Capital Bank Financial (CBF) 10-Q 2014 Q3 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 September 30, 2014

OR

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

For the Transition period from to

Commission File Number 001-35655

________________________________________________

(Exact name of registrant as specified in its charter)

________________________________________________

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

121 Alhambra Plaza Suite 1601 Coral Gables, Florida 33134

(Address of principal executive offices) (Zip Code)

(305) 670-0200

(Registrant’s telephone number, including area code)

Not Applicable

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

________________________________________________

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

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

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

Large accelerated filer	Accelerated filer	X
Non-accelerated filer	Smaller reporting company

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

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

Class A Common Stock, $0.01 Par Value	30,018,114
Class B Non-Voting Common, $0.01 Par Value	17,574,807
Class	Outstanding as of October 31, 2014

1

CAPITAL BANK FINANCIAL CORP.

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	3
CONSOLIDATED BALANCE SHEETS	3
CONSOLIDATED STATEMENTS OF INCOME	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	7
CONSOLIDATED STATEMENTS OF CASH FLOWS	8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	76
ITEM 4. CONTROLS AND PROCEDURES	77
PART II. OTHER INFORMATION	78
ITEM 1. LEGAL PROCEEDINGS	78
ITEM 1A. RISK FACTORS	78
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	78
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	78
ITEM 4. MINE SAFETY DISCLOSURES	78
ITEM 5. OTHER INFORMATION	78
ITEM 6. EXHIBITS	79

2

Capital Bank Financial Corp.

Consolidated Balance Sheets

(Unaudited)

(Dollars and shares in thousands)	September 30, 2014			December 31, 2013
Assets
Cash and due from banks	$	92,704		$	118,937
Interest-bearing deposits in other banks	66,706			45,504
Total cash and cash equivalents	159,410			164,441
Trading securities	2,312			6,348
Investment securities available-for-sale at fair value (amortized cost $582,623 and $688,717, respectively)	580,732			685,441
Investment securities held-to-maturity at amortized cost (fair value $457,712 and $459,693, respectively)	454,809			465,098
Loans held for sale	6,439			8,012
Loans, net of deferred loan costs and fees	4,817,332			4,544,017
Less: Allowance for loan losses	52,334			56,851
Loans, net	4,764,998			4,487,166
Other real estate owned	90,277			129,396
FDIC indemnification asset	21,025			33,610
Receivable from FDIC	3,491			7,624
Premises and equipment, net	174,941			179,855
Goodwill	134,522			131,987
Intangible assets, net	19,865			23,365
Deferred income tax asset, net	139,388			166,762
Other assets	138,090			128,456
Total Assets	$	6,690,299		$	6,617,561
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing demand	$	1,006,556		$	923,993
Negotiable order of withdrawal	1,309,839			1,321,903
Money market	914,226			961,526
Savings	514,729			530,144
Time deposits	1,430,106			1,447,497
Total deposits	5,175,456			5,185,063
Federal Home Loan Bank advances	226,138			96,278
Short-term borrowings	23,823			24,850
Long-term borrowings	139,396			138,561
Accrued expenses and other liabilities	60,547			60,021
Total liabilities	5,625,360			5,504,773
Shareholders’ equity
Preferred stock $0.01 par value: 50,000 shares authorized, 0 shares issued	—			—
Common stock-Class A 0.01 par value: 200,000 shares authorized, 36,662 issued and 30,114 outstanding and 36,212 issued and 33,051 outstanding, respectively.	367			362
Common stock-Class B 0.01 par value: 200,000 shares authorized, 19,017 issued and 18,217 outstanding and 19,647 issued and 19,047 outstanding, respectively.	190			196
Additional paid in capital	1,081,177			1,082,235
Retained earnings	144,567			107,485
Accumulated other comprehensive loss	(6,018		)	(7,528		)
Treasury stock, at cost, 7,348 and 3,761 shares, respectively	(155,344		)	(69,962		)
Total shareholders’ equity	1,064,939			1,112,788
Total Liabilities and Shareholders’ Equity	$	6,690,299		$	6,617,561

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

3

Capital Bank Financial Corp.

Consolidated Statements of Income

(Unaudited)

(Dollars and shares in thousands, except per share data)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Interest and dividend income
Loans, including fees	$	61,942		$	67,355		$	186,828		$	207,327
Investment securities:
Taxable interest income	4,913			4,383			13,853			11,925
Tax-exempt interest income	152			158			463			484
Dividends	14			14			44			44
Interest-bearing deposits in other banks	18			37			81			510
Other earning assets	604			533			1,763			1,485
Total interest and dividend income	67,643			72,480			203,032			221,775
Interest expense
Deposits	4,362			5,135			12,923			17,541
Long-term borrowings	1,731			1,952			5,154			6,346
Federal Home Loan Bank advances	115			1			217			3
Other borrowings	10			6			29			33
Total interest expense	6,218			7,094			18,323			23,923
Net Interest Income	61,425			65,386			184,709			197,852
Provision (reversal) for loan losses	(1,332		)	984			48			10,853
Net interest income after provision (reversal) for loan losses	62,757			64,402			184,661			186,999
Non-Interest Income
Service charges on deposit accounts	5,565			6,034			16,673			18,711
Debit card income	3,017			2,854			8,964			8,669
Fees on mortgage loans originated and sold	1,195			1,477			3,077			4,319
Investment advisory and trust fees	1,183			740			3,354			1,380
FDIC indemnification asset expense	(3,881		)	(502		)	(8,110		)	(3,779		)
Legal settlements and insurance recoveries	—			900			—			900
Investment securities gains (losses), net	317			(247		)	463			(42		)
Other-than-temporary impairment loss on investments:
Gross impairment loss	—			(54		)	—			(54		)
Less: Impairment recognized in other comprehensive income	—			—			—			—
Net impairment loss recognized in earnings	—			(54		)	—			(54		)
Other income	2,561			4,078			8,792			9,591
Total non-interest income	9,957			15,280			33,213			39,695
Non-Interest Expense
Salaries and employee benefits	22,590			22,668			69,537			66,090
Stock-based compensation expense	443			1,371			2,191			4,312
Net occupancy and equipment expense	8,475			8,866			25,797			26,459
Computer services	3,332			3,231			9,974			9,872
Software expense	1,932			1,874			5,740			5,514
Telecommunication expense	1,406			1,534			4,642			4,919
OREO valuation expense	2,752			6,045			9,347			18,844
(Gains) losses on sales of OREO	(223		)	188			(4,136		)	(3,204		)
Foreclosed asset related expense	845			1,265			3,295			4,909

4

Loan workout expense	911		2,063			3,205		6,363
Professional fees	1,532		2,426			5,574		7,418
Gains on extinguishment of debt	—		(430		)	—		(122		)
Contingent value right expense (income)	278		(776		)	1,372		2,535
Regulatory assessments	1,637		1,710			4,914		5,276
Other expense	5,508		7,228			16,463		20,773
Total non-interest expense	51,418		59,263			157,915		179,958
Income before income taxes	21,296		20,419			59,959		46,736
Income tax expense	8,053		8,975			22,877		20,098
Net income	$	13,243	$	11,444		$	37,082	$	26,638
Earnings per share:
Basic	$	0.28	$	0.22		$	0.75	$	0.50
Diluted	$	0.27	$	0.22		$	0.74	$	0.49
Weighted average shares outstanding:
Basic	47,912		51,804			49,164		53,170
Diluted	49,069		52,755			50,406		54,032

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

5

Capital Bank Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Net Income	$	13,243		$	11,444		$	37,082		$	26,638
Other comprehensive income before tax:
Unrealized holding (losses) gains on investment securities available-for-sale	(4,634		)	17,692			2,040			(15,826		)
Unrealized holding losses on investment securities transferred from available-for-sale to held-to-maturity	—			(9,354		)	—			(9,354		)
Reclassification adjustment for (losses) gains realized in net income on securities available-for-sale	(333		)	54			(655		)	(151		)
Reclassification adjustment for losses amortized in net income on securities held-to-maturity	379			—			1,084			—
Other comprehensive (loss) income, before tax:	(4,588		)	8,392			2,469			(25,331		)
Tax effect	1,782			(3,234		)	(959		)	9,748
Other comprehensive (loss) income, net of tax:	(2,806		)	5,158			1,510			(15,583		)
Comprehensive income	$	10,437		$	16,602		$	38,592		$	11,055

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

6

Capital Bank Financial Corp.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Dollars and shares in thousands)
	Shares Common Stock Class A Outstanding		Class A Stock			Shares Common Stock Class B Outstanding		Class B Stock			Additional Paid in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholder's Equity
Balance, December 31, 2013	33,051		$	362		19,047		$	196		$	1,082,235		$	107,485	$	(7,528	)	$	(69,962	)	$	1,112,788
Net income	—		—			—		—			—			37,082		—			—			37,082
Other comprehensive income, net of tax expense of $959	—		—			—		—			—			—		1,510			—			1,510
Stock-based compensation	—		—			—		—			2,191			—		—			—			2,191
Full value stock awards	12		—			—		—			—			—		—			—			—
Excess tax benefit from share-based payment	—		—			—		—			1,603			—		—			—			1,603
Restricted stock cancelled	(192	)	(1		)	—		—			(4,852		)	—		—			—			(4,853		)
Purchase of treasury stock	(3,387	)	—			(200	)	—			—			—		—			(85,382		)	(85,382		)
Conversion of shares	630		6			(630	)	(6		)	—			—		—			—			—
Balance, September 30, 2014	30,114		$	367		18,217		$	190		$	1,081,177		$	144,567	$	(6,018	)	$	(155,344	)	$	1,064,939
Balance, December 31, 2012	33,025		330			22,821		228			1,076,797			68,641		9,347			—			1,155,343
Net income	—		—			—		—			—			26,638		—			—			26,638
Other comprehensive income, net of tax benefit of $9,748	—		—			—		—			—			—		(15,583		)	—			(15,583		)
Stock-based compensation	—		—			—		—			4,312			—		—			—			4,312
Fractional shares	—		—			8		—			(1		)	—		—			—			(1		)
Restricted stock grants	4		—			—		—			—			—		—			—			—
Purchase of treasury stock	(3,439	)	—			—		—			—			—		—			(62,884		)	(62,884		)
Conversion of shares	3,148		31			(3,148	)	(31		)	—			—		—			—			—
Balance, September 30, 2013	32,738		$	361		19,681		$	197		$	1,081,108		$	95,279	$	(6,236	)	$	(62,884	)	$	1,107,825

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

7

Capital Bank Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	Nine Months Ended
	September 30, 2014			September 30, 2013
Cash flows from operating activities
Net income	$	37,082		$	26,638
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Accretion of purchased credit impaired loans	(92,743		)	(126,634		)
Depreciation and amortization	14,248			15,795
Provision for loan losses	48			10,853
Deferred income tax	23,879			14,977
Net amortization of investment securities premium/discount	6,375			9,339
Other than temporary impairment of investment securities	—			54
Net realized (gains) losses on sales of investment securities	(463		)	42
Stock-based compensation expense	2,191			4,312
Gains on sales of OREO	(4,136		)	(3,204		)
OREO valuation expenses	9,347			18,844
Other	39			(38		)
Net deferred loan origination fees	(5,417		)	(2,416		)
Gains on extinguishment of debt	—			(122		)
Mortgage loans originated for sale	(107,232		)	(138,686		)
Proceeds from sales of mortgage loans originated for sale	111,882			145,363
Fees on mortgage loans originated and sold	(3,077		)	(4,319		)
FDIC indemnification asset expense	8,110			3,779
Gains on sales/disposals of premises and equipment	(45		)	(419		)
Gains on exchange of partnership interests	—			(1,536		)
Proceeds from FDIC loss share agreements	9,616			12,211
Change in other assets	(7,220		)	10,507
Change in accrued expenses and other liabilities	(4,218		)	6,658
Net cash (used in) provided by operating activities	(1,734		)	1,998
Cash flows from investing activities
Purchases of investment securities available-for-sale	(140,653		)	(436,365		)
Purchases of investment securities held-to-maturity	(44,143		)	—
Sales of investment securities available-for-sale	172,594			225
Repayments of principal and maturities of investment securities available-for-sale	73,896			178,592
Repayments of principal and maturities of investment securities held-to-maturity	53,897			27,347
Net purchases of FHLB and FRB stock	(3,421		)	(978		)
Net (increase) decrease in loans	(212,736		)	319,814
Proceeds from sales of loans	2,564			—
Purchases of premises and equipment	(5,241		)	(2,473		)
Proceeds from sales of premises and equipment	139			6,707
Proceeds from sales of OREO	64,360			62,165
Net cash (used in) provided by investing activities	(38,744		)	155,034

8

Cash flows from financing activities
Net increase (decrease) in demand, money market and savings accounts	7,783			(113,473		)
Net decrease in time deposits	(17,390		)	(490,925		)
Net decrease in federal funds purchased and securities sold under agreement to repurchase	(1,027		)	(18,284		)
Net decrease in short term FHLB advances	129,720			—
Net increase (decrease) in long term FHLB advances	140			(136		)
Prepayments of long term borrowings	—			(42,500		)
Excess tax benefit from share-based payment	1,603			—
Purchases of treasury stock	(85,382		)	(62,884		)
Net cash provided by (used in) financing activities	35,447			(728,202		)
Net decrease in cash and cash equivalents	(5,031		)	(571,170		)
Cash and cash equivalents at beginning of period	164,441			734,874
Cash and cash equivalents at end of period	$	159,410		$	163,704
Supplemental disclosures of cash:
Interest paid	$	17,869		$	24,954
Cash collections of contractual interest on purchased credit impaired loans	63,528			91,983
Income taxes paid	1,315			1,641
Supplemental disclosures of non-cash transactions:
OREO acquired through loan transfers and acquisitions	$	30,452		$	53,366
Transfer of available-for-sale securities to held-to-maturity securities	—			510,976

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

9

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Principles of Consolidation and Nature of Operations

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

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

Out of Period Adjustments

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

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40)—Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". The amendments in this update provide guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update apply to all entities and will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU 2014-14, "Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40)—Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure". The amendment in this update requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration ("FHA") of the U.S. Department of Housing and Urban Development ("HUD"), and the U.S. Department of Veterans Affairs ("VA"). This ASU will be effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation- Stock Compensation (Topic 718)—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period”. This update provides specific guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. This ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

10

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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

In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers (Topic 606)”. This update clarifies the principles for recognizing revenue from contracts with customers. This ASU, which does not apply to financial instruments, is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.

In January 2014, the FASB issued ASU 2014-4, “Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This update clarifies that when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1)the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2)the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In January 2014, the FASB issued ASU 2014-1, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” This ASU allows for use of the proportional amortization method for qualified affordable housing projects if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized in the income statement as a component of income tax expense. This ASU provides for a practical expedient, which allows for amortization of only expected tax credits over the period tax credits are expected to be received. This method is permitted if it produces a measurement that is substantially similar to the measurement that would result from using both tax credits and other tax benefits. This ASU is effective for fiscal years and interim periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

11

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

2. Earnings Per Common Share

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

(Shares in thousands)	Three Months Ended		Nine Months Ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
Weighted average number of shares outstanding:
Basic	47,912	51,804	49,164	53,170
Dilutive effect of options outstanding	498	31	490	—
Dilutive effect of unvested restricted shares	659	920	752	862
Diluted	49,069	52,755	50,406	54,032

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

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

(Shares in thousands)	Three Months Ended		Nine Months Ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
Anti-dilutive stock options	12	269	12	3,133
Anti-dilutive unvested restricted shares	—	—	—	—

3. Investment Securities

Trading securities totaled $2.3 million and $6.3 million at September 30, 2014 and December 31, 2013, respectively.

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

(Dollars in thousands)	September 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Available-for-Sale
Marketable equity securities	$	946	$	—	$	—	$	946
Mortgage-backed securities—residential issued by government sponsored entities	578,097		1,136		3,171		576,062
Industrial revenue bonds	3,580		144		—		3,724
Total	$	582,623	$	1,280	$	3,171	$	580,732
Held-to-Maturity
U.S. Government agencies	$	14,288	$	—	$	32	$	14,256
Corporate bonds	25,000		163		—		25,163
State and political subdivisions—tax exempt	12,970		475		—		13,445
State and political subdivisions—taxable	539		21		—		560
Mortgage-backed securities—residential issued by government sponsored entities	402,012		2,638		362		404,288
Total	$	454,809	$	3,297	$	394	$	457,712

12

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Available-for-Sale
Asset-backed securities	$	133,647	$	363	$	785	$	133,225
Marketable equity securities	946		—		15		931
Mortgage-backed securities—residential issued by government sponsored entities	549,869		2,337		5,580		546,626
Industrial revenue bonds	3,750		109		—		3,859
Collateralized debt obligations	505		295		—		800
Total	$	688,717	$	3,104	$	6,380	$	685,441
Held-to-Maturity
U.S. Government agencies	$	14,972	$	—	$	401	$	14,571
State and political subdivisions—tax exempt	14,201		27		129		14,099
State and political subdivisions—taxable	545		—		12		533
Mortgage-backed securities—residential issued by government sponsored entities	435,380		328		5,218		430,490
Total	$	465,098	$	355	$	5,760	$	459,693

Proceeds from sales of securities were $22.3 million and $172.6 million for the three and nine months ended September 30, 2014, respectively. Gross gains of $0.3 million and $1.4 million were realized on sales of these investments for the three and nine months ended September 30, 2014, respectively. Gross losses of $0.8 million were realized on sales of these investments for the nine months ended September 30, 2014.

Proceeds from sales of securities were $0.2 million for the nine months ended September 30, 2013. Gross gains of $0.2 million were realized on sales of these investments for the nine months ended September 30, 2013.

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

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

13

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	September 30, 2014
	Amortized Cost		Estimated Fair Value		Yield
Available-for-sale
Due in one year or less	$	—	$	—	—	%
Due after one year through five years	—		—		—	%
Due after five years through ten years	3,580		3,724		2.23	%
Due after ten years	—		—		—	%
Mortgage-backed securities—residential issued by government sponsored entities	578,097		576,062		1.78	%
Subtotal	581,677		579,786		1.78	%
Marketable equity securities	946		946
Total	$	582,623	$	580,732
	Amortized Cost		Estimated Fair Value		Yield
Held-to-maturity
Due in one year or less	$	203	$	204	0.76	%
Due after one year through five years	10,818		10,882		4.65	%
Due after five years through ten years	24,882		25,354		4.52	%
Due after ten years	16,894		16,984		2.97	%
Mortgage-backed securities—residential issued by government sponsored entities	402,012		404,288		2.36	%
Total	$	454,809	$	457,712	2.56	%

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

(Dollars in thousands)	Less than 12 Months				12 Months or Longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
September 30, 2014
Available-for-Sale
Mortgage-backed securities—residential issued by government sponsored entities	$	329,422	$	2,621	$	44,276	$	550	$	373,698	$	3,171
Total	$	329,422	$	2,621	$	44,276	$	550	$	373,698	$	3,171
Held-to-Maturity
U.S. Government agencies	$	14,256	$	32	$	—	$	—	$	14,256	$	32
Mortgage-backed securities—residential issued by government sponsored entities	48,313		362		—		—		48,313		362
Total	$	62,569	$	394	$	—	$	—	$	62,569	$	394

14

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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

As of September 30, 2014, the Company’s security portfolio consisted of 130 securities, 40 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed securities.

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

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

Investment securities having carrying values of approximately $314.1 million and $313.5 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.

15

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

4. Loans

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

(Dollars in thousands)	September 30, 2014		December 31, 2013
Non-owner occupied commercial real estate	$	797,197	$	775,733
Other commercial construction and land	243,563		300,494
Multifamily commercial real estate	71,119		67,688
1-4 family residential construction and land	76,442		71,351
Total commercial real estate	1,188,321		1,215,266
Owner occupied commercial real estate	1,026,853		1,058,148
Commercial and industrial loans	959,641		803,736
Lease financing	2,175		2,676
Total commercial	1,988,669		1,864,560
1-4 family residential	913,219		804,322
Home equity loans	373,604		386,366
Other consumer loans	242,451		170,526
Total consumer	1,529,274		1,361,214
Other	117,507		110,989
Total loans	$	4,823,771	$	4,552,029

Total loans include $6.4 million and $8.0 million of 1-4 family residential loans held for sale and $9.2 million and $3.8 million of net deferred loan origination costs and fees as of September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014, other loans include $46.5 million, $47.3 million and $2.1 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively. As of December 31, 2013, other loans include $49.7 million, $36.2 million and $2.2 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively.

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

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

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

16

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Accretable Yield
Balance at beginning of period	$	329,421		$	444,481		$	383,775		$	553,348
Accretion of income	(28,560		)	(39,625		)	(92,743		)	(126,634		)
Reclassification from nonaccretable difference	12,720			15,018			48,616			46,117
Other	(6,394		)	(21,459		)	(32,461		)	(74,416		)
Balance at end of period	$	307,187		$	398,415		$	307,187		$	398,415
Nonaccretable difference, balance at the end of the period	$	210,101		$	316,047		$	210,101		$	316,047

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

(Dollars in thousands)
Periods ending December 31,
2014	$	26,482
2015	86,888
2016	62,361
2017	42,443
2018	28,143
Thereafter	60,870
Total	$	307,187

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

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

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

• Indices for PCI loans with variable rates of interest.

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

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

17

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Non-covered Loans

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

(Dollars in thousands)	Non-PCI Loans
September 30, 2014	New		Acquired		PCI Loans		Total Non-covered Loans
Non-owner occupied commercial real estate	$	327,458	$	61,027	$	369,945	$	758,430
Other commercial construction and land	88,013		266		141,762		230,041
Multifamily commercial real estate	27,439		13,863		25,109		66,411
1-4 family residential construction and land	65,428		—		11,014		76,442
Total commercial real estate	508,338		75,156		547,830		1,131,324
Owner occupied commercial real estate	700,945		40,683		228,602		970,230
Commercial and industrial loans	836,036		13,362		102,429		951,827
Lease financing	2,175		—		—		2,175
Total commercial	1,539,156		54,045		331,031		1,924,232
1-4 family residential	523,598		45,826		286,913		856,337
Home equity loans	87,047		159,270		85,689		332,006
Other consumer loans	230,889		4,944		6,543		242,376
Total consumer	841,534		210,040		379,145		1,430,719
Other	70,180		3,664		42,815		116,659
Total loans	$	2,959,208	$	342,905	$	1,300,821	$	4,602,934

(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

18

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Covered Loans

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

(Dollars in thousands)	Non-PCI Loans
September 30, 2014	New		Acquired		PCI Loans		Total Covered Loans
Non-owner occupied commercial real estate	$	—	$	—	$	38,767	$	38,767
Other commercial construction and land	—		—		13,522		13,522
Multifamily commercial real estate	—		—		4,708		4,708
1-4 family residential construction and land	—		—		—		—
Total commercial real estate	—		—		56,997		56,997
Owner occupied commercial real estate	—		—		56,623		56,623
Commercial and industrial loans	—		193		7,621		7,814
Lease financing	—		—		—		—
Total commercial	—		193		64,244		64,437
1-4 family residential	—		1,330		55,552		56,882
Home equity loans	—		31,786		9,812		41,598
Other consumer loans	—		—		75		75
Total consumer	—		33,116		65,439		98,555
Other	—		—		848		848
Total loans	$	—	$	33,309	$	187,528	$	220,837

(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

19

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 September 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	$	—	$	—	$	—	$	—	$	517	$	—	$	517
Other commercial construction and land	23		—		—		—		255		—		278
Multifamily commercial real estate	—		—		—		—		—		—		—
1-4 family residential construction and land	—		—		—		—		168		—		168
Total commercial real estate	23		—		—		—		940		—		963
Owner occupied commercial real estate	1,373		—		—		—		2,605		—		3,978
Commercial and industrial loans	106		—		—		—		3,154		66		3,326
Lease financing	—		—		—		—		—		—		—
Total commercial	1,479		—		—		—		5,759		66		7,304
1-4 family residential	190		45		—		—		527		27		789
Home equity loans	615		241		—		—		1,691		830		3,377
Other consumer loans	2,579		—		—		—		740		—		3,319
Total consumer	3,384		286		—		—		2,958		857		7,485
Other	—		—		—		—		10		—		10
Total loans	$	4,886	$	286	$	—	$	—	$	9,667	$	923	$	15,762

(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	$	699	$	262	$	26,491	$	4,122	$	—	$	—	$	31,574
Other commercial construction and land	190		15		30,857		6,983		—		—		38,045
Multifamily commercial real estate	—		—		2,098		—		—		—		2,098
1-4 family residential construction and land	—		—		1,212		—		—		—		1,212
Total commercial real estate	889		277		60,658		11,105		—		—		72,929
Owner occupied commercial real estate	1,138		214		17,607		3,038		—		—		21,997
Commercial and industrial loans	750		239		24,608		128		—		—		25,725
Lease financing	—		—		—		—		—		—		—
Total commercial	1,888		453		42,215		3,166		—		—		47,722
1-4 family residential	3,444		220		27,803		7,691		—		—		39,158
Home equity loans	1,162		75		4,740		1,396		—		—		7,373
Other consumer loans	202		—		176		27		—		—		405
Total consumer	4,808		295		32,719		9,114		—		—		46,936
Other	81		—		2,693		—		—		—		2,774
Total loans	$	7,666	$	1,025	$	138,285	$	23,385	$	—	$	—	$	170,361

20

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
Lease financing	—		—		—		—		—		—		—
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
Lease financing	—		—		—		—		—		—		—
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.

21

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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.

• 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 PCI loans by internal rating at September 30, 2014:

					Substandard
(Dollars in thousands)	Pass		Special Mention		Accruing/ Accreting		Non-accrual		Doubtful		Total
Non-owner occupied commercial real estate	$	386,116	$	963	$	889	$	517	$	—	$	388,485
Other commercial construction and land	87,412		612		—		255		—		88,279
Multifamily commercial real estate	41,302		—		—		—		—		41,302
1-4 family residential construction and land	62,988		78		2,194		168		—		65,428
Total commercial real estate	577,818		1,653		3,083		940		—		583,494
Owner occupied commercial real estate	726,576		4,671		7,777		2,604		—		741,628
Commercial and industrial loans	841,717		234		4,419		3,221		—		849,591
Lease financing	2,175		—		—		—		—		2,175
Total commercial	1,570,468		4,905		12,196		5,825		—		1,593,394
1-4 family residential	569,955		151		94		554		—		570,754
Home equity loans	273,315		—		2,267		2,521		—		278,103
Other consumer loans	235,093		—		—		740		—		235,833
Total consumer	1,078,363		151		2,361		3,815		—		1,084,690
Other	73,584		—		250		10		—		73,844
Total loans	$	3,300,233	$	6,709	$	17,890	$	10,590	$	—	$	3,335,422

22

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes loans, excluding PCI 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

5. Allowance for Loan Losses

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

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Balance, beginning of period	$	55,307		$	56,832		$	56,851		$	57,262
Reversal of provision for loan losses for PCI loans	(4,205		)	(72		)	(7,633		)	(703		)
Provision for loan losses for non-PCI loans	2,873			1,056			7,681			11,556
Non-PCI loans charged-off	(2,306		)	(1,945		)	(6,438		)	(15,335		)
Recoveries of non-PCI loans previously charged-off	665			522			1,873			3,613
Balance, end of period	$	52,334		$	56,393		$	52,334		$	56,393

23

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 nine months ended September 30, 2014 by the class of loans against which the allowance is allocated:

(Dollars in thousands)	June 30, 2014		Provision/ (Reversals)			Net (Charge-offs)/ Recoveries			September 30, 2014
Non-owner occupied commercial real estate	$	4,487	$	(1,772	)	$	119		$	2,834
Other commercial construction and land	11,502		1,401			11			12,914
Multifamily commercial real estate	480		(17		)	—			463
1-4 family residential construction and land	1,631		(386		)	(2		)	1,243
Total commercial real estate	18,100		(774		)	128			17,454
Owner occupied commercial real estate	3,317		(430		)	(10		)	2,877
Commercial and industrial loans	8,645		(113		)	(177		)	8,355
Lease financing	1		—			—			1
Total commercial	11,963		(543		)	(187		)	11,233
1-4 family residential	17,138		(1,250		)	(8		)	15,880
Home equity loans	4,290		(371		)	(299		)	3,620
Other consumer loans	3,431		1,244			(851		)	3,824
Total consumer	24,859		(377		)	(1,158		)	23,324
Other	385		362			(424		)	323
Total loans	$	55,307	$	(1,332	)	$	(1,641	)	$	52,334

(Dollars in thousands)	December 31, 2013		Provision/ (Reversals)			Net(Charge-offs)/ Recoveries			September 30, 2014
Non-owner occupied commercial real estate	$	4,635	$	(1,806	)	$	5		$	2,834
Other commercial construction and land	8,217		4,881			(184		)	12,914
Multifamily commercial real estate	320		143			—			463
1-4 family residential construction and land	1,558		(315		)	—			1,243
Total commercial real estate	14,730		2,903			(179		)	17,454
Owner occupied commercial real estate	4,450		(1,443		)	(130		)	2,877
Commercial and industrial loans	8,310		217			(172		)	8,355
Lease financing	3		(2		)	—			1
Total commercial	12,763		(1,228		)	(302		)	11,233
1-4 family residential	21,724		(5,742		)	(102		)	15,880
Home equity loans	3,869		530			(779		)	3,620
Other consumer loans	2,682		3,267			(2,125		)	3,824
Total consumer	28,275		(1,945		)	(3,006		)	23,324
Other	1,083		318			(1,078		)	323
Total loans	$	56,851	$	48		$	(4,565	)	$	52,334

24

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 nine months ended September 30, 2013 by the class of loans against which the allowance is allocated:

(Dollars in thousands)	June 30, 2013		Provision/ (Reversals)			Net(Charge-offs)/ Recoveries			September 30, 2013
Non-owner occupied commercial real estate	$	4,329	$	2,344		$	11		$	6,684
Other commercial construction and land	12,310		(1,201		)	85			11,194
Multifamily commercial real estate	258		44			—			302
1-4 family residential construction and land	1,806		353			2			2,161
Total commercial real estate	18,703		1,540			98			20,341
Owner occupied commercial real estate	4,696		357			17			5,070
Commercial and industrial loans	8,288		(264		)	(466		)	7,558
Lease financing	—		3			—			3
Total commercial	12,984		96			(449		)	12,631
1-4 family residential	17,572		(1,040		)	51			16,583
Home equity loans	3,937		(40		)	(120		)	3,777
Other consumer loans	2,361		734			(565		)	2,530
Total consumer	23,870		(346		)	(634		)	22,890
Other	1,275		(306		)	(438		)	531
Total loans	$	56,832	$	984		$	(1,423	)	$	56,393

(Dollars in thousands)	December 31, 2012		Provision/ (Reversals)			Net (Charge-offs)/ Recoveries			September 30, 2013
Non-owner occupied commercial real estate	$	3,764	$	2,936		$	(16	)	$	6,684
Other commercial construction and land	12,711		(2,120		)	603			11,194
Multifamily commercial real estate	348		(87		)	41			302
1-4 family residential construction and land	1,716		420			25			2,161
Total commercial real estate	18,539		1,149			653			20,341
Owner occupied commercial real estate	4,055		732			283			5,070
Commercial and industrial loans	7,490		8,885			(8,817		)	7,558
Lease financing	—		3			—			3
Total commercial	11,545		9,620			(8,534		)	12,631
1-4 family residential	15,740		772			71			16,583
Home equity loans	8,670		(3,861		)	(1,032		)	3,777
Other consumer loans	2,082		2,097			(1,649		)	2,530
Total consumer	26,492		(992		)	(2,610		)	22,890
Other	686		1,076			(1,231		)	531
Total loans	$	57,262	$	10,853		$	(11,722	)	$	56,393

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

25

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended
(Dollars in thousands)	September 30, 2014									September 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832
Charge-offs:
Non-owner occupied commercial real estate	(88		)	—			(88		)	—			—			—
Other commercial construction and land	—			—			—			(50		)	—			(50		)
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	(4		)	—			(4		)	—			—			—
Total commercial real estate	(92		)	—			(92		)	(50		)	—			(50		)
Owner occupied commercial real estate	(12		)	—			(12		)	—			—			—
Commercial and industrial loans	(283		)	—			(283		)	(544		)	—			(544		)
Lease financing	—			—			—			—			—			—
Total commercial	(295		)	—			(295		)	(544		)	—			(544		)
1-4 family residential	(13		)	—			(13		)	(9		)	—			(9		)
Home equity loans	(337		)	—			(337		)	(3		)	—			(3		)
Other consumer loans	(984		)	—			(984		)	(685		)	—			(685		)
Total consumer	(1,334		)	—			(1,334		)	(697		)	—			(697		)
Other	(585		)	—			(585		)	(654		)	—			(654		)
Total charge-offs	(2,306		)	—			(2,306		)	(1,945		)	—			(1,945		)
Recoveries:
Non-owner occupied commercial real estate	207			—			207			11			—			11
Other commercial construction and land	11			—			11			135			—			135
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	2			—			2			2			—			2
Total commercial real estate	220			—			220			148			—			148
Owner occupied commercial real estate	2			—			2			17			—			17
Commercial and industrial loans	106			—			106			78			—			78
Lease financing	—			—			—			—			—			—
Total commercial	108			—			108			95			—			95
1-4 family residential	5			—			5			60			—			60
Home equity loans	38			—			38			(117		)	—			(117		)
Other consumer loans	133			—			133			120			—			120
Total consumer	176			—			176			63			—			63
Other	161			—			161			216			—			216
Total recoveries	665			—			665			522			—			522
Net charge-offs	(1,641		)	—			(1,641		)	(1,423		)	—			(1,423		)
Provision (reversal) for loan losses:
Non-owner occupied commercial real estate	(76		)	(1,696		)	(1,772		)	153			2,191			2,344
Other commercial construction and land	493			908			1,401			(242		)	(959		)	(1,201		)
Multifamily commercial real estate	23			(40		)	(17		)	(13		)	57			44
1-4 family residential construction and land	(70		)	(316		)	(386		)	38			315			353
Total commercial real estate	370			(1,144		)	(774		)	(64		)	1,604			1,540
Owner occupied commercial real estate	(29		)	(401		)	(430		)	(99		)	456			357
Commercial and industrial loans	66			(179		)	(113		)	47			(311		)	(264		)
Lease financing	—			—			—			3			—			3
Total commercial	37			(580		)	(543		)	(49		)	145			96
1-4 family residential	395			(1,645		)	(1,250		)	87			(1,127		)	(1,040		)
Home equity loans	389			(760		)	(371		)	(6		)	(34		)	(40		)
Other consumer loans	1,239			5			1,244			711			23			734
Total consumer	2,023			(2,400		)	(377		)	792			(1,138		)	(346		)
Other	443			(81		)	362			377			(683		)	(306		)
Total provision (reversal) for loan losses	2,873			(4,205		)	(1,332		)	1,056			(72		)	984
Allowance for loan losses at the end of the period	$	22,067		$	30,267		$	52,334		$	17,273		$	39,120		$	56,393

26

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)	Nine Months Ended
	September 30, 2014									September 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	(292		)	—			(292		)	(92		)	—			(92		)
Other commercial construction and land	(207		)	—			(207		)	(152		)	—			(152		)
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	(6		)	—			(6		)	—			—			—
Total commercial real estate	(505		)	—			(505		)	(244		)	—			(244		)
Owner occupied commercial real estate	(156		)	—			(156		)	—			—			—
Commercial and industrial loans	(444		)	—			(444		)	(9,555		)	—			(9,555		)
Lease financing	—			—			—			—			—			—
Total commercial	(600		)	—			(600		)	(9,555		)	—			(9,555		)
1-4 family residential	(114		)	—			(114		)	(37		)	—			(37		)
Home equity loans	(931		)	—			(931		)	(1,370		)	—			(1,370		)
Other consumer loans	(2,572		)	—			(2,572		)	(2,066		)	—			(2,066		)
Total consumer	(3,617		)	—			(3,617		)	(3,473		)	—			(3,473		)
Other	(1,716		)	—			(1,716		)	(2,063		)	—			(2,063		)
Total charge-offs	(6,438		)	—			(6,438		)	(15,335		)	—			(15,335		)
Recoveries:
Non-owner occupied commercial real estate	297			—			297			76			—			76
Other commercial construction and land	23			—			23			755			—			755
Multifamily commercial real estate	—			—			—			41			—			41
1-4 family residential construction and land	6			—			6			25			—			25
Total commercial real estate	326			—			326			897			—			897
Owner occupied commercial real estate	26			—			26			283			—			283
Commercial and industrial loans	272			—			272			738			—			738
Lease financing	—			—			—			—			—			—
Total commercial	298			—			298			1,021			—			1,021
1-4 family residential	12			—			12			108			—			108
Home equity loans	152			—			152			338			—			338
Other consumer loans	447			—			447			417			—			417
Total consumer	611			—			611			863			—			863
Other	638			—			638			832			—			832
Total recoveries	1,873			—			1,873			3,613			—			3,613
Net charge-offs	(4,565		)	—			(4,565		)	(11,722		)	—			(11,722		)
Provision (reversal) for loan losses:
Non-owner occupied commercial real estate	105			(1,911		)	(1,806		)	(46		)	2,982			2,936
Other commercial construction and land	992			3,889			4,881			(769		)	(1,351		)	(2,120		)
Multifamily commercial real estate	(1		)	144			143			(60		)	(27		)	(87		)
1-4 family residential construction and land	(140		)	(175		)	(315		)	145			275			420
Total commercial real estate	956			1,947			2,903			(730		)	1,879			1,149
Owner occupied commercial real estate	10			(1,453		)	(1,443		)	(654		)	1,386			732
Commercial and industrial loans	448			(231		)	217			8,226			659			8,885
Lease financing	(2		)	—			(2		)	3			—			3
Total commercial	456			(1,684		)	(1,228		)	7,575			2,045			9,620
1-4 family residential	952			(6,694		)	(5,742		)	232			540			772
Home equity loans	1,003			(473		)	530			1,014			(4,875		)	(3,861		)
Other consumer loans	3,326			(59		)	3,267			2,234			(137		)	2,097
Total consumer	5,281			(7,226		)	(1,945		)	3,480			(4,472		)	(992		)
Other	988			(670		)	318			1,231			(155		)	1,076
Total provision (reversal) for loan losses	7,681			(7,633		)	48			11,556			(703		)	10,853
Allowance for loan losses at the end of the period	$	22,067		$	30,267		$	52,334		$	17,273		$	39,120		$	56,393

27

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 loan and by impairment evaluation method as of September 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	$	—	$	1,725	$	1,109		$	—	$	388,485	$	408,712
Other commercial construction and land	—		2,009		10,905			—		88,279		155,284
Multifamily commercial real estate	—		115		348			—		41,302		29,817
1-4 family residential construction and land	—		925		318			—		65,428		11,014
Total commercial real estate	—		4,774		12,680			—		583,494		604,827
Owner occupied commercial real estate	—		2,491		386			3,503		738,125		285,225
Commercial and industrial loans	—		7,153		1,202			6,095		843,496		110,050
Lease financing	—		1		—			—		2,175		—
Total commercial	—		9,645		1,588			9,598		1,583,796		395,275
1-4 family residential	—		3,129		12,751			—		564,315		342,465
Home equity loans	26		596		2,998			304		277,799		95,501
Other consumer loans	8		3,511		305			129		235,704		6,618
Total consumer	34		7,236		16,054			433		1,077,818		444,584
Other	—		378		(55		)	—		73,844		43,663
Total loans	$	34	$	22,033	$	30,267		$	10,031	$	3,318,952	$	1,488,349

(1) Loans collectively evaluated for impairment include $375.5 million of acquired loans which are presented net of unamortized purchase discounts of $13.1 million.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class of loan 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.

28

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructuring

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 nine months ended September 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 September 30, 2014. The Company had loans modified in TDRs with recorded investments of $1.2 million and $3.7 million for the three and nine months ended September 30, 2014, respectively. The Company had loans modified in TDRs with recorded investments of $1.2 million and $1.4 million for the three and nine months ended September 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 expense	(977		)
Amortization of indemnification asset	(7,133		)
Cash received on reimbursable losses	(4,475		)
Balance, September 30, 2014	$	21,025
Balance, December 31, 2012	$	49,417
Indemnification asset income	2,003
Amortization of indemnification asset	(5,782		)
Cash received on reimbursable losses	(8,801		)
Balance, September 30, 2013	$	36,837

29

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

7. Other Real Estate Owned

The activity within Other Real Estate Owned (“OREO”) for the three and nine months ended September 30, 2014 and 2013 is presented in the table below. Ending balances for OREO covered by loss sharing agreements with the FDIC as of September 30, 2014 and 2013 were $14.9 million and $27.3 million, respectively. Non-covered OREO ending balances as of September 30, 2014 and 2013 were $75.4 million and $102.4 million, respectively.

For the three and nine months ended September 30, 2014, proceeds on sales of OREO were $16.0 million and $64.4 million, respectively. Net gains on sales were $0.2 million and $4.1 million, respectively. For the three and nine months ended September 30, 2013, proceeds on sales of OREO were $17.5 million and $62.2 million, respectively. Net losses on sales were $0.2 million for the three months ended September 30, 2013 and net gains were $3.2 million for the nine months ended September 30, 2013.

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Balance, beginning of period	$	96,283		$	142,793		$	129,396		$	154,093
Real estate acquired from borrowers	12,590			10,585			30,452			53,366
Valuation allowance	(2,752		)	(6,045		)	(9,347		)	(18,844		)
Properties sold	(15,844		)	(17,679		)	(60,224		)	(58,961		)
Balance, end of period	$	90,277		$	129,654		$	90,277		$	129,654

8. Federal Home Loan Bank Advances and Short-Term Borrowings

Short-term borrowings include 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 September 30, 2014 and December 31, 2013 were $23.8 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 September 30, 2014 and December 31, 2013 provided for incremental borrowing availability of up to $58.7 million and $95.4 million, respectively.

At September 30, 2014 and December 31, 2013, the Bank had $25.7 million and $25.6 million in letters of credit issued by the FHLB respectively, of which $25.2 million are used as collateral for public fund deposits in lieu of pledging securities to the State of Florida.

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

30

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands)
Contractual Outstanding Amount
September 30, 2014		Maturity Date	Fixed Contractual Rate
$	50,000	October 23, 2014	0.24%
40,000		November 25, 2014	0.22%
60,000		December 26, 2014	0.18%
75,000		May 19, 2015	0.36%
614		November 6, 2017	0.50%
524		February 10, 2026	—%
$	226,138

(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	—%
$	96,278

9. Long-Term Borrowings

Structured repurchase agreements

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

(Dollars in thousands)
Carrying Amount
September 30, 2014		December 31, 2013		Contractual Amount		Maturity Date	Contractual Rate
$	10,611	$	10,823	$	10,000	November 6, 2016	4.75%
10,646		10,833		10,000		March 30, 2017	4.50%
10,426		10,521		10,000		December 18, 2017	3.79%
10,403		10,492		10,000		December 18, 2017	3.72%
10,674		10,780		10,000		March 22, 2019	3.56%
$	52,760	$	53,449	$	50,000

These repurchase agreements have a weighted-average rate of 4.06% at September 30, 2014 and December 31, 2013 and are collateralized by $63.2 million and $62.1 million, respectively, of mortgage-backed securities.

31

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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. On September 7, 2013 the Company called and redeemed $8.0 million of trust preferred securities issued by TIBB, which had a fixed interest rate of 10.60% The prepayment resulted in a $0.4 million gain on extinguishment of debt.

The subordinated debentures as of September 30, 2014 and December 31, 2013 consisted of the following:

(Dollars in thousands)
			Carrying Amount
Date of Offering	Face Amount		September 30, 2014		December 31, 2013		Interest Rate as of September 30, 2014			Maturity Date
July 31, 2001	$	5,000	$	3,887	$	3,851	3.82	%	(3 Month LIBOR+358 bps)	July 31, 2031
July 31, 2001	4,000		2,683		2,636		3.82	%	(3 Month LIBOR+358 bps)	July 31, 2031
June 26, 2003	10,000		5,992		5,921		3.34	%	(3 Month LIBOR+310 bps)	June 26, 2033
September 25, 2003	10,000		6,478		6,368		3.08	%	(3 Month LIBOR+285 bps)	September 25, 2033
December 30, 2003	10,000		5,776		5,704		3.09	%	(3 Month LIBOR+285 bps)	December 30, 2033
June 28, 2005	3,000		1,582		1,545		1.91	%	(3 Month LIBOR+168 bps)	June 28, 2035
December 22, 2005	10,000		4,577		4,491		1.63	%	(3 Month LIBOR+140 bps)	March 15, 2036
December 28, 2005	13,000		6,615		6,458		1.77	%	(3 Month LIBOR+154 bps)	March 15, 2036
June 23, 2006	20,000		11,417		11,206		1.78	%	(3 Month LIBOR+155 bps)	July 7, 2036
May 16, 2007	56,000		28,688		28,050		1.88	%	(3 Month LIBOR+165 bps)	June 15, 2037
June 15, 2007	10,000		5,401		5,327		1.66	%	(3 Month LIBOR+143 bps)	September 6, 2037
	$	151,000	$	83,096	$	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 September 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.

32

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

At September 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	10,611		—		10,611
Due in 2017	31,475		—		31,475
Due in 2018	—		—		—
Thereafter	14,214		83,096		97,310
Total	$	56,300	$	83,096	$	139,396

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 September 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
September 30, 2014	Amount	Ratio	Amount	Ratio	Amount		Ratio
Tier 1 Capital
(to Average Assets)
CBF Consolidated	N/A	N/A	$251,319	≥ 4.0%	$	923,231	14.4%
Capital Bank, N.A.	$313,810	≥ 5.0%	$251,048	≥ 4.0%	$	855,566	13.4%
Tier 1 Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	$197,728	≥ 4.0%	$	923,231	18.4%
Capital Bank, N.A.	$296,245	≥ 6.0%	$197,497	≥ 4.0%	$	855,566	17.1%
Total Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	$395,456	≥ 8.0%	$	979,541	19.5%
Capital Bank, N.A.	$493,742	≥ 10.0%	$394,994	≥ 8.0%	$	911,730	18.2%

33

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(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	$254,126	≥ 4.0%	$	949,619	14.9%
Capital Bank, N.A.	$317,562	≥ 5.0%	$254,050	≥ 4.0%	$	849,520	13.4%
Tier 1 Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	$192,428	≥ 4.0%	$	949,619	19.7%
Capital Bank, N.A.	$288,410	≥ 6.0%	$192,273	≥ 4.0%	$	849,520	17.7%
Total Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	N/A	$384,856	≥ 8.0%	$	1,010,422	21.0%
Capital Bank, N.A.	$480,683	≥ 10.0%	$384,546	≥ 8.0%	$	910,162	18.9%

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 September 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. On September 5, 2013 and July 8, 2014, the OCC approved dividends to the Company by its subsidiary Capital Bank N.A., of $105.0 million and $56.0 million, respectively.

Share Repurchases

During 2013 and 2014, the Company’s Board of Directors authorized stock repurchase plans of up to $200.0 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 and nine months ended September 30, 2014, the Company repurchased $19.5 million, or 819,773 common shares at an average price of $23.78 per share and $85.4 million, or 3,586,771 common shares at average price of $23.80 per share, respectively.

As of September 30, 2014, the Company has repurchased a total of $155.3 million, or 7,348,088 common shares at an average price of $21.14 per share with $44.7 million of remaining availability for future share repurchases.

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.

34

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

11. Stock-Based Compensation

As of September 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 nine months ended September 30, 2014 and 2013.

(Dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Stock options	$	195	$	215	$	560	$	395
Restricted stock	248		1,156		1,631		3,917
Total stock-based compensation expense	$	443	$	1,371	$	2,191	$	4,312

The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was $0.2 million and $0.5 million for the three months ended September 30, 2014 and 2013, respectively, and $0.9 million and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively.

Stock Options

Under the 2010 Plan 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 nine months ended September 30, 2014.

During the nine months ended September 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.

35

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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

	Nine Months Ended September 30, 2013
Dividend yield	—%
Risk-free interest rate	1.0%
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 nine months ended September 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 nine months ended September 30, 2014 and 2013 is as follows:

	Nine Months Ended
	September 30, 2014				September 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
Exercised	—		—		—		—
Canceled, expired or forfeited	(11	)	75.94		(21	)	113.80
Balance, September 30,	3,112		$	20.30	3,133		$	20.50

The weighted average remaining contractual life for outstanding stock options was approximately 5.90 years at September 30, 2014. The aggregate intrinsic value at September 30, 2014 was $12.5 million and $11.8 million for stock options outstanding and exercisable, respectively.

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 September 30, 2014 were as follows:

(Shares in thousands)	Outstanding Options				Exercisable 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	8.64 years	$	18.00	118	$	18.00
$20.00	2,864	5.68 years	20.00		2,864	20.00
$28.44 - $2,026.00	12	3.23 years	138.87		12	138.87
$18.00 - $2,026.00	3,112	5.90 years	$	20.30	2,994	$	20.39

36

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Restricted Stock

Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. 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. No restricted stock awards were granted under the 2013 Plan during the three and nine months ended September 30, 2014.

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.

On April 2, 2014, 405,133 restricted stock awards vested upon achievement of the $25.00 stock price goal. The Company recognized $1.7 million in excess tax benefits related to the vesting of such awards.The following table summarizes unvested restricted stock activity for the nine months ended September 30, 2014 and 2013:

	Nine Months Ended
	September 30, 2014				September 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		—	—
Canceled, expired or forfeited	—		—		—	—
Balance, September 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. The Company recognized the $0.3 million fair value of the stock awards in compensation expense on the grant date.

37

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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 nine months ended September 30, 2014 and 2013:

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Income before income taxes	$	21,296		$	20,419		$	59,959		$	46,736
Income taxes computed at Federal statutory tax rate	7,454			7,147			20,986			16,358
Effect of:
State taxes (net of federal benefit)	754			784			2,237			1,795
State statutory rate change	—			1,545			—			1,545
Tax-exempt interest income, net	(152		)	(163		)	(485		)	(503		)
Contingent value right expense	97			(301		)	480			1,156
Other, net	(100		)	(37		)	(341		)	(253		)
Total income tax expense	$	8,053		$	8,975		$	22,877		$	20,098

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 nine months ended September 30, 2014, the effective income tax rates were 38%. For the three and nine months ended September 30, 2013, the effective income tax rates were 44% and 43%, respectively. The higher prior year effective income tax rates were mainly due to the impact of a $1.5 million charge to income tax expense as a result of changes in certain statutory rates that were enacted into law during the three months ended September 30, 2013.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the states of Florida, New York, South and North Carolina and Tennessee. The net deferred tax assets as of September 30, 2014 and December 31, 2013 were $139.4 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 September 30, 2014 and December 31, 2013.

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

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.

38

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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 forward loan sales agreements are based upon the amounts required to settle the contracts. Fair values for commitments to originate loans held for sale are based on fees currently charged to enter into similar agreements. Fair values for fixed-rate commitments also consider the difference between current levels of interest rates and the committed rates.

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 other debt securities that are not actively traded, custom discounted cash flow modeling (Level 3 inputs).

As of September 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.

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.

39

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

Sensitivity to Changes in Significant Unobservable Inputs

As discussed above, as of September 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 September 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	$	2,312	$	—	$	2,312	$	—
Available-for-sale securities:
Mortgage-backed securities—residential	576,062		—		576,062		—
Industrial revenue bonds	3,724		—		—		3,724
Marketable equity securities	946		—		946		—
Available-for-sale securities	$	580,732	$	—	$	577,008	$	3,724
Gross asset value of derivatives	$	15	$	—	$	15	$	—
Liabilities
Gross liability value of derivatives	$	21	$	—	$	21	$	—

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

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.

40

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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 nine months ended and held at September 30, 2014:

(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Industrial Revenue Bonds
Beginning balance, June 30, 2014	$	3,736
Included in other comprehensive income	(12		)
Ending balance, September 30, 2014	$	3,724

(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	35
Ending balance, September 30, 2014	$	3,724

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 nine months ended and held at September 30, 2013:

(Dollars in thousands)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Corporate Bonds		Industrial Revenue Bonds		Collateralized Debt Obligations
Beginning balance, June 30, 2013	$	—	$	3,872	$	301
Included in other comprehensive income	—		93		28
Ending balance, September 30, 2013	$	—	$	3,965	$	329

(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	—			165		32
Sales	(225		)	—		—
Ending balance, September 30, 2013	$	—		$	3,965	$	329

Quantitative Information about Recurring Level 3 Fair Value Measurements

(Dollars in thousands)	Fair Value at September 30, 2014		Valuation Technique	Significant Unobservable Input	Range
Industrial revenue bonds	$	3,724	Discounted cash flow	Discount rate	3.2%
				Illiquidity factor	0.5%

41

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

(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 on a Nonrecurring Basis

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below as of September 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	$	—	$	—	$	77,856
Other repossessed assets	—		144		—

Other real estate owned measured at fair value as of September 30, 2014 had a carrying amount of $99.5 million, less valuation allowances totaling $21.6 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 repossessed 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 September 30, 2014		Valuation Technique	Significant Unobservable Input	Range
Other real estate owned	$	77,856	Fair value of property	Appraised value less cost to sell	6%-10%

(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%

42

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
September 30, 2014	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	159,410	$	159,410	$	159,410	$	—	$	—
Trading securities	2,312		2,312		—		2,312		—
Investment securities available-for-sale	580,732		580,732		—		577,008		3,724
Investment securities held-to-maturity	454,809		457,712		—		457,712		—
Loans, net	4,771,437		4,917,215		—		6,439		4,910,776
FDIC indemnification asset	21,025		21,025		—		—		21,025
Receivable from FDIC	3,491		3,491		—		3,491		—
Other earning assets (1)	47,796		47,796		—		—		47,796
Gross asset value of derivatives	15		15		—		15		—
Total financial assets	$	6,041,027	$	6,189,708	$	159,410	$	1,046,977	$	4,983,321
Financial Liabilities
Non-contractual deposits	3,745,350		3,745,350		—		—		3,745,350
Contractual deposits	1,430,106		1,428,890		—		—		1,428,890
Federal Home Loan Bank advances	226,138		226,073		—		226,073		—
Short-term borrowings	23,823		23,823		—		23,823		—
Long-term borrowings	52,760		54,454		—		—		54,454
Subordinated debentures	86,636		98,156		—		—		98,156
Gross liability value of derivatives	21		21		—		21		—
Total financial liabilities	$	5,564,834	$	5,576,767	$	—	$	249,917	$	5,326,850

(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 earning assets (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
Non-contractual 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.

43

Capital Bank Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

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.

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)	September 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)	15		6,054		15		4,215
Total assets	$	15	$	6,054	$	15	$	16,715
Liabilities
Interest rate swaps associated with certificates of deposits (maturing in 2040)	$	—	$	—	$	1,320	$	25,000
Forward loan sales contracts (maturing in 2014)	21		8,096		10		3,545
Total liabilities	$	21	$	8,096	$	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 nine months ended September 30, 2014, the Company recorded $29 thousand and $1.8 million, respectively, in non-interest income, and $14 thousand and $49 thousand, respectively, in non-interest expense as a result of changes in fair value of derivatives. The interest rate swaps associated with certificates of deposit were terminated in September 2014, and, as a result, the Company recognized a $0.3 million loss in non-interest expense.

For the three and nine months ended September 30, 2013, the company recorded $(0.3) million and $(0.7) million in non-interest income, respectively, and $0.2 million and $0.4 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, N.A.’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, N.A’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, N.A.’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 the Company’s consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 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 September 30, 2014, and statements of income for the three and nine months ended September 30, 2014. Except as noted in tables or otherwise, dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in millions.

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.

45

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.

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. Mr. Singletary then relocated to Florida to 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.

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, Capital and Liquidity, 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 September 30, 2014, we had net income of $13.2 million, or $0.27 per diluted share, an increase of 8% and 23% over the second quarter and prior year third quarter, respectively. Results include the following non-core items: $0.3 million of contingent value right (“CVR”) expense; $0.2 million of net gains on sales of investment securities; and $0.1 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 9% annualized rate;

• New loans of $445.1 million, up 53% year over year and 35% year to date;

• Nonperforming loans declined sequentially at a 75% annualized rate;

• Legacy credit expenses declined 55% year over year;

• Efficiency and core efficiency ratios declined to 72.0% and 71.6%, respectively;

• ROA and core ROA increased to 0.80% and 0.81%, respectively; and

• Tangible book value per share increased to $19.00.

46

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 and investment securities. Our interest-bearing liabilities include deposits, subordinated debentures, repurchase agreements and other short-term borrowings.

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

Net interest income for the three months ended September 30, 2014 increased by $0.6 million, or 0.9%, to $61.4 million from $60.8 million for the three months ended June 30, 2014. The sequential increase was due to increased loan balances and investment securities yields. The net interest margin declined 12 basis points to 4.14% from 4.26% and the net interest spread declined to 4.01% from 4.12%. Loan yields declined to 5.17% from 5.40% mainly due to the lower yield on new loans as compared to the yields of our legacy portfolio. New loans were $445.1 million with an average yield of 3.59%, up from 3.50% in the second quarter of 2014. The increase in investment securities yields was mainly due to the repositioning of a portion of our portfolio into agency-backed commercial mortgage-backed securities as part of our strategy to manage the bank’s overall interest rate risk position. Deposits remained consistent at $5.2 billion. The cost of core deposits remained flat at 0.14% and the cost of funds remained flat at 0.45%.

(Dollars in thousands)	Three Months Ended   September 30, 2014						Three Months Ended June 30, 2014
	Average Balances		Interest		Yield/Rate		Average Balances		Interest		Yield/Rate
Interest earning assets
Loans (1)	$	4,762,260	$	62,095	5.17	%	$	4,593,337	$	61,826	5.40	%
Investment securities (1)	1,064,710		5,160		1.92	%	1,060,611		4,648		1.76	%
Interest-bearing deposits in other banks	38,857		19		0.19	%	62,172		37		0.24	%
Other earning assets (2)	45,774		604		5.24	%	40,346		578		5.75	%
Total interest earning assets	5,911,601		$	67,878	4.56	%	5,756,466		$	67,089	4.67	%
Non-interest earning assets	725,578						763,185
Total assets	$	6,637,179					$	6,519,651
Interest bearing liabilities
Time deposits	$	1,372,696	$	2,983	0.86	%	$	1,358,478	$	2,878	0.85	%
Money market	935,223		552		0.23	%	931,867		523		0.23	%
Negotiable order of withdrawal	1,313,693		537		0.16	%	1,330,856		556		0.17	%
Savings	525,854		289		0.22	%	531,414		286		0.22	%
Total interest bearing deposits	4,147,466		4,361		0.42	%	4,152,615		4,243		0.41	%
Short-term borrowings and FHLB advances	214,122		125		0.23	%	98,002		50		0.20	%
Long-term borrowings	136,353		1,732		5.04	%	135,831		1,719		5.08	%
Total interest bearing liabilities	4,497,941		$	6,218	0.55	%	4,386,448		$	6,012	0.55	%
Non-interest bearing demand	1,010,817						1,002,757
Other liabilities	57,430						45,281
Shareholders’ equity	1,070,991						1,085,165
Total liabilities and shareholders’ equity	$	6,637,179					$	6,519,651
Net interest income and spread			$	61,660	4.01	%			$	61,077	4.12	%
Net interest margin					4.14	%					4.26	%

47

Rate/Volume Analysis

(Dollars in thousands)	Three Months Ended September 30, 2014 Compared to Three Months Ended June 30, 2014 Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	2,235		$	(1,966	)	$	269
Investment securities	18			494			512
Interest-bearing deposits in other banks	(12		)	(6		)	(18		)
Other earning assets (2)	74			(48		)	26
Total interest income	2,315			(1,526		)	789
Interest expense
Time deposits	30			75			105
Money market	2			27			29
Negotiable order of withdrawal	(7		)	(12		)	(19		)
Savings	(3		)	6			3
Short-term borrowings and FHLB advances	67			8			75
Long-term borrowings	7			6			13
Total interest expense	96			110			206
Change in net interest income	$	2,219		$	(1,636	)	$	583

(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 September 30, 2014 compared to three months ended September 30, 2013

Net interest income for the three months ended September 30, 2014 declined by $4.0 million, or 6.1%, to $61.4 million from $65.4 million for the three months ended September 30, 2013. The decline was mainly due to lower yields on new loans as compared to the yields of our legacy portfolio, partially offset by an increase in loan balances and yields on investment securities, and declines in time deposits and long-term borrowings. The net interest margin declined 31 basis points to 4.14% from 4.45% and the net interest spread declined to 4.01% from 4.32%. Loan yields declined to 5.17% from 5.93% mainly due to lower yields on new loans replacing higher yield legacy loans. For the trailing twelve months, new loans were $1.8 billion with an average yield of 3.66%. The cost of core deposits remained flat at 0.14%. The cost of funds declined to 0.45% from 0.51% for the prior year third quarter due to the continued planned shrinkage of high-cost legacy time deposits and the reduction in high coupon trust preferred debt prepaid in in the prior year. Average time deposit balances declined $287.7 million, or 17%, and their average rates declined five basis points.

48

(Dollars in thousands)	Three Months Ended   September 30, 2014						Three Months Ended September 30, 2013
	Average Balances		Interest		Yield/Rate		Average Balances		Interest		Yield/Rate
Interest earning assets
Loans (1)	$	4,762,260	$	62,095	5.17	%	$	4,514,747	$	67,524	5.93	%
Investment securities (1)	1,064,710		5,160		1.92	%	1,230,771		4,639		1.50	%
Interest-bearing deposits in other banks	38,857		19		0.19	%	61,995		37		0.24	%
Other earning assets (2)	45,774		604		5.24	%	40,195		533		5.26	%
Total interest earning assets	5,911,601		$	67,878	4.56	%	5,847,708		$	72,733	4.93	%
Non-interest earning assets	725,578						832,959
Total assets	$	6,637,179					$	6,680,667
Interest bearing liabilities
Time deposits	$	1,372,696	$	2,983	0.86	%	$	1,660,373	$	3,792	0.91	%
Money market	935,223		552		0.23	%	977,698		544		0.22	%
Negotiable order of withdrawal	1,313,693		537		0.16	%	1,260,477		521		0.16	%
Savings	525,854		289		0.22	%	524,728		276		0.21	%
Total interest bearing deposits	4,147,466		4,361		0.42	%	4,423,276		5,133		0.46	%
Short-term borrowings and FHLB advances	214,122		125		0.23	%	34,820		7		0.08	%
Long-term borrowings	136,353		1,732		5.04	%	140,938		1,953		5.50	%
Total interest bearing liabilities	4,497,941		$	6,218	0.55	%	4,599,034		$	7,093	0.61	%
Non-interest bearing demand	1,010,817						914,260
Other liabilities	57,430						55,823
Shareholders’ equity	1,070,991						1,111,550
Total liabilities and shareholders’ equity	$	6,637,179					$	6,680,667
Net interest income and spread			$	61,660	4.01	%			$	65,640	4.32	%
Net interest margin					4.14	%					4.45	%

Rate/Volume Analysis

(Dollars in thousands)	Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	3,560		$	(8,989	)	$	(5,429	)
Investment securities	(683		)	1,204			521
Interest-bearing deposits in other banks	(12		)	(6		)	(18		)
Other earning assets (2)	74			(3		)	71
Total interest income	2,939			(7,794		)	(4,855		)
Interest expense
Time deposits	(632		)	(177		)	(809		)
Money market	(24		)	32			8
Negotiable order of withdrawal	22			(6		)	16
Savings	1			12			13
Short-term borrowings and FHLB advances	86			32			118
Long-term borrowings	(62		)	(159		)	(221		)
Total interest expense	(609		)	(266		)	(875		)
Change in net interest income	$	3,548		$	(7,528	)	$	(3,980	)

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(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.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Net interest income for the nine months ended September 30, 2014 declined by $13.1 million, or 6.6%, to $184.7 million from $197.9 million for the nine months ended September 30, 2013. The decline was mainly due to lower yields on new loans as compared to the yields of our legacy portfolio, 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 declined eleven basis points to 4.26% from 4.37% and the net interest spread declined to 4.14% from 4.23%. Loan yields declined to 5.41% from 6.04%, mainly due to our new loan portfolio replacing higher yield legacy loans. For the nine months ended September 30, 2014, new loans were $1.1 billion with an average yield of 3.65% as compared to new loans of $844.4 million with an average yield of 4.10% for the nine months ended September 30, 2013. Investment securities yields increased due to the repositioning of our investment portfolio in higher yield investment securities. The cost of core deposits remained flat at 0.14%. The cost of funds declined to 0.45% from 0.56% at September 30, 2013, 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 time deposit balances declined $450.8 million, or 25%, and their average rates declined thirteen basis points.

(Dollars in thousands)	Nine Months Ended   September 30, 2014						Nine Months Ended   September 30, 2013
	Average Balances		Interest		Yield/Rate		Average Balances		Interest		Yield/Rate
Interest earning assets
Loans (1)	$	4,633,424	$	187,325	5.41	%	$	4,597,730	$	207,842	6.04	%
Investment securities (1)	1,088,570		14,608		1.79	%	1,177,377		12,714		1.44	%
Interest-bearing deposits in other banks	49,487		81		0.22	%	269,121		510		0.25	%
Other earning assets (2)	43,091		1,763		5.47	%	38,451		1,485		5.16	%
Total interest earning assets	5,814,572		$	203,777	4.69	%	6,082,679		$	222,551	4.89	%
Non-interest earning assets	758,525						859,025
Total assets	$	6,573,097					$	6,941,704
Interest bearing liabilities
Time deposits	$	1,381,485	$	8,834	0.85	%	$	1,832,242	$	13,429	0.98	%
Money market	938,560		1,602		0.23	%	1,048,559		1,748		0.22	%
Negotiable order of withdrawal	1,319,416		1,631		0.17	%	1,266,451		1,575		0.17	%
Savings	530,005		857		0.22	%	511,890		789		0.21	%
Total interest bearing deposits	4,169,466		12,924		0.41	%	4,659,142		17,541		0.50	%
Short-term borrowings and FHLB advances	139,063		246		0.24	%	38,924		36		0.12	%
Long-term borrowings	135,837		5,154		5.07	%	151,354		6,346		5.61	%
Total interest bearing liabilities	4,444,366		$	18,324	0.55	%	4,849,420		$	23,923	0.66	%
Non-interest bearing demand	985,445						902,337
Other liabilities	53,082						50,639
Shareholders’ equity	1,090,204						1,139,308
Total liabilities and shareholders’ equity	$	6,573,097					$	6,941,704
Net interest income and spread			$	185,453	4.14	%			$	198,628	4.23	%
Net interest margin					4.26	%					4.37	%

50

Rate/Volume Analysis

(Dollars in thousands)	Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 Due to changes (3) in:
	Average Volume			Average Yield / Rate			Net Increase (Decrease)
Interest income
Loans (1)	$	1,602		$	(22,119	)	$	(20,517	)
Investment securities	(1,014		)	2,908			1,894
Interest-bearing deposits in other banks	(368		)	(61		)	(429		)
Other earning assets (2)	186			92			278
Total interest income	406			(19,180		)	(18,774		)
Interest expense
Time deposits	(3,026		)	(1,569		)	(4,595		)
Money market	(187		)	41			(146		)
Negotiable order of withdrawal	66			(10		)	56
Savings	28			40			68
Short-term borrowings and FHLB advances	155			55			210
Long-term borrowings	(619		)	(573		)	(1,192		)
Total interest expense	(3,583		)	(2,016		)	(5,599		)
Change in net interest income	$	3,989		$	(17,164	)	$	(13,175	)

(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 nine months ended September 30, 2014 and 2013:

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Provision (reversal) for loan losses on PCI loans	$	(4,205	)	$	(72	)	$	(7,633	)	$	(703	)
Provision for loan losses on non-PCI loans	2,873			1,056			7,681			11,556
Provision (reversal) for Loan Losses	$	(1,332	)	$	984		$	48		$	10,853

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

The provision (reversal) for loan losses for the three months ended September 30, 2014 was $(1.3) million compared to a provision of $1.0 million for the three months ended September 30, 2013. The reversal of impairment was mainly due to improvements in our expectations of future cash flows on PCI loans resulting from higher than anticipated payoffs across all market areas and product types. Improvement in cash flows resulted in a $2.4 million and a $1.8 million reversal of impairment for covered and non-covered loans, respectively. In contrast, in the prior year, estimation of cash flows resulted in $0.2 million reversal of impairment in covered loans and $0.1 million additional impairment for non-covered loans, respectively.

51

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013.

The provision for loan losses for the nine months ended September 30, 2014 was $48 thousand compared to $10.9 million for the nine months ended September 30, 2013. The improvement was mainly due to the reversal of provision associated with PCI loans and a lower level of net charge offs on new loans. The 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 across all market areas and product types. Improvement in cash flows for non-covered and covered loans resulted in a $5.4 million and $2.2 million reversals of impairment, respectively. In contrast, in the prior year, improvement in cash flows for covered loans resulted in a $3.4 million reversal of impairment, partially offset by $2.7 million in increased impairment of non-covered loans. For our new loan portfolio, a $7.8 million charge off was recorded during the nine months of the prior year related to a single commercial credit relationship associated with suspected fraud. Charge offs declined to $4.6 million from $11.7 million in the prior year.

The table below illustrates the impact of our third 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)	$	10,828	6.09	%	7.99	%	$	194,826	4.84	%	2.84
Non-covered loans pools (1)	19,439		5.59	%	7.81	%	1,293,523		5.01	%	3.22
Total	$	30,267	5.67	%	7.83	%	$	1,488,349	4.99	%	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 September 30, 2014 compared to three months ended September 30, 2013

Non-interest income declined $5.3 million to $10.0 million for the three months ended September 30, 2014 from $15.3 million for the three months ended September 30, 2013. The decline was mainly due to lower credit loss expectations in our legacy loan portfolios, which resulted in an increase of $3.4 million in FDIC indemnification asset amortization, and the absence of a $1.5 million gain recorded in the prior year upon exchange of two small investment company partnership interests and a $0.9 million insurance recovery. Contributing to the decline was a $0.5 million, or 8%, decline in service charges on deposit accounts as a result of a 9% decline in average balances of customer overdrafts. Partially offsetting this decline was an increase of $0.6 million in gains on sales of investment securities, and an increase of $0.4 million in investment advisory and trust fees due to increased assets under management and advisory commissions.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Non-interest income declined $6.5 million to $33.2 million for the nine months ended September 30, 2014 from $39.7 million for the nine months ended September 30, 2013. The decline was mainly due to lower credit loss expectations in our legacy loan portfolios, which resulted in a $4.3 million increase in FDIC indemnification asset amortization, and a $2.0 million decline in service charges on deposit accounts, a result of a 16% decline in average balances on customer overdrafts. Contributing to the decline was a $1.2 million decline in mortgage fees, as residential mortgage loans sold declined to $111.9 million for the nine months ended September 30, 2014 from $145.4 million for the nine months ended September 30, 2013, in addition to the absence of the prior year $1.5 million gain and the $0.9 million insurance recovery discussed above. Partially offsetting this decline was an increase of $2.0 million in investment advisory and trust fees due to increased assets under management and advisory commissions, and an increase of $0.5 million in gains on sales of investment securities.

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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						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Service charges on deposit accounts	$	5,565		$	6,034		$	16,673		$	18,711
Debit card income	3,017			2,854			8,964			8,669
Fees on mortgage loans originated and sold	1,195			1,477			3,077			4,319
Investment advisory and trust fees	1,183			740			3,354			1,380
FDIC indemnification asset expense	(3,881		)	(502		)	(8,110		)	(3,779		)
Legal settlements and insurance recoveries	—			900			—			900
Gain on Exchange of partnership interests	—			1,536			—			1,536
Investment securities gains (losses), net	317			(247		)	463			(42		)
Other-than-temporary impairment loss on investments:
Gross impairment loss	—			(54		)	—			(54		)
Other income	2,561			2,542			8,792			8,055
Total non-interest income	$	9,957		$	15,280		$	33,213		$	39,695

Non-interest Expense

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

Non-interest expense declined $7.8 million, or 13%, to $51.4 million for the three months ended September 30, 2014 from $59.3 million for the three months ended September 30, 2013. The decline was mainly due to a $4.9 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. Contributing to the decline was a $0.9 million decline in stock-based compensation expense mainly associated with original founders awards, and a $0.9 million decline in professional fees. Partially offsetting this decline was an increase of $1.1 million in CVR expense as a result of our most recent estimate of expected credit losses from our legacy portfolios, and the absence of $0.4 million of prior year gains on extinguishment of debt. 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.

OREO sales during the three months resulted in $15.8 million in cash proceeds, including $0.2 million in gains, reducing our OREO balance by 6.2% from June 30, 2014.

Salaries and employee benefits remained relatively flat for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

Net occupancy expense declined $0.4 million as a result of our continued focus on consolidating facilities, partially offset by contractual increases in operating lease costs.

Other operating expense declined $1.8 million due to a decline in operational charge-offs, amortization of intangibles, and insurance costs.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Non-interest expense declined $22.0 million, or 12%, to $157.9 million for the nine months ended September 30, 2014 from $180.0 million for the nine months ended September 30, 2013. The decline was mainly due to a $14.3 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. Contributing to the decline was a $2.1 million decline in stock-based compensation expense mainly associated with original founders awards, a $1.8 million decline in professional fees, and a $1.2 million decline in CVR expense as a result of our most recent estimate of expected credit losses from our legacy portfolios.

53

OREO sales during the nine months resulted in $60.2 million in cash proceeds, including $4.1 million in gains, reducing our OREO balance by 30% from December 31, 2013.

Salaries and employee benefits increased $3.4 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 declined $0.7 million for the nine months ended September 30, 2014 as compared to the nine months ended September 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 $4.5 million mainly due to a decline in operational charge-offs, amortization of intangibles, and insurance costs.

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

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Salaries and employee benefits	$	22,590		$	22,668		$	69,537		$	66,090
Stock-based compensation expense	443			1,371			2,191			4,312
Net occupancy and equipment expense	8,475			8,866			25,797			26,459
Computer services	3,332			3,231			9,974			9,872
Software expense	1,932			1,874			5,740			5,514
Telecommunication expense	1,406			1,534			4,642			4,919
OREO valuation expense	2,752			6,045			9,347			18,844
(Gains) losses on sales of OREO	(223		)	188			(4,136		)	(3,204		)
Foreclosed asset related expense	845			1,265			3,295			4,909
Loan workout expense	911			2,063			3,205			6,363
Professional fees	1,532			2,426			5,574			7,418
Gains on extinguishment of debt	—			(430		)	—			(122		)
Legal settlement expense	100			535			100			535
Contingent value right expense (income)	278			(776		)	1,372			2,535
Regulatory assessments	1,637			1,710			4,914			5,276
Amortization of intangibles	973			1,270			3,373			3,812
Other expense	4,435			5,423			12,990			16,426
Total non-interest expense	$	51,418		$	59,263		$	157,915		$	179,958

Our efficiency ratios for the three months ended September 30, 2014 and 2013 were 72.03% and 73.47%, respectively. Our core efficiency ratios for the three months ended September 30, 2014 and 2013 were 71.62% and 73.51%, respectively. Our efficiency ratios for the nine months ended September 30, 2014 and 2013 were 72.46% and 75.76%, respectively. Our core efficiency ratios for the nine months ended September 30, 2014 and 2013 were 71.39% and 73.05%, 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 nine months ended September 30, 2014 and 2013 is as follows:

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(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Net interest income	$	61,425		65,386			184,709			197,852
Reported non-interest income	9,957			15,280			33,213			39,695
Less: Securities gains (losses)	317			(54		)	463			151
Core non-interest income	$	9,640		$	15,334		$	32,750		$	39,544
Reported non-interest expense	$	51,418		$	59,263		$	157,915		$	179,958
Less: Stock-based compensation	242			1,147			1,306			3,991
Contingent value right expense (income)	278			$	(776	)	$	1,372		$	2,535
Conversion and merger related expense (conversion, merger expense and other expense)	—			(19		)	—			133
Gains on extinguishment of debt	—			(430		)	—			(122		)
Core non-interest expense	$	50,898		$	59,341		$	155,237		$	173,421
Efficiency Ratio	72.03		%	73.47		%	72.46		%	75.76		%
Core Efficiency Ratio	71.62		%	73.51		%	71.39		%	73.05		%

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 analysis 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.

Income Taxes

The provision for income taxes was $8.1 million for the three months ended September 30, 2014 and $9.0 million for the three months ended September 30, 2013. The effective income tax rates were 38% and 44% for these periods, respectively. The provision for income taxes was $22.9 million for the nine months ended September 30, 2014 and $20.1 million for the nine months ended September 30, 2013. The effective income tax rates were 38% and 43% for these periods, respectively. The higher prior year effective income tax rates were mainly due to the impact of a $1.5 million charge to income tax expense as a result of changes in certain statutory rates that were enacted into law during the three months ended September 30, 2013.

At September 30, 2014 and December 31, 2013, the Company had no amounts recorded for uncertain tax positions and no unrecognized tax benefits. We do not expect to identify any unrecognized tax benefits during the next 12 months.

Financial Condition

Our assets totaled $6.7 billion at September 30, 2014 and $6.6 billion at December 31, 2013. Total loans increased $271.7 million to $4.8 billion at September 30, 2014 compared to $4.6 billion at December 31, 2013. The increase in total loans was due to $1.1 billion of new loans, partially offset by $227.8 million in resolutions of problem loans and $639.8 million in net principal repayments. Investment securities declined by $119.0 million mainly due to principal cash flows retained and redeployed to fund loan growth. Total deposits were $5.2 billion at September 30, 2014 and December 31, 2013. Time deposits declined by $17.4 million as a result of continued planned shrinkage in high-cost legacy time deposits, which declined by $222.7 million, partially offset by an increase in lower cost brokered time deposits of $205.4 million. The net increase in demand deposit and non-interest bearing accounts of $70.5 million increased our core deposits to 72.4% of total deposits at September 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 $389.4 million and $259.7 million at September 30, 2014 and December 31, 2013, respectively. The increase in borrowed funds was mainly due to $129.9 million of new short-term FHLB advances.

55

Shareholders’ equity was $1.1 billion at September 30, 2014 and December 31, 2013. During 2013 and 2014, the Company’s Board of Directors authorized stock repurchase plans of up to $200.0 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 September 30, 2014, the Company repurchased $19.5 million, or 819,773 common shares at an average price of $23.78 per share. During the nine months ended September 30, 2014, the Company repurchased $85.4 million, or 3,586,771 common shares at an average price of $23.80 per share. As of September 30, 2014, the Company has repurchased a total of $155.3 million or 7,348,088 common shares at an average price of $21.14 per share, and had $44.7 million of remaining availability for future share repurchases.

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.

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

(Dollars in thousands)	September 30, 2014				December 31, 2013				Sequential Change
	Amount		Percent		Amount		Percent		Amount			Percent
Non-owner occupied commercial real estate	$	797,197	16.5	%	$	775,733	17.0	%	$	21,464		2.8	%
Other commercial construction and land	243,563		5.0	%	300,494		6.6	%	(56,931		)	(18.9	)%
Multifamily commercial real estate	71,119		1.5	%	67,688		1.5	%	3,431			5.1	%
1-4 family residential construction and land	76,442		1.6	%	71,351		1.6	%	5,091			7.1	%
Total commercial real estate	1,188,321		24.6	%	1,215,266		26.7	%	(26,945		)	(2.2	)%
Owner occupied commercial real estate	1,026,853		21.3	%	1,058,148		23.2	%	(31,295		)	(3.0	)%
Commercial and industrial loans	959,641		19.9	%	803,736		17.7	%	155,905			19.4	%
Lease financing	2,175		—	%	2,676		0.1	%	(501		)	(18.7	)%
Total commercial	1,988,669		41.2	%	1,864,560		41.0	%	124,109			6.7	%
1-4 family residential	913,219		18.9	%	804,322		17.7	%	108,897			13.5	%
Home equity loans	373,604		7.7	%	386,366		8.5	%	(12,762		)	(3.3	)%
Other consumer loans	242,451		5.0	%	170,526		3.7	%	71,925			42.2	%
Total consumer	1,529,274		31.6	%	1,361,214		29.9	%	168,060			12.3	%
Other	117,507		2.6	%	110,989		2.4	%	6,518			5.9	%
Total loans	$	4,823,771	100.0	%	$	4,552,029	100.0	%	$	271,742		6.0	%

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The following tables set forth the carrying amounts of our non-PCI and PCI loan portfolio by category:

(Dollars in thousands)	September 30, 2014
	Non PCI Loans
	New		Acquired		PCI Loans		Total
Non-owner occupied commercial real estate	$	327,458	$	61,027	$	408,712	$	797,197
Other commercial construction and land	88,013		266		155,284		243,563
Multifamily commercial real estate	27,439		13,863		29,817		71,119
1-4 family residential construction and land	65,428		—		11,014		76,442
Total commercial real estate	508,338		75,156		604,827		1,188,321
Owner occupied commercial real estate	700,945		40,683		285,225		1,026,853
Commercial and industrial loans	836,036		13,555		110,050		959,641
Lease financing	2,175		—		—		2,175
Total commercial	1,539,156		54,238		395,275		1,988,669
1-4 family residential	523,598		47,156		342,465		913,219
Home equity loans	87,047		191,056		95,501		373,604
Other consumer loans	230,889		4,944		6,618		242,451
Total consumer	841,534		243,156		444,584		1,529,274
Other	70,180		3,664		43,663		117,507
Total loans	$	2,959,208	$	376,214	$	1,488,349	$	4,823,771

(Dollars in thousands)	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 nine months ended September 30, 2014, our loan portfolio increased by $271.7 million due to $1.1 billion of new loans, partially offset by $227.8 million in resolutions of problem loans and $639.8 million in net principal repayments. New and acquired non-impaired loans now represent 69% of our total loan portfolio as compared to 59% at December 31, 2013. 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 43.4% and 36.2%, respectively, of new loan production for the nine months ended September 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.

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

(Dollars in thousands)	Nine Months Ended
	September 30, 2014				September 30, 2013
	Amount		Percent		Amount		Percent
Non-owner occupied commercial real estate	$	108,452	9.5	%	$	54,994	6.5	%
Other commercial construction and land	70,429		6.2	%	32,464		3.8	%
Multifamily commercial real estate	13,713		1.2	%	2,256		0.3	%
1-4 family residential construction and land	39,835		3.5	%	44,032		5.2	%
Total commercial real estate	232,429		20.4	%	133,746		15.8	%
Owner occupied commercial real estate	114,363		10.0	%	161,537		19.1	%
Commercial and industrial loans	380,516		33.4	%	276,956		32.8	%
Lease financing	—		—	%	2,554		0.3	%
Total commercial	494,879		43.4	%	441,047		52.2	%
1-4 family residential	217,699		19.1	%	153,114		18.1	%
Home equity loans	41,992		3.7	%	19,314		2.3	%
Other consumer loans	137,151		12.1	%	81,222		9.6	%
Total consumer	396,842		34.9	%	253,650		30.0	%
Other	15,177		1.3	%	15,922		2.0	%
Total loans	$	1,139,327	100.0	%	$	844,365	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 33.4%, 11.8%, 29.6% and 25.2% of our new loans, respectively, for the nine months ended September 30, 2014. Florida, South Carolina, North Carolina, and Tennessee accounted for 22.6%, 16.7%, 45.1% and 15.6% of our new loans, respectively, for the nine months ended September 30, 2013. Of the new loans for the nine months ended September 30, 2014, $101.2 million related to purchased high quality residential loans.

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 where the FDIC reimburses 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, Green Bankshares and Southern Community Financial and certain loans of the Failed Banks that we acquired, which are not covered by any loss sharing agreement.

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Covered Loans

As of September 30, 2014, covered loans were $220.8 million, representing 4.6% of our loan portfolio of which 0.6% were past due 30-89 days, 10.6% were greater than 90 days past due and still accruing/accreting and 0.4% were nonaccrual. As of December 31, 2013, covered loans were $285.4 million, representing 6.3% of our loan portfolio of which 0.3% were past due 30-89 days, 14.2% were greater than 90 days past due and still accruing/accreting and 0.5% were 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 $3.5 million at September 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 September 30, 2014, totaling $128.3 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 September 30, 2014, non-covered loans were $4.6 billion, representing 95.4% of our loan portfolio, of which 0.3% were past due 30-89 days, 3.0% 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, 5.0% were greater than 90 days past due and still accruing/accreting and 0.2% 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.

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)	September 30, 2014								December 31, 2013
	Portfolio Balance		% 30-89 Days Past Due		% Greater Than 90 Days Past Due and Still Accruing/ Accreting		% Non- accrual		Portfolio Balance		% 30-89 Days Past Due		% Greater Than 90 Days Past Due and Still Accruing/ Accreting		% Non- accrual
Covered Portfolio
Non-owner occupied commercial real estate	$	38,767	0.7	%	10.6	%	—	%	$	55,734	0.2	%	19.1	%	—	%
Other commercial construction and land	13,522		0.1	%	51.6	%	—	%	19,162		—	%	44.2	%	—	%
Multifamily commercial real estate	4,708		—	%	—	%	—	%	9,109		—	%	—	%	—	%
1-4 family residential construction and land	—		—	%	—	%	—	%	—		—	%	—	%	—	%
Total commercial real estate	56,997		0.5	%	19.5	%	—	%	84,005		0.1	%	22.8	%	—	%
Owner occupied commercial real estate	56,623		0.4	%	5.4	%	—	%	67,302		0.4	%	9.9	%	—	%
Commercial and industrial loans	7,814		3.1	%	1.6	%	0.8	%	10,212		—	%	15.6	%	—	%
Lease financing	—		—	%	—	%	—	%	—		—	%	—	%	—	%
Total commercial	64,437		0.7	%	4.9	%	0.1	%	77,514		0.3	%	10.6	%	0.1	%
1-4 family residential	56,882		0.5	%	13.5	%	—	%	70,599		0.3	%	15.3	%	—	%
Home equity loans	41,598		0.8	%	3.4	%	2.0	%	51,315		0.4	%	2.4	%	2.5	%
Other consumer loans	75		—	%	36.0	%	—	%	102		—	%	65.7	%	—	%
Total consumer	98,555		0.6	%	9.2	%	0.9	%	122,016		0.4	%	9.9	%	1.0	%
Other	848		—	%	—	%	—	%	1,822		—	%	52.4	%	—	%
Total covered loans	$	220,837	0.6	%	10.6	%	0.4	%	$	285,357	0.3	%	14.2	%	0.5	%
Non-covered Portfolio
Non-owner occupied commercial real estate	$	758,430	0.1	%	3.5	%	0.1	%	$	719,999	0.2	%	4.9	%	—	%
Other commercial construction and land	230,041		0.1	%	13.4	%	0.1	%	281,332		0.4	%	20.8	%	0.2	%
Multifamily commercial real estate	66,411		—	%	3.2	%	—	%	58,579		0.5	%	4.5	%	—	%
1-4 family residential construction and land	76,442		—	%	1.6	%	0.2	%	71,351		—	%	2.5	%	—	%
Total commercial real estate	1,131,324		0.1	%	5.4	%	0.1	%	1,131,261		0.3	%	8.7	%	0.1	%
Owner occupied commercial real estate	970,230		0.3	%	1.8	%	0.3	%	990,846		0.5	%	3.4	%	0.3	%
Commercial and industrial loans	951,827		0.1	%	2.6	%	0.3	%	793,524		—	%	3.8	%	0.2	%
Lease financing	2,175		—	%	—	%	—	%	2,676		—	%	—	%	—	%
Total commercial	1,924,232		0.2	%	2.2	%	0.3	%	1,787,046		0.3	%	3.6	%	0.3	%
1-4 family residential	856,337		0.4	%	3.2	%	0.1	%	733,723		1.0	%	5.1	%	0.2	%
Home equity loans	332,006		0.5	%	1.4	%	0.5	%	335,051		0.8	%	2.2	%	0.7	%
Other consumer loans	242,376		1.1	%	0.1	%	0.3	%	170,424		1.3	%	0.7	%	0.5	%
Total consumer	1,430,719		0.6	%	2.3	%	0.2	%	1,239,198		1.0	%	3.7	%	0.4	%
Other	116,659		0.1	%	2.3	%	—	%	109,167		0.4	%	4.3	%	—	%
Total non-covered loans	$	4,602,934	0.3	%	3.0	%	0.2	%	$	4,266,672	0.5	%	5.0	%	0.2	%
Total loans	$	4,823,771	0.3	%	3.4	%	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 September 30, 2014, $23.4 million (or approximately 14.5%) 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 the covered and non-covered loans classified as delinquent 90 days or more 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.

Total non-performing loans as of September 30, 2014 declined by $93.3 million, or 35%, to $172.3 million as compared to $265.6 million at December 31, 2013. The change in non-performing loans during the nine months ended September 30, 2014 was attributable to $94.1 million in resolutions and $30.4 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures. Partially offsetting these decreases were $31.2 million of loans that became non-performing.

During the nine months ended September 30, 2014, of the loans we foreclosed, or received deeds in lieu of foreclosure, approximately 45.3% consisted of commercial real estate loans and approximately 10.6% were associated with the covered loans in South Carolina.

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

(Dollars in thousands)	September 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	$	83,475	$	38,767	46.4	%	$	4,122	10.6	%
Other commercial construction and land	74,378		13,522		18.2	%	6,983		51.6	%
Multifamily commercial real estate	10,853		4,708		43.4	%	—		—	%
1-4 family residential construction and land	3,170		—		—	%	—		—	%
Total commercial real estate	171,876		56,997		33.2	%	11,105		19.5	%
Owner occupied commercial real estate	70,133		56,623		80.7	%	3,038		5.4	%
Commercial and industrial loans	18,024		7,814		43.4	%	194		2.5	%
Lease financing	—		—		—	%	—		—	%
Total commercial	88,157		64,437		73.1	%	3,232		5.0	%
1-4 family residential	86,643		56,882		65.7	%	7,718		13.6	%
Home equity loans	58,313		41,598		71.3	%	2,226		5.4	%
Other consumer loans	222		75		33.8	%	27		36.0	%
Total consumer	145,178		98,555		67.9	%	9,971		10.1	%
Other	16,084		848		5.3	%	—		—	%
Total covered loans	$	421,295	$	220,837	52.4	%	$	24,308	11.0	%
Non-covered Portfolio
Non-owner occupied commercial real estate	$	842,791	$	758,430	90.0	%	$	27,008	3.6	%
Other commercial construction and land	505,033		230,041		45.5	%	31,112		13.5	%
Multifamily commercial real estate	75,344		66,411		88.1	%	2,098		3.2	%
1-4 family residential construction and land	110,312		76,442		69.3	%	1,380		1.8	%
Total commercial real estate	1,533,480		1,131,324		73.8	%	61,598		5.4	%
Owner occupied commercial real estate	1,044,121		970,230		92.9	%	20,212		2.1	%
Commercial and industrial loans	1,058,339		951,827		89.9	%	27,762		2.9	%
Lease financing	2,175		2,175		100.0	%	—		—	%
Total commercial	2,104,635		1,924,232		91.4	%	47,974		2.5	%
1-4 family residential	936,059		856,337		91.5	%	28,330		3.3	%
Home equity loans	386,580		332,006		85.9	%	6,431		1.9	%
Other consumer loans	257,588		242,376		94.1	%	916		0.4	%
Total consumer	1,580,227		1,430,719		90.5	%	35,677		2.5	%
Other	124,687		116,659		93.6	%	2,703		2.3	%
Total non-covered loans	$	5,343,029	$	4,602,934	86.1	%	$	147,952	3.2	%
Total loans	$	5,764,324	$	4,823,771	83.7	%	$	172,260	3.6	%

(1) The carrying amount for total covered and non-covered loans represents a discount from the total gross customer balance of $200.5 million, or 47.6%, and $740.1 million, or 13.9%, respectively.

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

(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	%	—		—	%
1-4 family residential construction and land	3,556		—		—	%	—		—	%
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	%
Lease financing	—		—		—	%	—		—	%
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	%	—		—	%
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.

Allowance and Provision for Loan Losses

At September 30, 2014, the allowance for loan losses was $52.3 million, of which $30.2 million was associated with PCI loans and $22.1 million related to new loans or acquired non-PCI loans. At September 30, 2014, the allowance for loan losses represents 1.08% of our total $4.8 billion loan portfolio. 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. At December 31, 2013, the allowance for loan losses represented 1.25% of our total $4.6 billion loan portfolio.

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 analysis and loan pool analysis. Individual loan analysis 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.

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 to Provision 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.

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

	Three Months Ended
(Dollars in thousands)	September 30, 2014									September 30, 2013
	Non-PCI			PCI			Total			Non-PCI			PCI			Total
Allowance for loan losses at the beginning of the period	$	20,835		$	34,472		$	55,307		$	17,640		$	39,192		$	56,832
Charge-offs:
Non-owner occupied commercial real estate	(88		)	—			(88		)	—			—			—
Other commercial construction and land	—			—			—			(50		)	—			(50		)
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	(4		)	—			(4		)	—			—			—
Total commercial real estate	(92		)	—			(92		)	(50		)	—			(50		)
Owner occupied commercial real estate	(12		)	—			(12		)	—			—			—
Commercial and industrial loans	(283		)	—			(283		)	(544		)	—			(544		)
Lease financing	—			—			—			—			—			—
Total commercial	(295		)	—			(295		)	(544		)	—			(544		)
1-4 family residential	(13		)	—			(13		)	(9		)	—			(9		)
Home equity loans	(337		)	—			(337		)	(3		)	—			(3		)
Other consumer loans	(984		)	—			(984		)	(685		)	—			(685		)
Total consumer	(1,334		)	—			(1,334		)	(697		)	—			(697		)
Other	(585		)	—			(585		)	(654		)	—			(654		)
Total charge-offs	(2,306		)	—			(2,306		)	(1,945		)	—			(1,945		)
Recoveries:
Non-owner occupied commercial real estate	207			—			207			11			—			11
Other commercial construction and land	11			—			11			135			—			135
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	2			—			2			2			—			2
Total commercial real estate	220			—			220			148			—			148
Owner occupied commercial real estate	2			—			2			17			—			17
Commercial and industrial loans	106			—			106			78			—			78
Lease financing	—			—			—			—			—			—
Total commercial	108			—			108			95			—			95
1-4 family residential	5			—			5			60			—			60
Home equity loans	38			—			38			(117		)	—			(117		)
Other consumer loans	133			—			133			120			—			120
Total consumer	176			—			176			63			—			63
Other	161			—			161			216			—			216
Total recoveries	665			—			665			522			—			522
Net charge-offs	(1,641		)	—			(1,641		)	(1,423		)	—			(1,423		)
Provision (reversal) for loan losses:
Non-owner occupied commercial real estate	(76		)	(1,696		)	(1,772		)	153			2,191			2,344
Other commercial construction and land	493			908			1,401			(242		)	(959		)	(1,201		)
Multifamily commercial real estate	23			(40		)	(17		)	(13		)	57			44
1-4 family residential construction and land	(70		)	(316		)	(386		)	38			315			353
Total commercial real estate	370			(1,144		)	(774		)	(64		)	1,604			1,540
Owner occupied commercial real estate	(29		)	(401		)	(430		)	(99		)	456			357
Commercial and industrial loans	66			(179		)	(113		)	47			(311		)	(264		)
Lease financing	—			—			—			3			—			3
Total commercial	37			(580		)	(543		)	(49		)	145			96
1-4 family residential	395			(1,645		)	(1,250		)	87			(1,127		)	(1,040		)
Home equity loans	389			(760		)	(371		)	(6		)	(34		)	(40		)
Other consumer loans	1,239			5			1,244			711			23			734
Total consumer	2,023			(2,400		)	(377		)	792			(1,138		)	(346		)
Other	443			(81		)	362			377			(683		)	(306		)
Total provision (reversal) for loan losses	2,873			(4,205		)	(1,332		)	1,056			(72		)	984
Allowance for loan losses at the end of the period	$	22,067		$	30,267		$	52,334		$	17,273		$	39,120		$	56,393

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	Nine Months Ended
(Dollars in thousands)	September 30, 2014									September 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	(292		)	—			(292		)	(92		)	—			(92		)
Other commercial construction and land	(207		)	—			(207		)	(152		)	—			(152		)
Multifamily commercial real estate	—			—			—			—			—			—
1-4 family residential construction and land	(6		)	—			(6		)	—			—			—
Total commercial real estate	(505		)	—			(505		)	(244		)	—			(244		)
Owner occupied commercial real estate	(156		)	—			(156		)	—			—			—
Commercial and industrial loans	(444		)	—			(444		)	(9,555		)	—			(9,555		)
Lease financing	—			—			—			—			—			—
Total commercial	(600		)	—			(600		)	(9,555		)	—			(9,555		)
1-4 family residential	(114		)	—			(114		)	(37		)	—			(37		)
Home equity loans	(931		)	—			(931		)	(1,370		)	—			(1,370		)
Other consumer loans	(2,572		)	—			(2,572		)	(2,066		)	—			(2,066		)
Total consumer	(3,617		)	—			(3,617		)	(3,473		)	—			(3,473		)
Other	(1,716		)	—			(1,716		)	(2,063		)	—			(2,063		)
Total charge-offs	(6,438		)	—			(6,438		)	(15,335		)	—			(15,335		)
Recoveries:
Non-owner occupied commercial real estate	297			—			297			76			—			76
Other commercial construction and land	23			—			23			755			—			755
Multifamily commercial real estate	—			—			—			41			—			41
1-4 family residential construction and land	6			—			6			25			—			25
Total commercial real estate	326			—			326			897			—			897
Owner occupied commercial real estate	26			—			26			283			—			283
Commercial and industrial loans	272			—			272			738			—			738
Lease financing	—			—			—			—			—			—
Total commercial	298			—			298			1,021			—			1,021
1-4 family residential	12			—			12			108			—			108
Home equity loans	152			—			152			338			—			338
Other consumer loans	447			—			447			417			—			417
Total consumer	611			—			611			863			—			863
Other	638			—			638			832			—			832
Total recoveries	1,873			—			1,873			3,613			—			3,613
Net charge-offs	(4,565		)	—			(4,565		)	(11,722		)	—			(11,722		)
Provision (reversal) for loan losses:
Non-owner occupied commercial real estate	105			(1,911		)	(1,806		)	(46		)	2,982			2,936
Other commercial construction and land	992			3,889			4,881			(769		)	(1,351		)	(2,120		)
Multifamily commercial real estate	(1		)	144			143			(60		)	(27		)	(87		)
1-4 family residential construction and land	(140		)	(175		)	(315		)	145			275			420
Total commercial real estate	956			1,947			2,903			(730		)	1,879			1,149
Owner occupied commercial real estate	10			(1,453		)	(1,443		)	(654		)	1,386			732
Commercial and industrial loans	448			(231		)	217			8,226			659			8,885
Lease financing	(2		)	—			(2		)	3			—			3
Total commercial	456			(1,684		)	(1,228		)	7,575			2,045			9,620
1-4 family residential	952			(6,694		)	(5,742		)	232			540			772
Home equity loans	1,003			(473		)	530			1,014			(4,875		)	(3,861		)
Other consumer loans	3,326			(59		)	3,267			2,234			(137		)	2,097
Total consumer	5,281			(7,226		)	(1,945		)	3,480			(4,472		)	(992		)
Other	988			(670		)	318			1,231			(155		)	1,076
Total provision (reversal) for loan losses	7,681			(7,633		)	48			11,556			(703		)	10,853
Allowance for loan losses at the end of the period	$	22,067		$	30,267		$	52,334		$	17,273		$	39,120		$	56,393

65

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 September 30, 2014 and December 31, 2013.

(Dollars in thousands)	September 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	$	388,485	$	1,725	0.4	%	$	287,562	$	1,615	0.6	%
Other commercial construction and land	88,279		2,009		2.3	%	67,789		1,201		1.8	%
Multifamily commercial real estate	41,302		115		0.3	%	29,187		116		0.4	%
1-4 family residential construction and land	65,428		925		1.4	%	56,979		1,065		1.9	%
Total commercial real estate	583,494		4,774		0.8	%	441,517		3,997		0.9	%
Owner occupied commercial real estate	741,628		2,491		0.3	%	691,253		2,611		0.4	%
Commercial and industrial loans	849,591		7,153		0.8	%	663,919		6,877		1.0	%
Lease financing	2,175		1		—	%	2,676		3		0.1	%
Total commercial	1,593,394		9,645		0.6	%	1,357,848		9,491		0.7	%
1-4 family residential	564,315		3,129		0.6	%	377,668		2,279		0.6	%
Home equity loans	278,103		622		0.2	%	270,170		398		0.1	%
Other consumer loans	235,833		3,519		1.5	%	157,991		2,318		1.5	%
Total consumer	1,078,251		7,270		0.7	%	805,829		4,995		0.6	%
Other	73,844		378		0.5	%	61,279		468		0.8	%
Total loans	$	3,328,983	$	22,067	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 September 30, 2014 and December 31, 2013:

66

(Dollars in thousands)	September 30, 2014 (1)						December 31, 2013 (1)
	Covered		Non- Covered		Total		Covered		Non- Covered		Total
Non-owner occupied commercial real estate	$	15,048	$	110,381	$	125,429	$	26,995	$	123,515	$	150,510
Other commercial construction and land	9,604		61,393		70,997		15,297		110,245		125,542
Multifamily commercial real estate	806		5,125		5,931		2,421		6,270		8,691
1-4 family residential construction and land	—		5,166		5,166		—		8,336		8,336
Total commercial real estate	25,458		182,065		207,523		44,713		248,366		293,079
Owner occupied commercial real estate	20,017		55,548		75,565		24,747		86,335		111,082
Commercial and industrial loans	3,967		39,481		43,448		4,504		54,261		58,765
Lease financing	—		—		—		—		—		—
Total commercial	23,984		95,029		119,013		29,251		140,596		169,847
1-4 family residential	9,827		47,574		57,401		16,208		59,828		76,036
Home equity loans	2,914		8,995		11,909		6,983		13,663		20,646
Other consumer loans	27		971		998		67		2,189		2,256
Total consumer	12,768		57,540		70,308		23,258		75,680		98,938
Other	822		7,901		8,723		1,794		13,114		14,908
Total loans	$	63,032	$	342,535	$	405,567	$	99,016	$	477,756	$	576,772

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

Total criticized and classified loans declined $171.2 million during the nine months ended September 30, 2014 as a result of $30.4 million in transfers to other real estate owned and $209.6 million of pay downs, charge offs and upgrades. Loan downgrades of $68.8 million partially offset the 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.

Within the context of the accounting for impaired loans described in the preceding paragraph, other than the PCI loans described above, as of September 30, 2014, there were 22 loans individually evaluated for impairment and 11 deemed impaired with a related allowance for loan losses of $34 thousand. At December 31, 2013, there were 28 loans individually evaluated for impairment and 7 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.

67

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)	September 30, 2014									December 31, 2013
	Covered			Non- Covered			Total			Covered			Non- Covered			Total
Total non-accrual loans	$	923		$	9,667		$	10,590		$	1,336		$	10,474		$	11,810
Accruing/accreting loans delinquent 90 days or more	23,385			138,285			161,670			40,437			213,379			253,816
Total non-performing loans	24,308			147,952			172,260			41,773			223,853			265,626
Non-accrual investment securities	—			—			—			—			800			800
Repossessed personal property	—			144			144			—			108			108
Other real estate owned	14,859			75,418			90,277			25,251			104,145			129,396
Total non-performing assets	$	39,167		$	223,514		$	262,681		$	67,024		$	328,906		$	395,930
Allowance for loan losses	$	11,076		$	41,258		$	52,334		$	13,051		$	43,800		$	56,851
Non-performing assets as a percent of total assets	0.59		%	3.34		%	3.93		%	1.01		%	4.97		%	5.98		%
Non-performing loans as a percent of total loans	0.50		%	3.07		%	3.57		%	0.92		%	4.92		%	5.84		%
Allowance for loan losses as a percent of non-performing loans	45.57		%	27.89		%	30.38		%	31.24		%	19.57		%	21.40		%
Allowance for loan losses as a percent of non-PCI loans							0.66		%							0.71		%

At September 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 September 30, 2014 declined by $133.2 million to $262.7 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 $93.3 million and $39.1 million, respectively. The decline in non-performing loans was due to $94.1 million in resolutions and $30.4 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures, offset by $31.2 million of loans that became non-performing. The decline in other real estate owned was mainly due to sales of $60.2 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 September 30, 2014 and December 31, 2013:

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(Dollars in thousands)	September 30, 2014
Security Type	Amortized Cost		Estimated Fair Value		Percent of Total Portfolio		Yield	Modified Duration in Years
Available-for-Sale
Marketable equity securities	$	946	$	946	0.2	%	NA	NA
Mortgage-backed securities—residential issued by government sponsored entities	578,097		576,062		99.2	%	1.78%	3.85
Industrial revenue bonds	3,580		3,724		0.6	%	2.23%	0.24
Total	$	582,623	$	580,732	100.0	%	1.78%	3.83
Held-to-Maturity
U.S. Government agencies	$	14,288	$	14,256	3.1	%	2.85%	5.43
Corporate bonds	25,000		25,163		5.5	%	5.17%	5.09
State and political subdivisions—tax exempt	12,970		13,445		2.9	%	3.18%	4.40
State and political subdivisions—taxable	539		560		0.1	%	3.88%	4.04
Mortgage-backed securities—residential issued by government sponsored entities	402,012		404,288		88.4	%	2.36%	4.09
Total	$	454,809	$	457,712	100.0	%	2.56%	4.20

(Dollars in thousands)	December 31, 2013
Security Type	Amortized Cost		Estimated 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
Collateralized 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

Contractual maturities of investment securities at September 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:

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(Dollars in thousands)	Within One Year				After One Year Within Five Years				After Five Years Within Ten Years				After Ten Years				Other Securities				Total
September 30, 2014	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available-for-Sale
Marketable equity securities	$	—	—		$	—	—		$	—	—		$	—	—		$	946	NA		$	946	NA
Mortgage-backed securities—residential issued by government sponsored entities	—		—		—		—		—		—		—		—		576,062		1.78	%	576,062		1.78	%
Industrial revenue bonds	—		—		—		—		—		—		3,724		2.23	%	—		—		3,724		2.23	%
Total	$	—	—		$	—	—		$	—	—		$	3,724	2.23	%	$	577,008	1.78	%	$	580,732	1.78	%
Held-to-Maturity
U.S. Government agencies	$	—	—		$	—	—		$	—	—		$	14,256	2.85	%	$	—	—		$	14,256	2.85	%
Corporate bonds	—		—		10,050		4.87	%	15,113		5.37	%	—		—		—		—		25,163		5.17	%
State and political subdivisions—tax exempt	204		0.76	%	832		2.03	%	10,242		3.25	%	2,167		3.54	%	—		—		13,445		3.18	%
State and political subdivisions—taxable	—		—		—		—		—		—		560		3.88	%	—		—		560		3.88	%
Mortgage-backed securities—residential issued by government sponsored entities	—		—		—		—		—		—		—		—		404,288		2.36	%	404,288		2.36	%
Total	$	204	0.76	%	$	10,882	4.65	%	$	25,355	4.52	%	$	16,983	2.97	%	$	404,288	2.36	%	$	457,712	2.56	%

(Dollars in thousands)	Within One Year				After One Year Within Five Years				After Five Years Within Ten Years				After Ten Years				Other Securities				Total
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	%
Collateralized 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 our analysis, there were no investment securities considered to be other-than-temporarily impaired at September 30, 2014 and December 31, 2013.

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

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Deposits

Our strategy is to fund asset growth primarily with low-cost customer deposits in order to maintain a stable liquidity profile and net interest margin.

As of September 30, 2014, our core deposits, which we define as demand deposits, savings and money market accounts, increased by $7.8 million as compared to December 31, 2013. Net new checking account growth contributed to the increase in core deposits during the nine months ended September 30, 2014, as we are building our deposit base around service-oriented customer relationships. The average contractual rate on core deposits remained flat at 0.14%.

Time deposit balances declined by $17.4 million as compared to December 31, 2013. At September 30, 2014, our wholesale time deposits increased by $205.4 million as compared to December 31, 2013, providing a lower cost source of funding as compared with higher rate legacy time deposits. The $222.7 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 1.05% from 1.18% at December 31, 2013.

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

(Dollars in thousands)	September 30, 2014						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	$	1,006,556	19	%	—	%	$	923,993	18	%	—	%	$	82,563		8.9	%
Negotiable order of withdrawal	1,309,839		25	%	0.15	%	1,321,903		25	%	0.15	%	(12,064		)	(0.9	)%
Savings	514,729		10	%	0.22	%	530,144		10	%	0.21	%	(15,415		)	(2.9	)%
Money market	914,226		18	%	0.23	%	961,526		19	%	0.21	%	(47,300		)	(4.9	)%
Total core deposits	3,745,350		72	%	0.14	%	3,737,566		72	%	0.14	%	7,784			0.2	%
Customer time deposits	1,161,255		22	%	1.12	%	1,384,001		27	%	1.14	%	(222,746		)	(16.1	)%
Wholesale time deposits	268,851		5	%	0.78	%	63,496		1	%	2.04	%	205,355			323.4	%
Total time deposits	1,430,106		28	%	1.05	%	1,447,497		28	%	1.18	%	(17,391		)	(1.2	)%
Total deposits	$	5,175,456	100	%	0.39	%	$	5,185,063	100	%	0.43	%	$	(9,607	)	(0.2	)%

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

(Dollars in thousands)	Three Months Ended
	September 30, 2014				December 31, 2013
	Average Amount		Average Rate		Average Amount		Average Rate
Non-interest-bearing demand	$	1,010,817	—	%	$	964,823	—	%
Interest-bearing
Negotiable order of withdrawal	1,313,693		0.16	%	1,288,723		0.17	%
Savings	525,854		0.22	%	531,930		0.21	%
Money market	935,223		0.23	%	947,429		0.22	%
Time deposits (1)	1,372,696		0.86	%	1,513,038		0.83	%
Total deposits	$	5,158,283	0.34	%	$	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.

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

(Dollars in thousands)	September 30, 2014
Months to maturity:	Time Deposits of $100K and Greater		Time Deposits of less than $100K		Total
Three or less	$	142,536	$	102,565	$	245,101
Over three to six	88,994		92,165		181,159
Over six to twelve	167,857		161,421		329,278
Over twelve	403,356		271,212		674,568
Total deposits	$	802,743	$	627,363	$	1,430,106

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 September 30, 2014 and December 31, 2013, we had 13.93% 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 analysis 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)
	September 30, 2014			December 31, 2013
Total shareholders' equity	$	1,064,939		$	1,112,788
Less: goodwill, core deposits intangibles	(154,387		)	(155,352		)
Tangible common equity	$	910,552		$	957,436
Total assets	$	6,690,299		$	6,617,561
Less: goodwill, core deposits intangibles	(154,387		)	(155,352		)
Tangible assets	$	6,535,912		$	6,462,209
Tangible common equity ratio	13.93		%	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).

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As of September 30, 2014, we had a Tier 1 leverage ratio of 14.4%, which provides us with $282.1 million in excess capital relative to the 10% Tier 1 leverage ratio required under our OCC Operating Agreement and $410.3 million in excess capital relative to our longer-term target of 8%.

As of September 30, 2014, Capital Bank, N.A. had a 13.4% Tier 1 leverage ratio, an 17.1% Tier 1 risk-based ratio and an 18.2% 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% (Tier 1 Capital ratio). 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.

The minimum ratios along with the actual ratios for us and Capital Bank, N.A. as of September 30, 2014 and December 31, 2013 are presented in the following tables.

(Dollars in thousands)			Actual
	Well Capitalized Requirement	Adequately Capitalized Requirement	September 30, 2014	December 31, 2013
Tier 1 Capital
(to Average Assets)
CBF Consolidated	N/A	≥ 4.0%	14.4%	14.9%
Capital Bank, N.A.	≥ 5.0%	≥ 4.0%	13.4%	13.4%
Tier 1 Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	≥ 4.0%	18.4%	19.7%
Capital Bank, N.A.	≥ 6.0%	≥ 4.0%	17.1%	17.7%
Total Capital
(to Risk Weighted Assets)
CBF Consolidated	N/A	≥ 8.0%	19.5%	21.0%
Capital Bank, N.A.	≥ 10.0%	≥ 8.0%	18.2%	18.9%

	Actual
(Dollars in thousands)	September 30, 2014		December 31, 2013
CBF Consolidated
Tier 1 Capital	$	923,231	$	949,623
Excess Tier 1 Capital:
vs. 10% regulatory requirement	$	282,128	$	314,306
vs. 8% target	$	410,348	$	441,370
Capital Bank, N.A.
Tier 1 Capital	$	855,566	$	849,520
Excess Tier 1 Capital:
vs. 10% regulatory requirement	$	215,440	$	214,396
vs. 8% target	$	343,466	$	341,421

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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 September 30, 2014 and December 31, 2013, cash and liquid securities totaled 17.9%, and 20.0% of assets, respectively providing us with $193.7 million and $328.7 million, respectively, of excess liquidity relative to our planning target. As of September 30, 2014 and December 31, 2013, the ratio of wholesale to total funding was 12.8% 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.

At September 30, 2014 and December 31, 2013, there were $226.1 million and $96.3 million, respectively, in FHLB advances outstanding. In addition, we had $25.7 million and $25.6 million in letters of credit outstanding as of September 30, 2014 and December 31, 2013, respectively. Collateral available under our agreements with the FHLB provided for incremental borrowing availability of up to approximately $58.7 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 September 30, 2014 and December 31, 2013, our holding company had cash of approximately $73.6 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 $85.4 million of common stock during the nine months ended September 30, 2014. Partially offsetting this decline was $56.0 million of dividends to the Company by its subsidiary Capital Bank N.A., which was approved by the OCC on July 8, 2014.

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 analyzes 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:

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(Dollars in thousands, except per share amounts)
	September 30, 2014			December 31, 2013
Total shareholders' equity	$	1,064,939		$	1,112,788
Less: goodwill, core deposits intangibles, net of taxes	(146,671		)	(146,277		)
Tangible book value	$	918,268		$	966,511
Common shares outstanding	48,331			52,098
Book Value Per Share	$	22.03		$	21.36
Tangible book value per share	$	19.00		$	18.55

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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 September 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 September 30, 2014, securities accounted for 16% of assets, and the effective duration of the portfolio was 3.6 years with limited extension risk to 3.8 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 September 30, 2014, core deposits accounted for 72% of total deposits, and checking balances accounted for 62% 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.

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 September 30, 2014, our sensitivity to interest rate risk was as follows:

(Dollars in thousands) Interest Rate Change in Basis Points	Next 12 Months Net Interest Income					Economic Value of Equity
	$ Change			% Change		$ Change			% Change
300	$	13,820		5.9	%	$	55,707		4.6	%
200	9,215			4.0	%	42,144			3.5	%
100	4,185			1.8	%	23,660			2.0	%
—	—			—	%	—			—	%
(25)	(877		)	(0.4	)%	(6,883		)	(0.6	)%

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 September 30, 2014, we were in compliance with all of the limits and policies established by our Board of Directors for active scenarios.

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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 September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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.

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 September 30, 2014:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
July 1-31	255,803	$	23.36	255,803	$	8,178,076
August 1-31	340,977	23.68		340,977	102,751
September 1-30	222,993	24.43		222,993	44,656,133
Total	819,773	$	23.78	819,773	$	44,656,133

During 2013 and 2014, the Company’s Board of Directors authorized stock repurchase plans of up to $200.0 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 September 30, 2014, the Company repurchased $19.5 million, or 819,773 common shares at an average price of $23.78 per share. During the nine months ended September 30, 2014, the Company repurchased $85.4 million, or 3,586,771 common shares at an average price of $23.80 per share.

As of September 30, 2014, the Company has repurchased a total of $155.3 million or 7,348,088 common shares at an average price of $21.14 per share, and had $44.7 million of remaining availability for future share repurchases.

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:	November 6, 2014	/s/ R. Eugene Taylor
		R. Eugene Taylor
		Chairman and Chief Executive Officer
Date:	November 6, 2014	/s/ Christopher G. Marshall
		Christopher G. Marshall Chief Financial Officer
		(Principal Accounting Officer)

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