Update: Capital Bank Financial Q2 2014 Earnings

| About: Capital Bank (CBF)


Captial Bank Financial reported Q2 '14 earnings.

Earnings improved, but were supported by nonrecurring items; that is in-line with my assessment of the bank's weak earning power.

I still see the bank as overvalued based on its lack of an adequate allowance account.

For Q2 2014, Capital Bank Financial Corp. (NASDAQ:CBF) reported net income up 47% from the prior year period. Margins are still suffering from low yields, and net interest income actually declined from the sequential quarter's results despite the bank originating $442 million in new loans (record quarterly growth).

For the quarter, the company earned $0.25 per share, or $12.4 million. Net interest income from the larger loan portfolio (portfolio up 3.7% this year) fell to $60.8 million (down 6.9% YOY) due to a 12.5% decrease in the rate earned on new loans (down to 3.5%, lower than quarter's NIM of 4.26%). Tangible book value per share ($18.85) improved by $0.16 per share, less than EPS, due to management's purchase of 1.8 million shares at an average price of $24.04 (~5% higher than where shares trade today). There are a lot of moving parts here, but the biggest contribution (in my opinion) to the 47% YOY improvement can be traced to a $3 million decline in the bank's provision expense.

I've been very skeptical about the bank's valuation and repurchase plans, and this is mostly based on the quality of assets. Healing or not, here are a few issues that investors need to think about. Tangible book value of $926.2 million may be missing ~$180 million of portfolio appreciation (management says anyways - P.53), but it also includes $148.4 million worth of deferred tax assets that I think are worthless and made up by GAAP. If you net these, we don't move much and shares are still trading above tangible book where the company feels comfortable making purchases. This, however, doesn't even address the fact that the bank's declining allowance account (at $55.3 million) only covers 17.93% of nonperforming asset, or that management is transferring a lot of securities to the held-to-maturity portfolio, which can hide future declines in market value. A lot to think about here, and I continue to look for holes that could give me enough confidence to start shorting shares.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in CBF over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.