Capital Bank Financial - Public Offer For Investors With A High Risk Tolerance

| About: Capital Bank (CBF)

Capital Bank Financial Corporation (NASDAQ:CBF) made its public debut on Thursday. Shares of the bank holding company ended their first day with gains of 1.0% to close at $18.19 per share.

The public offering

Capital Bank Financial Corp is a bank holding corporation founded in 2009. It tries to create a regional banking franchise in the southeastern region by organic growth and acquisitions of failed, underperforming and undercapitalized banks. The bank sold 10 million shares for $18.00 a piece. The firm sold 5.7 million shares, with selling shareholders offering 4.3 million shares. Capital Bank Financial Corp raised $103 million in gross proceeds in the offering process. Based on the offer price of $18, the firm is valued at $601 million.

The offering is quite a disappointment. Initially the firm and its bankers set an offer price range of $21-$23 per share. Given the low demand for shares, the company was forced to lower the offer price to $18. At the same time, Capital Bank Financial cut back on the offer size as well. Just 10 million shares were offered, instead of the originally planned offer size of 11.4 million, as selling shareholders cut their size from 5.7 million to 4.3 million shares. In total, the firm sold about 34% of its shares outstanding. Shares ended the week at $18.14 per share, valuing the company at $605 million.

Major banks which brought the company public were Credit Suisse, Goldman Sachs, Barclays, Bank of America/Merrill Lynch and FBR.


Capital Bank Financial raised $900 million in 2009 and 2010, to make acquisitions of struggling banks. Since inception, the bank has acquired 6 depository institutions. The bank operates with 165 branches in Tennessee, Florida, North Carolina, South Carolina and Virginia.

The bank has a total asset base of $7.8 billion as of June 30, 2012. This includes the pending acquisition of Southern Community Financial. The bank has a large deposit base of $6.1 billion and $1.1 billion in shareholder's equity.

The company reported net interest income of $276.8 million on a pro forma basis for its full year of 2011. The company net lost $33.9 million, or $0.69 per diluted share. For the first six months of 2012, net interest income came in at $143.7 million. Net income improved to $10.4 million, or $0.21 per diluted share, on the back of lower loan loss provisions.

Capital Bank operates with a stable capital position. The Tier-1 common ratio comes in at 13.7%, while the Tier-1 ratio based on risk weighted assets is 19.9%. Capital Bank carries relatively many risky assets on its balance sheet, as it targets underperforming banks.

Based on a net interest income estimate of $290 million for 2012, the market values Capital Bank Financial Corp at 2.1 times annual net interest income. Shares trade at roughly 30 times annual earnings for 2012, assuming annual earnings of $21 million.

Investment Thesis

Capital Bank Financial' public offering was quite a disappointment. The public offering took place at a price of $18, revised downwards from an initial price range of $21-$23 per share. Despite the offer price at a discount, demand did not increase as shares ended the day with modest gains of 1.0%. Selling shareholders even cut back on the size of the offering.

Proceeds of the offering will be used to finance further acquisition driven growth in the future. The bank does not expect to pay a dividend in the near future.

Investors are not overly confident in the prospects of Capital Bank yet. Shares trade just above the tangible book value of $17.36 per share. Investors are still fearful about execution risks. Capital Bank most likely will acquire more banks in the near future. Furthermore the bank carries assets with relatively greater risk, as the bank has many risk-weighted-assets.

It is up to investors' risk tolerance if they like to invest in Capital Bank Financial. Acquisition execution risks and a risky asset base make it not a suitable investment for conservative investors. For those confident in the prospects for the economy, shares do offer potential if questionable assets outperform.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.