		150,328			225
Repayments of principal and maturities of investment securities available-for-sale		51,660			143,787
Repayments of principal and maturities of investment securities held-to-maturity		33,804			—
Net purchases of FHLB and FRB stock		(498	)		(978	)
Net (increase) decrease in loans		(121,816	)		180,975
Purchases of premises and equipment		(4,503	)		(1,631	)
Proceeds from sales of premises and equipment		115			6,647
Proceeds from sales of OREO		48,295			44,716
Net cash provided by (used in) investing activities		4,985			(62,531	)
Cash flows from financing activities
Net increase (decrease) in demand, money market and savings accounts		64,163			(111,831	)
Net decrease in time deposits		(87,769	)		(290,497	)
Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase		7,963			(12,545	)
Net decrease in short term FHLB advances		(55,000	)		—
Net increase (decrease) in long term FHLB advances		119,907			(90	)
Prepayments of long term borrowings		—			(34,500	)
Excess tax benefit from share-based payment		1,603			—
Purchases of treasury stock		(65,884	)		(49,984	)
Net cash used in financing activities		(15,017	)		(499,447	)
Net decrease in cash and cash equivalents		(23,408	)		(578,411	)
Cash and cash equivalents at beginning of period		164,441			734,874
Cash and cash equivalents at end of period	$	141,033		$	156,463
Supplemental disclosures of cash:
Interest paid	$	10,556		$	19,764
Cash collections of contractual interest on purchased credit impaired loans		44,245			61,570
Income taxes paid		705			1,538
Supplemental disclosures of noncash transactions:
OREO acquired through loan transfers and acquisitions	$	17,864		$	42,822

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

7

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Principles of Consolidation and Nature of Operations

Capital Bank Financial Corp. (“CBF” or the “Company”; formerly known as North American Financial Holdings, Inc.) is a bank holding company incorporated in Delaware and headquartered in Florida whose business is conducted primarily through Capital Bank, National Association (“Capital Bank, NA” or the “Bank”). CBF has a total of 162 full service banking offices located in Florida, North and South Carolina, Tennessee and Virginia.

In September 2012, Capital Bank Corporation (“CBKN”), Green Bankshares Inc. (“GRNB”) and TIB Financial Corp. (“TIBB”), majority owned subsidiaries of the Company, merged with and into Capital Bank Financial Corp. with CBF continuing as the surviving corporation (the “Reorganization”). Upon completion of the Reorganization, the outstanding common shares held by the minority shareholders were converted into an aggregate of 3.7 million shares of CBF’s Class A common stock. The Reorganization was accounted for as a merger with CBF as the acquirer (which is the surviving entity for legal purposes).

On October 1, 2012, the Company completed its acquisition of Southern Community Financial Corporation (“SCMF” or “Southern Community”), a publicly held bank holding company headquartered in Winston Salem, North Carolina.

The accompanying consolidated financial statements (Unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and Regulation S-X. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete financial statement presentation. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All significant inter-company accounts and transactions have been eliminated in consolidation. For further information refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013.

Out of Period Adjustments

During the three months ended March 31, 2014, the Company recorded a correction of an error resulting from the state net operating loss that the Company was not entitled to subsequent to the 2011 Green Bankshares acquisition. The impact of this correction decreased deferred tax assets and increased goodwill by $2.5 million. After evaluating the quantitative and qualitative aspects of this error, the Company concluded that its prior period financial statements were not materially misstated.

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-12, “Compensation- Stock Compensation (Topic 718)—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period”. This update provides specific guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. This ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (topic 860)—Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures”. This update changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

8

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update clarifies the principles for recognizing revenue from contracts with customers. This ASU, which does not apply to financial instruments, is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This update clarifies that when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” This ASU allows for use of the proportional amortization method for qualified affordable housing projects if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized in the income statement as a component of income tax expense. This ASU provides for a practical expedient, which allows for amortization of only expected tax credits over the period tax credits are expected to be received. This method is permitted if it produces a measurement that is substantially similar to the measurement that would result from using both tax credits and other tax benefits. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This update requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. For public entities, this ASU is effective for fiscal years and interim periods beginning after December 15, 2013, with early adoption permitted. The adoption on January 1, 2014 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

2. Earnings Per Common Share

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

(Shares in thousands)	Three Months Ended				Six Months Ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Weighted average number of shares outstanding:
Basic		49,090		53,108		49,800		53,865
Dilutive effect of options outstanding		527		—		486		—
Dilutive effect of restricted shares		644		954		806		912
Diluted		50,261		54,062		51,092		54,777

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

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

(Shares in thousands)	Three Months Ended				Six Months Ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Anti-dilutive stock options		14		3,000		14		2,942
Anti-dilutive restricted shares		—		—		—		—

9

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

3. Investment Securities

Trading securities totaled $6.5 million and $6.3 million at June 30, 2014 and December 31, 2013, respectively.

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at June 30, 2014, and December 31, 2013 are presented below:

(Dollars in thousands)	June 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Available-for-Sale
Marketable equity securities	$	946	$	3	$	—	$	949
Mortgage-backed securities—residential issued by government sponsored entities		587,142		3,965		1,047		590,060
Industrial revenue bonds		3,580		156		—		3,736
Total	$	591,668	$	4,124	$	1,047	$	594,745
Held-to-Maturity
U.S. Government agencies	$	14,567	$	2	$	4	$	14,565
Corporate bonds		25,000		—		—		25,000
State and political subdivisions—tax exempt		13,599		433		—		14,032
State and political subdivisions—taxable		541		20		—		561
Mortgage-backed securities—residential issued by government sponsored entities		421,460		5,353		—		426,813
Total	$	475,167	$	5,808	$	4	$	480,971
(Dollars in thousands)	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Available-for-Sale
Asset-backed securities	$	133,647	$	363	$	785	$	133,225
Marketable equity securities		946		—		15		931
Mortgage-backed securities—residential issued by government sponsored entities		549,869		2,337		5,580		546,626
Industrial revenue bonds		3,750		109		—		3,859
Collateralized debt obligations		505		295		—		800
Total	$	688,717	$	3,104	$	6,380	$	685,441
Held-to-Maturity
U.S. Government agencies	$	14,972	$	—	$	401	$	14,571
State and political subdivisions—tax exempt		14,201		27		129		14,099
State and political subdivisions—taxable		545		—		12		533
Mortgage-backed securities—residential issued by government sponsored entities		435,380		328		5,218		430,490
Total	$	465,098	$	355	$	5,760	$	459,693

Proceeds from sales and calls of securities were $149.5 million and $150.3 million for the three and six months ended June 30, 2014, respectively. Gross gains and losses of $0.8 million and $(0.8) million, respectively, and $1.1 million and $(0.8) million, respectively, were realized on these sales and calls for the three and six months ended June 30, 2014, respectively.

Proceeds from sales and calls of securities were $0.2 million and $1.2 million for the three and six months ended June 30, 2013, respectively. Gross gains of $0.2 million were realized on these sales and calls for the three and six months ended June 30, 2013.

The estimated fair value of investment securities at June 30, 2014, by contractual maturity, is shown in the table that follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Debt securities not due at a single maturity date are shown separately.

10

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	June 30, 2014
	Amortized Cost		Estimated Fair Value		Yield
Available-for-sale
Due in one year or less	$	—	$	—		—
Due after one year through five years		—		—		—
Due after five years through ten years		—		—		—
Due after ten years		3,580		3,736		2.23	%
Mortgage-backed securities—residential issued by government sponsored entities		587,142		590,060		1.80	%
		590,722		593,796		1.80	%
Marketable equity securities		946		949
Total	$	591,668	$	594,745
	Amortized Cost		Estimated Fair Value		Yield
Held-to-maturity
Due in one year or less	$	205	$	205		0.76	%
Due after one year through five years		919		934		2.30	%
Due after five years through ten years		34,991		35,258		4.59	%
Due after ten years		17,592		17,761		3.04	%
Mortgage-backed securities—residential issued by government sponsored entities		421,460		426,813		2.39	%
Total	$	475,167	$	480,971		2.58	%

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

(Dollars in thousands)	Less than 12 Months				12 Months or Longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
June 30, 2014
Available-for-Sale
Mortgage-backed securities—residential issued by government sponsored entities	$	193,239	$	820	$	47,426	$	227	$	240,665	$	1,047
Total	$	193,239	$	820	$	47,426	$	227	$	240,665	$	1,047
Held-to-Maturity
U.S. Government agencies	$	7,662	$	4	$	—	$	—	$	7,662	$	4
Total	$	7,662	$	4	$	—	$	—	$	7,662	$	4
(Dollars in thousands)	Less than 12 Months				12 Months or Longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2013
Available-for-Sale
Asset-backed securities	$	102,835	$	785	$	—	$	—	$	102,835	$	785
Marketable equity securities		931		15		—		—		931		15
Mortgage-backed securities—residential issued by government sponsored entities		339,565		5,580		—		—		339,565		5,580
Total	$	443,331	$	6,380	$	—	$	—	$	443,331	$	6,380
Held-to-Maturity
U.S. Government agencies	$	14,571	$	401	$	—	$	—	$	14,571	$	401
State and political subdivisions—tax exempt		10,489		129		—		—		10,489		129
State and political subdivisions—taxable		533		12		—		—		533		12
Mortgage-backed securities—residential issued by government sponsored entities		342,333		5,218		—		—		342,333		5,218
Total	$	367,926	$	5,760	$	—	$	—	$	367,926	$	5,760

11

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

As of June 30, 2014, the Company’s security portfolio consisted of 132 securities, 21 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, 2014 and December 31, 2013 were issued by U.S. government-sponsored entities and agencies, which the government has affirmed its commitment to support. Unrealized losses associated with these securities are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2014 or December 31, 2013.

Investment securities having carrying values of approximately $305.3 million and $313.5 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.

4. Loans

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

(Dollars in thousands)	June 30, 2014		December 31, 2013
Non-owner occupied commercial real estate	$	793,733	$	775,733
Other commercial construction and land		243,671		300,494
Multifamily commercial real estate		62,793		67,688
1-4 family residential construction and land		80,160		71,351
Total commercial real estate		1,180,357		1,215,266
Owner occupied commercial real estate		1,040,533		1,058,148
Commercial and industrial loans		932,800		803,736
Lease financing		2,346		2,676
Total commercial		1,975,679		1,864,560
1-4 family residential		863,897		804,322
Home equity loans		380,767		386,366
Other consumer loans		213,639		170,526
Total consumer		1,458,303		1,361,214
Other		107,836		110,989
Total loans	$	4,722,175	$	4,552,029

Total loans include $9.9 million and $8.0 million of 1-4 family residential loans held for sale and $6.8 million and $3.8 million of net deferred loan origination costs and fees as of June 30, 2014 and December 31, 2013, respectively.

As of June 30, 2014, other loans include $44.8 million, $39.8 million and $1.9 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively. As of December 31, 2013, other loans include $49.7 million, $36.2 million and $2.2 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively.

12

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Covered loans represent loans acquired from the FDIC subject to loss sharing agreements. Covered loans are further broken out into (i) loans acquired with evidence of credit impairment (“Purchased Credit Impaired or PCI Loans”) and (ii) non-PCI loans. Loans originated or purchased by the Company (“New Loans”) and loans acquired through the purchase of CBKN, GRNB, SCMF and TIBB, are not subject to the loss sharing agreements and are classified as “non covered.” Additionally, certain consumer loans acquired through the acquisition of First National Bank of the South, Metro Bank and Turnberry Bank (collectively, the “Failed Banks”) from the FDIC, are specifically excluded from the loss sharing agreements.

The Company designates loans as PCI by evaluating both qualitative and quantitative factors. At the time of acquisition, the Company accounted for the PCI loans by segregating each portfolio into loan pools with similar risk characteristics. Over the lives of the acquired PCI loans, the Company continues to estimate cash flows expected to be collected on each loan pool. The Company evaluates, at each balance sheet date, whether its estimates of the present value of the cash flows from the loan pools, determined using the effective interest rates, has decreased, such that the present value of such cash flows is less than the recorded investment of the pool, and if so, recognizes a provision for loan loss in its consolidated statement of income, unless interest rate driven. Additionally, if we have favorable changes in our estimates of cash flows expected to be collected for a loan pool such that the then-present value exceeds the recorded investment of that pool, we will first reverse any previously established allowance for loan losses for the pool. If such estimate exceeds the amount of any previously established allowance, we will accrete future interest income over the remaining life of the pool at a rate which, when used to discount the expected cash flows, results in the then-present value of such cash flows equaling the recorded investment of the pool at the time of the revised estimate.

The table below presents a rollforward of accretable yield and income expected to be earned related to PCI loans and the amount of non-accretable difference at the end of the period. Nonaccretable difference represents estimated contractually required payments in excess of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the PCI loans. Other represents reductions of accretable yield due to non-credit events such as interest rate reductions on variable rate PCI loans and prepayment activity on PCI loans.

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Accretable Yield
Balance at beginning of period	$	346,995		$	491,237		$	383,775		$	553,348
Accretion of income		(31,021	)		(42,023	)		(64,183	)		(87,009	)
Reclassification from nonaccretable difference		29,229			20,826			35,896			31,099
Other		(15,782	)		(25,559	)		(26,067	)		(52,957	)
Balance at end of period	$	329,421		$	444,481		$	329,421		$	444,481
Nonaccretable Difference
Balance at end of period	$	232,776		$	358,810		$	232,776		$	358,810

The following table represents the periods we estimate the remaining accretable yield will accrete into income based on the Company’s most recent estimates of cash flows for PCI loans:

(Dollars in thousands)
Periods ending December 31,
2014	$	54,928
2015		87,936
2016		61,438
2017		41,080
2018		27,909
Thereafter		56,130
Total	$	329,421

13

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

• Indices for PCI loans with variable rates of interest.

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

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

As a result of overall improvement of credit loss expectations in our most recent estimates of cash flows, substantially related to the Company’s legacy Southern Community and Green Bankshares portfolios, the Company recognized $0.3 million and $0.4 million in Contingent Value Right (“CVR”) expense for the three months ended June 30, 2014 and 2013, respectively and $1.1 million and $3.3 million for the six months ended June 30, 2014 and 2013, respectively.

Non-covered Loans

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

(Dollars in thousands)	Non-PCI Loans
June 30, 2014	New		Acquired		PCI Loans		Total Non-covered Loans
Non-owner occupied commercial real estate	$	295,756	$	68,261	$	389,203	$	753,220
Other commercial construction and land		62,754		246		163,498		226,498
Multifamily commercial real estate		17,179		14,061		26,720		57,960
1-4 family residential construction and land		66,334		—		13,826		80,160
Total commercial real estate		442,023		82,568		593,247		1,117,838
Owner occupied commercial real estate		687,303		42,236		250,346		979,885
Commercial and industrial loans		795,315		17,081		111,785		924,181
Lease financing		2,346		—		—		2,346
Total commercial		1,484,964		59,317		362,131		1,906,412
1-4 family residential		448,315		48,126		306,825		803,266
Home equity loans		73,749		168,109		91,814		333,672
Other consumer loans		200,024		5,383		8,167		213,574
Total consumer		722,088		221,618		406,806		1,350,512
Other		60,186		3,739		43,043		106,968
Total loans	$	2,709,261	$	367,242	$	1,405,227	$	4,481,730

14

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Non-PCI Loans
December 31, 2013	New		Acquired		PCI Loans		Total Non-covered Loans
Non-owner occupied commercial real estate	$	219,482	$	68,080	$	432,437	$	719,999
Other commercial construction and land		67,537		252		213,543		281,332
Multifamily commercial real estate		12,537		16,650		29,392		58,579
1-4 family residential construction and land		56,978		1		14,372		71,351
Total commercial real estate		356,534		84,983		689,744		1,131,261
Owner occupied commercial real estate		642,794		48,459		299,593		990,846
Commercial and industrial loans		643,044		20,519		129,961		793,524
Lease financing		2,676		—		—		2,676
Total commercial		1,288,514		68,978		429,554		1,787,046
1-4 family residential		332,585		52,078		349,060		733,723
Home equity loans		52,918		181,138		100,995		335,051
Other consumer loans		151,584		6,407		12,433		170,424
Total consumer		537,087		239,623		462,488		1,239,198
Other		57,320		3,959		47,888		109,167
Total loans	$	2,239,455	$	397,543	$	1,629,674	$	4,266,672

Covered Loans

The following is a summary of the major categories of covered loans outstanding as of June 30, 2014 and December 31, 2013:

(Dollars in thousands)	Non-PCI Loans
June 30, 2014	New		Acquired		PCI Loans		Total Covered Loans
Non-owner occupied commercial real estate	$	—	$	—	$	40,513	$	40,513
Other commercial construction and land		—		—		17,173		17,173
Multifamily commercial real estate		—		—		4,833		4,833
1-4 family residential construction and land		—		—		—		—
Total commercial real estate		—		—		62,519		62,519
Owner occupied commercial real estate		—		—		60,648		60,648
Commercial and industrial loans		—		195		8,424		8,619
Lease financing		—		—		—		—
Total commercial		—		195		69,072		69,267
1-4 family residential		—		1,423		59,208		60,631
Home equity loans		—		33,049		14,046		47,095
Other consumer loans		—		—		65		65
Total consumer		—		34,472		73,319		107,791
Other		—		—		868		868
Total loans	$	—	$	34,667	$	205,778	$	240,445

15

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Non-PCI Loans
December 31, 2013	New		Acquired		PCI Loans		Total Covered Loans
Non-owner occupied commercial real estate	$	—	$	—	$	55,734	$	55,734
Other commercial construction and land		—		—		19,162		19,162
Multifamily commercial real estate		—		—		9,109		9,109
1-4 family residential construction and land		—		—		—		—
Total commercial real estate		—		—		84,005		84,005
Owner occupied commercial real estate		—		—		67,302		67,302
Commercial and industrial loans		—		356		9,856		10,212
Lease financing		—		—		—		—
Total commercial		—		356		77,158		77,514
1-4 family residential		—		1,017		69,582		70,599
Home equity loans		—		36,114		15,201		51,315
Other consumer loans		—		—		102		102
Total consumer		—		37,131		84,885		122,016
Other		—		—		1,822		1,822
Total loans	$	—	$	37,487	$	247,870	$	285,357

The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of June 30, 2014:

(Dollars in thousands)	30-89 Days Past Due				Greater than 90 Days Past Due and Still Accruing/Accreting				Non-accrual
Non-purchased credit impaired loans	Non-Covered		Covered		Non-Covered		Covered		Non-Covered		Covered		Total
Non-owner occupied commercial real estate	$	—	$	—	$	—	$	—	$	1,250	$	—	$	1,250
Other commercial construction and land		10		—		—		—		314		—		324
Multifamily commercial real estate		—		—		—		—		—		—		—
1-4 family residential construction and land		—		—		—		—		—		—		—
Total commercial real estate		10		—		—		—		1,564		—		1,574
Owner occupied commercial real estate		15		—		—		—		1,648		—		1,663
Commercial and industrial loans		211		—		—		—		2,424		66		2,701
Total commercial		226		—		—		—		4,072		66		4,364
1-4 family residential		359		45		—		—		1,628		28		2,060
Home equity loans		1,188		291		—		—		2,186		1,086		4,751
Other consumer loans		2,546		—		—		—		728		—		3,274
Total consumer		4,093		336		—		—		4,542		1,114		10,085
Other		—		—		—		—		10		—		10
Total loans	$	4,329	$	336	$	—	$	—	$	10,188	$	1,180	$	16,033
(Dollars in thousands)	30-89 Days Past Due				Greater than 90 Days Past Due and Still Accruing/Accreting				Non-accrual
Purchased credit impaired loans	Non-Covered		Covered		Non-Covered		Covered		Non-Covered		Covered		Total
Non-owner occupied commercial real estate	$	444	$	—	$	32,945	$	4,124	$	—	$	—	$	37,513
Other commercial construction and land		162		312		36,046		9,434		—		—		45,954
Multifamily commercial real estate		—		—		2,100		208		—		—		2,308
1-4 family residential construction and land		126		—		2,219		—		—		—		2,345
Total commercial real estate		732		312		73,310		13,766		—		—		88,120
Owner occupied commercial real estate		2,574		13		26,661		2,955		—		—		32,203
Commercial and industrial loans		410		1		30,072		182		—		—		30,665
Total commercial		2,984		14		56,733		3,137		—		—		62,868
1-4 family residential		3,583		482		32,461		8,460		—		—		44,986
Home equity loans		1,599		86		5,301		4,343		—		—		11,329
Other consumer loans		255		—		203		27		—		—		485
Total consumer		5,437		568		37,965		12,830		—		—		56,800
Other		17		—		3,014		—		—		—		3,031
Total loans	$	9,170	$	894	$	171,022	$	29,733	$	—	$	—	$	210,819

16

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2013:

(Dollars in thousands)	30-89 Days Past Due				Greater than 90 Days Past Due and Still Accruing/Accreting				Non-accrual
Non-purchased credit impaired loans	Non-Covered		Covered		Non-Covered		Covered		Non-Covered		Covered		Total
Non-owner occupied commercial real estate	$	—	$	—	$	—	$	—	$	90	$	—	$	90
Other commercial construction and land		—		—		—		—		563		—		563
Multifamily commercial real estate		305		—		—		—		—		—		305
1-4 family residential construction and land		—		—		—		—		1		—		1
Total commercial real estate		305		—		—		—		654		—		959
Owner occupied commercial real estate		20		—		—		—		3,394		—		3,414
Commercial and industrial loans		2		—		—		—		1,879		66		1,947
Total commercial		22		—		—		—		5,273		66		5,361
1-4 family residential		862		—		—		—		1,417		—		2,279
Home equity loans		1,046		146		—		—		2,324		1,270		4,786
Other consumer loans		1,800		—		—		—		806		—		2,606
Total consumer		3,708		146		—		—		4,547		1,270		9,671
Total loans	$	4,035	$	146	$	—	$	—	$	10,474	$	1,336	$	15,991
(Dollars in thousands)	30-89 Days Past Due				Greater than 90 Days Past Due and Still Accruing/Accreting				Non-accrual
Purchased credit impaired loans	Non-Covered		Covered		Non-Covered		Covered		Non-Covered		Covered		Total
Non-owner occupied commercial real estate	$	1,463	$	107	$	35,563	$	10,658	$	—	$	—	$	47,791
Other commercial construction and land		1,105		—		58,633		8,479		—		—		68,217
Multifamily commercial real estate		—		—		2,641		—		—		—		2,641
1-4 family residential construction and land		5		—		1,796		—		—		—		1,801
Total commercial real estate		2,573		107		98,633		19,137		—		—		120,450
Owner occupied commercial real estate		4,626		260		33,974		6,631		—		—		45,491
Commercial and industrial loans		249		—		29,819		1,597		—		—		31,665
Total commercial		4,875		260		63,793		8,228		—		—		77,156
1-4 family residential		6,696		227		37,646		10,824		—		—		55,393
Home equity loans		1,733		59		7,313		1,227		—		—		10,332
Other consumer loans		344		—		1,249		67		—		—		1,660
Total consumer		8,773		286		46,208		12,118		—		—		67,385
Other		433		—		4,745		954		—		—		6,132
Total loans	$	16,654	$	653	$	213,379	$	40,437	$	—	$	—	$	271,123

Pooled PCI 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.

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 at origination and upon identification of a material change for all loans, on an annual basis for commercial loans exceeding $0.5 million and at least quarterly for loans not rated Pass. 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.

17

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

• 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 by internal rating at June 30, 2014:

					Substandard
(Dollars in thousands)	Pass		Special Mention		Accruing/ Accreting		Non-accrual		Doubtful		Total
Non-owner occupied commercial real estate	$	361,677	$	122	$	968	$	1,250	$	—	$	364,017
Other commercial construction and land		62,274		412		—		314		—		63,000
Multifamily commercial real estate		31,240		—		—		—		—		31,240
1-4 family residential construction and land		62,404		2,283		1,647		—		—		66,334
Total commercial real estate		517,595		2,817		2,615		1,564		—		524,591
Owner occupied commercial real estate		714,139		5,425		8,327		1,648		—		729,539
Commercial and industrial loans		804,329		374		5,398		2,490		—		812,591
Lease financing		2,346		—		—		—		—		2,346
Total commercial		1,520,814		5,799		13,725		4,138		—		1,544,476
1-4 family residential		496,054		154		—		1,656		—		497,864
Home equity loans		269,656		434		1,545		3,272		—		274,907
Other consumer loans		204,660		—		19		728		—		205,407
Total consumer		970,370		588		1,564		5,656		—		978,178
Other		63,653		—		262		10		—		63,925
Total loans	$	3,072,432	$	9,204	$	18,166	$	11,368	$	—	$	3,111,170

The following table summarizes loans, excluding purchased credit-impaired loans by internal rating at December 31, 2013:

					Substandard
(Dollars in thousands)	Pass		Special Mention		Accruing/ Accreting		Non-accrual		Doubtful		Total
Non-owner occupied commercial real estate	$	285,919	$	568	$	985	$	90	$	—	$	287,562
Other commercial construction and land		67,178		48		—		563		—		67,789
Multifamily commercial real estate		28,882		—		305		—		—		29,187
1-4 family residential construction and land		53,224		1,958		1,796		1		—		56,979
Total commercial real estate		435,203		2,574		3,086		654		—		441,517
Owner occupied commercial real estate		681,571		4,093		2,195		3,394		—		691,253
Commercial and industrial loans		651,585		1,183		9,206		1,945		—		663,919
Lease financing		2,676		—		—		—		—		2,676
Total commercial		1,335,832		5,276		11,401		5,339		—		1,357,848
1-4 family residential		384,235		28		—		1,417		—		385,680
Home equity loans		263,490		37		3,050		3,593		—		270,170
Other consumer loans		157,157		—		28		806		—		157,991
Total consumer		804,882		65		3,078		5,816		—		813,841
Other		61,006		—		273		—		—		61,279
Total loans	$	2,636,923	$	7,915	$	17,838	$	11,809	$	—	$	2,674,485

18

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

5. Allowance for Loan Losses

Activity in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 is as follows:

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Balance, beginning of period	$	55,606		$	57,171		$	56,851		$	57,262
(Reversal) provision for loan losses on PCI loans		(940	)		2,517			(3,428	)		(631	)
Provision for loan losses on non-PCI loans		2,344			1,950			4,808			10,500
Non-PCI loans charged-off		(2,176	)		(6,069	)		(4,132	)		(13,390	)
Recoveries of non-PCI loans previously charged-off		473			1,263			1,208			3,091
Balance, end of periods	$	55,307		$	56,832		$	55,307		$	56,832

The following table presents the roll forward of the allowance for loan losses for the three and six months ended June 30, 2014 by the class of loans against which the allowance is allocated:

(Dollars in thousands)	March 31, 2014		Provision/ (Reversals)			Net (Charge-offs)/ Recoveries			June 30, 2014
Non-owner occupied commercial real estate	$	3,829	$	785		$	(127	)	$	4,487
Other commercial construction and land		8,892		2,605			5			11,502
Multifamily commercial real estate		403		77			—			480
1-4 family residential construction and land		1,559		69			3			1,631
Total commercial real estate		14,683		3,536			(119	)		18,100
Owner occupied commercial real estate		3,530		(206	)		(7	)		3,317
Commercial and industrial loans		8,198		519			(72	)		8,645
Lease financing		1		—			—			1
Total commercial		11,729		313			(79	)		11,963
1-4 family residential		20,383		(3,169	)		(76	)		17,138
Home equity loans		4,875		(153	)		(432	)		4,290
Other consumer loans		3,063		1,003			(635	)		3,431
Total consumer		28,321		(2,319	)		(1,143	)		24,859
Other		873		(126	)		(362	)		385
Total loans	$	55,606	$	1,404		$	(1,703	)	$	55,307
(Dollars in thousands)	December 31, 2013		Provision/ (Reversals)			Net(Charge-offs)/ Recoveries			June 30, 2014
Non-owner occupied commercial real estate	$	4,635	$	(34	)	$	(114	)	$	4,487
Other commercial construction and land		8,217		3,480			(195	)		11,502
Multifamily commercial real estate		320		160			—			480
1-4 family residential construction and land		1,558		71			2			1,631
Total commercial real estate		14,730		3,677			(307	)		18,100
Owner occupied commercial real estate		4,450		(1,013	)		(120	)		3,317
Commercial and industrial loans		8,310		330			5			8,645
Lease financing		3		(2	)		—			1
Total commercial		12,763		(685	)		(115	)		11,963
1-4 family residential		21,724		(4,492	)		(94	)		17,138
Home equity loans		3,869		901			(480	)		4,290
Other consumer loans		2,682		2,023			(1,274	)		3,431
Total consumer		28,275		(1,568	)		(1,848	)		24,859
Other		1,083		(44	)		(654	)		385
Total loans	$	56,851	$	1,380		$	(2,924	)	$	55,307

19

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the roll forward of the allowance for loan losses for the three and six months ended June 30, 2013 by the class of loans against which the allowance is allocated:

(Dollars in thousands)	March 31, 2013		Provision/ (Reversals)			Net (Charge-offs)/ Recoveries			June 30, 2013
Non-owner occupied commercial real estate	$	3,449	$	871		$	9		$	4,329
Other commercial construction and land		12,880		(646	)		76			12,310
Multifamily commercial real estate		192		66			—			258
1-4 family residential construction and land		1,559		245			2			1,806
Total commercial real estate		18,080		536			87			18,703
Owner occupied commercial real estate		4,114		360			222			4,696
Commercial and industrial loans		10,515		1,757			(3,984	)		8,288
Total commercial		14,629		2,117			(3,762	)		12,984
1-4 family residential		16,800		780			(8	)		17,572
Home equity loans		4,615		(449	)		(229	)		3,937
Other consumer loans		2,170		712			(521	)		2,361
Total consumer		23,585		1,043			(758	)		23,870
Other		877		771			(373	)		1,275
Total loans	$	57,171	$	4,467		$	(4,806	)	$	56,832
(Dollars in thousands)	December 31, 2012		Provision/ (Reversals)			Net(Charge-offs)/ Recoveries			June 30, 2013
Non-owner occupied commercial real estate	$	3,764	$	592		$	(27	)	$	4,329
Other commercial construction and land		12,711		(919	)		518			12,310
Multifamily commercial real estate		348		(131	)		41			258
1-4 family residential construction and land		1,716		67			23			1,806
Total commercial real estate		18,539		(391	)		555			18,703
Owner occupied commercial real estate		4,055		375			266			4,696
Commercial and industrial loans		7,490		9,149			(8,351	)		8,288
Total commercial		11,545		9,524			(8,085	)		12,984
1-4 family residential		15,740		1,812			20			17,572
Home equity loans		8,670		(3,821	)		(912	)		3,937
Other consumer loans		2,082		1,363			(1,084	)		2,361
Total consumer		26,492		(646	)		(1,976	)		23,870
Other		686		1,382			(793	)		1,275
Total loans	$	57,262	$	9,869		$	(10,299	)	$	56,832

20

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the roll forward of the allowance for loan losses for PCI and Non-PCI loans for the three and six months ended June 30, 2014 and 2013, by the class of loans against which the allowance is allocated:

	Three Months Ended
(Dollars in thousands)	June 30, 2014									June 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	20,194		$	35,412		$	55,606		$	20,496		$	36,675		$	57,171
Charge-offs:
Non-owner occupied commercial real estate		204			—			204			11			—			11
Other commercial construction and land		(1	)		—			(1	)		28			—			28
1-4 family residential construction and land		(1	)		—			(1	)		—			—			—
Total commercial real estate		202			—			202			39			—			39
Owner occupied commercial real estate		8			—			8			—			—			—
Commercial and industrial loans		106			—			106			4,107			—			4,107
Lease financing		—			—			—			—			—			—
Total commercial		114			—			114			4,107			—			4,107
1-4 family residential		80			—			80			28			—			28
Home equity loans		465			—			465			587			—			587
Other consumer loans		781			—			781			680			—			680
Total consumer		1,326			—			1,326			1,295			—			1,295
Other		534			—			534			628			—			628
Total charge-offs		2,176			—			2,176			6,069			—			6,069
Recoveries:
Non-owner occupied commercial real estate		77			—			77			20			—			20
Other commercial construction and land		4			—			4			104			—			104
1-4 family residential construction and land		2			—			2			2			—			2
Total commercial real estate		83			—			83			126			—			126
Owner occupied commercial real estate		1			—			1			222			—			222
Commercial and industrial loans		34			—			34			123			—			123
Total commercial		35			—			35			345			—			345
1-4 family residential		4			—			4			20			—			20
Home equity loans		33			—			33			358			—			358
Other consumer loans		146			—			146			159			—			159
Total consumer		183			—			183			537			—			537
Other		172			—			172			255			—			255
Total recoveries		473			—			473			1,263			—			1,263
Net charge-offs (recoveries)		1,703			—			1,703			4,806			—			4,806
Provision for loan losses:
Non-owner occupied commercial real estate		159			626			785			(222	)		1,093			871
Other commercial construction and land		(1	)		2,606			2,605			(346	)		(300	)		(646	)
Multifamily commercial real estate		(13	)		90			77			(6	)		72			66
1-4 family residential construction and land		(36	)		105			69			6			239			245
Total commercial real estate		109			3,427			3,536			(568	)		1,104			536
Owner occupied commercial real estate		(183	)		(23	)		(206	)		(277	)		637			360
Commercial and industrial loans		347			172			519			1,057			700			1,757
Lease financing		(1	)		1			—			—			—			—
Total commercial		163			150			313			780			1,337			2,117
1-4 family residential		303			(3,472	)		(3,169	)		115			665			780
Home equity loans		473			(626	)		(153	)		359			(808	)		(449	)
Other consumer loans		899			104			1,003			750			(38	)		712
Total consumer		1,675			(3,994	)		(2,319	)		1,224			(181	)		1,043
Other		397			(523	)		(126	)		514			257			771
Total provision for loan losses		2,344			(940	)		1,404			1,950			2,517			4,467
Allowance for loan losses at the end of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832

21

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Six Months Ended
	June 30, 2014									June 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	18,951		$	37,900		$	56,851		$	17,439		$	39,823		$	57,262
Charge-offs:
Non-owner occupied commercial real estate		204			—			204			92			—			92
Other commercial construction and land		207			—			207			102			—			102
1-4 family residential construction and land		2			—			2			—			—			—
Total commercial real estate		413			—			413			194			—			194
Owner occupied commercial real estate		144			—			144			—			—			—
Commercial and industrial loans		161			—			161			9,011			—			9,011
Total commercial		305			—			305			9,011			—			9,011
1-4 family residential		101			—			101			28			—			28
Home equity loans		594			—			594			1,367			—			1,367
Other consumer loans		1,588			—			1,588			1,381			—			1,381
Total consumer		2,283			—			2,283			2,776			—			2,776
Other		1,131			—			1,131			1,409			—			1,409
Total charge-offs		4,132			—			4,132			13,390			—			13,390
Recoveries:
Non-owner occupied commercial real estate		90			—			90			65			—			65
Other commercial construction and land		12			—			12			620			—			620
Multifamily commercial real estate		—			—			—			41			—			41
1-4 family residential construction and land		4			—			4			23			—			23
Total commercial real estate		106			—			106			749			—			749
Owner occupied commercial real estate		24			—			24			266			—			266
Commercial and industrial loans		166			—			166			660			—			660
Total commercial		190			—			190			926			—			926
1-4 family residential		7			—			7			48			—			48
Home equity loans		114			—			114			455			—			455
Other consumer loans		314			—			314			297			—			297
Total consumer		435			—			435			800			—			800
Other		477			—			477			616			—			616
Total recoveries		1,208			—			1,208			3,091			—			3,091
Net charge-offs (recoveries)		2,924			—			2,924			10,299			—			10,299
Provision for loan losses:
Non-owner occupied commercial real estate		181			(215	)		(34	)		(199	)		791			592
Other commercial construction and land		499			2,981			3,480			(527	)		(392	)		(919	)
Multifamily commercial real estate		(24	)		184			160			(47	)		(84	)		(131	)
1-4 family residential construction and land		(70	)		141			71			107			(40	)		67
Total commercial real estate		586			3,091			3,677			(666	)		275			(391	)
Owner occupied commercial real estate		39			(1,052	)		(1,013	)		(555	)		930			375
Commercial and industrial loans		382			(52	)		330			8,179			970			9,149
Lease financing		(2	)		—			(2	)		—			—			—
Total commercial		419			(1,104	)		(685	)		7,624			1,900			9,524
1-4 family residential		557			(5,049	)		(4,492	)		145			1,667			1,812
Home equity loans		614			287			901			1,020			(4,841	)		(3,821	)
Other consumer loans		2,087			(64	)		2,023			1,523			(160	)		1,363
Total consumer		3,258			(4,826	)		(1,568	)		2,688			(3,334	)		(646	)
Other		545			(589	)		(44	)		854			528			1,382
Total provision for loan losses		4,808			(3,428	)		1,380			10,500			(631	)		9,869
Allowance for loan losses at the end of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832

22

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class of loans and by impairment evaluation method as of June 30, 2014:

(Dollars in thousands)	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	$	—	$	1,682	$	2,805	$	632	$	363,385	$	429,716
Other commercial construction and land		—		1,505		9,997		—		63,000		180,671
Multifamily commercial real estate		—		92		388		—		31,240		31,553
1-4 family residential construction and land		—		997		634		—		66,334		13,826
Total commercial real estate		—		4,276		13,824		632		523,959		655,766
Owner occupied commercial real estate		—		2,531		786		4,904		724,635		310,994
Commercial and industrial loans		1		7,263		1,381		6,277		806,314		120,209
Lease financing		—		1		—		—		2,346		—
Total commercial		1		9,795		2,167		11,181		1,533,295		431,203
1-4 family residential		3		2,739		14,396		790		487,148		366,033
Home equity loans		17		516		3,757		240		274,667		105,860
Other consumer loans		9		3,121		301		157		205,250		8,232
Total consumer		29		6,376		18,454		1,187		967,065		480,125
Other		—		358		27		—		63,925		43,911
Total loans	$	30	$	20,805	$	34,472	$	13,000	$	3,088,244	$	1,611,005

(1) Loans collectively evaluated for impairment include $401.9 million of acquired loans which are presented net of unamortized purchase discounts of $14.0 million.

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, 2013:

(Dollars in thousands)	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	$	—	$	1,615	$	3,020	$	877	$	286,685	$	488,171
Other commercial construction and land		—		1,201		7,016		—		67,789		232,705
Multifamily commercial real estate		—		116		204		—		29,187		38,501
1-4 family residential construction and land		—		1,065		493		—		56,979		14,372
Total commercial real estate		—		3,997		10,733		877		440,640		773,749
Owner occupied commercial real estate		—		2,611		1,839		4,844		686,409		366,895
Commercial and industrial loans		507		6,370		1,433		9,623		654,296		139,817
Lease financing		—		3		—		—		2,676		—
Total commercial		507		8,984		3,272		14,467		1,343,381		506,712
1-4 family residential		—		2,279		19,445		—		377,668		418,642
Home equity loans		—		398		3,471		—		270,170		116,196
Other consumer loans		5		2,313		364		207		157,784		12,535
Total consumer		5		4,990		23,280		207		805,622		547,373
Other		—		468		615		273		61,006		49,710
Total loans	$	512	$	18,439	$	37,900	$	15,824	$	2,650,649	$	1,877,544

(1) Loans collectively evaluated for impairment include $435.0 million of acquired loans which are presented net of unamortized purchase discounts of $14.7 million.

23

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bank may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. A troubled debt restructuring (“TDR”) typically involves either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date(s) with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Upon modification of a loan, the Bank measures the related impairment as the excess of the recorded investment in the loan over the discounted expected future cash flows. The present value of expected future cash flows is discounted at the loan’s effective interest rate. If the impairment analysis results in a loss, an allowance for loan losses is established for the loan. During the three and six months ended June 30, 2014, loans modified in TDRs were nominal. Because of the immateriality of the amount and the nature of the modifications, the modifications did not have a material impact on the Company’s consolidated financial statements or on the determination of the allowance for loan losses at June 30, 2014. The Company had loans modified in TDRs with recorded investments of $3.1 million and $3.4 million for the three and six months ended June 30, 2014, respectively. The Company had loans modified in TDRs with recorded investments of $0.2 million for the six months ended June 30, 2013.

6. FDIC Indemnification Asset

The Company has recorded an indemnification asset related to loss sharing agreements entered into with the FDIC wherein 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. 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. These agreements resulted from the purchase of the Failed Banks.

The loss sharing agreements consist 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 our reimbursement 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 following is a summary of the activity in the FDIC indemnification asset:

(Dollars in thousands)
Balance, December 31, 2013	$	33,610
Indemnification asset income		423
Amortization of indemnification asset		(4,652	)
Cash received on reimbursable losses		(3,852	)
Balance, June 30, 2014	$	25,529
Balance, December 31, 2012	$	49,417
Indemnification asset income		492
Amortization of indemnification asset		(3,769	)
Cash received on reimbursable losses		(7,410	)
Balance, June 30, 2013	$	38,730

7. Other Real Estate Owned

The activity within Other Real Estate Owned (“OREO”) for the three and six months ended June 30, 2014 and 2013 is presented in the table below. Ending balances for OREO covered by loss sharing agreements with the FDIC as of June 30, 2014 and 2013 were $17.0 million and $31.7 million, respectively. Non-covered OREO ending balances as of June 30, 2014 and 2013 were $79.3 million and $111.1 million, respectively.

For the three and six months ended June 30, 2014, proceeds on sales of OREO were $32.3 million and $48.3 million, respectively. Net gains on sales were $3.2 million and $3.9 million, respectively. For the three and six months ended June 30, 2013, proceeds on sales of OREO were $28.9 million and $44.7 million, respectively. Net gains on sales were $2.2 million and $3.4 million, respectively.

24

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Balance, beginning of period	$	120,270		$	151,613		$	129,396		$	154,093
Real estate acquired from borrowers		8,159			24,131			17,864			42,822
Valuation allowance		(3,022	)		(6,209	)		(6,595	)		(12,799	)
Properties sold and other		(29,124	)		(26,743	)		(44,382	)		(41,324	)
Balance, end of period	$	96,283		$	142,792		$	96,283		$	142,792

8. 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 (“FHLB”).

The Bank has securities sold under agreements to repurchase with customers. These agreements are collateralized by investment securities of the United States Government or its agencies which are chosen by the Bank. The amounts outstanding at June 30, 2014 and December 31, 2013 were $32.8 million and $24.9 million, respectively.

The Bank invests in FHLB stock for the purpose of establishing credit lines with the FHLB. 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. The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage, multifamily, home equity line of credit and commercial real estate secured loans. The amounts of eligible collateral at June 30, 2014 and December 31, 2013, provided for incremental borrowing availability of up to $70.8 million and $95.4 million, respectively.

At June 30, 2014 and December 31, 2013 the bank had $25.6 million in letters of credit issued by the FHLB, of which $25.2 million are used as collateral in lieu of pledging securities to the State of Florida.

The advances as of June 30, 2014 and December 31, 2013 consisted of the following:

(Dollars in thousands)
Contractual Outstanding Amount June 30, 2014		Maturity Date	Fixed Contractual Rate
$	50,000	July 23, 2014	0.19%
	70,000	July 30, 2014	0.20%
	40,000	May 19, 2015	0.36%
	651	November 6, 2017	0.50%
	534	February 10, 2026	0.00%
$	161,185
(Dollars in thousands)
Contractual Outstanding Amount December 31, 2013		Maturity Date	Fixed Contractual Rate
$	95,000	May 16, 2014	0.36%
	724	November 6, 2017	0.50%
	554	February 10, 2026	0.00%
$	96,278

25

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

9. Long Term Borrowings

Structured repurchase agreements

The repurchase agreements as of June 30, 2014 and December 31, 2013 consisted of the following:

(Dollars in thousands)
June 30, 2014 Carrying Amount		December 31, 2013 Carrying Amount		Contractual Amount		Maturity Date	Contractual Rate
$	10,683	$	10,823	$	10,000	November 6, 2016	4.75%
	10,709		10,833		10,000	March 30, 2017	4.50%
	10,458		10,521		10,000	December 18, 2017	3.79%
	10,433		10,492		10,000	December 18, 2017	3.72%
	10,710		10,780		10,000	March 22, 2019	3.56%
$	52,993	$	53,449	$	50,000

These repurchase agreements have a weighted-average rate of 4.06% at June 30, 2014 and December 31, 2013 and are collateralized by $66.0 million and $62.1 million, respectively, of mortgage-backed securities.

Subordinated Debentures

Through its acquisitions of CBKN, GRNB, SCMF and TIBB, the Company assumed thirteen 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 liabilities. 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. 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 Company or the trust, at their respective option after a period of time, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board (“FRB”), if then required. Deferral of interest payments on the trust preferred securities is allowed for up to 60 months without being considered an event of default. On March 18, 2013, the Company called and redeemed $34.5 million of trust preferred securities issued by SCMF, which had a fixed interest rate of 7.95%. The prepayment resulted in a $0.3 million loss on extinguishment of debt.

(Dollars in thousands)
Date of Offering	Original Face Amount		Carrying Amount June 30, 2014		Carrying Amount December 31, 2013		Interest Rate as of June 30, 2014		Maturity Date
July 31, 2001	$	5,000	$	3,875	$	3,851		3.80% (3 Month LIBOR+358 bps)	July 31, 2031
July 31, 2001		4,000		2,667		2,636		3.80% (3 Month LIBOR+358 bps)	July 31, 2031
June 26, 2003		10,000		5,968		5,921		3.33% (3 Month LIBOR+310 bps)	June 26, 2033
September 25, 2003		10,000		6,441		6,368		3.08% (3 Month LIBOR+285 bps)	September 25, 2033
December 30, 2003		10,000		5,752		5,704		3.08% (3 Month LIBOR+285 bps)	December 30, 2033
June 28, 2005		3,000		1,570		1,545		1.91% (3 Month LIBOR+168 bps)	June 28, 2035
December 22, 2005		10,000		4,548		4,491		1.63% (3 Month LIBOR+140 bps)	March 15, 2036
December 28, 2005		13,000		6,562		6,458		1.77% (3 Month LIBOR+154 bps)	March 15, 2036
June 23, 2006		20,000		11,346		11,206		1.78% (3 Month LIBOR+155 bps)	July 7, 2036
May 16, 2007		56,000		28,474		28,050		1.88% (3 Month LIBOR+165 bps)	June 15, 2037
June 15, 2007		10,000		5,375		5,327		1.66% (3 Month LIBOR+143 bps)	September 6, 2037
	$	151,000	$	82,578	$	81,557

Other Subordinated Debentures

Through the acquisition of CBKN, the Company assumed $3.4 million 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 $3.5 million and $3.6 million as of June 30, 2014, and December 31, 2013, respectively. 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.

26

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

At June 30, 2014, the maturities of long-term borrowings were as follows:

(Dollars in thousands)	Fixed Rate		Floating Rate		Total
Due in 2014 through 2015	$	—	$	—	$	—
Due in 2016		10,683		—		10,683
Due in 2017		31,600		—		31,600
Due in 2018		—		—		—
Thereafter		14,255		82,578		96,833
Total	$	56,538	$	82,578	$	139,116

10. 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.

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, 2014 and December 31, 2013 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 are presented in the following tables:

(Dollars in thousands)	Well Capitalized Requirement		Adequately Capitalized Requirement		Actual
June 30, 2014	Amount	Ratio	Amount	Ratio	Amount		Ratio
Tier 1 Capital
(to Average Assets)
CBF Consolidated	N/A	N/A	³ $251,319	³ 4.0%	$	917,990	14.6%
Capital Bank, N.A.	³ $313,810	³ 5.0%	³ $251,048	³ 4.0%	$	887,652	14.1%
Tier 1 Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	³ $197,728	³ 4.0%	$	917,990	18.6%
Capital Bank, N.A.	³ $296,245	³ 6.0%	³ $197,497	³ 4.0%	$	887,652	18.0%
Total Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	³ $395,456	³ 8.0%	$	977,260	19.8%
Capital Bank, N.A.	³ $493,742	³ 10.0%	³ $394,994	³ 8.0%	$	946,771	19.2%
(Dollars in thousands)	Well Capitalized Requirement		Adequately Capitalized Requirement		Actual
December 31, 2013	Amount	Ratio	Amount	Ratio	Amount		Ratio
Tier 1 Capital
(to Average Assets)
CBF Consolidated	N/A	N/A	³ $254,126	³ 4.0%	$	949,619	14.9%
Capital Bank, N.A.	³ $317,562	³ 5.0%	³ $254,050	³ 4.0%	$	849,520	13.4%
Tier 1 Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	³ $192,428	³ 4.0%	$	949,619	19.7%
Capital Bank, N.A.	³ $288,410	³ 6.0%	³ $192,273	³ 4.0%	$	849,520	17.7%
Total Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	³ $384,856	³ 8.0%	$	1,010,422	21.0%
Capital Bank, N.A.	³ $480,683	³ 10.0%	³ $384,546	³ 8.0%	$	910,162	18.9%

27

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

In August 2010, Capital Bank, NA entered into an Operating Agreement with the Office of the Comptroller of the Currency (the “OCC Operating Agreement”). 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).

As of June 30, 2014 and December 31, 2013, the Company and the Bank met all capital requirements to which they were subject. Tier 1 Capital for the Company includes trust preferred securities to the extent allowable.

The OCC Operating Agreement prohibited Capital Bank, NA from paying a dividend to the Company for three years following the acquisition of the Failed Banks and, now that the three-year period elapsed, 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 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. The OCC has approved dividends totaling $161.0 million to the Company by its subsidiary Capital Bank N.A.

Share Repurchases

On February 5, 2013, the Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock. The Company has repurchased $50.0 million, or 2,839,441 common shares at an average price of $17.60 per share, completing the aforementioned stock repurchase authorization.

On September 16, 2013, the Board of Directors authorized the repurchase of up to an additional $100.0 million of the Company’s common stock. During the three and six months ended June 30, 2014, the Company repurchased $43.2 million, or 1,798,133 common shares at an average price of $24.04 per share and $65.9 million, or 2,766,998 common shares at average price of $23.80 per share, respectively. As of June 30, 2014, the Company has repurchased a total of $85.9 million, or 3,688,874 common shares at an average price of $23.28 per share with $14.2 million of remaining availability for future share repurchases under this plan.

On July 23, 2014, the Board of Directors authorized the repurchase of up to an additional $50.0 million of the Company’s common stock. Stock repurchases may be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase program does not obligate the Company to repurchase any particular amount of shares, and the program may be extended, modified, suspended, or discontinued at any time.

The Company accounts for treasury stock using the cost method as a reduction of shareholders’ equity in the accompanying consolidated balance sheets and statement of changes in shareholders’ equity.

11. Stock-Based Compensation

As of June 30, 2014, the Company had two compensation plans, the 2010 Equity Incentive Plan (the “2010 Plan”) and the 2013 Omnibus Compensation Plan (the “2013 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, stock bonus awards and other incentive awards. The 2010 Plan was replaced by the 2013 Plan and no further awards may be made pursuant to the 2010 Plan.

The 2013 Plan was effective May 22, 2013 and expires on May 22, 2023, the tenth anniversary of the effective date. The maximum number of shares of common stock of the Company that may be optioned or awarded under this plan is 2,639,000 shares. Awards under this plan may be made to any person selected by the Compensation Committee.

The following table summarizes the components and classification of stock-based compensation expense for the three and six months ended June 30, 2014 and 2013.

(Dollars in thousands)	Three Months Ended				Six Months Ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Stock options	$	171	$	96	$	366	$	179
Restricted stock		849		1,268		1,382		2,762
Total stock-based compensation expense	$	1,020	$	1,364	$	1,748	$	2,941

The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was $0.4 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $0.5 million and $1.1 million for the six months ended June 30, 2014 and 2013, respectively.

28

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Stock Options

Under the 2010 and 2013 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. No stock options were granted under these plans during the three and six months ended June 30, 2014.

During the three and six months ended June 30, 2013, 264,000 options were granted to employees. These options vest over service periods of 2 years. The fair value of each option is estimated as of the date of the 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 dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan at the date of grant. The risk-free interest rate was developed using the U.S. Treasury yield curve for a period equal to the expected life of the options on the grant date. 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. 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.

The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted during the three and six months ended June 30, 2013:

	Three and Six Months Ended
	June 30, 2013
Dividend yield	0.0%
Risk-free interest rate	1.016%
Expected option life	5.75 years
Volatility	37.0%
Weighted average grant-date fair value of options granted	$6.52

ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During the three and six months ended June 30, 2014 and 2013, 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.

A summary of the stock option activity for the six months ended June 30, 2014 and 2013 is as follows:

	Six Months Ended
	June 30, 2014					June 30, 2013
(Shares in thousands)	Shares			Weighted     Average Exercise Price Per Share		Shares			Weighted     Average Exercise Price Per Share
Balance, January 1,		3,123		$	20.50		2,890		$	21.39
Granted		—			—		264			18.00
Excercised		—			—		—			—
Expired or Forfeited		(9	)		59.60		(8	)		182.10
Balance, June 30,		3,114		$	20.39		3,146		$	20.70

29

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The weighted average remaining term for outstanding stock options was approximately 6.1 years at June 30, 2014. The aggregate intrinsic value at June 30, 2014 was $11.7 million and $11.0 million for stock options outstanding and exercisable, respectively. The aggregate intrinsic value at June 30, 2013 was $0 for stock options outstanding and exercisable. The intrinsic value for stock options is calculated as the difference between 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 June 30, 2014 were as follows:

(Shares in thousands)	Outstanding Options						Excercisable Options
Range of Exercise Prices	Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Shares		Weighted Average Exercise Price Per Share
$18.00		236		8.89 years	$	18.00		118	$	18.00
$20.00		2,864		5.93 years		20.00		2,864		20.00
$28.44 - $2,026.00		14		3.27 years		138.87		14		138.87
$18.00 - $2,026.00		3,114		6.15 years	$	20.39		2,996	$	20.39

Options outstanding at June 30, 2013 were as follows:

(Shares in thousands)	Outstanding Options						Excercisable Options
Range of Exercise Prices	Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Shares		Weighted Average Exercise Price Per Share
$18.00		264		9.89 years	$	18.00		—	$	—
$20.00		2,864		6.93 years		20.00		2,864		20.00
$28.44 - $2,026.00		18		3.65 years		171.04		17		176.99
$18.00 - $2,026.00		3,146		7.16 years	$	20.70		2,881	$	20.94

Restricted Stock and Full Value Stock Awards

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. The terms of the restricted stock awards granted to employees provide for vesting upon the achievement of stock price goals as follows: (1) one-third at $25.00 per share; (2) one-third at $28.00 per share; and (3) one-third 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 value of the restricted stock is being amortized on a straight-line basis over the implied service periods. On May 21, 2013, 4,000 restricted stock awards were granted under the 2010 Plan. The fair value of the restricted stock was estimated to be equal to the closing stock price on the grant date.

During the three months ended June 30, 2014, 405,133 restricted stock awards vested upon achievement of the $25.00 stock price goal. The Company recognized $1.6 million in excess tax benefits related to the vesting and exercise of such awards.

30

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes unvested restricted stock activity for the six months ended June 30, 2014 and 2013:

	Six Months Ended
	June 30, 2014					June 30, 2013
(Shares in thousands)	Shares			Weighted Average Grant-Date Fair Value     Per Share		Shares		Weighted Average Grant-Date Fair Value     Per Share
Balance, January 1,		1,215		$	14.28		1,212	$	14.27
Granted		—			—		4		18.00
Vested or released		(405	)		15.07		—		—
Expired or forfeited		—			—		—		—
Balance, June 30,		810		$	13.89		1,216	$	14.28

Full Value Stock Awards

On June 5, 2014, 11,880 shares of stock were granted to Directors under the 2013 Plan. The fair value of each stock award was estimated to be equal to the closing stock price on the date of the grant. For the three and six months ended June 30, 2014, the Company recognized the $0.3 million fair value of the stock awards in compensation expense.

12. Income Taxes

A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income tax expense reported is as follows for the three and six months ended June 30, 2014 and 2013:

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Income before income taxes	$	20,041		$	15,009		$	38,663		$	26,317
Income taxes computed at Federal statutory tax rate		7,014			5,253			13,532			9,211
Effect of:
State taxes (net of federal benefit)		738			588			1,483			1,032
Tax-exempt interest income, net		(158	)		(170	)		(333	)		(340	)
Contingent value right expense		114			150			383			1,159
Other, net		(92	)		(241	)		(241	)		61
Total income tax expense	$	7,616		$	5,580		$	14,824		$	11,123

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates. For the three and six months ended June 30, 2014, the effective income tax rates were 38%. For the three and six months ended June 30, 2013, the effective income tax rates were 37% and 42%, respectively. The fluctuations in effective income tax rates have primarily been due to the impact of the CVR expense.

For the three and six months ended June 30, 2014 and 2013, the change in value of the CVR and related expense resulted from the overall improvement in our most recent estimates of cash flows, substantially related to the Company’s legacy Southern Community and Green Bankshares portfolios. The potential payments resulting from CVRs issued as a part of these acquisitions, which were non-taxable transactions, are considered by the Internal Revenue Service as additional consideration to the former shareholders. Accordingly, the expense associated with changes in estimated value of the CVRs is not deductible for income tax purposes.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the states of Florida, South and North Carolina and Tennessee. The net deferred tax assets as of June 30, 2014 and December 31, 2013 were $148.4 million and $166.8 million, respectively. 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, the Company considered both positive and negative evidence in concluding that no valuation allowance was necessary at June 30, 2014 and December 31, 2013.

At June 30, 2014 and December 31, 2013, the Company had $109.3 million and $103.7 million of gross federal net operating loss carryforwards, respectively, which begin to expire after 2029 if unused and are subject to an annual limitation of $10.9 million.

At June 30, 2014 and December 31, 2013, the Company had no amounts recorded for uncertain tax positions.

31

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

13. 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.

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.

Derivative financial instruments

Fair values for interest rate swaps, foreign exchange contracts, forward loan sales agreements and interest rate caps 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.

Valuation of Investment Securities

The fair values of available-for-sale, held-to-maturity and trading securities 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 certain corporate debt securities that are not actively traded, custom discounted cash flow modeling (Level 3 inputs).

As of June 30, 2014, Capital Bank held industrial revenue bonds which are floating rate issues. Since there is no active secondary market for the trading of the bonds, the Company has developed a model to estimate fair value. This model determines an appropriate discount rate for the bonds based on current market rates for liquid corporate bonds with an equivalent credit rating plus an estimated illiquidity factor, and calculates the present value of expected future cash flows using this discount rate.

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.

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.

32

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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 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

As discussed above, as of June 30, 2014, the Company owns industrial revenue bonds, which require recurring fair value estimates categorized within level 3 of the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of these securities are incorporated in the discounted cash flow modeling valuation. Rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of other non-investment grade corporate debt. Significant changes in any inputs in isolation would result in significantly different fair value estimates.

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, 2014:

(Dollars in thousands)			Fair Value Measurement 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	$	6,515	$	4,250	$	2,265	$	—
Available-for-sale securities:
Mortgage-backed securities—residential		590,060		—		590,060		—
Industrial revenue bonds		3,736		—		—		3,736
Marketable equity securities		949		—		949		—
Available-for-sale securities	$	594,745	$	—	$	591,009	$	3,736
Gross asset value of derivatives	$	5	$	—	$	5	$	—
Liabilities
Gross liability value of derivatives	$	211	$	—	$	211	$	—

There were no transfers of assets and liabilities between levels of the fair value hierarchy during the three and six months ended June 30, 2014.

33

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2013:

(Dollars in thousands)			Fair Value Measurement 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	$	6,348	$	4,477	$	1,871	(1)	$	—
Available-for-sale securities:
Asset-backed securities		133,225		—		133,225			—
Mortgage-backed securities-residential		546,626		—		546,626			—
Industrial revenue bonds		3,859		—		—			3,859
Marketable equity securities		931		—		931	(1)		—
Collateralized debt obligations		800		—		800			—
Available-for-sale securities	$	685,441	$	—	$	681,582		$	3,859
Gross asset value of derivatives	$	15	$	—	$	15		$	—
Liabilities
Gross liability value of derivatives	$	1,330	$	—	$	1,330		$	—

(1) Transferred from Level 1 to Level 2 due to limited observable market data.

The tables below present the activity 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 and six months ended and held at June 30, 2014:

(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Industrial Revenue Bonds
Beginning balance, March 31, 2014	$	3,727
Included in other comprehensive income		9
Ending balance, June 30, 2014	$	3,736

(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Industrial Revenue Bonds
Beginning balance, January 1, 2014	$	3,859
Principal reduction		(170	)
Included in other comprehensive income		47
Ending balance, June 30, 2014	$	3,736

The tables below present the activity 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 and six months ended and held at June 30, 2013:

34

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Industrial Revenue Bonds		Collateralized Debt Obligations
Beginning balance, March 31, 2013	$	26		$	3,857	$	307
Included in earnings-gain on sales		199			—		—
Included in other comprehensive income		—			15		(6	)
Sales		(225	)		—		—
Ending balance, June 30, 2013	$	—		$	3,872	$	301
(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Industrial Revenue Bonds		Collateralized Debt Obligations
Beginning balance, January 1, 2013	$	26		$	3,800	$	297
Included in earnings-gain on sales		199			—		—
Included in other comprehensive income		—			72		4
Sales		(225	)		—		—
Ending balance, June 30, 2013	$	—		$	3,872	$	301

Quantitative Information about Recurring Level 3 Fair Value Measurements

(Dollars in thousands)	Fair Value at June 30, 2014		Valuation Technique		Significant Unobservable Input	Range
Industrial revenue bonds	$	3,736		Discounted cash flow	Discount rate	3.5%
					Illiquidity factor	0.5%
(Dollars in thousands)	Fair Value at December 31, 2013		Valuation Technique		Significant Unobservable Input	Range
Industrial revenue bonds	$	3,859		Discounted cash flow	Discount rate	3.7%-3.9%
					Illiquidity factor	0.5%

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of June 30, 2014:

(Dollars in thousands)	Fair Value Measurement 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	$	—	$	—	$	83,761
Other repossesed assets		—		107		—
Impaired loans		—		—		790

35

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Other real estate owned measured at fair value as of June 30, 2014 had a carrying amount of $104.1 million, less valuation allowances totaling $20.4 million. 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, 2013:

(Dollars in thousands)	Fair Value Measurement 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	$	—	$	—	$	118,579
Other repossesed assets		—		108		—
Impaired loans		—		—		1,332

Other real estate owned measured at fair value as of December 31, 2013 had a carrying amount of $138.4 million, less valuation allowances totaling $19.8 million. 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, 2014		Valuation Technique	Significant Unobservable Input	Range
Other real estate owned	$	83,761	Fair value of property	Appraised value less cost to sell	6%-10%
Impaired loans		790	Fair value of collateral	Appraised value less cost to sell	6%-8%
(Dollars in thousands)	Fair Value at December 31, 2013		Valuation Technique	Significant Unobservable Input	Range
Other real estate owned	$	118,579	Fair value of property	Appraised value less cost to sell	7%-10%
Impaired loans		1,332	Fair value of collateral	Appraised value less cost to sell	8%

36

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Carrying amount and estimated fair values of financial instruments were as follows:

(Dollars in thousands)	Fair Value Measurement
June 30, 2014	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	141,033	$	141,033	$	141,033	$	—	$	—
Trading securities		6,515		6,515		4,250		2,265		—
Investment securities available-for-sale		594,745		594,745		—		591,009		3,736
Investment securities held-to-maturity		475,167		480,971		—		480,971		—
Loans, net		4,666,868		4,850,557		—		9,926		4,840,631
FDIC indemnification asset		25,529		25,529		—		—		25,529
Receivable from FDIC		4,578		4,578		—		4,578		—
Other (1)		44,873		44,873		—		—		44,873
Gross asset value of derivatives		5		5		—		5		—
Total financial assets	$	5,959,313	$	6,148,806	$	145,283	$	1,088,754	$	4,914,769
Financial Liabilities
Noncontractual deposits	$	3,801,729	$	3,801,729	$	—	$	—	$	3,801,729
Contractual deposits		1,359,727		1,356,923		—		—		1,356,923
Federal Home Loan Bank advances		161,185		161,124		—		161,124		—
Short-term borrowings		32,814		32,814		—		32,814		—
Long-term borrowings		52,993		55,178		—		—		55,178
Subordinated debentures		86,123		96,786		—		—		96,786
Gross liability value of derivatives		211		211		—		211		—
Total financial liabilities	$	5,494,782	$	5,504,765	$	—	$	194,149	$	5,310,616
(Dollars in thousands)	Fair Value Measurement
December 31, 2013	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	164,441	$	164,441	$	164,441	$	—	$	—
Trading securities		6,348		6,348		4,477		1,871		—
Investment securities available-for-sale		685,441		685,441		—		681,582		3,859
Investment securities held-to-maturity		465,098		459,693		—		459,693		—
Loans, net		4,495,178		4,681,554		—		8,012		4,673,542
FDIC indemnification asset		33,610		33,610		—		—		33,610
Receivable from FDIC		7,624		7,624		—		7,624		—
Other (1)		44,088		44,088		—		—		44,088
Gross asset value of derivatives		15		15		—		15		—
Total financial assets	$	5,901,843	$	6,082,814	$	168,918	$	1,158,797	$	4,755,099
Financial Liabilities
Noncontractual deposits	$	3,737,566	$	3,737,566	$	—	$	—	$	3,737,566
Contractual deposits		1,447,497		1,448,032		—		—		1,448,032
Federal Home Loan Bank advances		96,278		96,241		—		96,241		—
Short-term borrowings		24,850		24,850		—		24,850		—
Long-term borrowings		53,449		55,861		—		—		55,861
Subordinated debentures		85,112		100,795		—		—		100,795
Gross liability value of derivatives		1,330		1,330		—		1,330		—
Total financial liabilities	$	5,446,082	$	5,464,675	$	—	$	122,421	$	5,342,254

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

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, derivatives, 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, FDIC indemnification asset and correspondent bank’s stocks due to restrictions placed on 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 include 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.

37

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

14. Derivative Instruments

The Company has derivative financial instruments acquired in its purchase of SCMF, primarily in the form of interest rate swaps. The forward loan sales contracts are derived from loans held for sale or in the Company’s pipeline. These transactions involve both credit and market risk.

The Company’s derivative instrument contracts which are recorded in other assets and other liabilities on the Company’s balance sheets consist of the following:

(Dollars in thousands)	June 30, 2014				December 31, 2013
	Fair Value		Notional Amount		Fair Value		Notional Amount
Assets
Interest rate cap contracts (matured in 2014)	$	—	$	—	$	—	$	12,500
Forward loan sales contracts (maturing in 2014)		5		2,613		15		4,215
Total assets	$	5	$	2,613	$	15	$	16,715
Liabilities
Interest rate swaps associated with certificates of deposits (maturing in 2040)	$	162	$	25,000	$	1,320	$	25,000
Forward loan sales contracts (maturing in 2014)		49		10,723		10		3,545
Total liabilities	$	211	$	35,723	$	1,330	$	28,545

The Company does not enter into derivative financial instruments for speculative purposes. None of the derivatives held are designated as hedging instruments or otherwise qualify for hedge accounting treatment and all changes in fair value are recognized in non-interest income or non-interest expense during the period of change. For the three and six months ended June 30, 2014, the company recorded $0.6 million and $1.7 million, respectively, in non-interest income, and $16 thousand and $35 thousand, respectively, in non-interest expense as a result of changes in fair value of derivatives. For the three and six months ended June 30, 2013, the company recorded $0.5 million and $0.7 million in non-interest income, respectively, and $0.1 million and $0.2 million in non-interest expense, respectively, as a result of changes in fair value of derivatives.

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 primary objective for each of these contracts is to minimize risk. Interest rate risk being the primary risk for the interest rate swaps and forward loan sales contracts.

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

Certain of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results described in such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation: market and economic conditions, the management of our growth, the risks associated with Capital Bank, NA’s loan portfolio and real estate holdings, local economic conditions affecting retail and commercial real estate, the Company’s geographic concentration in the southeastern region of the United States, restrictions imposed by Capital Bank, NA’s loss sharing agreements with the FDIC, the assumptions and judgments required by loss share accounting and the acquisition method of accounting, competition within the industry, dependence on key personnel, government legislation and regulation, the risks associated with identification, completion and integration of any future acquisitions, and risks related to Capital Bank, NA’s technology and information systems. Additional factors that may cause actual results to differ materially from these forward looking statements, include but are not limited to, the risk factors described in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2013. All forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Our financial information is prepared in accordance with U.S. GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our consolidated financial statements and accompanying notes. For more information on our accounting policies and estimates, refer to Company’s consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2013.

The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of June 30, 2014, and statements of income for the three and six months then ended. Except as noted in tables or otherwise, in dollar and share amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are not in thousands.

The following discussion pertains to our historical results, which includes the operations of First National Bank of the South, Metro Bank, Turnberry Bank (collectively, the “Failed Banks”), TIB Financial, Capital Bank Corp., Green Bankshares and Southern Community Financial subsequent to our acquisition of each such entity. Throughout this discussion we collectively refer to the above acquisitions as the “acquisitions” and we refer to loans originated or purchased by Capital Bank, N.A. as “new loans” or “originated loans”.

Overview

We are a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. We have raised $955.6 million to make acquisitions through a series of private placements and an initial public offering of our common stock. Since inception, we have acquired seven depository institutions, including the assets and certain deposits from the Failed Banks. We operate 162 branches in Florida, North and South Carolina, Tennessee and Virginia. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.

We were founded by a group of experienced bankers with a multi-decade record of leading, operating, acquiring and integrating financial institutions.

Our executive management team is led by our Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America Corp., where his career spanned 38 years and included responsibilities as Vice Chairman and President of the Consumer and Commercial Bank. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc.

Our Chief Financial Officer, Christopher G. Marshall, has over 31 years of financial and managerial experience, including serving as Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America’s Global Consumer and Small Business Bank. Mr. Marshall also served as Chief Financial Officer of Bank of America’s Consumer Products Group. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services.

39

Our Chief Credit Officer, R. Bruce Singletary, has over 32 years of experience, including 19 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region, where he established a centralized underwriting function to serve middle market commercial clients in the southeastern region of the United States. Mr. Singletary also served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank and as Senior Credit Policy Executive of C&S Sovran (renamed NationsBank Corp).

Our Chief of Strategic Planning and Investor Relations, Kenneth A. Posner, spent 13 years as an equity research analyst including serving as a Managing Director at Morgan Stanley focusing on a wide range of financial services firms. Mr. Posner also served in the United States Army, rising to the rank of Captain and has received professional designations as a Certified Public Accountant, a Chartered Financial Analyst and for Financial Risk Management.

On September 24, 2012, our majority owned subsidiaries, CBKN, GRNB and TIBB, merged with and into Capital Bank Financial Corp. (“CBF” or the “Company”), with CBF continuing as the surviving corporation (the “Reorganization”). Upon completion of the reorganization the outstanding common shares held by the minority shareholders were converted into an aggregate of 3.7 million shares of CBF’s Class A common stock.

On October 1, 2012, the Company completed its acquisition of Southern Community Financial Corporation (“SCMF” or “Southern Community”), a publicly held bank holding company headquartered in Winston Salem, North Carolina.

Primary Factors Used to Evaluate Our Business

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and income statement, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our budgeted performance and the financial condition and performance of comparable financial institutions in our region and nationally. Our financial information is prepared in accordance with U.S. GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our consolidated financial statements and accompanying notes. For a full description of income statement metrics and balance sheet drivers used to evaluate our business such as,Net Interest Income, Provision for Loan Losses, Non-Interest Income, Non-Interest Expense, Net Income, Loan Growth, Asset Quality, Deposit Growth, Liquidity and Capital, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the fiscal year ended December 31, 2013.

Quarterly Summary

For the three months ended June 30, 2014, we had net income of $12.4 million, or $0.25 per diluted share, an increase of 9% and 32% over the first quarter and prior year second quarter, respectively. Results include the following non-core items: $0.3 million of contingent value right (“CVR”) expense, and $0.3 million of stock-based compensation expense associated with original founders awards.

Operating and financial highlights for the quarter include the following:

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

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

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

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

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

• Tangible book value per share increased to $18.85.

40

Results of Operations

Net Interest Income

Net interest income is the largest component of our income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, federal funds sold and securities purchased under agreements to resell. Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, repurchase agreements and other short-term borrowings.

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

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

(Dollars in thousands)	Three Months Ended							Three Months Ended
	June 30, 2014							March 31, 2014
	Average Balances		Interest		Yield / Rate			Average Balances		Interest		Yield / Rate
Interest earning assets
Loans (1)	$	4,593,337	$	61,826		5.40	%	$	4,542,255	$	63,404		5.66	%
Investment securities (1)		1,060,611		4,648		1.76	%		1,141,231		4,801		1.71	%
Interest bearing deposits		62,172		37		0.24	%		47,526		25		0.21	%
Other (2)		40,346		578		5.75	%		43,123		581		5.46	%
Total interest earning assets		5,756,466	$	67,089		4.67	%		5,774,135	$	68,811		4.83	%
Non-interest earning assets		763,185							779,933
Total assets	$	6,519,651						$	6,554,068
Interest bearing liabilities
Time deposits	$	1,358,478	$	2,878		0.85	%	$	1,413,731	$	2,970		0.85	%
Money market		931,867		523		0.23	%		948,738		526		0.22	%
Negotiable order of withdrawal accounts		1,330,856		556		0.17	%		1,313,700		538		0.17	%
Savings		531,414		286		0.22	%		532,823		282		0.21	%
Total interest bearing deposits		4,152,615		4,243		0.41	%		4,208,992		4,316		0.42	%
Short-term borrowings and FHLB advances		98,002		50		0.20	%		103,851		70		0.27	%
Long-term borrowings		135,831		1,719		5.08	%		135,317		1,704		5.11	%
Total interest bearing liabilities		4,386,448	$	6,012		0.55	%		4,448,160	$	6,090		0.56	%
Non-interest bearing deposits		1,002,757							942,006
Other liabilities		45,281							48,964
Shareholders’ equity		1,085,165							1,114,938
Total liabilities and shareholders’ equity	$	6,519,651						$	6,554,068
Net interest income and spread			$	61,077		4.12	%			$	62,721		4.28	%
Net interest margin						4.26	%						4.41	%

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Rate/Volume Analysis

(Dollars in thousands)	Three Months Ended June 30, 2014
	Compared to Three Months Ended March 31, 2014
	Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	707		$	(2,285	)	$	(1,578	)
Investment securities		(348	)		195			(153	)
Interest-bearing deposits		8			4			12
Other (2)		(39	)		36			(3	)
Total interest income		328			(2,050	)		(1,722	)
Interest expense
Time deposits		(117	)		25			(92	)
Money market		(9	)		6			(3	)
Negotiable order of withdrawal accounts		7			11			18
Savings		(1	)		5			4
Short-term borrowings and FHLB advances		(4	)		(16	)		(20	)
Long-term borrowings		6			9			15
Total interest expense		(118	)		40			(78	)
Change in net interest income	$	446		$	(2,090	)	$	(1,644	)

(1) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. Average loan volumes include non-performing assets which results in the impact of the non-accrual of interest being reflected in the change in average rate.

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

(3) For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

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

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

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(Dollars in thousands)	Three Months Ended							Three Months Ended
	June 30, 2014							June 30, 2013
	Average Balances		Interest		Yield / Rate			Average Balances		Interest		Yield / Rate
Interest earning assets
Loans (1)	$	4,593,337	$	61,826		5.40	%	$	4,604,224	$	68,363		5.96	%
Investment securities (1)		1,060,611		4,648		1.76	%		1,292,249		4,525		1.40	%
Interest bearing deposits		62,172		37		0.24	%		164,784		102		0.25	%
Other (2)		40,346		578		5.75	%		36,278		462		5.11	%
Total interest earning assets		5,756,466	$	67,089		4.67	%		6,097,535	$	73,452		4.83	%
Non-interest earning assets		763,185							865,118
Total assets	$	6,519,651						$	6,962,653
Interest bearing liabilities
Time deposits	$	1,358,478	$	2,878		0.85	%	$	1,853,592	$	4,598		0.99	%
Money market		931,867		523		0.23	%		1,055,635		575		0.22	%
Negotiable order of withdrawal accounts		1,330,856		556		0.17	%		1,263,133		499		0.16	%
Savings		531,414		286		0.22	%		506,997		255		0.20	%
Total interest bearing deposits		4,152,615		4,243		0.41	%		4,679,357		5,927		0.51	%
Short-term borrowings and FHLB advances		98,002		50		0.20	%		38,794		15		0.16	%
Long-term borrowings		135,831		1,719		5.08	%		142,541		1,894		5.33	%
Total interest bearing liabilities		4,386,448	$	6,012		0.55	%		4,860,692	$	7,836		0.65	%
Non-interest bearing deposits		1,002,757							903,637
Other liabilities		45,281							56,324
Shareholders’ equity		1,085,165							1,142,000
Total liabilities and shareholders’ equity	$	6,519,651						$	6,962,653
Net interest income and spread			$	61,077		4.12	%			$	65,616		4.19	%
Net interest margin						4.26	%						4.32	%

Rate/Volume Analysis

(Dollars in thousands)	Three Months Ended June 30, 2014
	Compared to Three Months Ended June 30, 2013
	Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	(161	)	$	(6,376	)	$	(6,537	)
Investment securities		(896	)		1,019			123
Interest-bearing deposits		(61	)		(4	)		(65	)
Other (2)		55			61			116
Total interest income		(1,063	)		(5,300	)		(6,363	)
Interest expense
Time deposits		(1,112	)		(608	)		(1,720	)
Money market		(69	)		17			(52	)
Negotiable order of withdrawal accounts		27			30			57
Savings		13			18			31
Short-term borrowings and FHLB advances		29			6			35
Long-term borrowings		(87	)		(88	)		(175	)
Total interest expense		(1,199	)		(625	)		(1,824	)
Change in net interest income	$	136		$	(4,675	)	$	(4,539	)

(1) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. Average loan volumes include non-performing assets which results in the impact of the non-accrual of interest being reflected in the change in average rate.

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

(3) For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

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

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

(Dollars in thousands)	Six Months Ended							Six Months Ended
	June 30, 2014							June 30, 2013
	Average Balances		Interest		Yield / Rate			Average Balances		Interest		Yield / Rate
Interest earning assets
Loans (1)	$	4,567,937	$	125,230		5.53	%	$	4,638,263	$	140,319		6.10	%
Investment securities (1)		1,100,698		9,449		1.73	%		1,150,237		8,074		1.42	%
Interest bearing deposits		54,890		63		0.23	%		374,399		473		0.25	%
Other (2)		41,727		1,159		5.60	%		37,565		952		5.11	%
Total interest earning assets		5,765,252	$	135,901		4.75	%		6,200,464	$	149,818		4.87	%
Non-interest earning assets		775,274							880,302
Total assets	$	6,540,526						$	7,080,766
Interest bearing liabilities
Time deposits	$	1,385,952	$	5,850		0.85	%	$	1,919,601	$	9,633		1.01	%
Money market		940,256		1,049		0.22	%		1,084,577		1,204		0.22	%
Negotiable order of withdrawal accounts		1,322,325		1,094		0.17	%		1,269,488		1,054		0.17	%
Savings		532,115		568		0.22	%		505,365		513		0.20	%
Total interest bearing deposits		4,180,648		8,561		0.41	%		4,779,031		12,404		0.52	%
Short-term borrowings and FHLB advances		100,910		121		0.24	%		41,009		29		0.14	%
Long-term borrowings		135,575		3,423		5.09	%		156,648		4,393		5.66	%
Total interest bearing liabilities		4,417,133	$	12,105		0.55	%		4,976,688	$	16,826		0.68	%
Non-interest bearing deposits		972,549							896,277
Other liabilities		50,872							54,320
Shareholders’ equity		1,099,972							1,153,481
Total liabilities and shareholders’ equity	$	6,540,526						$	7,080,766
Net interest income and spread			$	123,796		4.20	%			$	132,992		4.19	%
Net interest margin						4.33	%						4.33	%

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Rate/Volume Analysis

(Dollars in thousands)	Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	(2,100	)	$	(12,989	)	$	(15,089	)
Investment securities		(360	)		1,735			1,375
Interest-bearing deposits		(370	)		(40	)		(410	)
Other (2)		111			96			207
Total interest income		(2,719	)		(11,198	)		(13,917	)
Interest expense
Time deposits		(2,407	)		(1,376	)		(3,783	)
Money market		(161	)		6			(155	)
Negotiable order of withdrawal accounts		44			(4	)		40
Savings		28			27			55
Short-term borrowings and FHLB advances		62			30			92
Long-term borrowings		(557	)		(413	)		(970	)
Total interest expense		(2,991	)		(1,730	)		(4,721	)
Change in net interest income	$	272		$	(9,468	)	$	(9,196	)

(1) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. Average loan volumes include non-performing assets which results in the impact of the non-accrual of interest being reflected in the change in average rate.

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

(3) For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

Provision for Loan Losses

The following table presents the provision (reversal) for loan losses for PCI and non-PCI loans for the three and six months ended June 30, 2014 and 2013:

(Dollars in thousands)	Three Months Ended					Six Months Ended
	June 30, 2014			June 30, 2013		June 30, 2014			June 30, 2013
Provision (reversal) for loan losses on PCI loans	$	(940	)	$	2,517	$	(3,428	)	$	(631	)
Provision for loan losses on non-PCI loans		2,344			1,950		4,808			10,500
Provision for Loan Losses	$	1,404		$	4,467	$	1,380		$	9,869

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

The provision for loan losses for the three months ended June 30, 2014 was $1.4 million compared to a provision of $4.5 million for the three months ended June 30, 2013. The improvement was mainly due to a lower level of net charge offs, which declined from $4.8 million to $1.7 million. For our new loans portfolio, a $4.2 million charge off was recorded during the three months of the prior year related to a single commercial credit relationship associated with suspected fraud. In the current year, the net reversal of impairment associated with PCI loans was mainly due to improvements in our expectations of future cash flows resulting from higher than anticipated payoffs mainly in the consumer and commercial categories and the continued resolution of special assets. Improvement in cash flows resulted in a $0.2 million and a $0.7 million reversal of impairment in covered and non-covered loans, respectively. In contrast, in the prior year, estimation of cash flows resulted in $0.2 million and $2.3 million additional impairment in covered and non-covered loans, respectively.

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

The provision for loan losses for the six months ended June 30, 2014 was $1.4 million compared to $9.9 million for the six months ended June 30, 2013. The improvement was mainly due to a lower level of net charge offs, which declined from $10.3 million to $2.9 million. For our new loans portfolio, a $7.8 million charge off was recorded during the six months of the prior year related to a single commercial credit relationship associated with suspected fraud. In the current year, the net reversal of impairment associated with PCI loans was mainly due to improvements in our expectations of future cash flows resulting from higher than anticipated payoffs mainly in the consumer and commercial categories and the continued resolution of special assets. Improvement in cash flows on non-covered loans resulted in a $3.6 million reversal of impairment, partially offset by $0.2 million in increased impairment from covered loans. In contrast, in the prior year, improvement in cash flows on covered loans resulted in $3.3 million reversal of impairment, partially offset by $2.7 million in increased impairment from non-covered loans.

The table below illustrates the impact of our second quarter 2014 estimates of expected cash flows on PCI loans on impairment and prospective yield:

(Dollars in thousands)			Weighted Average Prospective Yields
	Cumulative Impairment		Based on Original Estimates of Expected Cash Flows			Based on Most Recent Estimates of Expected Cash Flows			Loan Balance (2)		Weighted Average Note Rate			Weighted Average Life (Years)
Covered loan pools (1)	$	13,223		6.09	%		7.99	%	$	212,791		4.91	%		2.87
Non-covered loans pools (1)		21,249		5.59	%		7.77	%		1,398,214		5.05	%		3.21
Total	$	34,472		5.67	%		7.80	%	$	1,611,005		5.03	%		3.17

(1) Covered loan pools are comprised of loans acquired in acquisition of the Failed Banks with loans types guaranteed by the FDIC under loss sharing agreements. Accordingly, certain pools classified as covered may include individual loans which are not, or are no longer covered.

(2) Loan balance represents the recorded investment of all loans in the covered and non-covered pools, respectively. Not all covered loans are classified as PCI.

Non-interest Income

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

Non-interest income declined $1.6 million to $11.9 million for the three months ended June 30, 2014 from $13.5 million for the three months ended June 30, 2013. The decline was mainly due to a $1.0 million increase in FDIC indemnification asset amortization as a result of lower credit loss expectations in our legacy loan portfolios, a $0.7 million decline in service charges on deposit accounts as a result of a 16% decline in average balances on customer overdrafts, and a $0.5 million decline in mortgage fees, as residential mortgage loans sold declined to $40.4 million for the three months ended June 30, 2014, from $49.8 million for the three months ended June 30, 2013. Partially offsetting this decline was an increase of $0.6 million in investment advisory and trust fees which benefited from a 23% increase year over year in fiduciary trust assets under management coupled with higher investment advisory commissions.

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

Non-interest income declined $1.2 million to $23.3 million for the six months ended June 30, 2014 from $24.4 million for the six months ended June 30, 2013. The decline was mainly due to a $1.6 million decline in service charges on deposit accounts as a result of a 19% decline in average balances on customer overdrafts, a $1.0 million increase in FDIC indemnification asset amortization as a result of lower credit loss expectations in our legacy loan portfolios, and a $1.0 million decline in mortgage fees, as residential mortgage loans sold declined to $66.4 million for the six months ended June 30, 2014 from $89.3 million for the six months ended June 30, 2013. Partially offsetting this decline was an increase of $1.5 million in investment advisory and trust fees due to an increase in fiduciary trust assets under management and higher investment advisory commissions as discussed above.

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The following table sets forth the components of non-interest income for the periods indicated:

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Service charges on deposit accounts	$	5,672		$	6,335		$	11,108		$	12,677
Debit card income		3,103			2,979			5,947			5,815
Fees on mortgage loans originated and sold		1,123			1,601			1,882			2,842
Investment advisory and trust fees		910			357			2,171			640
FDIC indemnification asset expense		(2,064	)		(1,108	)		(4,229	)		(3,277	)
Investment securities (losses) gains, net		(28	)		205			146			205
OREO revenue		538			427			1,196			955
Earnings on bank owned life insurance policies		396			417			863			820
Wire transfer fees		188			193			366			378
Other income		2,049			2,100			3,806			3,360
Total non-interest income	$	11,887		$	13,506		$	23,256		$	24,415

Non-interest Expense

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

Non-interest expense declined $8.1 million to $51.3 million for the three months ended June 30, 2014 from $59.4 million for the three months ended June 30, 2013. The decline was mainly due to a $6.5 million decline in the OREO valuation expense, foreclosed asset and loan workout expense components of our legacy credit expenses, which is reflecting the continued resolution of special assets. OREO sales during the quarter resulted in $32.4 million in cash proceeds, including $3.2 million in gains, reducing our OREO balance by 20% from March 31, 2014. Also contributing to the decline was a $0.3 million decrease in stock-based compensation expense mainly associated with original founders awards.

Salary and employee benefits increased $0.8 million mainly due to an increase in benefits reflecting higher healthcare costs.

Net occupancy expense remained relatively flat for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, as a result of our continued focus on consolidating facilities, offset by contractual increases in operating lease costs.

Other operating expense declined $1.3 million due to a decline in operational charge-offs, professional fees and insurance costs.

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

Non-interest expense declined $14.2 million to $106.5 million for the six months ended June 30, 2014 from $120.7 million for the six months ended June 30, 2013. The decline was mainly due to a $9.9 million decrease in the OREO valuation expense, foreclosed asset and loan workout expense components of our total legacy credit expenses, which is reflecting the continued resolution of special assets. OREO sales during the six months resulted in $48.3 million in cash proceeds, including $3.9 million in gains, reducing our OREO balance by 26% from December 31, 2013. Also contributing to the decline was a reduction of $2.2 million in CVR expense as a result of our most recent estimate of expected credit losses from our legacy Southern Community and Green Bankshares portfolios, and a $1.2 million decrease in stock-based compensation expense mainly associated with original founders awards. The CVR liability is measured each quarter and is payable after the fifth anniversary of the consummation of the respective acquisition and the current amount of the liability represents the expected payout discounted at an estimated market discount rate from the payout date to the reporting date.

Salary and employee benefits increased $3.5 million, mainly due to an increase in compensation as a result of higher incentive compensation and employee benefits due to increasing healthcare costs.

Net occupancy expense decline $0.3 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, as a result of our continued focus on consolidating facilities, partially offset by contractual increases in operating lease costs.

Other operating expense declined $4.1 million due to a decline in operational charge-offs, professional fees and insurance costs.

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The following table sets forth the components of non-interest expense for the periods indicated:

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Salaries and employee benefits	$	23,449		$	22,638		$	46,947		$	43,422
Stock-based compensation expense		1,020			1,364			1,748			2,941
Net occupancy and equipment expense		8,723			8,686			17,322			17,593
OREO valuation expense		3,022			6,209			6,595			12,799
Gain on sales of OREO		(3,192	)		(2,205	)		(3,913	)		(3,392	)
Foreclosed asset related expense		991			2,225			2,450			3,644
Loan workout expense		1,117			2,236			2,294			4,300
Conversion and merger related expense		—			140			—			253
Professional fees		2,038			2,344			4,042			4,992
Loss on extinguishment of debt		—			—			—			308
Software expense		1,940			1,817			3,808			3,640
Computer services		3,389			3,541			6,642			6,641
Contingent value right expense		327			428			1,094			3,311
FDIC assessments		1,648			1,763			3,277			3,566
Telecomunication expense		1,628			1,631			3,236			3,385
Amortization of intangible		1,186			1,270			2,400			2,542
Other expense		3,987			5,295			8,555			10,750
Total non-interest expense	$	51,273		$	59,382		$	106,497		$	120,695

Our efficiency ratio for the three months ended June 30, 2014 and 2013 was 70.5% and 75.3%, respectively. Our core efficiency ratio for the three months ended June 30, 2014 and 2013 was 69.3% and 73.0%, respectively. Our efficiency ratio for the six months ended June 30, 2014 and 2013 was 72.7% and 76.9%, respectively. Our core efficiency ratio for the six months ended June 30, 2014 and 2013 was 71.3% and 72.7%, respectively.

The core efficiency ratio, which equals core non-interest expense divided by core net revenues (net interest income plus core non-interest income), for the three and six months ended June 30, 2014 and 2013 is as follows:

(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Reported non-interest expense	$	51,273		$	59,382		$	106,497		$	120,695
Less: Stock-based compensation expense		531			1,366			1,064			2,943
CVR expense		327			428			1,094			3,311
Conversion and merger related expenses and salaries and employee benefits		—			140			—			253
Loss on extinguishment of debt		—			—			—			308
Core non-interest expense	$	50,415		$	57,448		$	104,339		$	113,880
Net interest income	$	60,831		$	65,352		$	123,284		$	132,466
Reported non-interest income		11,887			13,506			23,256			24,415
Less: Securities (losses) gains		(28	)		205			146			205
Core non-interest income	$	11,915		$	13,301		$	23,110		$	24,210
Efficiency Ratios		70.5	%		75.3	%		72.7	%		76.9	%
Core Efficiency Ratios		69.3	%		73.0	%		71.3	%		72.7	%

The core efficiency ratio is a non-GAAP measure which we believe provides analysts and investors with information useful in understanding our business and evaluating our operating efficiency. We monitor the core efficiency ratio to evaluate and control operating costs. The core efficiency ratio is also a measure utilized by our Board of Directors in measuring management’s performance in controlling operating costs in comparison to peers. This non-GAAP measure has inherent limitations and is not required to be uniformly applied. It should not be considered in isolation or as a substitute for analyses of results reported under GAAP. This non-GAAP measure may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for non-interest expense.

48

Income Taxes

The provision for income taxes was $7.6 million for the three months ended June 30, 2014 and $5.6 million for the three months ended June 30, 2013. The effective income tax rate was 38% and 37%, respectively. The change in effective income tax rate was mainly due to more favorable tax-exempt interest income and the impact of the CVR expense to the three months ended June 30, 2013 as compared to the three months ended June 30, 2014. The change in value of the CVR resulted from the overall improvement in our most recent estimates of cash flows, substantially related to the Company’s legacy Southern Community and Green Bankshares portfolios. The change in estimated value of the CVRs is not deductible for income tax purposes. Excluding the impact of the CVR expense, the effective income tax rate was 37% for the three months ended June 30, 2014.

The provision for income taxes was $14.8 million for the six months ended June 30, 2014 and $11.1 million for the six months ended June 30, 2013. The effective income tax rate was 38% and 42%, respectively. The change in effective income tax rates was mainly due to the impact of the CVR expense. As noted above, the change in estimated value of the CVRs is not deductible for income tax purposes. Excluding the impact of the CVR expense, the effective income tax rate was 37% for the six months ended June 30, 2014.

There were no unrecognized tax benefits at June 30, 2014 and December 31, 2013, and we do not expect to identify any unrecognized tax benefits during the next 12 months.

Financial Condition

Our assets totaled $6.6 billion at June 30, 2014 and December 31, 2013. Total loans increased $170.1 million to $4.7 billion at June 30, 2014 compared to $4.6 billion at December 31, 2013. The increase in total loans was due to $694.2 million of new loans, partially offset by $149.2 million in resolutions of problem loans and $374.9 million in net principal repayments. Investment securities declined by $80.5 million mainly due to the sale of approximately $125.0 million in lower rate asset backed securities in order to re-balance our investment securities portfolio as part of our strategy to manage the bank’s overall interest rate risk position. Total deposits were $5.2 billion at June 30, 2014 and December 31, 2013. Continued planned shrinkage in high-cost legacy time deposits, which declined by $87.8 million, and the increase in demand deposit and non-interest bearing accounts of $73.8 million, increased our core deposits to 73.7% of total deposits at June 30, 2014 compared to 72.1% at December 31, 2013. Borrowed funds, consisting of FHLB advances, short-term borrowings, notes payable and subordinated debentures, totaled $333.1 million and $259.7 million at June 30, 2014 and December 31, 2013, respectively. The increase in borrowed funds was mainly due to $64.9 million of new short-term FHLB advances.

Shareholders’ equity was $1.1 billion at June 30, 2014 and December 31, 2013. During 2013, the Company’s Board of Directors authorized stock repurchase plans of $150.0 million. Stock repurchases may be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase programs do not obligate the Company to repurchase any particular amount of shares, and the programs may be extended, modified, suspended, or discontinued at any time. During the three months ended June 30, 2014, the Company repurchased $43.2 million, or 1,798,133 common shares at an average price of $24.04 per share. During the six months ended June 30, 2014, the Company repurchased $65.9 million, or 2,766,998 common shares at an average price of $23.81 per share. As of June 30, 2014, the Company has repurchased a total of $135.8 million or 6,528,315 common shares at an average price of $20.80 per share, and had $14.2 million of remaining availability for future share repurchases under the $150.0 authorization.

On July 23, 2014, the Board of Directors authorized an additional repurchase of up to $50.0 million of its common stock to be made from time to time, subject to market conditions and other factors.

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 have worked 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.

49

The following table sets forth the carrying amounts of our loan portfolio:

(Dollars in thousands)	As of June 30, 2014					As of December 31, 2013					Sequential Change
	Amount		Percent			Amount		Percent			Amount			Percent
Non-owner occupied commercial real estate	$	793,733		16.8	%	$	775,733		17.0	%	$	18,000			2.3	%
Other commercial construction and land		243,671		5.2	%		300,494		6.6	%		(56,823	)		-18.9	%
Multifamily commercial real estate		62,793		1.3	%		67,688		1.5	%		(4,895	)		-7.2	%
1-4 family residential construction and land		80,160		1.7	%		71,351		1.6	%		8,809			12.3	%
Total commercial real estate		1,180,357		25.0	%		1,215,266		26.7	%		(34,909	)		-2.9	%
Owner occupied commercial real estate		1,040,533		22.0	%		1,058,148		23.2	%		(17,615	)		-1.7	%
Commercial and industrial loans		932,800		19.8	%		803,736		17.7	%		129,064			16.1	%
Lease financing		2,346		0.0	%		2,676		0.1	%		(330	)		-12.3	%
Total commercial		1,975,679		41.8	%		1,864,560		41.0	%		111,119			6.0	%
1-4 family residential		863,897		18.3	%		804,322		17.7	%		59,575			7.4	%
Home equity loans		380,767		8.1	%		386,366		8.5	%		(5,599	)		-1.4	%
Other consumer loans		213,639		4.5	%		170,526		3.7	%		43,113			25.3	%
Total consumer		1,458,303		30.9	%		1,361,214		29.9	%		97,089			7.1	%
Other		107,836		2.3	%		110,989		2.4	%		(3,153	)		-2.8	%
Total loans	$	4,722,175		100.0	%	$	4,552,029		100.0	%	$	170,146			3.7	%

The following table sets forth the carrying amounts of our non-pci and pci loan portfolio by category:

(Dollars in thousands)	As of June 30, 2014
	Non PCI Loans
	New		Acquired		PCI Loans		Total
Non-owner occupied commercial real estate	$	295,756	$	68,261	$	429,716	$	793,733
Other commercial construction and land		62,754		246		180,671		243,671
Multifamily commercial real estate		17,179		14,061		31,553		62,793
1-4 family residential construction and land		66,334		—		13,826		80,160
Total commercial real estate		442,023		82,568		655,766		1,180,357
Owner occupied commercial real estate		687,303		42,236		310,994		1,040,533
Commercial and industrial loans		795,315		17,276		120,209		932,800
Lease financing		2,346		—		—		2,346
Total commercial		1,484,964		59,512		431,203		1,975,679
1-4 family residential		448,315		49,549		366,033		863,897
Home equity loans		73,749		201,158		105,860		380,767
Other consumer loans		200,024		5,383		8,232		213,639
Total consumer		722,088		256,090		480,125		1,458,303
Other		60,186		3,739		43,911		107,836
Total loans	$	2,709,261	$	401,909	$	1,611,005	$	4,722,175

(Dollars in thousands)	As of December 31, 2013
	Non PCI Loans
	New		Acquired		PCI Loans		Total
Non-owner occupied commercial real estate	$	219,482	$	68,080	$	488,171	$	775,733
Other commercial construction and land		67,537		252		232,705		300,494
Multifamily commercial real estate		12,537		16,650		38,501		67,688
1-4 family residential construction and land		56,978		1		14,372		71,351
Total commercial real estate		356,534		84,983		773,749		1,215,266
Owner occupied commercial real estate		642,794		48,459		366,895		1,058,148
Commercial and industrial loans		643,044		20,875		139,817		803,736
Lease financing		2,676		—		—		2,676
Total commercial		1,288,514		69,334		506,712		1,864,560
1-4 family residential		332,585		53,095		418,642		804,322
Home equity loans		52,918		217,252		116,196		386,366
Other consumer loans		151,584		6,407		12,535		170,526
Total consumer		537,087		276,754		547,373		1,361,214
Other		57,320		3,959		49,710		110,989
Total loans	$	2,239,455	$	435,030	$	1,877,544	$	4,552,029

During the six months ended June 30, 2014, our loan portfolio increased by $170.1 million due to $694.2 million of new loans, partially offset by $149.2 million in resolutions of problem loans and $374.9 million in net principal repayments. The composition of new loan production is indicative of our business strategy of emphasizing commercial and industrial and consumer loans. As illustrated in the table below, commercial loans and consumer and other loans represented approximately 45.9% and 35.2%, respectively, of new loan production for the six months ended June 30, 2014. We expect that this production will be more balanced going forward, as we have substantially reduced our concentration in commercial real estate loans.

The following table sets forth our new loans (excluding renewals of existing loans) segmented by loan type:

(Dollars in thousands)	Six Months Ended
	June 30, 2014					June 30, 2013
	Amount		Percent			Amount		Percent
Non-owner occupied commercial real estate	$	66,717		9.6	%	$	20,239		3.7	%
Other commercial construction and land		36,324		5.2	%		21,840		3.9	%
Multifamily commercial real estate		3,606		0.5	%		1,856		0.4	%
1-4 family residential construction and land		24,890		3.6	%		28,327		5.1	%
Total commercial real estate		131,537		18.9	%		72,262		13.1	%
Owner occupied commercial real estate		77,137		11.1	%		116,324		21.0	%
Commercial and industrial loans		241,489		34.8	%		196,862		35.6	%
Total commercial		318,626		45.9	%		313,186		56.6	%
1-4 family residential		128,115		18.5	%		99,244		17.9	%
Home equity loans		25,530		3.7	%		11,514		2.1	%
Other consumer loans		84,678		12.2	%		49,738		9.0	%
Total consumer		238,323		34.4	%		160,496		29.0	%
Other		5,750		0.8	%		7,091		1.3	%
Total loans	$	694,236		100.0	%	$	553,035		100.0	%

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. Accordingly, we have reduced the concentration in our portfolio over time, which had characterized our acquired loan portfolios.

Florida, South Carolina, North Carolina and Tennessee accounted for 31.9%, 13.4%, 31.2% and 23.5% of our new loans, respectively, for the six months ended June 30, 2014. Florida, South Carolina, North Carolina, and Tennessee accounted for 32.7%, 9.9%, 43.3% and 14.1% of our new loans, respectively, for the six months ended June 30, 2013. Of the new loans for the six months ended June 30, 2014, $46.0 million related to purchased high quality residential loans.

50

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 Credit 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 of the South 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 new loans we originate or purchase, loans acquired through the acquisitions of Capital Bank, TIB Bank, Greenbank and Southern Community Financial 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, 2014, covered loans were $240.5 million, representing 5.1% of our loan portfolio of which 0.5% were past due 30-89 days, 12.4% were greater than 90 days past due and still accruing/accreting and 0.5% were nonaccrual. As of December 31, 2013, covered loans were $285.3 million, representing 6.3% of our loan portfolio of which 0.3% were past due30-89 days, 14.2% greater than 90 days past due and still accruing/accreting and 0.5% nonaccrual. The status of these loans reflects 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 their acquisition date. Actual claims for reimbursement filed with the FDIC for incurred losses on covered loans but not yet paid were $4.6 million at June 30, 2014.

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.

Collection of loss claims under the loss sharing agreements requires extensive and specific recordkeeping and incremental 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, 2014, totaling $126.0 million have been collected from the FDIC. Additionally, the loss sharing agreements provide for regular examination of compliance with loss sharing agreements including 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, 2014, non-covered loans were $4.5 billion, representing 94.9% of our loan portfolio, of which 0.3% were past due 30-89 days, 4.3% were greater than 90 days past due and still accruing/accreting and 0.2% were nonaccrual. As of December 31, 2013, non-covered loans were $4.3 billion, representing 93.7% of our loan portfolio, of which 0.5% were past due 30-89 days, 5.6% were greater than 90 days past due and still accruing/accreting and 0.3% were nonaccrual.

As a large percentage of the non-covered loans are acquired impaired loans, 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.

51

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:

(Dollars in thousands)	June 30, 2014											December 31, 2013
	Portfolio Balance		% 30-89 Days Past Due			% Greater Than 90 Days Past Due and Still Accruing/ Accreting			% Non- accruals			Portfolio Balance		% 30-89 Days Past Due			% Greater Than 90 Days Past Due and Still Accruing/ Accreting			% Non- accruals
Covered Porfolio
Non-owner occupied commercial real estate	$	40,513		0.0	%		10.2	%		0.0	%	$	55,734		0.2	%		19.1	%		0.0	%
Other commercial construction and land		17,173		1.8	%		54.9	%		0.0	%		19,162		0.0	%		44.2	%		0.0	%
Multifamily commercial real estate		4,833		0.0	%		4.3	%		0.0	%		9,109		0.0	%		0.0	%		0.0	%
Total commercial real estate		62,519		0.5	%		22.0	%		0.0	%		84,005		0.1	%		22.8	%		0.0	%
Owner occupied commercial real estate		60,648		0.0	%		4.9	%		0.0	%		67,302		0.4	%		9.9	%		0.0	%
Commercial and industrial loans		8,619		0.0	%		2.1	%		0.8	%		10,212		0.0	%		15.6	%		0.0	%
Total commercial		69,267		0.0	%		4.5	%		0.1	%		77,514		0.3	%		10.6	%		0.1	%
1-4 family residential		60,631		0.9	%		14.0	%		0.0	%		70,599		0.3	%		15.3	%		0.0	%
Home equity loans		47,095		0.8	%		9.2	%		2.3	%		51,315		0.4	%		2.4	%		2.5	%
Other consumer loans		65		0.0	%		41.5	%		0.0	%		102		0.0	%		65.7	%		0.0	%
Total consumer		107,791		0.8	%		11.9	%		1.0	%		122,016		0.4	%		9.9	%		1.0	%
Other		868		0.0	%		0.0	%		0.0	%		1,822		0.0	%		52.4	%		0.0	%
Total covered loans	$	240,445		0.5	%		12.4	%		0.5	%	$	285,357		0.3	%		14.2	%		0.5	%
Non-covered Porfolio
Non-owner occupied commercial real estate	$	753,220		0.1	%		4.4	%		0.2	%	$	719,999		0.2	%		4.9	%		0.0	%
Other commercial construction and land		226,498		0.1	%		15.9	%		0.1	%		281,332		0.4	%		20.8	%		0.2	%
Multifamily commercial real estate		57,960		0.0	%		3.6	%		0.0	%		58,579		0.5	%		4.5	%		0.0	%
1-4 family residential construction and land		80,160		0.2	%		2.8	%		0.0	%		71,351		0.0	%		2.5	%		0.0	%
Total commercial real estate		1,117,838		0.1	%		6.6	%		0.1	%		1,131,261		0.3	%		8.7	%		0.1	%
Owner occupied commercial real estate		979,885		0.3	%		2.7	%		0.2	%		990,846		0.5	%		3.4	%		0.3	%
Commercial and industrial loans		924,181		0.1	%		3.3	%		0.3	%		793,524		0.0	%		3.8	%		0.2	%
Lease financing		2,346		0.0	%		0.0	%		0.0	%		2,676		0.0	%		0.0	%		0.0	%
Total commercial		1,906,412		0.2	%		3.0	%		0.2	%		1,787,046		0.3	%		3.6	%		0.3	%
1-4 family residential		803,266		0.5	%		4.0	%		0.2	%		733,723		1.0	%		5.1	%		0.2	%
Home equity loans		333,672		0.8	%		1.6	%		0.7	%		335,051		0.8	%		2.2	%		0.7	%
Other consumer loans		213,574		1.3	%		0.1	%		0.3	%		170,424		1.3	%		0.7	%		0.5	%
Total consumer		1,350,512		0.7	%		2.8	%		0.3	%		1,239,198		1.0	%		3.7	%		0.4	%
Other		106,968		0.0	%		2.8	%		0.0	%		109,167		0.4	%		4.3	%		0.0	%
Total non-covered loans	$	4,481,730		0.3	%		3.8	%		0.2	%	$	4,266,672		0.5	%		5.0	%		0.2	%
Total loans	$	4,722,175		0.3	%		4.3	%		0.2	%	$	4,552,029		0.5	%		5.6	%		0.3	%

Of the loans past due greater than 90 days and still in accruing/accreting status as of June 30, 2014, $29.7 million (or approximately 14.8%) were loans covered by loss sharing agreements with the FDIC. Of the loans past due greater than 90 days and still in accruing/accreting status as of December 31, 2013, $40.4 million (or approximately 15.9%) 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.

Total non-performing loans as of June 30, 2014 declined by $53.5 million to $212.1 million as compared to $265.6 million at December 31, 2013. The change in non-performing loans during the six months ended June 30, 2014 was attributable to $17.9 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures and $73.3 million in resolutions. Partially offsetting these decreases were $37.7 million of loans that became non-performing.

During the six months ended June 30, 2014 of the loans we foreclosed, or received deeds in lieu of foreclosure, approximately 54% consisted of commercial real estate loans and approximately 14.9% were associated with the covered loans in South Carolina.

52

The customer-owed principal balances and carrying amounts as of June 30, 2014 and December 31, 2013 are set forth in the tables below:

(Dollars in thousands)	June 30, 2014
	Gross Customer Balance Owed		Carrying Amount (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	$	86,574	$	40,513		46.8	%	$	4,124		10.2	%
Other commercial construction and land		79,609		17,173		21.6	%		9,434		54.9	%
Multifamily commercial real estate		11,178		4,833		43.2	%		208		4.3	%
1-4 family residential construction and land		3,170		—		0.0	%		—		0.0	%
Total commercial real estate		180,531		62,519		34.6	%		13,766		22.0	%
Owner occupied commercial real estate		75,741		60,648		80.1	%		2,955		4.9	%
Commercial and industrial loans		18,739		8,619		46.0	%		248		2.9	%
Total commercial		94,480		69,267		73.3	%		3,203		4.6	%
1-4 family residential		90,687		60,631		66.9	%		8,488		14.0	%
Home equity loans		64,221		47,095		73.3	%		5,429		11.5	%
Other consumer loans		200		65		32.5	%		27		41.5	%
Total consumer		155,108		107,791		69.5	%		13,944		12.9	%
Other		16,249		868		5.3	%		—		0.0	%
Total covered loans	$	446,368	$	240,445		53.9	%	$	30,913		12.9	%
Non-covered Portfolio
Non-owner occupied commercial real estate	$	836,309	$	753,220		90.1	%	$	34,195		4.5	%
Other commercial construction and land		504,812		226,498		44.9	%		36,360		16.1	%
Multifamily commercial real estate		66,981		57,960		86.5	%		2,100		3.6	%
1-4 family residential construction and land		113,511		80,160		70.6	%		2,219		2.8	%
Total commercial real estate		1,521,613		1,117,838		73.5	%		74,874		6.7	%
Owner occupied commercial real estate		1,051,834		979,885		93.2	%		28,309		2.9	%
Commercial and industrial loans		1,032,433		924,181		89.5	%		32,496		3.5	%
Lease financing		2,346		2,346		100.0	%		—		0.0	%
Total commercial		2,086,613		1,906,412		91.4	%		60,805		3.2	%
1-4 family residential		863,012		803,266		93.1	%		34,089		4.2	%
Home equity loans		388,710		333,672		85.8	%		7,487		2.2	%
Other consumer loans		188,046		213,574		113.6	%		931		0.4	%
Total consumer		1,439,768		1,350,512		93.8	%		42,507		3.1	%
Other		115,864		106,968		92.3	%		3,024		2.8	%
Total non-covered loans	$	5,163,858	$	4,481,730		86.8	%	$	181,210		4.0	%
Total loans	$	5,610,226	$	4,722,175		84.2	%	$	212,123		4.5	%

(1) The carrying amount for total covered and non-covered loans represents a discount from the total gross customer balance of $205.9 million, or 46.1%, and $682.1 million, or 13.2%, respectively.

(2) Includes loans greater than 90 days past due.

53

(Dollars in thousands)	December 31, 2013
	Gross Customer Balance Owed		Carrying Amount (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	$	101,639	$	55,734		54.8	%	$	10,658		19.1	%
Other commercial construction and land		86,039		19,162		22.3	%		8,479		44.2	%
Multifamily commercial real estate		15,543		9,109		58.3	%		—		0.0	%
1-4 family residential construction and land		3,556		—		0.0	%		—		0.0	%
Total commercial real estate		206,777		84,005		40.6	%		19,137		22.8	%
Owner occupied commercial real estate		82,206		67,302		81.9	%		6,631		9.9	%
Commercial and industrial loans		20,466		10,212		49.8	%		1,663		16.3	%
Total commercial		102,672		77,514		75.5	%		8,294		10.7	%
1-4 family residential		101,830		70,599		69.4	%		10,824		15.3	%
Home equity loans		70,686		51,315		72.6	%		2,497		4.9	%
Other consumer loans		85		102		—			67		65.7	%
Total consumer		172,601		122,016		70.7	%		13,388		11.0	%
Other		18,315		1,822		9.8	%		954		52.4	%
Total covered loans	$	500,365	$	285,357		57.0	%	$	41,773		14.6	%
Non-covered Portfolio
Non-owner occupied commercial real estate	$	811,499	$	719,999		88.7	%	$	35,653		5.0	%
Other commercial construction and land		555,044		281,332		50.7	%		59,196		21.0	%
Multifamily commercial real estate		68,124		58,579		86.0	%		2,641		4.5	%
1-4 family residential construction and land		104,530		71,351		68.3	%		1,797		2.5	%
Total commercial real estate		1,539,197		1,131,261		73.5	%		99,287		8.8	%
Owner occupied commercial real estate		1,072,309		990,846		92.4	%		37,368		3.8	%
Commercial and industrial loans		903,772		793,524		87.8	%		31,698		4.0	%
Lease financing		2,676		2,676		100.0	%		—		0.0	%
Total commercial		1,978,757		1,787,046		90.3	%		69,066		3.9	%
1-4 family residential		805,865		733,723		91.0	%		39,063		5.3	%
Home equity loans		390,049		335,051		85.9	%		9,637		2.9	%
Other consumer loans		183,869		170,424		92.7	%		2,055		1.2	%
Total consumer		1,379,783		1,239,198		89.8	%		50,755		4.1	%
Other		117,804		109,167		92.7	%		4,745		4.3	%
Total non-covered loans	$	5,015,541	$	4,266,672		85.1	%	$	223,853		5.2	%
Total loans	$	5,515,906	$	4,552,029		82.5	%	$	265,626		5.8	%

(1) The carrying amount for total covered and non-covered loans represents a discount from the total gross customer balance of $215.1 million, or 43.0%, and $748.8 million, or 14.9%, respectively.

(2) Includes loans greater than 90 days past due.

54

Allowance and Provision for Loan Losses

At June 30, 2014, the allowance for loan losses was $55.3 million of which $20.8 million related to new loans or acquired non-PCI loans, and $34.5 million was associated with PCI loans. At December 31, 2013, the allowance for loan losses was $56.9 million of which $19.0 million related to new loans or acquired non-PCI loans, and $37.9 million was associated with PCI loans.

For non PCI loans, the allowance for loan losses reflects an allowance for probable incurred credit losses in the loan portfolio. 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.

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.

For PCI loans, the allowance for loan losses is a measure of impairment based upon our most recent estimates of expected cash flows. Our estimation of expected cash flows, which is used to determine the need for provisions to or reversals of the allowance every reporting period, is determined by assigning probability of default (“PD”) and loss given default (“LGD”) assumptions, amongst other assumptions such as prepayment speeds and recovery or liquidation timing. For commercial real estate and other commercial loans, we generally assign PD assumptions through the mapping of the following loan level risk ratings: Pass, Watch, Sub-Performing and Non-Performing. For home equity loans, residential loans, and consumer loans, PD is determined by mapping payment performance and delinquency status to market based default assumptions. Estimated loan to value ratios, determined using current appraisals and/or real estate indices, are used to derive loss given default assumptions for real estate collateralized loans.

Senior management and our Board of Directors review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.

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 new 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 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.

As the majority of our acquired loans are considered PCI loans, our provision for loan losses in future periods for acquired loans 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. For new loans, 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. Refer toProvision for loan losses section for further discussion.

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.

The following table presents the roll forward of the allowance for loan losses for PCI and non-PCI loans for the three and six months ended June 30, 2014 and 2013 by the class of loans against which the allowance is allocated:

55

(Dollars in thousands)	Three Months Ended
	June 30, 2014									June 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	20,194		$	35,412		$	55,606		$	20,496		$	36,675		$	57,171
Charge-offs:
Non-owner occupied commercial real estate		204			—			204			11			—			11
Other commercial construction and land		(1	)		—			(1	)		28			—			28
1-4 family residential construction and land		(1	)		—			(1	)		—			—			—
Total commercial real estate		202			—			202			39			—			39
Owner occupied commercial real estate		8			—			8			—			—			—
Commercial and industrial loans		106			—			106			4,107			—			4,107
Lease financing		—			—			—			—			—			—
Total commercial		114			—			114			4,107			—			4,107
1-4 family residential		80			—			80			28			—			28
Home equity loans		465			—			465			587			—			587
Other consumer loans		781			—			781			680			—			680
Total consumer		1,326			—			1,326			1,295			—			1,295
Other		534			—			534			628			—			628
Total charge-offs		2,176			—			2,176			6,069			—			6,069
Recoveries:
Non-owner occupied commercial real estate		77			—			77			20			—			20
Other commercial construction and land		4			—			4			104			—			104
1-4 family residential construction and land		2			—			2			2			—			2
Total commercial real estate		83			—			83			126			—			126
Owner occupied commercial real estate		1			—			1			222			—			222
Commercial and industrial loans		34			—			34			123			—			123
Total commercial		35			—			35			345			—			345
1-4 family residential		4			—			4			20			—			20
Home equity loans		33			—			33			358			—			358
Other consumer loans		146			—			146			159			—			159
Total consumer		183			—			183			537			—			537
Other		172			—			172			255			—			255
Total recoveries		473			—			473			1,263			—			1,263
Net charge-offs (recoveries)		1,703			—			1,703			4,806			—			4,806
Provision for loan losses:
Non-owner occupied commercial real estate		159			626			785			(222	)		1,093			871
Other commercial construction and land		(1	)		2,606			2,605			(346	)		(300	)		(646	)
Multifamily commercial real estate		(13	)		90			77			(6	)		72			66
1-4 family residential construction and land		(36	)		105			69			6			239			245
Total commercial real estate		109			3,427			3,536			(568	)		1,104			536
Owner occupied commercial real estate		(183	)		(23	)		(206	)		(277	)		637			360
Commercial and industrial loans		347			172			519			1,057			700			1,757
Lease financing		(1	)		1			—			—			—			—
Total commercial		163			150			313			780			1,337			2,117
1-4 family residential		303			(3,472	)		(3,169	)		115			665			780
Home equity loans		473			(626	)		(153	)		359			(808	)		(449	)
Other consumer loans		899			104			1,003			750			(38	)		712
Total consumer		1,675			(3,994	)		(2,319	)		1,224			(181	)		1,043
Other		397			(523	)		(126	)		514			257			771
Total provision for loan losses		2,344			(940	)		1,404			1,950			2,517			4,467
Allowance for loan losses at the end of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832

56

(Dollars in thousands)	Six Months Ended
	June 30, 2014									June 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	18,951		$	37,900		$	56,851		$	17,439		$	39,823		$	57,262
Charge-offs:
Non-owner occupied commercial real estate		204			—			204			92			—			92
Other commercial construction and land		207			—			207			102			—			102
1-4 family residential construction and land		2			—			2			—			—			—
Total commercial real estate		413			—			413			194			—			194
Owner occupied commercial real estate		144			—			144			—			—			—
Commercial and industrial loans		161			—			161			9,011			—			9,011
Total commercial		305			—			305			9,011			—			9,011
1-4 family residential		101			—			101			28			—			28
Home equity loans		594			—			594			1,367			—			1,367
Other consumer loans		1,588			—			1,588			1,381			—			1,381
Total consumer		2,283			—			2,283			2,776			—			2,776
Other		1,131			—			1,131			1,409			—			1,409
Total charge-offs		4,132			—			4,132			13,390			—			13,390
Recoveries:
Non-owner occupied commercial real estate		90			—			90			65			—			65
Other commercial construction and land		12			—			12			620			—			620
Multifamily commercial real estate		—			—			—			41			—			41
1-4 family residential construction and land		4			—			4			23			—			23
Total commercial real estate		106			—			106			749			—			749
Owner occupied commercial real estate		24			—			24			266			—			266
Commercial and industrial loans		166			—			166			660			—			660
Total commercial		190			—			190			926			—			926
1-4 family residential		7			—			7			48			—			48
Home equity loans		114			—			114			455			—			455
Other consumer loans		314			—			314			297			—			297
Total consumer		435			—			435			800			—			800
Other		477			—			477			616			—			616
Total recoveries		1,208			—			1,208			3,091			—			3,091
Net charge-offs (recoveries)		2,924			—			2,924			10,299			—			10,299
Provision for loan losses:
Non-owner occupied commercial real estate		181			(215	)		(34	)		(199	)		791			592
Other commercial construction and land		499			2,981			3,480			(527	)		(392	)		(919	)
Multifamily commercial real estate		(24	)		184			160			(47	)		(84	)		(131	)
1-4 family residential construction and land		(70	)		141			71			107			(40	)		67
Total commercial real estate		586			3,091			3,677			(666	)		275			(391	)
Owner occupied commercial real estate		39			(1,052	)		(1,013	)		(555	)		930			375
Commercial and industrial loans		382			(52	)		330			8,179			970			9,149
Lease financing		(2	)		—			(2	)		—			—			—
Total commercial		419			(1,104	)		(685	)		7,624			1,900			9,524
1-4 family residential		557			(5,049	)		(4,492	)		145			1,667			1,812
Home equity loans		614			287			901			1,020			(4,841	)		(3,821	)
Other consumer loans		2,087			(64	)		2,023			1,523			(160	)		1,363
Total consumer		3,258			(4,826	)		(1,568	)		2,688			(3,334	)		(646	)
Other		545			(589	)		(44	)		854			528			1,382
Total provision for loan losses		4,808			(3,428	)		1,380			10,500			(631	)		9,869
Allowance for loan losses at the end of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832

No portion of the allowance allocated to non-PCI loans is in any way restricted to any individual loan or group of new loans or non-PCI loans, and the entirety of such 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 for non-PCI loans to the various segments of the loan portfolio based on information available as of June 30, 2014 and December 31, 2013.

57

(Dollars in thousands)	June 30, 2014							December 31, 2013
	Non-PCI Loan Balance		Allowance for Loan Losses		Percent of Non-PCI Loans			Non-PCI Loan Balance		Allowance for Loan Losses		Percent of Non-PCI Loans
Non-owner occupied commercial real estate	$	364,017	$	1,682		0.5	%	$	287,562	$	1,615		0.6	%
Other commercial construction and land		63,000		1,505		2.4	%		67,789		1,201		1.8	%
Multifamily commercial real estate		31,240		92		0.3	%		29,187		116		0.4	%
1-4 family residential construction and land		66,334		997		1.5	%		56,979		1,065		1.9	%
Total commercial real estate		524,591		4,276		0.8	%		441,517		3,997		0.9	%
Owner occupied commercial real estate		729,539		2,531		0.3	%		691,253		2,611		0.4	%
Commercial and industrial loans		812,591		7,264		0.9	%		663,919		6,877		1.0	%
Lease financing		2,346		1		0.0	%		2,676		3		0.1	%
Total commercial		1,544,476		9,796		0.6	%		1,357,848		9,491		0.7	%
1-4 family residential		487,938		2,742		0.6	%		377,668		2,279		0.6	%
Home equity loans		274,907		533		0.2	%		270,170		398		0.1	%
Other consumer loans		205,407		3,130		1.5	%		157,991		2,318		1.5	%
Total consumer		968,252		6,405		0.7	%		805,829		4,995		0.6	%
Other		63,925		358		0.6	%		61,279		468		0.8	%
Total loans	$	3,101,244	$	20,835		0.7	%	$	2,666,473	$	18,951		0.7	%

Criticized and Classified Loans

Loans with the following attributes are categorized as criticized and classified loans: (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. The following table summarizes criticized and classified loans at June 30, 2014 and December 31, 2013:

(Dollars in thousands)	June 30, 2014 (1)						December 31, 2013 (1)
	Covered		Non- Covered		Total		Covered		Non- Covered		Total
Non-owner occupied commercial real estate	$	16,002	$	109,919	$	125,921	$	26,995	$	123,515	$	150,510
Other commercial construction and land		13,012		71,099		84,111		15,297		110,245		125,542
Multifamily commercial real estate		1,028		5,196		6,224		2,421		6,270		8,691
1-4 family residential construction and land		—		8,509		8,509		—		8,336		8,336
Total commercial real estate		30,042		194,723		224,765		44,713		248,366		293,079
Owner occupied commercial real estate		22,674		66,642		89,316		24,747		86,335		111,082
Commercial and industrial loans		3,197		45,433		48,630		4,504		54,261		58,765
Total commercial		25,871		112,075		137,946		29,251		140,596		169,847
1-4 family residential		10,612		49,034		59,646		16,208		59,828		76,036
Home equity loans		6,113		10,006		16,119		6,983		13,663		20,646
Other consumer loans		27		1,014		1,041		67		2,189		2,256
Total consumer		16,752		60,054		76,806		23,258		75,680		98,938
Other		841		8,342		9,183		1,794		13,114		14,908
Total loans	$	73,506	$	375,194	$	448,700	$	99,016	$	477,756	$	576,772

(1) PCI and non-PCI loans are included in the balances presented.

Total criticized and classified loans declined $128.1 million for the six months ended June 30, 2014 as a result of $17.9 million in transfers to other real estate owned, $160.9 million of pay downs, charge offs and upgrades. Loan downgrades of $50.7 million partially offset the net decline.

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.

58

Within the context of the accounting for impaired loans described in the preceding paragraph, other than the PCI loans described above, as of June 30, 2014, there were 13 loans individually evaluated for impairment and deemed impaired with a related allowance for loan losses of $30 thousand. At December 31, 2013, there were seven loans individually evaluated for impairment and deemed impaired with a related allowance for loan losses of $0.5 million. The specific reserve at December 31, 2013 was primarily related to a commercial loan with a balance $1.8 million.

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, additional acquired loans not classified as purchased credit impaired and new 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:

(Dollars in thousands)	June 30, 2014									December 31, 2013
	Covered			Non- Covered			Total			Covered			Non- Covered			Total
Total non-accrual loans	$	1,180		$	10,188		$	11,368		$	1,336		$	10,474		$	11,810
Accruing/accreting loans delinquent 90 days or more		29,733			171,022			200,755			40,437			213,379			253,816
Total non-performing loans		30,913			181,210			212,123			41,773			223,853			265,626
Non-accrual investment securities		—			—			—			—			800			800
Repossessed personal property		—			107			107			—			108			108
Other real estate owned		17,013			79,270			96,283			25,251			104,145			129,396
Total non-performing assets	$	47,926		$	260,587		$	308,513		$	67,024		$	328,906		$	395,930
Allowance for loan losses	$	13,223		$	42,084		$	55,307		$	13,051		$	43,800		$	56,851
Non-performing asets as a percent of total assets		0.72	%		3.93	%		4.66	%		1.01	%		4.97	%		5.98	%
Non-performing loans as a percent of total loans		0.65	%		3.84	%		4.49	%		0.92	%		4.92	%		5.84	%
Allowance for loan losses as a percent of non-performing loans		42.77	%		23.22	%		26.07	%		31.24	%		19.57	%		21.40	%
Allowance for loan losses as a percent of non-PCI loans								0.67	%								0.71	%

At June 30, 2014 and December 31, 2013, covered and non-covered loans classified as delinquent 90 days or more and accruing/accreting are entirely comprised of components of PCI loan pools. There were no non-PCI loans included in this category at the end of each period presented. In addition to the discussion in the previous section, please refer to Note 4. Loans in our consolidated financial statements for a description of the accounting for pooled PCI loans.

Total non-performing assets at June 30, 2014 declined by $87.4 million to $308.5 million compared to $395.9 million at December 31, 2013. The change in non-performing assets was mainly attributable to a decline in non-performing loans and other real estate owned of $53.5 million and $33.1 million, respectively. The decline in non-performing loans was due to $73.3 million in resolutions and $17.9 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures, offset by $37.7 million of loans that became non-performing. The decline in other real estate owned was mainly due to sales of $44.4 million, partially offset by valuation adjustments and acquisitions as noted above.

Investment Securities

Investment securities represent a significant portion of our assets. We invest in a variety of securities including obligations of U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, obligations of states or political subdivisions, 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 Risk Committee of the Board 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 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 manage interest rate risk and 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 tables set forth our investment securities as of June 30, 2014 and December 31, 2013:

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(Dollars in thousands)	June 30, 2014
Security Type	Book Value		Fair Value		Percent of Total Portfolio			Yield			Modified Duration in Years
Available-for-sale
Marketable equity securities	$	946	$	949		0.2	%		NA			NA
Mortgage-backed securities—residential issued by government sponsored entities		587,142		590,060		99.2	%		1.80	%		3.81
Industrial revenue bonds		3,580		3,736		0.6	%		2.23	%		0.24
Total	$	591,668	$	594,745		100.0	%		1.80	%		3.79
Held-to-maturity
U.S. Government agencies	$	14,567	$	14,565		3.0	%		2.86	%		5.46
Corportate bonds		25,000		25,000		5.2	%		5.17	%		5.34
State and political subdivisions—tax exempt		13,599		14,032		2.9	%		3.22	%		4.39
State and political subdivisions—taxable		541		561		0.1	%		3.87	%		4.29
Mortgage-backed securities—residential issued by government sponsored entities		421,460		426,813		88.8	%		2.39	%		4.36
Total	$	475,167	$	480,971		100.0	%		2.58	%		4.44
(Dollars in thousands)	December 31, 2013
Security Type	Book Value		Fair Value		Percent of Total Portfolio			Yield			Modified Duration in Years
Available-for-sale
Asset-backed securities	$	133,647	$	133,225		19.4	%		0.62	%		3.99
Marketable equity securities		946		931		0.1	%		NA			NA
Mortgage-backed securities—residential issued by government sponsored entities		549,869		546,626		79.8	%		1.66	%		3.39
Industrial revenue bonds		3,750		3,859		0.6	%		2.25	%		0.24
Collaterilized debt obligations		505		800		0.1	%		—			—
Total	$	688,717	$	685,441		100.0	%		1.46	%		3.48
Held-to-maturity
U.S. Government agencies	$	14,972	$	14,571		3.2	%		2.86	%		5.53
State and political subdivisions—tax exempt		14,201		14,099		3.1	%		3.01	%		4.67
State and political subdivisions—taxable		545		533		0.1	%		3.86	%		4.65
Mortgage-backed securities—residential issued by government sponsored entities		435,380		430,490		93.6	%		2.38	%		4.73
Total	$	465,098	$	459,693		100.0	%		2.42	%		4.75

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Contractual maturities of investment securities at June 30, 2014 and December 31, 2013 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)	Within One Year					After One Year Within Five Years					After Five Years Within Ten Years					After Ten Years					Other Securities					Total
As of June 30, 2014	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale
Marketable equity securities	$	—		—		$	—		—		$	—		—		$	—		—		$	949		NA		$	949		NA
Mortgage-backed securities—residential issued by government sponsored entities		—		—			—		—			—		—			—		—			590,060		1.80	%		590,060		1.80	%
Industrial revenue bonds		—		—			—		—			—		—			3,736		2.23	%		—		—			3,736		2.23	%
Total	$	—		—		$	—		—		$	—		—		$	3,736		2.23	%	$	591,009		1.80	%	$	594,745		1.80	%
Held-to-maturity
U.S. Government agencies	$	—		—		$	—		—		$	—		—		$	14,565		2.86	%	$	—		—		$	14,565		2.86	%
Corporate bonds		—		—			—		—			25,000		5.17	%		—		—			—		—			25,000		5.17	%
State and political subdivisions—tax exempt		205		0.76	%		935		2.30	%		10,258		3.17	%		2,634		3.89	%		—		—			14,032		3.22	%
State and political subdivisions—taxable		—		—			—		—			—		—			561		3.87	%		—		—			561		3.87	%
Mortgage-backed securities—residential issued by government sponsored entities		—		—			—		—			—		—			—		—			426,813		2.39	%		426,813		2.39	%
Total	$	205		0.76	%	$	935		2.30	%	$	35,258		4.59	%	$	17,760		3.04	%	$	426,813		2.39	%	$	480,971		2.58	%
(Dollars in thousands)	Within One Year					After One Year Within Five Years					After Five Years Within Ten Years					After Ten Years					Other Securities					Total
As of December 31, 2013	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale
Asset-backed securities	$	—		—		$	—		—		$	55,983		0.64	%	$	77,242		0.61	%	$	—		—		$	133,225		0.62	%
Marketable equity securities		—		—			—		—			—		—			—		—			931		NA			931		NA
Mortgage-backed securities—residential issued by government sponsored entities		—		—			—		—			—		—			—		—			546,626		4.66	%		546,626		1.66	%
Industrial revenue bonds		—		—			—		—			—		—			3,859		2.25	%		—		—			3,859		2.25	%
Collaterilized debt obligations		—		—			—		—			—		—			800		—			—		—			800		—
Total	$	—		—		$	—		—		$	55,983		0.64	%	$	81,901		0.68	%	$	547,557		4.66	%	$	685,441		1.46	%
Held-to-maturity
U.S. Government agencies	$	—		—		$	—		—		$	—		—		$	14,571		2.86	%	$	—		—		$	14,571		2.86	%
State and political subdivisions—tax exempt		674		0.83	%		1,140		2.06	%		7,631		3.02	%		4,654		3.56	%		—		—			14,099		3.01	%
State and political subdivisions—taxable		—		—			—		—			—		—			533		3.86	%		—		—			533		3.86	%
Mortgage-backed securities—residential issued by government sponsored entities		—		—			—		—			—		—			—		—			430,490		2.38	%		430,490		2.38	%
Total	$	674		0.83	%	$	1,140		2.06	%	$	7,631		3.02	%	$	19,758		3.05	%	$	430,490		2.38	%	$	459,693		2.42	%

We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, 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 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 amounts and estimated fair value of such security. Based on the Company’s analysis, there were no investment securities considered to be other-than-temporarily impaired as of June 30, 2014 and 2013.

At December 31, 2013 the Company owned a collateralized debt obligation (“CDO”) collateralized by trust preferred securities issued primarily by banks and several insurance companies. The Company sold its investment in the CDO on January 7, 2014. Proceeds from the sale were $0.8 million and gross gains were $0.3 million.

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, as we are building our deposit base around service-oriented customer relationships.

As of June 30, 2014, our core deposits, which we define as demand deposits, savings and money market accounts, increased by $64.2 million compared to December 31, 2013. Record net new checking account growth contributed to the increase in core deposits during the six months ended June 30, 2014. The average contractual rate on core deposits remained flat at 0.14%.

Time deposit balances declined by $87.8 million as compared to December 31, 2013. At June 30, 2014, our wholesale time deposits increased by $90.0 million compared to December 31, 2013, providing a lower cost source of funding as compared with higher rate legacy time deposits. The $178.4 million net decrease in retail certificates of deposit accounts was primarily a result of continued planned shrinkage in these high-cost legacy time deposits. The average contractual rate on time deposits decreased to 1.09% from 1.18% at December 31, 2013.

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The following table sets forth the balances and average contractual rates payable to customers on our deposits, segmented by account type as of June 30, 2014 and December 31, 2013:

(Dollars in thousands)	As of June 30, 2014								As of December 31, 2013								Sequential Change
	Amount		Percent of Total			Weighted Average Contractual Rate			Amount		Percent of Total			Weighted Average Contractual Rate			Amount			Percent
Non-interest-bearing demand deposits	$	1,000,049		19	%		0.00	%	$	923,993		18	%		0.00	%	$	76,056			8.2	%
Negotiable order of withdrawal accounts		1,319,667		26	%		0.14	%		1,321,903		25	%		0.15	%		(2,236	)		-0.2	%
Savings		528,567		10	%		0.22	%		530,144		10	%		0.21	%		(1,577	)		-0.3	%
Money market		953,446		18	%		0.23	%		961,526		19	%		0.21	%		(8,080	)		-0.8	%
Total core deposits		3,801,729		74	%		0.14	%		3,737,566		72	%		0.14	%		64,163			1.7	%
Customer time deposits		1,217,967		24	%		1.11	%		1,396,361		27	%		1.14	%		(178,394	)		-12.8	%
Wholesale time deposits		141,760		3	%		0.99	%		51,136		1	%		2.41	%		90,624			177.2	%
Total time deposits		1,359,727		26	%		1.09	%		1,447,497		28	%		1.18	%		(87,770	)		-6.1	%
Total deposits	$	5,161,456		100	%		0.39	%	$	5,185,063		100	%		0.43	%	$	(23,607	)		-0.5	%

The following table sets forth our average deposits and the average rates expensed for the periods indicated:

(Dollars in thousands)	Three Months Ended
	June 30, 2014					December 31, 2013
	Average Amount		Average Rate			Average Amount		Average Rate
Non-interest-bearing demand deposits	$	1,002,757		0.00	%	$	964,823		0.00	%
Interest-bearing deposits
Negotiable order of withdrawal accounts		1,330,856		0.17	%		1,288,723		0.17	%
Savings		531,414		0.22	%		531,930		0.21	%
Money market		931,867		0.23	%		947,429		0.22	%
Time deposits (1)		1,358,478		0.85	%		1,513,038		0.83	%
Total deposits	$	5,155,372		0.33	%	$	5,245,943		0.34	%

⁽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.

The following table sets forth our time deposits segmented by months to maturity and deposit amount:

(Dollars in thousands)	June 30, 2014
Months to maturity:	Time Deposits of $100K and Greater		Time Deposits of less than $100K		Total
Three or less	$	92,003	$	119,151	$	211,154
Over Three to Six		69,803		53,819		123,622
Over Six to Twelve		174,755		194,741		369,496
Over Twelve		370,019		285,436		655,455
Total deposits	$	706,580	$	653,147	$	1,359,727

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Capital Resources and Liquidity

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.

As of June 30, 2014 and December 31, 2013, we had 14.19% and 14.82% tangible common equity ratios, respectively. We calculate tangible common equity, tangible assets and the tangible common equity ratio, which are non-GAAP measures, because we believe they are useful for both investors and management as these are measures commonly used by financial institutions, regulators and investors to measure the capital adequacy of financial institutions. 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. We believe these measures facilitate comparison of the quality and composition of the Company’s capital over time and in comparison to its competitors.

These non-GAAP measures have inherent limitations and are not required to be uniformly applied. They should not be considered in isolation or as a substitute for analyses of results reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for shareholders’ equity or total assets. The following table provides reconciliations of tangible common equity and tangible common equity ratio to GAAP total common shareholders’ equity and tangible assets to GAAP total assets:

(Dollars in thousands)
	June 30, 2014			December 31, 2013
Shareholder’s equity	$	1,073,558		$	1,112,788
Less: Goodwill and other intangible assets, net		(155,398	)		(155,352	)
Tangible common shareholder’s equity	$	918,160		$	957,436
Total assets		6,624,006			6,617,561
Less: Goodwill and other intangible assets, net		(155,398	)		(155,352	)
Tangible assets	$	6,468,608		$	6,462,209
Tangible common equity ratio		14.19	%		14.82	%

The Company operates with a significant level of excess capital above regulatory requirements (see the table below for the historical capital ratios as well as minimum and well capitalized ratio requirements). As of June 30, 2014, we had a Tier 1 leverage ratio of 14.6%, which provides us with $289.7 million in excess capital relative to the 10% Tier 1 leverage ratio required under our OCC Operating Agreement and $415.4 million in excess capital relative to our longer-term target of 8%.

As of June 30, 2014, Capital Bank, N.A. had a 14.1% Tier 1 leverage ratio, an 18.0% Tier 1 risk-based ratio and an 19.2% total risk-based capital ratio.

As of December 31, 2013, we had a Tier 1 leverage ratio of 14.9%, which provides us with $314.3 million in excess capital relative to the 10% Tier 1 leverage ratio required under the OCC Operating Agreement and $441.4 million in excess capital relative to our longer-term target of 8%.

As of December 31, 2013, Capital Bank, N.A. had a 13.4% Tier 1 leverage ratio, an 17.7% Tier 1 risk-based ratio and an 18.9% 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, 2014 and December 31, 2013 are presented in the following tables.

(Dollars in thousands)							Actual
June 30, 2014	Well Capitalized Requirement			Adequately Capitalized Requirement			June 30, 2014			December 31, 2013
Tier 1 Capital (to Average Assets)
CBF Consolidated		N/A		³	4.0	%		14.6	%		14.9	%
Capital Bank, N.A.	³	5.0	%	³	4.0	%		14.1	%		13.4	%
Tier 1 Capital (to Risk Weighted Assets)
CBF Consolidated		N/A		³	4.0	%		18.6	%		19.7	%
Capital Bank, N.A.	³	6.0	%	³	4.0	%		18.0	%		17.7	%
Total Capital (to Risk Weighted Assets)
CBF Consolidated		N/A		³	8.0	%		19.8	%		21.0	%
Capital Bank, N.A.	³	10.0	%	³	8.0	%		19.2	%		18.9	%

	Actual
(Dollars in thousands)	June 30, 2014		December 31, 2013
CBF Consolidated
Tier 1 Capital	$	917,990	$	949,623
Excess Tier 1 Capital:
vs. 10% regulatory requirement	$	289,692	$	314,306
vs. 8% target	$	415,352	$	441,370
Capital Bank, N.A.
Tier 1 Capital	$	887,652	$	849,520
Excess Tier 1 Capital:
vs. 10% regulatory requirement	$	260,032	$	214,396
vs. 8% target	$	385,556	$	341,421

In July 2013, the U.S. banking regulators adopted a final rule which implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and certain changes required by the Dodd-Frank Act. The final rule establishes an integrated regulatory capital framework and introduces the “Standardized Approach” for risk weighted assets, which will replace the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015 (the date we expect to become subject to the new rules). We do not believe adoption of the final rules and relevant provisions will have a significant impact on our operations.

Liquidity

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 requires 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 and cash flow from our amortizing investment and loan portfolios (including scheduled payments, prepayments, and maturities from portfolios of loans and investment securities). Our ability to borrow funds from non-deposit sources provides additional flexibility in meeting our liquidity needs. Short-term borrowings include federal funds purchased, securities sold under repurchase agreements 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 structured repurchase agreements and subordinated notes underlying our trust preferred securities.

        As of June 30, 2014 and December 31, 2013, cash and liquid securities totaled 18.4%, and 20.0% of assets, respectively providing us with $223.9 million and $328.7 million, respectively, of excess liquidity relative to our planning target. As of June 30, 2014 and December 31, 2013, the ratio of wholesale to total funding was 10.0% and 7.2% respectively, which is below our planning target of 15%. 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 bank’s total assets as reported in their most recent quarterly financial information submitted to the FHLB and subject to the pledging of sufficient collateral.

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At June 30, 2014 and December 31, 2013, there were $161.2 million and $96.3 million in advances outstanding, respectively. In addition, we had $25.6 million in letters of credit outstanding as of June 30, 2014 and December 31, 2013 and collateral available under our agreements with the FHLB provided for incremental borrowing availability of up to approximately $70.8 million and $95.4 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.

As of June 30, 2014 and December 31, 2013, our holding company had cash of approximately $39.4 million and $109.9 million, respectively. This cash is available for providing capital support to our subsidiary bank and for other general corporate purposes, including potential future acquisitions. The decline in cash at our holding company was primarily due to the repurchase of $65.9 million of common stock during the six months ended June 30, 2014. During July 2014, the OCC approved and the Bank declared and paid dividends of $56 million to the Holding Company.

We calculate tangible book value, and tangible book value per share, which are non-GAAP measures because we believe they are useful for both investors and management as these are measures commonly used by financial institutions, regulators and investors to measure the capital adequacy of financial institutions. Tangible book value is equal to book value less goodwill and core deposit intangibles, net of related deferred tax liabilities. We believe these measures facilitate comparison of the quality and composition of the Company’s capital over time and in comparison to its competitors. These non-GAAP measures have inherent limitations and are not required to be uniformly applied. They should not be considered in isolation or as a substitute for analyses of results reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for total shareholders’ equity. The following table sets forth a reconciliation of tangible book value and tangible book value per share to total shareholders’ equity, which is the most directly comparable GAAP measure:

(Dollars in thousands, except per share amounts)
	June 30, 2014			December 31, 2013
Shareholder’s equity	$	1,073,558		$	1,112,788
Less: Goodwill		(134,522	)		(131,987	)
Less: Core deposits and other intangibles, net of taxes		(12,768	)		(14,290	)
Tangible Book Value	$	926,268		$	966,511
Book Value Per Share	$	21.84		$	21.36
Tangible Book Value Per Share	$	18.85		$	18.55

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk Management

The Company pursues a conservative strategy with respect to interest rate risk management, with the goal of minimizing the risk that interest rate volatility will negatively impact our financial results. Due to the current low level of interest rates, we regard rising interest rates as the most likely source of risk and accordingly have sought to maintain an asset-sensitive position.

There are several components to our conservative interest rate strategy. First, we avoid holding loans with long duration. At June 30, 2014, approximately 52% of the loan portfolio was variable rate, and of the remaining fixed rate loans, the vast majority had terms of five years or less. Second, the purpose of our securities portfolio is to provide liquidity and to manage interest rate sensitivity, and as such we limit its duration. At June 30, 2014, securities accounted for 16% of assets, and the effective duration of the portfolio was 3.6 years with limited extension risk to 3.9 years in a plus 300 immediate parallel shift in interest rates. We utilize average life estimates based on prepayment rates obtained from an independent source. Third, we seek to fund the Bank, to the extent possible, with long-duration core deposits, and within core deposits, we emphasize checking account balances as the most stable and least risky source of funds. At June 30, 2014, core deposits accounted for 74% of total deposits, and checking balances accounted for 61% of core deposits.

We continuously monitor the Bank’s interest rate risk profile through our Asset Liability Committee, which consists of our Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, Chief of Strategic Planning, 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 predefined interest rate shocks affect our financial performance, measured in terms of forecast net interest income and economic value of equity, which is the intrinsic value of assets, less the intrinsic value of liabilities. Under our policy, these predefined rate shocks include minus 300, minus 200, minus 100, plus 100, plus 200 and plus 300 basis point immediate parallel shifts in interest rates.

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If a predefined immediate parallel rate shock cannot be modeled due to the low level of interest rates, a proportional rate shock and policy limit applies and all other declining rate shocks will be suspended until such scenarios can be modeled. Because of the current low level of interest rates, the minus 100, minus 200 and minus 300 rate shocks have been suspended. The maximum negative impact on forecast net interest income and economic value of equity in a minus 25 basis point immediate parallel shift in interest rates is measured on a proportional basis. In addition to monitoring our compliance with these policies, management undertakes additional analysis, considering a wide range of possible interest rate fluctuations, including changes in the shape of the yield curve, and assessing the sensitivity of these results to key assumptions, including the behavior of depositors and loan customers.

Based upon the current interest rate environment, as of June 30, 2014, our sensitivity to interest rate risk was as follows:

(Dollars in thousands)	Next 12 Months Net Interest Income						Economic Value of Equity
Interest Rate Change in Basis Points	$ Change			% Change			$ Change			% Change
300	$	14,910			6.3	%	$	55,149			4.2	%
200		9,726			4.1	%		41,586			3.1	%
100		4,387			1.8	%		23,429			1.8	%
—		—			0.0	%		—			0.0	%
(25)		(934	)		-0.4	%		(6,823	)		-0.5	%

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 calculating these exposures, we use an interest rate simulation model which is validated by third-party reviewers on an annual basis.

In the event the model indicates an unacceptable level of risk, we may take a number of actions to reduce this risk, including changing the terms, pricing, and conditions of new loans and deposits, 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, 2014, we were in compliance with all of the limits and policies established by our Board of Directors for active scenarios.

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.

ITEM 4: CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and are also designed to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

(b) Internal Control Over Financial Reporting

Changes in internal control over financial reporting

There has been no change in the Company’s internal control over financial reporting during the period ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1:     LEGAL PROCEEDINGS

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, results of operations or liquidity.

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ITEM 1A: RISK FACTORS

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.

ITEM 2: UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

The following table provides information regarding repurchases of the Company’s common stock by the Company during the three months ended June 30, 2014:

					Total Number of
					Shares Purchased		Maximun Dollar Value
					as Part of Publicly		of Shares that May Yet
	Total Number of		Average Price Paid		Announced Plans		Be Purchased Under
Period	Shares Purchased		Per Share		or Programs		the Program
April 1-30		590,980	$	24.26		590,980	$	43,038,321
May 1-31		999,487		23.79		999,487		19,258,183
June 1-30		207,666		24.58		207,666		14,154,103
Total		1,798,133	$	24.04		1,798,133	$	14,154,103

During 2013, the Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common stock to be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase program did not obligate the Company to repurchase any particular amount of shares. As of June 30, 2014, the Company has repurchased $135.8 million, or 6,528,315 common shares at an average price of $20.81 per share. As of June 30, 2014, the Company had $14.2 million of remaining availability for future share repurchases under the 2013 authorization.

On July 23, 2014, the Board of Directors authorized an additional repurchase of up to $50.0 million of its common stock to be made from time to time, subject to market conditions and other factors.

ITEM 3: DEFAULT UPON SENIOR SECURITIES

None

ITEM 4: MINE SAFETY DISCLOSURES

None

ITEM 5: OTHER INFORMATION

None

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ITEM 6: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit Number	Description
31.1	Chief Executive Officer’s certification required under Section 302 of Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer’s certification required under Section 302 of Sarbanes-Oxley Act of 2002
32.1	Chief Executive Officer’s certification required under Section 906 of Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer’s certification required under Section 906 of Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAPITAL BANK FINANCIAL CORP.
Date: August 7, 2014	/s/ R. Eugene Taylor
	R. Eugene Taylor
	Chairman and Chief Executive Officer
Date: August 7, 2014	/s/ Christopher G. Marshall
	Christopher G. Marshall Chief Financial Officer
	(Principal Accounting Officer)

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