S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 23, 2011

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

North American Financial Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   6021   27-1454759
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

9350 South Dixie Highway

Miami, Florida 33156

(305) 670-0200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Christopher G. Marshall

Chief Financial Officer

9350 South Dixie Highway

Miami, Florida 33156

(305) 670-0200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David E. Shapiro, Esq.

Wachtell, Lipton, Rosen & Katz

51 West 52nd Street

New York, New York 10019

Telephone: (212) 403-1000

Facsimile: (212) 403-2000

 

Lee A. Meyerson, Esq.

Lesley Peng, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

Facsimile: (212) 455-2502

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

     Accelerated filer  ¨

Non-accelerated filer    x

  (Do not check if a smaller reporting company)    Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities to Be Registered   Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Class A common stock, par value $0.01 per share

  $300,000,000   $34,830
 
 
(1) 

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.

(2) 

Includes shares of Class A common stock which may be sold pursuant to the underwriters’ option to purchase additional shares.

 

 

The Registrant hereby amends this Registration Statement on such date as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated June 23, 2011

PROSPECTUS

             Shares

North American Financial Holdings, Inc.

Class A Common Stock

This prospectus relates to the initial public offering of our Class A common stock. We are offering              shares of our Class A common stock. This prospectus also relates to the offer and sale of up to              shares of our Class A common stock that are held by the selling stockholders identified in this prospectus. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. We estimate that the public offering price per share of our Class A common stock will be between $             and $             per share. We intend to apply to list our Class A common stock on The Nasdaq Global Select Market under the symbol “        .”

See “Risk Factors” on page 13 to read about factors you should consider before buying our Class A common stock.

The shares of our Class A common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts

   $         $     

Proceeds, before expenses, to us

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

To the extent that the underwriters sell more than              shares of Class A common stock, the underwriters have the option to purchase up to an additional              shares from us and the selling stockholders at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares of our Class A common stock against payment in New York, New York on                     , 2011.

 

Credit Suisse    BofA Merrill Lynch    Goldman, Sachs & Co.

Prospectus dated                     , 2011


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     13   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     37   

USE OF PROCEEDS

     38   

DIVIDEND POLICY

     39   

CAPITALIZATION

     40   

DILUTION

     41   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

     43   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     46   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     56   

BUSINESS

     99   

SUPERVISION AND REGULATION

     114   

MANAGEMENT

     127   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND SELLING STOCKHOLDERS

     143   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     146   

DESCRIPTION OF CAPITAL STOCK

     148   

SHARES ELIGIBLE FOR FUTURE SALE

     152   

MATERIAL U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS

     153   

CERTAIN ERISA CONSIDERATIONS

     156   

UNDERWRITING

     157   

ADDITIONAL INFORMATION

     162   

WHERE YOU CAN FIND MORE INFORMATION

     162   

INDEX TO FINANCIAL STATEMENTS

     F-1   

In this prospectus, unless the context suggests otherwise, references to “NAFH,” “we,” “our,” “us,” and the “Company” for all periods prior and subsequent to the acquisitions described in this prospectus refer to North American Financial Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, which includes NAFH National Bank, a national banking association (which we refer to as “NAFH Bank” and whose name is expected to change to “Capital Bank” in June 2011), TIB Financial Corp. (which we refer to as “TIB Financial”) and Capital Bank Corporation (which we refer to as “Capital Bank Corp.”). In addition, references to “Green Bankshares” refer to Green Bankshares, Inc. References to the “Failed Banks” refer to First National Bank of the South in Spartanburg, South Carolina (which we refer to as “First National Bank”), Metro Bank of Dade County in Miami, Florida (which we refer to as “Metro Bank”) and Turnberry Bank in Aventura, Florida (which we refer to as “Turnberry Bank”). References to “common stock” refer to our Class A common stock, par value $0.01 per share, and Class B non-voting common stock, par value $0.01 per share.

 

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About this Prospectus

You should rely only on the information contained in this prospectus. We, the selling stockholders and the underwriters have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our Class A common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions.

Unless otherwise expressly stated or the context otherwise requires, all information in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares of Class A common stock to cover over-allotments, if any.

Market Data

Market data used in this prospectus has been obtained from independent industry sources and publications, such as SNL Financial and Case-Shiller. We have not independently verified the data obtained from these sources, and we make no representations as to the accuracy or completeness of the data. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.

 

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PROSPECTUS SUMMARY

The following is a summary of selected information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before deciding to purchase shares of our Class A common stock. You should read this entire prospectus carefully, especially the “Risk Factors” immediately following this Prospectus Summary, the historical and pro forma financial statements and the related notes thereto and management’s discussion and analysis thereof included elsewhere in this prospectus, before making an investment decision to purchase our Class A common stock.

Background

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. In December 2009 and January 2010, we raised approximately $900 million to make acquisitions through a series of private placements of our common stock. Since then, we have acquired five depository institutions, including the assets and certain deposits of three failed banks from the Federal Deposit Insurance Corporation (which we refer to as the “FDIC”). As of March 31, 2011, we operated 82 branches in Florida, North Carolina and South Carolina. We expect to complete the acquisition of a sixth depository institution owned by Green Bankshares, Inc., in the third quarter of 2011. Upon completion of our transaction with Green Bankshares, we will operate 146 branches in Tennessee, Florida, North Carolina, South Carolina 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, including tenure as President of the Consumer and Commercial Bank. He also has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc. Our Chief Financial Officer, Christopher G. Marshall, has over 23 years of financial and managerial experience, including service as the Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America’s Global Consumer and Small Business Bank. Our Chief Risk 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 and as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Kenneth A. Posner serves as our Chief of Investment Analytics and Research. Mr. Posner spent 13 years as an equity research analyst at Morgan Stanley focusing on a wide range of financial services firms.

After giving pro forma effect to our pending transaction with Green Bankshares, as of March 31, 2011, we had approximately $7.2 billion in total assets, $4.4 billion in loans, $2.8 billion in core deposits (which exclude time deposits), $5.5 billion in total deposits and $973.2 million in shareholders’ equity.

Our Acquisitions

Our banking operations commenced on July 16, 2010, when we purchased approximately $1.2 billion of assets and assumed approximately $960.1 million of deposits of three failed banks from the FDIC: First National Bank of the South in Spartanburg, South Carolina, Metro Bank of Dade County in Miami, Florida and Turnberry Bank in Aventura, Florida. The acquired assets included loans with an estimated fair value of $768.6 million at the acquisition date. These transactions gave us an initial market presence in Miami, which we targeted because of its size and concentrated business activity, and South Carolina, which we targeted because of its attractive demographic growth trends. In connection with these acquisitions, we entered into loss sharing arrangements with the FDIC covering approximately $796.1 million of loans and real estate owned of the Failed Banks that we acquired.

 

 

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On September 30, 2010, we invested approximately $175.0 million in TIB Financial Corp., a publicly held bank holding company headquartered in Naples, Florida with approximately $1.7 billion in assets at the acquisition date, and, after giving effect to a subsequent rights offering to legacy TIB Financial shareholders, we acquired approximately 94% of TIB Financial’s common stock. The acquired assets included loans with an estimated fair value of $1.0 billion at the acquisition date. This acquisition expanded our geographic reach in Florida to include markets that we believe have particularly attractive deposit customer characteristics and provided a platform to support our future growth.

On January 28, 2011, we invested approximately $181.1 million in Capital Bank Corp., a publicly held bank holding company headquartered in Raleigh, North Carolina with approximately $1.7 billion in assets at the acquisition date and, after giving effect to a subsequent rights offering to legacy Capital Bank Corp. shareholders, we acquired approximately 83% of Capital Bank Corp.’s common stock. The acquired assets included loans with an estimated fair value of $1.1 billion at the acquisition date. This transaction gave us a strong presence in fast-growing North Carolina markets, including the Raleigh metropolitan area, which, according to data derived from the U.S. Census, is the third fastest growing metropolitan area in the country by population.

On May 5, 2011, we agreed to invest approximately $217.0 million in Green Bankshares, a publicly held bank holding company headquartered in Greeneville, Tennessee with approximately $2.4 billion in assets reported as of March 31, 2011. Our investment in Green Bankshares is subject to stockholder approval, regulatory approvals and other customary closing conditions, and is expected to be completed in the third quarter of 2011. If completed, we expect to own approximately 90.1% of Green Bankshares’ common stock. Total assets as of March 31, 2011 included $1.7 billion of gross loans. This transaction will extend our market area in the fast-growing Tennessee metropolitan areas of Nashville and Knoxville.

Within a six-month period, we integrated and centralized the underwriting, risk and pricing functions of each of our acquired institutions and combined four of our acquired institutions onto a single information processing system. We expect to have all five of our acquired institutions fully integrated by July 2011.

In this prospectus, we refer to our five completed acquisitions and our pending transaction with Green Bankshares collectively as the “acquisitions.”

Reorganization

Prior to the completion of this offering, we intend to merge Capital Bank, the wholly owned bank subsidiary of Capital Bank Corp., and, assuming the completion of our Green Bankshares investment, GreenBank, the wholly owned bank subsidiary of Green Bankshares, with and into NAFH National Bank, which will be rebranded as Capital Bank, N.A. In addition, concurrent with the completion of this offering, we intend to merge each of our majority-held subsidiaries (TIB Financial, Capital Bank Corp. and, assuming the completion of our Green Bankshares investment, Green Bankshares) with the Company. In connection with the mergers of our majority-held subsidiaries, we expect that existing third-party stockholders of these subsidiaries will receive shares of our Class A common stock (we refer to these mergers collectively as the “reorganization”) in exchange for their minority existing shares. Following the completion of this offering and the reorganization, we will be a publicly traded bank holding company with a single directly and wholly owned bank subsidiary, Capital Bank, N.A. We estimate that we will issue approximately            shares of our Class A common stock to the other shareholders of our bank holding company subsidiaries that will be merged with the Company in the reorganization.

 

 

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The following diagrams illustrate our ownership structure, including our principal subsidiaries, assuming the completion of the Green Bankshares investment, as of June 22, 2011 and immediately after the completion of this offering and the reorganization:

LOGO

 

(1) 

On April 29, 2011, we combined TIB Financial’s banking subsidiary, TIB Bank, with NAFH Bank in an all-stock transaction. See “Business—Our Acquisitions—TIB Financial Corp.”

LOGO

 

 

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Our Business Strategy

Our business strategy is to build a mid-size regional bank by operating, integrating and growing our existing operations as well as to acquire other banks, including failed, underperforming and undercapitalized banks. We believe recent and continuing dislocations in the southeastern U.S. banking industry have created an opportunity for us to create a mid-sized regional bank that will be able to realize greater economies of scale compared to smaller community banks while still providing more personalized, local service than large-sized banks.

Operating Strategy

Our operating strategy emphasizes relationship banking focused on commercial and consumer lending and deposit gathering. We have organized operations under a line of business operating model, under which we have appointed experienced bankers to oversee loan and deposit production in each of our markets, while centralizing the credit, finance, technology and operations. Our management team possesses significant executive-level leadership experience at Fortune 500 financial services companies and we believe this experience is an important advantage in executing this regional, more focused, bank business model.

Organic Loan and Deposit Growth

The primary components of our operating strategy are to originate high-quality loans and low-cost customer deposits. Our executive management team has developed a hands-on operating culture focused on performance and accountability, with frequent and detailed oversight by executive management of key performance indicators. We have implemented a sales management system for our branches that is focused on growing loans and core deposits in each of our markets. We believe that this system holds loan officers and branch managers accountable for achieving loan production goals, which are subject to the conservative credit standards and disciplined underwriting practices that we have implemented as well as compliance, profitability and other standards that we monitor. We also believe that accountability is crucial to our results. Our executive management monitors production, credit quality and profitability measures on a quarterly, monthly, weekly and, in some cases, daily basis and provides ongoing feedback to our business unit leaders.

The current market conditions have forced many banks to focus internally, which we believe creates an opportunity for organic growth by strongly capitalized banks such as ourselves. We seek to grow our loan portfolio by offering personalized customer service, local market knowledge and a long-term perspective. We have selectively hired experienced loan officers with existing books of business in certain of our markets. Additionally, our executive management team takes an active role in soliciting, developing and maintaining client relationships.

Efficiency and Cost Savings

Another key element of our strategy is to operate efficiently by carefully managing our cost structure and taking advantage of economies of scale afforded by our acquisitions to control operating costs. We have been able to reduce headcount by consolidating duplicative operations of the acquired banks and streamlining management. We expect to recognize additional cost savings once we have integrated Capital Bank Corp. and, if acquired, Green Bankshares, onto our core processing platform. We plan to further improve efficiency by boosting the productivity of our sales force through our focus on accountability and employee incentives and through selective hiring of experienced loan officers with existing books of business.

Acquisition and Integration Strategy

We seek acquisition opportunities consistent with our business strategy that we believe will produce attractive returns for our stockholders. We plan to pursue acquisitions that position us in southeastern U.S. markets with attractive demographics and business growth trends, expand our branch network in existing

 

 

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markets, increase our earnings power or enhance our suite of products. Our future acquisitions may include distressed assets auctioned by the FDIC or another seller where our operations, underwriting and servicing capabilities or management experience give us an advantage in evaluating and resolving the assets.

Our acquisition process begins with detailed research of target institutions and the markets they serve. We then draw on our management team’s extensive experience and network of industry contacts in the southeastern region of the United States. Our research and analytics team, led by our Chief of Investment Analytics and Research, maintains lists of priority targets for each of our markets. The team analyzes financial, accounting, tax, regulatory, demographic, transaction structures and competitive considerations for each target and prepares acquisition projections for review by our executive management team and Board of Directors.

As part of our diligence process in connection with potential acquisitions, we undertake a detailed portfolio- and loan-level analysis conducted by a team of experienced credit analysts led by our Chief Risk Officer. In addition, our executive management team engages the target management teams in active dialogue and personally conducts extensive on-site diligence at target branches.

Our executive management team has demonstrated success not only in acquiring financial institutions and combining them onto a common platform, but also in managing the integration of those financial institutions. Our management team develops integration plans prior to the closing of a given transaction that allows us to (1) reorganize the acquired institution’s management team under our line of business model immediately after closing; (2) implement our credit, risk and interest rate risk management, liquidity and compliance and governance policies and procedures; and (3) integrate our target’s technology and processing systems rapidly. Using our procedures, we have already integrated credit and operational policies across each of our acquisitions. We reorganized the management of the Failed Banks within three months of closing, and we merged their core processing systems with TIB Financial’s platform within six months. We expect Capital Bank Corp. to be fully integrated in July 2011.

Sound Risk Management

Sound risk management is an important element of our commercial/retail bank business model and is overseen by our Chief Risk Officer, Bruce Singletary, who has over 19 years of experience managing credit risk. Our credit risk policy, which has been implemented across our organization, establishes prudent underwriting guidelines, limits portfolio concentrations by geography and loan type and incorporates an independent loan review function. Mr. Singletary has created a special assets division with 38 employees to work out or dispose of legacy problem assets using a detailed process taking into account a borrower’s repayment capacity, available guarantees, collateral value, interest accrual and other factors. We believe our risk management policies establish conservative regulatory capital ratios, robust liquidity (including contingency planning), limitations on wholesale funding (including brokered CDs, holding company debt and advances from the Federal Home Loan Bank of Atlanta (which we refer to as the “FHLB”)) and restrictions on interest rate risk.

Our Competitive Strengths

 

   

Experienced and Respected Management Team with a Successful Track Record. Members of our executive management team and Board of Directors have served in executive leadership roles at Fortune 500 financial services companies, including Bank of America, Fifth Third Bancorp and Morgan Stanley. The executive management team has extensive experience overseeing commercial and consumer banking, mergers and acquisitions, systems integrations, technology, operations, credit and regulatory compliance. Many members of our executive management team are from the southeastern region of the United States and have an extensive network of contacts with banking executives, existing and potential customers, and business and civic leaders throughout the region. We believe our executive management team’s reputation and track record give us an advantage in negotiating acquisitions and hiring and retaining experienced bankers.

 

 

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Growth-Oriented Business Model. Our executive management team seeks to foster a strong sales culture with a focus on developing key client relationships, including direct participation in sales calls, and through regular reporting and accountability while emphasizing risk management. Our executive management and line of business executives monitor performance on a quarterly, monthly, weekly and in some cases daily basis, and our compensation plans reward core deposit and responsible commercial loan growth, subject to credit quality, compliance and profitability standards. We have an integrated, scalable core processing platform and centralized credit, finance and technology operations that we believe will support future growth. Our business model contributed to our $170.5 million of commercial and consumer loan originations and $120.6 million in net core deposit growth in the first quarter of 2011.

 

   

Highly Skilled and Disciplined Acquirer. We integrated our first four investments into a common core processing platform within six months and expect to have the fifth integrated by July 2011. We have conducted due diligence on more than 50 financial institutions, many of which our diligence process indicated would not meet our strategic objectives. Including our pending transaction with Green Bankshares, we will have executed six acquisitions in just 12 months. We believe our track record of completing and integrating transactions quickly has helped us negotiate transactions on more economically favorable terms.

 

   

Reduced-Risk Legacy Portfolio. Our acquired loan portfolios have been marked-to-market with the application of the acquisition method of accounting, meaning that the carrying value of these assets at the time of their acquisitions reflected our estimate of lifetime credit losses. In addition, as of March 31, 2011, approximately 22% of our loan portfolio was covered by the loss sharing agreements we entered into with the FDIC, resulting in limited credit risk exposure for these assets.

 

   

Excess Capital and Liquidity. As a result of our private placements and the disciplined deployment of capital, we have ample capital with which to make acquisitions. As of March 31, 2011, we had a 17.5% tangible common equity ratio and a 19.2% Tier 1 leverage ratio, which provides us with $392.7 million in excess capital relative to the 10% Tier 1 leverage standard required under our operating agreement with the Office of the Comptroller of the Currency (which we refer to as the “OCC”). As of March 31, 2011, NAFH Bank had a 12.7% Tier 1 leverage ratio, a 45.8% Tier 1 risk-based ratio and a 46.2% total risk-based capital ratio. As of March 31, 2011, we had cash and securities equal to 30% of total assets, representing $742.5 million of liquidity in excess of our target of 15%, which provides ample liquidity to support our existing banking franchises. Further, our investment portfolio consists primarily of U.S. agency-guaranteed mortgage-backed securities, which have limited credit or liquidity risk.

 

   

Scalable Back-Office Systems. By July 2011, we expect that all of our acquired institutions will be operating on a single information processing system, which is also the same system used by Green Bankshares. Our systems are designed to accommodate all of our projected future growth and allow us to offer our customers virtually all of the services currently offered by the nation’s largest financial institutions, including state-of-the-art online banking.

 

 

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Our Market Area

We view our market area as the southeastern region of the United States. Our six acquisitions (including our pending Green Bankshares investment) have established a footprint defined by the Miami-Raleigh-Nashville triangle, which includes a combination of large and fast-growing metropolitan areas that we believe will offer us opportunities for organic loan and deposit growth. According to SNL Financial, the Raleigh metropolitan statistical area (which we refer to as “MSA”) has the third highest projected population growth rate in the nation, with over 19% growth projected between 2010 and 2015. Similarly, the Nashville MSA is projected to grow by 10%. Miami is already considered a large metropolitan area with a population in excess of 5 million. Approximately 46% of our current branches are located in our target MSAs. The following table highlights key demographics of our target market areas:

 

Target Metropolitan Statistical Area

   Number
of
Branches
     2010 Total
Population(2)
     2010-15
Projected
Pop.
Growth
    2010
Median
Household
Income
     2010-15
Projected
Household
Income
Growth
 

Miami-Ft. Lauderdale-Pompano Beach-Homestead, FL

     12         5,513         1.4   $ 51,835         13.5

Charlotte-Gastonia-Rock Hill, NC-SC

     1         1,793         14.8        62,215         13.2   

Nashville-Davidson-Murfreesboro-Franklin, TN

     21         1,608         9.6        58,639         11.3   

Raleigh-Cary, NC

     13         1,162         19.4        68,373         15.4   

Columbia, SC

     6         758         8.2        52,348         11.9   

Knoxville, TN

     10         703         6.4        48,593         13.8   

Durham-Chapel Hill, NC

     2         505         8.8        55,185         13.2   

Spartanburg, SC

     3         290         7.7        48,476         10.1   

Weighted Average: Target MSAs(1)

     68         12,333         9.1        56,504         12.8   

Weighted Average: NAFH Consolidated(1)

     148         18,119         6.3        62,213         12.7   

Aggregate: National

        311,213         3.9        54,442         12.4   

 

Source: SNL Financial.

(1) 

Population growth and median household income metrics are deposit weighted by MSA.

(2) 

Population in thousands.

Risk Factors

For a discussion of certain risk factors you should consider before making an investment, see “Risk Factors” beginning on page 13.

Additional Information

Our principal executive offices are located at 9350 South Dixie Highway, Miami, Florida 33156 and our telephone number is (305) 670-0200.

 

 

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The Offering

Common stock offered by us

            shares of Class A common stock.

 

Common stock offered by the selling stockholders

            shares of Class A common stock.

 

Over-allotment option

            shares of Class A common stock from the Company.

 

              shares of Class A common stock from the selling stockholders.

 

Common stock to be outstanding immediately after this offering

            shares of Class A common stock and             shares of Class B non-voting common stock.(1)

 

Use of proceeds

We estimate that the net proceeds to us from the sale of our Class A common stock in the offering will be approximately $        million, or approximately $        million if the underwriters’ over-allotment option is exercised in full, assuming an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.(2)

 

  We intend to use the net proceeds from the offering for general corporate purposes, including the acquisition of depository institutions through traditional open bank and FDIC failed bank acquisitions, as well as through selective acquisitions of financial services companies or of assets, deposits and branches that we believe present attractive risk-adjusted returns and provide a strategic benefit to our growth strategy. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders. See “Use of Proceeds.”

 

Voting rights

The Class A common stock possesses all of the voting power for all matters requiring action by holders of our common stock, with certain limited exceptions.

 

Regulatory ownership restrictions

We are a bank holding company. A holder of shares of common stock (or group of holders acting in concert) that directly or indirectly owns, controls or has the power to vote 10% or more of any class of our voting securities (more than 5% if the holder is a bank holding company) or is otherwise deemed to “control” us under applicable regulatory standards, may be subject to restrictions and notice or approval requirements.

 

  For a further discussion of regulatory ownership restrictions see “Supervision and Regulation.”

 

 

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Dividend policy

We have never paid cash dividends to holders of our common stock. We do not expect to declare or pay any cash or other dividends on our common stock in the foreseeable future after the completion of this offering.

 

Listing

We intend to apply to list our Class A common stock on The Nasdaq Global Select Market (which we refer to as “Nasdaq”) under the trading symbol “            .”

 

Risk factors

Please read the section entitled “Risk Factors” beginning on page 13 for a discussion of some of the factors you should consider before buying our Class A common stock.

  

 

(1) 

Based on 20,888,549 shares of Class A common stock and 25,261,449 shares of Class B non-voting common stock issued and outstanding as of March 31, 2011, and includes 1,029,823 shares of restricted stock issued under the NAFH 2010 Equity Incentive Plan. As of March 31, 2011, there were 57 holders of our Class A common stock and 23 holders of our Class B non-voting common stock. Unless otherwise indicated, information contained in this prospectus regarding the number of shares of our common stock outstanding after the offering does not include an aggregate of up to             shares of Class A common stock comprised of:

 

   

up to             shares of Class A common stock which may be issued by us pursuant to the underwriters’ option to purchase additional shares;

 

   

2,236,251 shares of Class A common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $20.00 per share, of which no shares were vested as of March 31, 2011.

 

(2) 

Except as otherwise indicated in this prospectus, all references to an assumed initial offer price mean $            , the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Summary Historical Consolidated and Unaudited Pro Forma Condensed Combined Financial Data

The following tables set forth our summary historical consolidated and unaudited pro forma condensed combined financial data. You should read this information in conjunction with “Selected Consolidated Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The summary historical consolidated financial information set forth below as of and for the year ended December 31, 2010 and for the period from November 30, 2009 (date of inception) through December 31, 2010 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial information set forth below as of and for the three months ended March 31, 2011 and 2010 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

On July 16, 2010, we purchased certain assets and assumed certain liabilities, including substantially all of the deposits of First National Bank, Metro Bank and Turnberry Bank from the FDIC, as receiver. On September 30, 2010 and January 28, 2011, we consummated controlling investments in TIB Financial and Capital Bank Corp., respectively. On May 5, 2011, we agreed to make a controlling investment in Green Bankshares. Our investment in Green Bankshares is subject to the approval of Green Bankshares’ shareholders, regulatory approval, and other customary closing conditions, and is expected to be completed in the third quarter of 2011. Although we were formed in November 2009, our activities prior to our first acquisition consisted solely of organizational, capital raising and related activities and activities related to identifying and analyzing potential acquisition candidates. We did not engage in any substantive operations (including banking operations) prior to our first acquisition.

The summary historical consolidated financial information in the following tables as of and for the year ended December 31, 2010, includes the results of the Company, including First National Bank, Metro Bank and Turnberry Bank subsequent to July 16, 2010 and TIB Financial subsequent to September 30, 2010. The summary historical consolidated financial information as of and for the three months ended March 31, 2011 includes the results of the Company, including First National Bank, Metro Bank, Turnberry Bank and TIB Financial as well as the results of Capital Bank Corp. subsequent to January 28, 2011. The summary unaudited pro forma condensed combined balance sheet information set forth below as of and for the three months ended March 31, 2011 has been derived from NAFH’s, Capital Bank Corp.’s and Green Bankshares’ historical unaudited financial statements as of and for the three months ended March 31, 2011, and the summary unaudited pro forma condensed combined results of operation set forth below as of and for the year ended December 31, 2010 has been derived from NAFH’s, TIB Financial’s, Capital Bank Corp.’s and Green Bankshares’ historical audited financial statements as of and for the year ended December 31, 2010. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial condition of the combined companies had the companies actually been combined on March 31, 2011 or operating results of the combined companies had they been combined on January 1, 2010.

The unaudited pro forma condensed combined financial information gives effect to and shows the pro forma impact on our historical financial statements of (1) the completion of our investments in TIB Financial, Capital Bank Corp. and Green Bankshares, as applicable, (2) the sale of              shares of Class A common stock in this offering at an assumed initial public offering price of $              per share and (3) the issuance of approximately              shares of our Class A common stock to minority stockholders of TIB Financial, Capital Bank Corp. and, assuming the completion of the Green Bankshares investment, Green Bankshares, each of which will be merged with the Company in the reorganization.

Because substantially all of our business is composed of operations acquired during these periods and because of the substantial change in the operations of each acquired business in connection with its acquisition,

 

 

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our results of operations reflect different operations in different periods (or portions of periods) and therefore cannot be meaningfully compared. In addition, results of operations for these periods reflect, among other things, the acquisition method of accounting. Under the acquisition method of accounting, all of the assets acquired and liabilities assumed were initially recorded on our consolidated balance sheet at their estimated fair values as of the date of acquisition. These estimated fair values differed substantially from the carrying amounts of the assets acquired and liabilities assumed as reflected in the financial statements of the Failed Banks, TIB Financial and Capital Bank Corp. immediately prior to the respective acquisitions.

 

    Pro Forma                    
(Dollars in thousands, other than per share
data)
  Three Months
Ended
March 31,
2011
    Year Ended
December 31,
2010
    Three Months
Ended
March 31,
2011
    Three Months
Ended
March 31,
2010
    Year Ended
December 31,
2010
    November 30
Through
December 31,
2009
 
    (Unaudited)  

Summary Results of Operations

           

Interest income

  $ 73,376      $ 267,063      $ 40,305      $ 725      $ 42,745      $ 72   

Interest expense

    14,893        69,872        7,466        —          6,234        —     
                                               

Net interest income

    58,483        226,744        32,839        725        36,511        72   

Provision for loan losses

    1,545        753        1,545        —          753        —     
                                               

Net interest income after provision for loan losses

    56,938        225,991        31,294        725        35,758        72   
                                               

Noninterest income

    12,960        68,681        4,501        —          19,659        —     

Noninterest expense

    59,916        223,392        35,040        3,114        44,421        214   
                                               

Income (loss) before income taxes

    9,982        71,280        755        (2,389     10,996        (142

Income tax expense (benefit)

    3,911        21,867        405        (1,008     (1,041     (50
                                               

Net income (loss) before attribution of noncontrolling interests

    6,071        66,422        350        (1,381     12,037        (92

Net income (loss) attributable to noncontrolling interests

    —          —          (50     —          7        —     
                                               

Net income (loss) attributable to NAFH.

  $ 6,071      $ 66,422      $ 400      $ (1,381   $ 12,030      $ (92
                                               

        Per Share Data

           

Earnings

           

Basic

  $        $        $ 0.01      $ (0.04   $ 0.31      $ (0.01
                                               

Diluted

  $        $        $ 0.01      $ (0.04   $ 0.31      $ (0.01
                                               

Tangible book value

  $        $        $ 17.76      $ 18.82      $ 18.26      $ 18.86   
                                               

Weighted average shares outstanding

           

Basic

        45,120,175        31,117,106        38,205,677        8,243,830   
                                               

Diluted

        45,250,175        31,117,106        38,205,677        8,243,830   
                                               

Common shares outstanding

        46,149,998        32,094,240        45,120,175        27,906,524   
                                               

 

 

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    Pro Forma                    
(Dollars in thousands, except per share data)   Three Months
Ended
March 31,
2011
    Three Months
Ended
March 31,
2011
    Three Months
Ended
March 31,
2010
    Year Ended
December 31,
2010
    November 30
Through
December 31,
2009
 
          (Unaudited)              

Summary Balance Sheet Data

         

Cash and cash equivalents

  $        $ 719,804      $ 603,794      $ 886,925      $ 526,711   

Investment securities

    991,249        765,402        —          479,716        —     

Loans held for sale

    2,384        1,424        —          —          —     

Loans receivable:

         

Not covered under FDIC loss sharing agreements

    3,781,175        2,282,926        —          1,046,463        —     

Covered under FDIC loss sharing agreements

    656,842        656,842        —          696,284        —     

Allowance for loan losses

    (2,287     (2,287     —          (753     —     
                                       

Net loans

    4,435,730        2,937,481        —          1,741,994        —     
                                       

Other real estate owned

    132,566        84,533        —          70,817        —     

FDIC indemnification asset

    77,597        77,597        —          91,467        —     

Receivable from FDIC

    45,095        45,095        —          46,585        —     

Goodwill and intangible assets, net

    142,194        86,950        —          51,770        —     

Other assets

    440,400        232,852        887        127,717        50   
                                       

Total assets

  $        $ 4,951,138      $ 604,681      $ 3,496,991      $ 526,761   
                                       

Deposits

  $ 5,524,357      $ 3,538,722      $ —        $ 2,260,097      $ —     

Advances from FHLB

    446,739        280,151        —          243,067        —     

Borrowings

    233,382        148,008        —          84,856        —     

Other liabilities

    62,220        43,953        542        27,735        441   
                                       

Total liabilities

      4,010,834        542        2,615,755        441   
                                       

Shareholders’ equity

      940,304        604,139        881,236        526,320   
                                       

Total liabilities and shareholders’ equity

  $        $ 4,951,138      $ 604,681      $ 3,496,991      $ 526,761   
                                       

Performance Ratios

         

Return on average assets

      0.03     (0.95 )%      0.76     (0.71 )% 

Return on average equity

      0.15     (0.95 )%      1.67     (0.71 )% 

Net interest margin

      3.42     0.50     2.51     0.55

Interest rate spread

      3.24     0.50     2.14     0.55

Efficiency ratio(1)

      93.84     NM        79.08     NM   

Average interest-earning assets to average interest-bearing liabilities

      124.03     NA        186.42     NA   

Average loans receivable to average deposits

      81.44     NA        79.40     NA   

Cost of interest-bearing liabilities

      0.87     NA        0.69     NA   

Asset Quality

         

Nonperforming loans to loans receivable(2)

         

Not covered under loss sharing agreements with the FDIC

      5.81     NA        5.40     NA   

Covered under loss sharing agreements with the FDIC

      19.68     NA        19.71     NA   

Nonperforming assets to total assets

      7.06     NA        7.65     NA   

Allowance for loan losses to nonperforming loans

      0.87     NA        0.39     NA   

Capital Ratios

         

Average equity to average total assets

      20.77     99.91     45.51     99.79

Tangible common equity

      17.54     99.91     24.08     99.92

Tier 1 leverage

      19.20     NM        24.30     NM   

Tier 1 risk-based capital

      30.80     NM        41.80     NM   

Total risk-based capital

      31.10     NM        41.90     NM   

 

(1) 

Non-interest expense divided by sum of net interest income and non-interest income.

(2) 

Non-performing loans include non-accrual loans and loans past due over 90 days that retain accrual status due to accretion of income on purchased credit impaired loans.

 

 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this prospectus including our consolidated financial statements and the related notes thereto, before deciding to invest in our Class A common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow. In such case, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks Relating to Our Banking Operations

We have recently completed five acquisitions and have a limited operating history from which investors can evaluate our profitability and prospects.

We were organized in November 2009 and acquired certain of the assets and assumed certain liabilities of the three Failed Banks in July 2010. We also completed controlling investments in TIB Financial in September 2010 and in Capital Bank Corp. in January 2011. Because our banking operations began in 2010, we do not have a meaningful operating history upon which investors can evaluate our operational performance or compare our recent performance to historical performance. Although we acquired certain assets and assumed certain liabilities or made investments in five depository institutions which had operated for longer periods of time than we have, their business models and experiences are not reflective of our plans. Accordingly, our limited time running these companies’ operations may make it difficult to predict our future prospects and financial performance based on the prior performance of such depository institutions. Moreover, because a material portion of the loans and other real estate we acquired in the acquisitions are covered by the loss sharing agreements and other loans and real estate we acquired were marked to fair value in connection with our acquisition of the Failed Banks’ businesses, the historical financial results of the acquired banks are less important to an understanding of our future operations. Certain other factors may also make it difficult to predict our future financial and operating performance, including, among others:

 

   

our current asset mix, loan quality and allowances are not representative of our anticipated future asset mix, loan quality and allowances, which may change materially as we undertake organic loan origination and banking activities and grow through future acquisitions;

 

   

a material portion of the loans and other real estate of the Failed Banks that we acquired are covered by the loss sharing agreements with the FDIC, which reimburse 80% of losses experienced on these assets and, thus, we may face higher losses once the FDIC loss sharing expires;

 

   

the income we report from certain acquired assets due to discount accretion and the amortization of the FDIC indemnification asset does not reflect the same amount of cash inflows to us and, if we are unable to replace these acquired assets with new performing loans and other performing assets, we may be unable to generate sufficient cash flows;

 

   

our significant cash reserves and liquid securities portfolio, which result in large part from the proceeds of our 2009 and 2010 private placement financings and cash payments from the FDIC in connection with our acquisition of the Failed Banks subject to loss sharing agreements, are not necessarily representative of our future cash position;

 

   

our cost structure and capital expenditure requirements during the transitional periods for which financial information is available are not reflective of our anticipated cost structure and capital spending as we integrate future acquisitions and continue to grow our organic banking platform; and

 

   

our regulatory capital ratios, which are required by agreements we have reached with our regulators and which result in part from the proceeds of our 2009 and 2010 private placement financings and cash payments from the FDIC in connection with our acquisition of the Failed Banks subject to loss sharing agreements, are not necessarily representative of our future regulatory capital ratios.

 

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Our acquisition history may not be indicative of our ability to execute our growth strategy.

Our prior acquisitions should be viewed in the context of the recent opportunities available to us as a result of the confluence of our access to capital at a time when market dislocations of historical proportions resulted in attractive asset acquisition opportunities. As conditions change, we may prove to be unable to execute our growth strategy, which could impact our future earnings, reputation and results of operations. We have recently completed the process of integrating four of the acquired banking platforms (the Failed Banks and TIB Financial) into a single unified operating platform and we are in the process of integrating Capital Bank Corp. See “—Risks Relating to our Growth Strategy.”

Continued or worsening general business and economic conditions could have a material adverse effect on our business, financial position, results of operations and cash flows.

Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy is unable to steadily emerge from the recent recession that began in 2007 or we experience worsening economic conditions, such as a so-called “double-dip” recession, our growth and profitability could be adversely affected. Weak economic conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors would be detrimental to our business. Our business is significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and cash flows.

The geographic concentration of our markets in the southeastern region of the United States makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could be detrimental to our financial condition.

Unlike larger financial institutions that are more geographically diversified, we are a regional banking franchise concentrated in southeastern region of the United States. We operate branches located in Florida, North Carolina, South Carolina and, upon completion of our transaction with Green Bankshares, Tennessee and Virginia. As of March 31, 2011, 48% of our loans were in Florida, 38% were in North Carolina and 14% were in South Carolina. A deterioration in local economic conditions in the loan market or in the residential, commercial or industrial real estate market could have a material adverse effect on the quality of our portfolio, the demand for our products and services, the ability of borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of our expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected NAFH Bank’s capital, we and NAFH Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital. See “Supervision and Regulation.”

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.

We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership and experience in the banking industry of our Chief Executive Officer R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America and 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. The loss of service of Mr. Taylor or one or more of our other executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer and the value of our common stock could be materially adversely affected.

 

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Leadership changes will occur from time to time and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although R. Eugene Taylor has entered into an employment agreement with us and we expect that, prior to the completion of this offering, Christopher G. Marshall, R. Bruce Singletary and Kenneth A. Posner will have entered into employment agreements with us, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.

Our loss sharing agreements impose restrictions on the operation of our business, failure to comply with the terms of our loss sharing agreements with the FDIC may result in significant losses, and we are exposed to unrecoverable losses on the Failed Banks’ assets that we acquired.

In July 2010, we purchased substantially all of the assets and assumed all of the deposits and certain other liabilities of the Failed Banks in FDIC-assisted transactions, and a material portion of our revenue is derived from such assets. Certain of the purchased assets are covered by the loss sharing agreements with the FDIC, which provide that a significant portion of the losses related to the covered assets will be borne by the FDIC. We are subject to audit by the FDIC at its discretion to ensure we are in compliance with the terms of these agreements. We, however, may experience difficulties in complying with the requirements of the loss sharing agreements, which could result in the covered assets losing some or all of their loss protection. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets losing their loss sharing coverage.

Although we have entered into loss sharing agreements which provide that the FDIC will bear 80% of losses on the covered loan assets we acquired in our acquisition of the Failed Banks, we are not protected from all such losses. The FDIC has the right to refuse or delay payment partially or in full for such loan losses if the loss sharing agreements are not managed in accordance with their terms, which are extensive. Additionally, the loss sharing agreements are limited in duration. Therefore, any losses that we experience after the terms of the loss sharing agreements have ended will not be recoverable from the FDIC, which would negatively impact our net income. See “Business—Our Acquisitions—Loss Sharing Agreements” for a description of the loss sharing arrangements with the FDIC.

Our loss sharing agreements also impose limitations on how we manage loans covered by loss sharing. For example, under the loss sharing agreements, we are not permitted to sell a covered loan even if in the ordinary course of our business we determine that taking such action would be advantageous for us. These restrictions could impair our ability to manage problem loans and extend the amount of time that such loans remain on our balance sheet and could negatively impact our business, financial condition, liquidity and results of operations.

Any requested or required changes in how we determine the impact of loss share accounting on our financial information could have a material adverse effect on our reported results.

A material portion of our financial results is based on loss share accounting, which is subject to assumptions and judgments made by us, our accountants and the regulatory agencies to whom we report such information. Loss share accounting is a complex accounting methodology. If these assumptions are incorrect or our accountants or the regulatory agencies to whom we report require that we change or modify our assumptions, such change or modification could have a material adverse effect on our financial condition, operations or our previously reported results. As such, any financial information generated through the use of loss share accounting is subject to modification or change. Any significant modification or change in such information could have a material adverse effect on our results of operations and our previously reported results.

 

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Our financial information reflects the application of the acquisition method of accounting. Any change in the assumptions used in such methodology could have an adverse effect on our results of operations.

As a result of our recent acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair market value. Our interest income, interest expense and net interest margin (which were equal to $40.3 million, $7.5 million and 3.4%, respectively, in the first quarter of 2011) reflect the impact of accretion of the fair value adjustments made to the carrying amounts of interest earning assets and interest bearing liabilities and our non-interest income (which totaled $4.5 million in the first quarter of 2011) for periods subsequent to the acquisitions includes the effects of discount accretion and amortization of the FDIC indemnification asset. In addition, the balances of non-performing assets were significantly reduced by the adjustments to fair value recorded in conjunction with the relevant acquisition. If our assumptions are incorrect or the regulatory agencies to whom we report require that we change or modify our assumptions, such change or modification could have a material adverse effect on our financial condition or results of operations or our previously reported results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Accounting for Acquired Loans” for additional information on the impact of acquisition method of accounting to our financial operations.

Our business is highly susceptible to credit risk.

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral (if any) securing the payment of their loans may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The credit standards, procedures and policies that we have established for borrowers may not prevent us from incurring substantial credit losses.

Although we do not have a long enough operating history to have restructured many of our loans for borrowers in financial difficulty, in the future, we may restructure originated or acquired loans if we believe the borrowers have a viable business plan to fully pay off all obligations. However, for our originated loans, if interest rates or other terms are modified upon extension of credit or if terms of an existing loan are renewed in such a situation and a concession is granted, we may be required to classify such action as a troubled debt restructuring (which we refer to as a “TDR”). We would classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Generally, these loans would be restructured to provide the borrower additional time to execute its business plan. With respect to restructured loans, we may grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured agreement, the loan would be placed on nonaccrual status and written down to the underlying collateral value.

Recent economic and market developments and the potential for continued economic disruption present considerable risks to us and it is difficult to determine the depth and duration of the economic and financial market problems and the many ways in which they may impact our business in general. Any failure to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.

A significant portion of our loan portfolio is secured by real estate. As of March 31, 2011, approximately 87% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in

 

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each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in our primary market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and shareholders’ equity could be adversely affected. For example, the housing market has been in a four-year recession and recent trends suggest a continued decline with home prices falling by 4.2% (as measured by the S&P/Case-Shiller Home Price Indices) in the first quarter of 2011 (representing a decline of 5.1% versus the first quarter of 2010). Further declines in home prices coupled with a deepened economic recession and continued rises in unemployment levels could drive losses beyond the level that is provided for in our allowance for loan losses. In that event, our earnings could be adversely affected.

Additionally, recent weakness in the secondary market for residential lending could have an adverse impact on our profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, any future mortgage loan originations and gains on sale of mortgage loans. Continued declines in real estate values and home sales volumes and financial stress on borrowers as a result of job losses or other factors could have further adverse effects on borrowers that result in higher delinquencies and charge-offs in future periods, which could adversely affect our financial position and results of operations.

Our construction and land development loans are based upon estimates of costs and the values of the complete projects.

While we intend to focus on originating loans other than non-owner occupied commercial real estate loans, our portfolio includes construction and land development loans (which we refer to as “C&D loans”) extended to builders and developers, primarily for the construction and/or development of properties. These loans have been extended on a presold and speculative basis and they include loans for both residential and commercial purposes. As of March 31, 2011, these loans totaled $404.0 million (or 14% of our total loan portfolio). Approximately $82.7 million of this amount was for construction and/or development of residential properties and $321.3 million was for construction/development of commercial properties. As of March 31, 2011, $116.2 million of our C&D loans were classified as nonperforming.

In general, C&D lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. The repayment of construction and land acquisition and development loans is often dependent, in part, on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring. In addition, speculative construction loans to a residential builder are often associated with homes that are not presold and, thus, pose a greater potential risk than construction loans to individuals on their personal residences. Slowing housing sales have been a contributing factor to an increase in nonperforming loans as well as an increase in delinquencies.

Our non-owner occupied commercial real estate loans may be dependent on factors outside the control of our borrowers.

While we intend to focus on originating loans other than non-owner occupied commercial real estate loans, in the acquisitions we acquired non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. As of March 31, 2011, our non-owner occupied commercial real estate loans totaled $742.1 million (or 25% of our total loan portfolio). Nonperforming

 

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non-owner occupied commercial real estate loans totaled $44.5 million as of March 31, 2011. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. Non-owner occupied commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. In such cases, we may be compelled to modify the terms of the loan or engage in other potentially expensive work-out techniques. If we foreclose on a non-owner occupied commercial real estate loan, our holding period for the collateral typically is longer than a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

Our allowance for loan losses and fair value adjustments may prove to be insufficient to absorb losses for loans that we originate.

Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

 

   

cash flow of the borrower and/or the project being financed;

 

   

the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

 

   

the duration of the loan;

 

   

the discount on the loan at the time of acquisition;

 

   

the credit history of a particular borrower; and

 

   

changes in economic and industry conditions.

We maintain an allowance for loan losses with respect to loans we originate, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management team through periodic reviews.

The application of the acquisition method of accounting to our completed acquisitions impacted our allowance for loan losses. Under the acquisition method of accounting, all loans were recorded in our financial statements at their fair value at the time of their acquisition and the related allowance for loan loss was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into consideration estimated credit quality. We may in the future determine that our estimates of fair value are too high, in which case we would begin providing for loan losses associated with the acquired loans. Through March 31, 2011, we had not recorded any provision for loan losses related to acquired loans.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans that we originate, identification of additional problem loans originated by us and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. If current trends in the real estate markets continue, we expect that we will continue to experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we

 

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will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations.

We continue to hold and acquire other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.

We foreclose on and take title to the real estate serving as collateral for many of our loans as part of our business. Real estate owned by us and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. At March 31, 2011, we had $84.5 million of OREO. Increased OREO balances have led to greater expenses as we incur costs to manage and dispose of the properties. We expect that our earnings will continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Any further decrease in real estate market prices may lead to additional OREO write-downs, with a corresponding expense in our statement of operations. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. The expenses associated with OREO and any further property write-downs could have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Legislative action regarding foreclosures or bankruptcy laws may negatively impact our business.

Recent laws delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans (some for a limited period of time), or otherwise limit the ability of residential loan servicers to take actions that may be essential to preserve the value of the mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increased servicing costs. As a servicer of mortgage loans, any restriction on our ability to foreclose on a loan, any requirement that we forego a portion of the amount otherwise due on a loan or any requirement that we modify any original loan terms will in some instances require us to advance principal, interest, tax and insurance payments, which may negatively impact our business, financial condition, liquidity and results of operations.

Delinquencies and defaults in residential mortgages have increased, creating a backlog in courts and an increase in industry scrutiny by regulators, as well as proposed new laws and regulations governing foreclosures. Such laws and regulations might restrict or delay our ability to foreclose and collect payments for single family residential loans under the loss sharing agreements.

For the single family residential loans covered by the loss sharing agreements, we cannot collect loss share payments until we liquidate the properties securing those loans. These loss share payments could be delayed by an extended foreclosure process, including delays resulting from a court backlog, local or national foreclosure

 

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moratoriums or other delays, and these delays could have a material adverse effect on our results of operations. New homeowner protection laws and regulations may also delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors. Any restriction on our ability to foreclose on a loan, any requirement that we forgo a portion of the amount otherwise due on a loan or any requirement that we modify any original loan terms will in some instances require us to advance principal, interest, tax and insurance payments, which is likely to negatively impact our business, financial condition, liquidity and results of operations.

Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.

Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.

Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates could reduce net interest income.

Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates, while a decrease in the general level of interest rates may adversely affect the fair value of our financial assets and liabilities and our ability to realize gains on the sale of assets. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits.

Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios and our overall results. Changes in interest rates may also have a significant impact on any future mortgage loan origination revenues. Historically, there has been an inverse correlation between the demand for mortgage loans and interest rates. Mortgage origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the assets on our balance sheet. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System (which we refer to as the “Federal Reserve”). We cannot predict the nature and timing of the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions, which could negatively impact our financial performance.

We have benefited in recent periods from a favorable interest rate environment, but we believe that this environment cannot be sustained indefinitely and interest rates would be expected to rise as the economy

 

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recovers. A strengthening U.S. economy would be expected to cause the Board of Governors of the Federal Reserve to increase short-term interest rates, which would increase our borrowing costs.

The fair value of our investment securities can fluctuate due to market conditions out of our control.

As of March 31, 2011, approximately 98% of our investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises mortgage-backed securities and securities of municipalities. As of March 31, 2011, the fair value of our investment securities portfolio was approximately $765.4 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the credit markets. In addition, we have historically taken a conservative investment posture, concentrating on government issuances of short duration. In the future, we may seek to increase yields through more aggressive investment strategies, which may include a greater percentage of corporate issuances and structured credit products. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on our business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.

We have a significant deferred tax asset that may not be fully realized in the future.

Our net deferred tax asset totaled $68.9 million as of March 31, 2011. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not accurate, the value of our deferred tax asset may not be recoverable and may result in a valuation allowance that would impact our earnings.

Recent market disruptions have caused increased liquidity risks and, if we are unable to maintain sufficient liquidity, we may not be able to meet the cash flow requirements of our depositors and borrowers.

The recent disruption and illiquidity in the credit markets are continuing challenges for banking institutions that have generally made potential funding sources more difficult to access, less reliable and more expensive. Our liquidity is generally used to make loans and to repay deposit liabilities as they become due or are demanded by customers, and further deterioration in the credit markets or a prolonged period without improvement of market liquidity could present significant challenges in the management of our liquidity and could adversely affect our business, results of operations and prospects. For example, if as a result of a sudden decline in depositor confidence resulting from negative market conditions, a substantial number of bank customers tried to withdraw their bank deposits simultaneously, our reserves may not be able to cover the withdrawals.

Furthermore, an inability to increase our deposit base at all or at attractive rates would impede our ability to fund our continued growth, which could have an adverse effect on our business, results of operations and financial condition. Collateralized borrowings such as advances from the FHLB are an important potential source of liquidity. Our borrowing capacity is generally dependent on the value of the collateral pledged to the FHLB. An adverse regulatory change could reduce our borrowing capacity or eliminate certain types of collateral and could otherwise modify or even eliminate our access to FHLB advances, Federal Fund line borrowings and discount window advances. Liquidity may also be adversely impacted by bank supervisory and regulatory authorities mandating changes in the composition of our balance sheet to asset classes that are less liquid. Any such change or termination may have an adverse effect on our liquidity.

 

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Our access to other funding sources could be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets. We may need to incur additional debt in the future to achieve our business objectives, in connection with future acquisitions or for other reasons. Any borrowings, if sought, may not be available to us or, if available, may not be on favorable terms. Without sufficient liquidity, we may not be able to meet the cash flow requirements of our depositors and borrowers, which could have a material adverse effect on our financial condition and results of operations.

We may not be able to retain or develop a strong core deposit base or other low-cost funding sources.

We expect to depend on checking, savings and money market deposit account balances and other forms of customer deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow a strong deposit base. Because 57% of our deposits as of March 31, 2011 were time deposits, it may prove harder to maintain and grow our deposit base than would otherwise be the case. We are also working to transition certain of our customers to lower cost traditional banking services as higher cost funding sources, such as high interest certificates of deposit, mature. There may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Customers may not transition to lower yielding savings or investment products or continue their business with us, which could adversely affect our operations. In addition, with recent concerns about bank failures, customers have become concerned about the extent to which their deposits are insured by the FDIC, particularly customers that may maintain deposits in excess of insured limits. Customers may withdraw deposits in an effort to ensure that the amount that they have on deposit with us is fully insured and may place them in other institutions or make investments that are perceived as being more secure. Further, even if we are able to grow and maintain our deposit base, the account and deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments (or similar products at other institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact our growth strategy and results of operations.

We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may decrease our growth or profits.

Consumer and commercial banking is highly competitive. Our market contains not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources may possess an advantage by being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed Internet platform.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Also, technology has lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by

 

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offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for certain products and services than we can.

Our ability to compete successfully depends on a number of factors, including:

 

   

the ability to develop, maintain and build upon long-term customer relationships based on quality service and high ethical standards;

 

   

the ability to attract and retain qualified employees to operate our business effectively;

 

   

the ability to expand our market position;

 

   

the scope, relevance and pricing of products and services offered to meet customer needs and demands;

 

   

the rate at which we introduce new products and services relative to our competitors;

 

   

customer satisfaction with our level of service; and

 

   

industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.

We are subject to losses due to the errors or fraudulent behavior of employees or third parties.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. When we originate loans, we rely upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.

We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

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In addition, we provide our customers the ability to bank remotely, including online over the Internet. The secure transmission of confidential information is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject us to additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.

As a public company, we will be required to meet periodic reporting requirements under the rules and regulations of the United States Securities and Exchange Commission. Complying with federal securities laws as a public company is expensive, and we will incur significant time and expense enhancing, documenting, testing and certifying our internal control over financial reporting. Any deficiencies in our financial reporting or internal controls could adversely affect our business and the trading price of our Class A common stock.

Prior to becoming a public company, we have not been required to comply with Securities and Exchange Commission (which we refer to as the “SEC”) requirements to have our financial statements completed and reviewed or audited within a specified time. As a publicly traded company following completion of this offering and the reorganization, we will be required to file periodic reports containing our financial statements with the SEC within a specified time following the completion of quarterly and annual periods. We will also be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 concerning internal controls over financial reporting commencing in the 2012 fiscal year. We may experience difficulty in meeting the SEC’s reporting requirements. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and reduce the trading price of our Class A common stock.

As a public company, we will incur significant legal, accounting, insurance and other expenses. Compliance with other rules of the SEC and the rules of Nasdaq will increase our legal and financial compliance costs and make some activities more time consuming and costly. Beginning with our Annual Report on Form 10-K for our fiscal year ending December 31, 2012, SEC rules will require that our Chief Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of our internal controls over financial reporting. Our independent registered public accounting firm will be required to attest to our assessment of our internal controls over financial reporting. This process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing staff and our outside auditors and testing of our internal controls over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and expense, may strain our internal resources and have an adverse impact on our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter.

During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal controls over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal controls over financial reporting are effective and would preclude our independent auditors from issuing an unqualified opinion that our internal controls over financial reporting are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the trading price of our Class A common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures

 

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or internal controls over financial reporting, it may negatively impact our business, results of operations and reputation. As of December 31, 2010, Green Bankshares reported a material weakness in its internal control over financial reporting. Failure to remediate such material weakness could have an adverse effect on us following the completion of the Green Bankshares investment.

Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Our market areas in the southeastern region of the United States are susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and manmade disasters, such as the 2010 oil spill in the Gulf of Mexico. Our market areas in Tennessee are susceptible to natural disasters, such as tornadoes and floods. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters.

Risks Relating to our Growth Strategy

We may not be able to effectively manage our growth.

Our future operating results depend to a large extent on our ability to successfully manage our rapid growth. Our rapid growth has placed, and it may continue to place, significant demands on our operations and management. Whether through additional acquisitions or organic growth, our current plan to expand our business is dependent upon:

 

   

the ability of our officers and other key employees to continue to implement and improve our operational, credit, financial, management and other internal risk controls and processes and our reporting systems and procedures in order to manage a growing number of client relationships;

 

   

to scale our technology platform;

 

   

to integrate our acquisitions and develop consistent policies throughout the various businesses; and

 

   

to manage a growing number of client relationships.

We may not successfully implement improvements to, or integrate, our management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in expected loan volume and the infrastructure that comes with new branches and banks. Thus, our growth strategy may divert management from our existing businesses and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow our banking franchise, our business and our consolidated results of operations and financial condition could be materially and adversely impacted. In addition, if we are unable to manage future expansion in our operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect our business.

 

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Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.

We intend to complement and expand our business by pursuing strategic acquisitions of banks and other financial institutions. Generally, any acquisition of target financial institutions or assets by us will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on such applications of approval, federal banking regulators consider, among other factors:

 

   

the effect of the acquisition on competition;

 

   

the financial condition and future prospects of the applicant and the banks involved;

 

   

the managerial resources of the applicant and the banks involved;

 

   

the convenience and needs of the community, including the record of performance under the Community Reinvestment Act (which we refer to as the “CRA”); and

 

   

the effectiveness of the applicant in combating money laundering activities.

Such regulators could deny our application based on the above criteria or other considerations or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell branches as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of any acquisition.

The success of future transactions will depend on our ability to successfully identify and consummate transactions with target financial institutions that meet our investment criteria. Because of the significant competition for acquisition opportunities and the limited number of potential targets, we may not be able to successfully consummate acquisitions necessary to grow our business.

The success of future transactions will depend on our ability to successfully identify and consummate transactions with target financial institutions that meet our investment criteria. There are significant risks associated with our ability to identify and successfully consummate transactions with target financial institutions. There are a limited number of acquisition opportunities, and we expect to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and effecting acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater technical, human and other resources than we do, and our financial resources will be relatively limited when contrasted with those of many of these competitors. These organizations may be able to achieve greater cost savings through consolidating operations than we could. Our ability to compete in acquiring certain sizable target institutions will be limited by our available financial resources. These inherent competitive limitations give others an advantage in pursuing the acquisition of certain target financial institutions. In addition, increased competition may drive up the prices for the types of acquisitions we intend to target, which would make the identification and successful consummation of acquisition opportunities more difficult. Competitors may be willing to pay more for target financial institutions than we believe are justified, which could result in us having to pay more for target financial institutions than we prefer or to forego target financial institutions. As a result of the foregoing, we may be unable to successfully identify and consummate future transactions to grow our business on commercially attractive terms, or at all.

Because the institutions we intend to acquire may have distressed assets, we may not be able to realize the value we predict from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future writedowns taken in respect of, these assets.

Delinquencies and losses in the loan portfolios and other assets of financial institutions that we acquire may exceed our initial forecasts developed during the due diligence investigation prior to acquiring those institutions.

 

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Even if we conduct extensive due diligence on an entity we decide to acquire, this diligence may not reveal all material issues that may affect a particular entity. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that is typical for these depository institutions. If, during the diligence process, we fail to identify issues specific to an entity or the environment in which the entity operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in other reporting losses. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions we acquire and of the Company as a whole. If any of the foregoing adverse events occur with respect to one subsidiary, they may adversely affect other of our subsidiaries or the Company as a whole. Current economic conditions have created an uncertain environment with respect to asset valuations and there is no certainty that we will be able to sell assets of target institutions if we determine it would be in our best interests to do so. The institutions we will target may have substantial amounts of asset classes for which there is currently limited or no marketability.

The success of future transactions will depend on our ability to successfully combine the target financial institution’s business with our existing banking business and, if we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

The success of future transactions will depend, in part, on our ability to successfully combine the target financial institution’s business with our existing banking business. As with any acquisition involving financial institutions, there may be business disruptions that result in the loss of customers or cause customers to remove their accounts and move their business to competing banking institutions. It is possible that the integration process could result in additional expenses in connection with the integration processes and the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts, including integration of the target financial institution’s systems into our systems may divert our management’s attention and resources, and we may be unable to develop, or experience prolonged delays in the development of, the systems necessary to operate our acquired banks, such as a financial reporting platform or a human resources reporting platform call center. If we experience difficulties with the integration process, the anticipated benefits of any future transaction may not be realized fully or at all or may take longer to realize than expected. Additionally, we may be unable to recognize synergies, operating efficiencies and/or expected benefits within expected timeframes within expected cost projections, or at all. We may also not be able to preserve the goodwill of the acquired financial institution.

Our pending transaction with Green Bankshares may present certain risks to our business and operations.

On May 5, 2011, we entered into an investment agreement providing for our acquisition of a 90.1% interest in Green Bankshares. The proposed investment presents the following risks, among others:

 

   

the possibility that the expected benefits of the transaction may not materialize in the timeframe expected or at all, or may be more costly to achieve;

 

   

the possibility that the transaction may not be timely completed, if at all;

 

   

the possibility that the parties may be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers and other assets of Green Bankshares in a manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies and integrating Green Bankshares’ workforce while maintaining focus on providing consistent, high quality customer service;

 

   

the possibility that required regulatory, stockholder or other approvals, including approval of the Federal Reserve and the Tennessee Department of Financial Institutions and the approval of Green Bankshares’ stockholders, might not be obtained or other closing conditions might not be satisfied in a timely manner or at all;

 

 

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reputational risks and the reaction of the companies’ customers to the transaction; and

 

   

whether or not completed, the proposed investment may require diversion of the attention of our management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us.

Projected operating results for entities to be acquired by us may be inaccurate and may vary significantly from actual results.

We will generally establish the pricing of transactions and the capital structure of entities to be acquired by us on the basis of financial projections for such entities. In general, projected operating results will be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from actual results. General economic, political and market conditions, which are not predictable, can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect our business and our consolidated results of operations and financial condition.

Our officers and directors may have conflicts of interest in determining whether to present business opportunities to us or another entity with which they are, or may become, affiliated.

Our officers and directors may become subject to fiduciary obligations in connection with their service on the boards of directors of other corporations. To the extent that our officers and directors become aware of acquisition opportunities that may be suitable for entities other than us to which they have fiduciary or contractual obligations, or they are presented with such opportunities in their capacities as fiduciaries to such entities, they may honor such obligations to such other entities. In addition, our officers and directors will not have any obligation to present us with any acquisition opportunity that does not fall within the parameters of our business (see “Business”). You should assume that to the extent any of our officers or directors becomes aware of an opportunity that may be suitable both for us and another entity to which such person has a fiduciary obligation or contractual obligation to present such opportunity as set forth above, he or she may first give the opportunity to such other entity or entities and may give such opportunity to us only to the extent such other entity or entities reject or are unable to pursue such opportunity. In addition, you should assume that to the extent any of our officers or directors becomes aware of an acquisition opportunity that does not fall within the above parameters but that may otherwise be suitable for us, he or she may not present such opportunity to us. In general, officers and directors of a corporation incorporated under Delaware law are required to present business opportunities to a corporation if the corporation could financially undertake the opportunity, the opportunity is within the corporation’s line of business and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation.

Changes in accounting standards may affect how we report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (which we refer to as the “FASB”) or other regulatory authorities change the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

 

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Risks Relating to the Regulation of Our Industry

We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.

We are subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect customers, depositors and deposit insurance funds, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that we can pay, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally accepted accounting principles. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry as a result of the financial crisis in the banking and financial markets. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.

We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.

Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on our operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on our business are:

 

   

changes to regulatory capital requirements;

 

   

exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier 1 capital;

 

   

creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

 

   

potential limitations on federal preemption;

 

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changes to deposit insurance assessments;

 

   

regulation of debit interchange fees we earn;

 

   

changes in retail banking regulations, including potential limitations on certain fees we may charge; and

 

   

changes in regulation of consumer mortgage loan origination and risk retention.

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to investors in our Class A common stock. For a more detailed description of the Dodd-Frank Act, see “Supervision and Regulation—Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”

The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules is uncertain.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital, to be phased in over time until fully phased in by January 1, 2019.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their Tier 1 capital. While the Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict how any new standards will ultimately be applied to us and our subsidiary banks.

The FDIC’s restoration plan and the related increased assessment rate could adversely affect our earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary banks, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the deposit insurance fund of the FDIC (which we refer to as the “DIF”) and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and

 

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the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations, including by reducing our profitability or limiting our ability to pursue certain business opportunities.

We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.

The CRA and other fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (which we refer to as “OFAC”). If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

 

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The Federal Reserve may require us to commit capital resources to support our subsidiary banks.

The Federal Reserve, which examines us and our subsidiaries, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to any of our subsidiary banks that experience financial distress.

A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

Stockholders may be deemed to be acting in concert or otherwise in control of NAFH Bank, which could impose prior approval requirements and result in adverse regulatory consequences for such holders.

We are a bank holding company regulated by the Federal Reserve. Accordingly, acquisition of control of us (or our bank subsidiary) requires prior regulatory notice or approval. With certain limited exceptions, federal regulations prohibit potential investors from, directly or indirectly, acquiring ownership or control of, or the power to vote, more than 10% (more than 5% if the acquiror is a bank holding company) of any class of our voting securities, or obtaining the ability to control in any manner the election of a majority of directors or otherwise exercising a controlling influence over our management or policies, without prior notice or application to, and approval of, the Federal Reserve under the Change in Bank Control Act or the Bank Holding Company Act of 1956, as amended (which we refer to as the “BHCA”). Any bank holding company or foreign bank with a U.S. presence also is required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain more than 5% of our outstanding voting securities.

In addition to regulatory approvals, any stockholder deemed to “control” us for purposes of the BHCA would become subject to investment and activity restrictions and ongoing regulation and supervision. Any entity owning 25% or more of any class of our voting securities, or a lesser percentage if such holder or group otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the BHCA. In addition, such a holder may be required to divest 5% or more of the voting securities of investments that may be deemed incompatible with bank holding company status, such as an investment in a company engaged in non-financial activities.

Regulatory determination of “control” of a depository institution or holding company is based on all of the relevant facts and circumstances. In certain instances, stockholders may be determined to be “acting in concert” and their shares aggregated for purposes of determining control for purposes of the Change in Bank Control Act. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. How this definition is applied in individual circumstances can vary among the various federal bank regulatory agencies and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert, including whether:

 

   

stockholders are commonly controlled or managed;

 

   

stockholders are parties to an oral or written agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding company;

 

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the holders each own stock in a bank and are also management officials, controlling stockholders, partners or trustees of another company; or

 

   

both a holder and a controlling stockholder, partner, trustee or management official of the holder own equity in the bank or bank holding company.

Our common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for purposes of determining whether those holders have control of a bank or bank holding company for Change in Bank Control Act purposes. Because the control regulations under the Change in Bank Control Act and the BHCA are complex, potential investors should seek advice from qualified banking counsel before making an investment in our Class A common stock.

Risks Related to Our Common Stock

You will incur immediate dilution as a result of this offering.

If you purchase our Class A common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares. As a result, and after the reorganization, you will incur immediate dilution of $        per share assuming an initial offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, representing the difference between such assumed offering price and our estimated pro forma net tangible book value per pro forma share as of March 31, 2011, of $        . Accordingly, if we are liquidated at our book value, you would not receive the full amount of your investment. See “Dilution.”

There is currently no market for our Class A common stock and a market for our Class A common stock may not develop, which could adversely affect the liquidity and price of our Class A common stock.

Before this offering, there has been no established public market for our Class A common stock. An active, liquid trading market for our Class A common stock may not develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of our Class A common stock at an attractive price, or at all. An inactive market may also impair our ability to raise capital by selling our Class A common stock and may impair our ability to acquire other companies, products or technologies by using our Class A common stock as consideration. We intend to apply to have our Class A common stock listed on Nasdaq, but our application may not be approved. In addition the liquidity of any market that may develop or the price that our stockholders may obtain for their shares of our Class A common stock cannot be predicted. The initial public offering price for our Class A common stock will be determined by negotiations between us, the selling stockholders and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting.” Consequently, you may not be able to sell your Class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell.

The market price of our Class A common stock could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our Class A common stock in the public market following this offering or in future offerings, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future, at a time and place that we deem appropriate.

Upon completion of this offering and the reorganization, we will have             shares of Class A common stock and             shares of Class B non-voting common stock issued and outstanding. Of the outstanding shares of Class A common stock, all of the             shares sold in this offering (or             shares if the underwriters exercise in full their over-allotment option) will be freely tradable, except that any shares purchased by

 

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“affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933, amended (which we refer to as the “Securities Act”), only may be sold in compliance with the limitations described in the section entitled “Shares Eligible For Future Sale.” Taking into consideration the effect of the lock-up agreements described below and the provisions of Rule 144 under the Securities Act, the remaining shares of our common stock, including Class A common stock and Class B non-voting stock, may be eligible for resale in the public market under Rule 144 under the Securities Act subject to applicable restrictions under Rule 144.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC (which we refer to as “Credit Suisse”) for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof as described herein and the filing of a shelf registration statement pursuant to the registration rights agreement entered into by us and our stockholders in connection with our private placements. Our officers, directors and certain existing stockholders have also agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse for the “lock-up period.” These 180-day periods are subject to extension in certain circumstances. See “Underwriting” and “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

In addition, we intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of approximately            million shares of Class A common stock for issuance under our 2010 Equity Incentive Plan. We may issue all of these shares without any action or approval by our stockholders and these shares once issued (including upon exercise of outstanding options) will be available for sale into the public market subject to the restrictions described above, if applicable to the holder. Any shares issued in connection with acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by investors who purchase our shares in this offering.

The market price of our Class A common stock may be volatile, which could cause the value of an investment in our Class A common stock to decline.

The market price of our Class A common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

   

general market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

   

downgrades in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

   

changes in market valuations or earnings of similar companies;

 

   

any future sales of our common stock or other securities; and

 

   

additions or departures of key personnel.

 

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The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our Class A common stock. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources and harm our business or results of operations. For example, we are currently operating in, and have benefited from, a protracted period of historically low interest rates that will not be sustained indefinitely, and future fluctuations in interest rates could cause an increase in volatility of the market price of our Class A common stock.

We do not currently intend to pay dividends on shares of our common stock in the foreseeable future after the completion of this offering and our ability to pay dividends will be subject to restrictions under applicable banking laws and regulations and under the provisions of our Trust Preferred Securities.

We do not currently intend to pay cash dividends on our common stock in the foreseeable future after the completion of this offering. The payment of cash dividends in the future will be dependent upon various factors, including our earnings, if any, cash balances, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then-existing Board of Directors. It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations in the foreseeable future after the completion of this offering and, accordingly, our Board of Directors does not currently anticipate declaring any dividends. Because we do not expect to pay cash dividends on our common stock for some time, any gains on an investment in our Class A common stock in this offering will be limited to the appreciation, if any, of the market value of our Class A common stock.

Banks and bank holding companies are subject to certain regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. The payment of dividends by us depending on our financial condition could be deemed an unsafe or unsound practice. Our ability to pay dividends will directly depend on the ability of our subsidiary banks to pay dividends to us, which in turn will be restricted by the requirement that they maintain an adequate level of capital in accordance with requirements of their regulators and, in the future, can be expected to be further influenced by regulatory policies and capital guidelines. In addition, TIB Financial currently has deferred interest on its junior subordinated debentures underlying its trust preferred securities and is prohibited from paying any dividends on its common stock until it is current on its interest payments. TIB Financial may not repay the deferred interest without regulatory consent, and, upon completion of the reorganization, as the surviving company in the reorganization, we may be subject to this restriction on the payment of dividends. See “Dividend Policy.”

Our management team may allocate the proceeds of this offering in ways in which you may not agree.

We have broad discretion in applying the net proceeds we will receive in this offering. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from this offering favorably. For additional information, see “Use of Proceeds.”

Certain provisions of our certificate of incorporation and the loss sharing agreements may have anti-takeover effects, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management. In addition, Delaware law may inhibit takeovers of us and could limit our ability to engage in certain strategic transactions our Board of Directors believes would be in the best interests of stockholders.

Our certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of our Board of

 

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Directors to designate the terms of and issue new series of preferred stock, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities, including our Class A common stock.

Our loss sharing agreements with the FDIC require that we receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to us or our stockholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the relevant loss sharing arrangement. Among other things, prior FDIC consent is required for (1) a merger or consolidation of us or our bank subsidiary with or into another company if our stockholders will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of any of our bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of NAFH Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of any class of our voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of 25% or more of any class of our voting securities). If we or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share protection, there could be a material adverse effect on our financial condition, results of operations and cash flows. See “Supervision and Regulation.”

We are also subject to anti-takeover provisions under Delaware law. We have not opted out of Section 203 of the Delaware General Corporation Law (which we refer to as the “DGCL”), which, subject to certain exceptions, prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless (1) prior to such time the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. 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. Accordingly, these statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption “Risk Factors” and elsewhere in this prospectus, including the exhibits hereto.

Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. The inclusion of this forward-looking information should not be regarded as a representation by us, the selling stockholders, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward looking statements including, but not limited to:

 

   

changes in general economic and financial market conditions;

 

   

changes in the regulatory environment;

 

   

economic conditions generally and in the financial services industry;

 

   

changes in the economy affecting real estate values;

 

   

our ability to achieve loan and deposit growth; and

 

   

volatility and direction of market interest rates and a weakening of the economy which could materially impact credit quality trends and the ability to generate loans.

All forward-looking statements are necessarily only estimates of future results and that actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this prospectus. In particular, you should consider the numerous risks described in the “Risk Factors” section of this prospectus. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. You should, however, review the risk factors we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find More Information.”

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our Class A common stock in the offering will be approximately $         million, or approximately $         million if the underwriters’ over-allotment option is exercised in full, assuming an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share of Class A common stock, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, would increase (decrease) the net proceeds to us of the offering by $         million, or $         million if the underwriters’ over-allotment option is exercised in full, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

We intend to use the net proceeds from the offering for general corporate purposes, including the acquisition of depository institutions through traditional open bank and FDIC failed bank acquisitions, as well as through selective acquisitions of financial services companies or of assets, deposits and branches that we believe present attractive risk-adjusted returns and provide a strategic benefit to our growth strategy.

We will not receive any proceeds from the sale of shares of our Class A common stock from our selling stockholders.

 

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DIVIDEND POLICY

We have never paid cash dividends to holders of our common stock. We do not expect to declare or pay any cash or other dividends on our common stock in the foreseeable future after the completion of this offering. We intend to reinvest cash flow generated by operations in our business.

As a bank holding company, any dividends paid to us by our subsidiary financial institution(s) are subject to various federal and state regulatory limitations and also subject to the ability of our subsidiary financial institution(s) to pay dividends to us. In addition, TIB Financial currently has deferred interest on its junior subordinated debentures underlying its trust preferred securities and is prohibited from paying any dividends on its common stock until it is current on its interest payments. TIB Financial may not repay the deferred interest without regulatory consent, and, upon completion of the reorganization, as the surviving company in the reorganization, we may be subject to this restriction on the payment of dividends. In the future, we may enter into credit agreements or other borrowing arrangements that restrict our ability to declare or pay cash dividends. Any determination to pay cash dividends in the future will be at the discretion of our Board of Directors and will depend on various factors, including our financial condition, earnings, cash requirements, legal restrictions, regulatory restrictions and other factors deemed relevant by our Board of Directors. For more discussion on restrictions of dividends, see “Risk Factors—Risks Related to our Common Stock—We do not currently intend to pay dividends on shares of our common stock in the foreseeable future after the completion of this offering and our ability to pay dividends will be subject to restrictions under applicable banking laws and regulations and under the provisions of our Trust Preferred Securities” and “Supervision and Regulation.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2011 on an actual basis and on an as adjusted basis to give pro forma effect to (1) the completion of our investment in Green Bankshares, (2) the sale of             shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, and (3) the issuance of approximately              shares of our Class A common stock to the minority stockholders of our majority-held bank holding company subsidiaries (TIB Financial, Capital Bank Corp. and, assuming the completion of our Green Bankshares investment, Green Bankshares), each of which will be merged with us in the reorganization as if each event had occurred on March 31, 2011.

This table should be read in conjunction with “Selected Historical Consolidated Financial Information,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

     At March 31, 2011  
     Actual     Pro Forma(1)  
     (unaudited)  
     (dollars in thousands, except
per share data)
 

Cash and cash equivalents

   $ 719,804      $     

Long-term debt

     97,358     

Shareholders’ equity:

    

Preferred stock $0.01 par value per share: 50,000,000 shares authorized, no shares issued and outstanding

     —       

Class A common stock, $0.01 par value per share: 200,000,000 shares authorized, 20,888,549 shares issued and outstanding, actual; 200,000,000 shares authorized,              shares issued and outstanding, as adjusted

     209     

Class B non-voting common stock, $0.01 par value per share: 200,000,000 shares authorized, 25,261,449 shares issued and outstanding, actual; 200,000,000 shares authorized,              shares issued and outstanding, as adjusted

     252     

Additional paid-in capital

     878,485     

Retained earnings

     12,338     

Accumulated other comprehensive loss

     (97  

Noncontrolling interest

     49,117     
                

Total shareholders’ equity

     940,304     
                

Total capitalization

   $ 1,037,662      $                    
                

 

(1) 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share of Class A common stock, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, would increase (decrease) total stockholder’s equity and total capitalization by $         million and increase (decrease) cash and cash equivalents by $         million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions estimated and offering expenses.

An increase of one million shares in the number of shares offered by us, together with a $1.00 increase in the assumed offering price of $         per share of Class A common stock, would increase total cash and cash equivalents, total stockholder’s equity and total capitalization by $         million. Similarly, a decrease of one million shares in the number of shares of Class A common stock offered by us, together with a $1.00 decrease in the assumed public offering price of $         per share, would decrease total cash and cash equivalents, total stockholder’s equity and total capitalization by $         million.

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted by the amount by which the initial offering price per share paid by the purchasers of Class A common stock in this offering exceeds the net tangible book value per share of our Class A common stock following this offering and after giving effect to the reorganization. As of March 31, 2011, net tangible book value attributable to our stockholders was $819.5 million, or $17.76 per share of common stock. Net tangible book value, including noncontrolling interests, was $853.4 million as of March 31, 2011. Net tangible book value per share equals total consolidated tangible assets minus total consolidated liabilities divided by the number of outstanding shares of our Class A common stock outstanding and Class B common stock.

Our net tangible book value as of March 31, 2011 would have been approximately $        , or $         per share of Class A common stock, after giving effect to the sale by us of          shares of Class A common stock in this offering at the initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, and the completion of the reorganization.

This represents an immediate increase in the net tangible book value of $         per share to existing stockholders and an immediate dilution in the net tangible book value of $         per share to the investors who purchase our Class A common stock in this offering. Sales of shares by our selling stockholders in this offering do not affect our net tangible book value.

The following table illustrates the per share dilution after giving pro forma effect to this offering and the reorganization:

 

Initial public offering price per share

      $           

Net tangible book value per share as of March 31, 2011

   $ 17.76      

Increase in net tangible book value per share attributable to this offering

     
           

Net tangible book value per share after this offering

     
           

Dilution per share to new investors

      $           
           

Each $1.00 increase (decrease) in the assumed initial offering price of $         per share of Class A common stock would increase (decrease) the net tangible book value as of March 31, 2011 by approximately $        , or approximately $         per share, and the dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of one million shares in the number of shares offered by us, together with a $1.00 increase in the assumed offering price of $         per share of Class A common stock, would result in our net tangible book value as of March 31, 2011 of approximately $         million, or $         per share, and the dilution per share to investors in this offering would be $         per share. Similarly, a decrease of one million shares in the number of shares of Class A common stock offered by us, together with a $1.00 decrease in the assumed public offering price of $         per share, would result in our net tangible book value as of March 31, 2011 of approximately $         million, or $         per share, and the dilution per share to investors in this offering would be $         per share. The information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option to purchase additional shares in full in this offering, our net tangible book value at March 31, 2011 would be $         million, or $         per share, representing an immediate increase in the net tangible book value of $         per share to existing stockholders and an immediate dilution in the net tangible book value of $         per share to the investors who purchase our Class A common stock in this offering.

 

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The following table summarizes, as of March 31, 2011 (giving pro forma effect of the sale by us of             shares of Class A common stock in this offering and after giving effect to the reorganization), the difference between existing stockholders and new investors with respect to the number of shares of Class A common stock purchased from us, the total consideration paid to us for these shares and the average price per share paid by our existing stockholders and to be paid by the new investors in this offering. The calculation below reflecting the effect of shares purchased by new investors is based on the initial public offering price of $        per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
      Number      Percent     Amount      Percent    

Existing stockholders(1)

                           $                

New investors

                           $     
                                          

Total

        100.0        100.0   $     
                                          

 

(1)

Includes              shares of Class A common stock and             shares of Class B non-voting common stock.

To the extent any outstanding options are exercised, there will be further dilution to new investors. To the extent all             outstanding options had been exercised as of March 31, 2011, the net tangible book value per share after this offering would be $         and total dilution per share to new investors would be $        .

If the underwriters exercise their option to purchase additional shares in full:

 

   

the percentage of shares of common stock held by existing stockholders will decrease to approximately     % of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares held by new investors will increase to             , or approximately         % of the total number of shares of our common stock outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth our selected historical consolidated financial information. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The selected historical consolidated financial information set forth below as of and for the year ended December 31, 2010 and for the period from November 30, 2009 (date of inception) through December 31, 2009 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial information set forth below as of and for the three months ended March 31, 2011 and 2010 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

On July 16, 2010, we purchased certain assets and assumed certain liabilities, including substantially all deposits, of First National Bank, Metro Bank and Turnberry Bank from the FDIC, as receiver. On September 30, 2010 and January 28, 2011, we consummated controlling investments in TIB Financial and Capital Bank Corp., respectively. Although we were formed in November 2009, our activities prior to our first acquisition consisted solely of organizational, capital raising and related activities and activities related to identifying and analyzing potential acquisition candidates. We did not engage in any substantive operations (including banking operations) prior to our first acquisition.

The selected historical consolidated financial information in the following tables as of and for the year ended December 31, 2010 includes the results of the Company, including First National Bank, Metro Bank and Turnberry Bank subsequent to July 16, 2010 and TIB Financial subsequent to September 30, 2010. The selected historical consolidated financial information presented in the following tables as of and for the three months ended March 31, 2011 includes the results of the Company, including First National Bank, Metro Bank, Turnberry Bank and TIB Financial as well as the results of Capital Bank Corp. subsequent to January 28, 2011.

Because substantially all of our business is composed of operations acquired during these periods and because of the substantial change in the operations of each acquired business in connection with its acquisition, our results of operations for the three months ended March 31, 2011 and for the year ended December 31, 2010 reflect different operations in different periods (or portions of periods) and therefore cannot be meaningfully compared. In addition, results of operations for these periods reflect, among other things, the acquisition method of accounting. Under the acquisition method of accounting, all of the assets acquired and liabilities assumed were initially recorded on our consolidated balance sheet at their estimated fair values as of the date of acquisition. These estimated fair values differed substantially from the carrying amounts of the assets acquired and liabilities assumed as reflected in the financial statements of the Failed Banks and of TIB Financial and Capital Bank Corp.

 

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(Dollars in thousands, except per share data)   As of and for
Three Months
Ended March 31,
2011
    As of and for  the
Three Months
Ended March 31,
2010
    As of and for
Year Ended
December 31,
2010
    As of December
31, 2009 and for
the Period From
November 30
Through
December 31,
2009
 

Summary Results of Operations Data

       

Interest income

  $ 40,305      $ 725      $ 42,745      $ 72   

Interest expense

    7,466        —          6,234        —     
                               

Net interest income

    32,839        725        36,511        72   

Provision for loan losses

    1,545        —          753        —     
                               

Net interest income after provision for loan losses

    31,294        725        35,758        72   
                               

Non-interest income

    4,501        —          19,659        —     

Non-interest expense

    35,040        3,114        44,421        214   
                               

Income (loss) before income taxes

    755        (2,389     10,996        (142

Income tax expense (benefit)

    405        (1,008     (1,041     (50
                               

Net income (loss) before attribution of noncontrolling interests

    350        (1,381     12,037        (92

Net income (loss) attributable to noncontrolling interests

    (50     —          7        —     
                               

Net income (loss) attributable to North American Financial Holdings, Inc.

  $ 400      $ (1,381   $ 12,030      $ (92
                               

Summary Balance Sheet Data

       

Cash and cash equivalents

  $ 719,804      $ 603,794      $ 886,925      $ 526,711   

Investment securities

    765,402        —          479,716        —     

Loans held for sale

    1,424        —          —          —     

Loans receivable:

       

Not covered under FDIC loss sharing agreements

    2,282,926        —          1,046,463        —     

Covered under FDIC loss sharing agreements.

    656,842        —          696,284        —     

Allowance for loan losses

    (2,287     —          (753     —     
                               

Net loans

    2,937,481        —          1,741,994        —     
                               

Other real estate owned

    84,533        —          70,817        —     

FDIC indemnification assets

    77,597        —          91,467        —     

Receivable from FDIC

    45,095        —          46,585        —     

Goodwill and intangible assets, net

    86,950        —          51,770        —     

Other assets

    232,852        887        127,717        50   
                               

Total assets

  $ 4,951,138      $ 604,681      $ 3,496,991      $ 526,761   
                               

Deposits

    3,538,722        —          2,260,097        —     

Advances from FHLB

    280,151        —          243,067        —     

Borrowings

    148,008        —          84,856        —     

Other liabilities

    43,953        542        27,735        441   
                               

Total liabilities

    4,010,834        542        2,615,755        441   
                               

Shareholders’ equity

    940,304        604,139        881,236        526,320   
                               

Total liabilities and shareholders’ equity

  $ 4,951,138      $ 604,681      $ 3,496,991      $ 526,761   
                               

 

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(Dollars in thousands, except per share data)   As of and for
Three Months

Ended March 31,
2011
    As of and for the
Three Months
Ended March  31,
2010
    As of and for
Year Ended
December 31,
2010
    As of December
31, 2009 and
for the Period From
November 30
Through
December 31,
2009
 

Per Share Data

       

Earnings

       

Basic

  $ 0.01      $ (0.04   $ 0.31      $ (0.01

Diluted

  $ 0.01      $ (0.04   $ 0.31      $ (0.01

Tangible book value

  $ 17.76      $ 18.82      $ 18.26      $ 18.86   

Weighted average shares outstanding

       

Basic

    45,120,175        31,117,106        38,205,677        8,243,830   

Diluted

    45,250,175        31,117,106        38,205,677        8,243,830   

Common shares outstanding

    46,149,998        32,094,240        45,120,175        27,906,524   

Performance Ratios

       

Return on average assets

    0.03     (0.95 )%      0.76     (0.71 )% 

Return on average equity

    0.15     (0.95 )%      1.67     (0.71 )% 

Net interest margin

    3.42     0.50     2.51     0.55

Interest rate spread

    3.24     0.50     2.14     0.55

Efficiency ratio(1)

    93.84     NM        79.08     NM   

Average interest-earning assets to average interest-bearing liabilities

    124.03     NA        186.42     NA   

Average loans receivable to average deposits

    81.44     NA        79.40     NA   

Cost of interest-bearing liabilities

    0.87     NA        0.69     NA   

Asset Quality

       

Nonperforming loans to loans receivable(2)

       

Not covered under loss sharing agreements with the FDIC

    5.81     NA        5.40     NA   

Covered under loss sharing agreements with the FDIC

    19.68     NA        19.71     NA   

Nonperforming assets to total assets

    7.06     NA        7.65     NA   

Allowance for loan losses to nonperforming loans

    0.87     NA        0.39     NA   

Capital Ratios

       

Average equity to average total assets

    20.77     99.91     45.51     99.79

Tangible common equity

    17.54     99.91     24.08     99.92

Tier 1 leverage

    19.20     NM        24.30     NM   

Tier 1 risk-based capital

    30.80     NM        41.80     NM   

Total risk-based capital

    31.10     NM        41.90     NM   

 

(1)

Non-interest expense divided by sum of net interest income and non-interest income.

(2)

Non-performing loans include non-accrual loans and loans past due over 90 days that retain accrual status due to accretion of income on purchased credit impaired loans.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined balance sheet as of March 31, 2011 and the unaudited pro forma condensed combined statements of income for the three months ended March 31, 2011 and the year ended December 31, 2010 has been presented to give effect to and show the pro forma impact on our historical financial statements of (1) the completion of our investments in TIB Financial, Capital Bank Corp. and Green Bankshares, as applicable, (2) the sale of             shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, and (3) the issuance of approximately             shares of our Class A common stock to the minority stockholders of TIB Financial, Capital Bank Corp. and, assuming the completion of the Green Bankshares investment, Green Bankshares, each of which will be merged with us in the reorganization.

On July 16, 2010, we purchased certain assets and assumed certain liabilities, including substantially all deposits, of First National Bank, Metro Bank and Turnberry Bank from the FDIC, as receiver. The financial impact of these transactions is included in our historical financial position and results of operations. We have omitted certain historical financial information of First National Bank, Metro Bank and Turnberry Bank required by Rule 3-05 of Regulation S-X and the related pro forma financial information under Article 11 of Regulation S-X pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions (“SAB 1:K”) and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances where a registrant engages in an acquisition of a troubled financial institution in which federal assistance is an essential and significant part of the transaction and for which audited financial statements are not reasonably available.

On September 30, 2010 and January 28, 2011, we consummated controlling investments in TIB Financial and Capital Bank Corp., respectively. The results of operations of TIB Financial and Capital Bank Corp. have been reflected in our consolidated financial statements from their respective dates of consummation and, under the acquisition method of accounting, the assets and liabilities of each of them have been reflected in our consolidated financial statements at their respective estimated fair values as of their respective dates of consummation.

On May 5, 2011, we agreed to make a controlling investment in Green Bankshares. Our investment in Green Bankshares is subject to the approval of Green Bankshares’ shareholders, regulatory approval, and other customary closing conditions, and is expected to be completed in the third quarter of 2011.

Our unaudited pro forma condensed combined balance sheet as of March 31, 2011 presents our consolidated financial position giving pro forma effect to the following transactions as if they had occurred as of March 31, 2011:

 

   

the completion of our investment in Green Bankshares and the related proposed repurchase of its TARP preferred stock that is expected to occur at the time of the investment;

 

   

the sale of             shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses; and

 

   

the issuance of approximately             shares of our Class A common stock to the minority stockholders of our majority-held bank holding company subsidiaries, which will be merged with the Company in the reorganization.

 

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Our unaudited pro forma condensed combined statements of income for the year ended December 31, 2010 presents our consolidated results of operations giving pro forma effect to the following transactions as if they had occurred as of January 1, 2010:

 

   

the completion of our investment in TIB Financial and the related repurchase of its TARP preferred stock that occurred at the time of the investment;

 

   

the completion of our investment in Capital Bank Corp. and the related repurchase of its TARP preferred stock that occurred at the time of the investment;

 

   

the completion of our investment in Green Bankshares and the related proposed repurchase of its TARP preferred stock that is expected to occur at the time of the investment; and

 

   

elimination of minority interest in connection with the reorganization.

Our unaudited pro forma condensed combined statements of income for the three months ended March 31, 2011 presents our consolidated results of operations giving pro forma effect to the following transactions as if they had occurred as of January 1, 2010:

 

   

the completion of our investment in Capital Bank Corp. and the related repurchase of its TARP preferred stock that occurred at the time of the investment;

 

   

the completion of our investment in Green Bankshares and related proposed repurchase of its TARP preferred stock that is expected to occur at the time of the investment; and

 

   

the elimination of minority interest in connection with the reorganization.

The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with:

 

   

NAFH’s historical unaudited financial statements as of and for the three months ended March 31, 2011;

 

   

NAFH’s historical audited financial statements as of and for the year ended December 31, 2010;

 

   

TIB Financial’s historical audited financial statements as of and for the year ended December 31, 2010;

 

   

Capital Bank Corp.’s historical unaudited financial statements as of and for the three months ended March 31, 2011;

 

   

Capital Bank Corp.’s historical audited financial statements as of and for the year ended December 31, 2010;

 

   

Green Bankshares’ historical unaudited financial statements as of and for the three months ended March 31, 2011; and

 

   

Green Bankshares’ historical audited financial statements as of and for the year ended December 31, 2010.

The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on our historical financial information. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of each period presented. The adjustments included in these unaudited pro forma condensed financial statements are preliminary and may be revised. The unaudited pro forma condensed combined financial information also does not consider any potential impacts of current market conditions on revenues, potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Further, the pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined financial information from the Green Bankshares investment is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded at the time the controlling investment is completed. Certain reclassifications have been made to the historical financial statements of TIB Financial, Capital Bank Corp. and Green Bankshares to conform to the presentation in NAFH’s financial statements.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of March 31, 2011

 

    North American Financial
Holdings, Inc.
    Green Bankshares, Inc.     North American Financial
Holdings, Inc.
 
(Dollars in thousands)   March 31,
2011
(As Reported)
    Adjustments
for
Investment
in Green
Bankshares(1)
    March 31,
2011
(As Reported)
    Adjustments
for
Investment
and TARP
Repurchase(2)
    Adjustments
for this
Offering and
the
Reorganization

(Pro Forma)
    March 31,
2011
(Pro Forma)
 

Assets

           

Cash and cash equivalents

  $ 719,804      $ (223,250   $ 331,416      $ 144,722 (3)    $        $     

Investment securities

    765,402        —          226,847        (1,000 )(4)      —          991,249   

Loans held for sale

    1,424        —          960        —          —          2,384   

Loans, net of deferred costs and fees

    2,939,768        —          1,680,249        (182,000 )(5)      —          4,438,017   

Less: Allowance for loan losses

    2,287        —          65,109        (65,109 )(5)      —          2,287   
                                               

Loans, net

    2,937,481        —          1,615,140        (116,891     —          4,435,730   

Other real estate owned

    84,533        —          60,033        (12,000 )(6)      —          132,566   

FDIC indemnification asset

    77,597        —          —          —          —          77,597   

Receivable from FDIC

    45,095        —          —          —          —          45,095   

Goodwill and other intangible assets, net

    86,950        —          6,125        49,119 (7)      —          142,194   

Other assets

    232,852        2,375        152,173        53,000 (8)      —          440,400   
                                               

Total assets

  $ 4,951,138      $ (220,875   $ 2,392,694      $ 116,950      $        $     
                                               

Liabilities and Shareholders’ Equity

           

Deposits

  $ 3,538,722      $ —        $ 1,975,635      $ 10,000 (9)    $ —        $ 5,524,357   

Advances from FHLB

    280,151        —          158,588        8,000 (10)      —          446,739   

Borrowings

    148,008        —          107,374        (22,000 )(11)      —          233,382   

Other liabilities

    43,953        —          18,267        —          —          62,220   
                                               

Total liabilities

  $ 4,010,834      $ —        $ 2,259,864      $ (4,000   $ —        $ 6,266,698   

Preferred Stock

  $ —        $ —        $ 68,468      $ (68,468   $        $     

Common stock—Class A

    209        —          —          —                   (12)   

Common stock—Class B

    253        —          —          —         

Common stock—Green Bankshares

    —          —          26,366        (26,366    

Additional paid-in capital

    878,484        (220,875     195,956        57,824                 (12)   

Retained earnings (accumulated deficit)

    12,338        —          (158,997     158,997       

Accumulated other comprehensive income (loss)

    (97     —          1,037        (1,037    

Noncontrolling interest

    49,117        —          —          —                   (12)   
                                               

Total shareholders’ equity

  $ 940,304      $ (220,875   $ 132,830      $ 120,950      $        $     
                                               

Total liabilities and shareholders’ equity

  $ 4,951,138      $ (220,875   $ 2,392,694      $ 116,950      $        $     
                                               

 

(1)

On May 5, 2011, we agreed to invest approximately $217.0 million in Green Bankshares. Adjustments in this column reflect payment to Green Bankshares of the $217.0 million purchase price and estimated transaction costs of $6.3 million in connection with the proposed acquisition. If completed, we expect to own approximately 90.1% of Green Bankshares’ common stock.

 

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(2) 

Adjustments in this column reflect purchase method accounting and estimated fair value adjustments expected to result from our pending acquisition with Green Bankshares as well as the related proposed repurchase of its TARP preferred stock. The following table summarizes the preliminary purchase price allocation to the estimated fair value of assets and liabilities of Green Bankshares as of March 31, 2011:

 

Fair value of assets acquired:

  

Cash and cash equivalents

   $ 476,138   

Investment securities

     225,847   

Loans held for sale

     960   

Loans, net

     1,498,249   

Other real estate owned

     48,033   

Goodwill and other intangible assets

     55,244   

Other assets

     205,173   
        

Total assets acquired

     2,509,644   
        

Fair value of liabilities assumed:

  

Deposits

     1,985,635   

Advances from FHLB

     166,588   

Borrowings

     85,374   

Other liabilities

     18,267   
        

Total liabilities assumed

     2,255,864   
        

Net assets acquired

     253,780   

Less: Non-controlling interest

     (36,780
        

Purchase price

   $ 217,000   
        

In determining the estimated fair value of the non-controlling interest, we utilized the closing market price per share on Nasdaq of Green Bankshares’ common stock ($2.79) on March 31, 2011 and multiplied this stock price by the 13,182,797 outstanding common shares at that date.

We plan to perform our valuation of the balance sheet as of the closing date of the Green Bankshares investment and expect to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the closing date of the Green Bankshares investment. The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to us as of March 31, 2011 and may differ significantly from the fair value adjustments that will be recorded as of the closing date of the Green Bankshares investment.

 

(3) 

Cash and cash equivalents approximated fair value and did not require a fair value adjustment. Adjustments include proceeds of $217,000 from the Green Bankshares investment and a reduction of $72,278 from the TARP repurchase.

(4) 

Investment securities were reported at fair value at March 31, 2011. The fair values of investment securities are primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities. Adjustment relates to a reduction in estimated fair value of securities that do not have a readily determinable fair value and are priced with internal models.

(5) 

Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates as of March 31, 2011, we estimated a total loan fair value discount of $182,000. Additionally, since all loans were adjusted to estimated fair value, the historical allowance for loan losses of $65,109 was eliminated, resulting in a net loan adjustment of $116,891.

(6) 

Other real estate owned was reduced by $12,000 based on our estimate of property values given current market conditions.

(7) 

Adjustment includes goodwill of $37,353 and a core deposit intangible (which we refer to as “CDI”) of $11,000, less elimination of historical CDI and other intangibles of $6,125. Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition is expected to be nontaxable and, as a result, there will be no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition will deductible for tax purposes. The CDI represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on an accelerated method over that period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.

(8) 

The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $62,000. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including

 

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net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Adjustment was reduced by $6,339 which represented the historical deferred tax asset balance.

(9) 

Time deposits were not included in the CDI evaluation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. The fair value of these time deposits was estimated by first stratifying the deposit pool by maturity and determining the contractual interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates. Adjustment of $10,000 reflects an estimated time deposit premium, which means that in aggregate, current market rates were lower than contractual rates.

(10)

Fair values for FHLB advances were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The estimated fair value premium totaled $8,000.

(11)

Adjustment represents an estimated $22,000 fair value discount to borrowings, which primarily consist of subordinated debt. Fair values for the subordinated debt were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and contractual interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value.

(12)

The proposed reorganization will not affect total shareholders’ equity, but it does result in the elimination of the $49,117 of noncontrolling interest as of March 31, 2011, which will be reclassified to common stock and additional paid in capital at the reorganization date.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

Three Months Ended March 31, 2011

 

    North American
Financial
Holdings, Inc.
    Capital Bank Corp.     Green Bankshares, Inc.     North American Financial
Holdings, Inc.
 
(Dollars in thousands except per share
data)
  Three Months
Ended
March 31,
2011
(As Reported)
    Period From
January 1 to
January 28,
2011
(As Reported)
    Adjustments     Three Months
Ended
March 31,
2011
(As Reported)
    Adjustments     Adjustments
for the
Reorganization
    Three Months
Ended
March 31,
2011
(Pro Forma)
 

Interest income:

             

Loans, including fees

  $ 35,551      $ 5,479      $ 291 (1)    $ 24,600      $ 200 (1)    $ —        $ 66,121   

Investment securities

    3,913        465        —          1,706        —          —          6,084   

Interest–bearing deposits in other banks

    710        11        —          181        —          —          902   

FHLB and other stock dividends

    131        —          —          138        —          —          269   
                                                       

Total interest income

    40,305        5,955        291        26,625        200        —          73,376   
                                                       

Interest expense:

             

Deposits

    5,926        1,551        (429 )(2)      5,330        (1,250 )(2)      —          11,128   

Borrowings and other debt

    1,540        445        (68 )(3)      2,028        (180 )(3)      —          3,765   
                                                       

Total interest expense

    7,466        1,996        (497     7,358        (1,430     —          14,893   
                                                       

Net interest income

    32,839        3,959        788        19,267        1,630        —          58,483   

Provision for loan losses

    1,545        40        (40 )(4)      13,897        (13,897 )(4)      —          1,545   
                                                       

Net interest income after provision for loan losses

    31,294        3,919        828        5,370        15,527        —          56,938   
                                                       

Noninterest income:

             

Service charges on deposit accounts

    1,919        291        —          5,830        —          —          8,040   

Mortgage banking income

    531        210        —          87        —          —          828   

Investment advisory and trust fees

    387        78        —          515        —          —          980   

Investment securities losses, net

    (57     —          —          —          —          —          (57

Other income

    1,721        253        —          1,195        —          —          3,169   
                                                       

Total non-interest income

    4,501        832        —          7,627        —          —          12,960   
                                                       

Noninterest expense:

             

Salaries and employee benefits

    15,093        1,977        —          9,108        —          —          26,178   

Occupancy and equipment expense

    5,338        823        —          3,590        —          —          9,751   

OREO losses and related expenses

    1,178        176        (16 )(5)      3,803        (2,099 )(5)      —          3,042   

Conversion expenses

    3,737        —          —          —          —          —          3,737   

Other expense

    9,694        1,179        (191 )(6)      6,526        —   (7)      —          17,208   
                                                       

Total non-interest expense

    35,040        4,155        (207     23,027        (2,099     —          59,916   
                                                       

Income (loss) before income taxes

    755        596        1,035        (10,030     17,626        —          9,982   

Income tax expense

    405        —          620 (8)      281        2,605 (8)      —          3,911   
                                                       

Net income (loss)

    350        596        415        (10,311     15,021        —          6,071   

Dividends and accretion on preferred stock

    —          861        (861 )(9)      1,250        (1,250 )(9)      —          —     
                                                       

Net income (loss) attributable to common shareholders

    350        (265     1,276        (11,561     16,271        —          6,071   

Net income (loss) attributable to noncontrolling interests

    (50     —          171 (10)      —          466 (10)      (587 )(11)      —     
                                                       

Net income (loss) attributable to North American Financial Holdings, Inc.

  $ 400      $ (265   $ 1,105      $ (11,561   $ 15,805      $ 587      $ 6,071   
                                                       

Earnings per share—basic

  $ 0.01      $ (0.01   $ 0.02      $ (0.26   $ 0.35      $        $     
                                                       

Earnings per share—diluted

  $ 0.01      $ (0.01   $ 0.02      $ (0.26   $ 0.35      $        $     
                                                       

Weighted average shares—basic

    45,120,175        —          —          —          —            (11)   
                                                       

Weighted average shares—diluted

    45,250,175        —          —          —          —            (11)   
                                                       

 

(1)

Adjustments reflect the estimated impact of loan yield accretion on the first quarter of 2011 related to fair value acquisition adjustments. The loan yield accretion impact at Capital Bank Corp. was based on fair value acquisition adjustments actually recorded as of their respective transaction dates. The loan yield accretion impact at Green Bankshares was based on an estimated $4,000 loan fair value discount, excluding the impact of credit deterioration, and an estimated five-year accretion period.

 

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(2) 

Adjustments reflect the estimated impact of time deposit premium amortization on the first quarter of 2011 related to fair value acquisition adjustments. The time deposit premium amortization impact at Capital Bank Corp. was based on fair value acquisition adjustments actually recorded as of their respective transaction dates. The time deposit premium amortization impact at Green Bankshares was based on an estimated $10,000 time deposit fair value premium and a two-year amortization period.

(3) 

Adjustments reflect the estimated impact of premium amortization/discount accretion on the first quarter of 2011 from fair value acquisition adjustments related to other borrowings and debt, which includes FHLB advances, borrowings and subordinated debt. The premium amortization/discount accretion impact at Capital Bank Corp. was based on fair value acquisition adjustments actually recorded as of their respective transaction dates. The impact at Green Bankshares was based on an estimated $8,000 FHLB advance fair value premium with a five-year amortization period as well as an estimated $22,000 subordinated debt fair value discount with a 25-year accretion period.

(4) 

Adjustments reflect the elimination of provision for loan losses due to the estimated impact of fair value credit adjustments required by acquisition accounting and the proper accounting for acquired loans with evidence of credit deterioration. These loan loss provisions and related loan charge-offs were assumed to have been included in the fair value discount estimated on the loan portfolio at acquisition and would have affected goodwill recorded in the purchase price allocation instead of provision for loan losses in the statement of income.

(5) 

Adjustments reflect the reversal of other real estate write downs and losses recorded during the first quarter of 2011. These write downs were assumed to have been reflected in the acquisition method fair value estimate as the one-year measurement period would have improved the underlying assumptions used in valuing these assets at acquisition. Remaining expense in this line item represent other foreclosure-related costs that were not directly related to the valuation of these properties.

(6) 

For Capital Bank Corp., adjustments reflect the difference between estimated impact of amortization on other intangible assets recorded in acquisition accounting and actual amortization recorded in the period from January 1 to January 28, 2011.

(7) 

For Green Bankshares, the estimated impact of amortization on core deposit intangible to be recorded in acquisition accounting is not materially different from actual amortization recorded in the first quarter of 2011.

(8) 

Adjustments reflect reversal of valuation allowances recorded against deferred tax assets in the first quarter of 2011 as well as recognition of tax expense associated with the adjusted net income before taxes assuming an effective rate of 38%.

(9) 

Adjustments reflect elimination of dividends and accretion on preferred stock as TARP preferred stock was repurchased concurrent with the Capital Bank Corp. transaction and is expected to be repurchased concurrent with the proposed Green Bankshares investment.

(10) 

Adjustments for income attributable to noncontrolling interests were calculated based on noncontrolling stockholder ownership subsequent to each respective transaction. For TIB Financial, Capital Bank Corp. and Green Bankshares, the noncontrolling stockholder ownership was based on ownership levels immediately following its rights offering (5.53% noncontrolling ownership for TIB Financial, 16.95% noncontrolling ownership for Capital Bank Corp. and 9.90% noncontrolling ownership for Green Bankshares).

(11) 

Adjustments reflect issuance of new shares of Class A common stock to existing noncontrolling stockholders and elimination of the net income (loss) attributable to noncontrolling interests due to the planned merger of TIB Financial, Capital Bank Corp. and Green Bankshares into the Company concurrent with this offering.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

Year Ended December 31, 2010

 

    NAFH, Inc.     TIB Financial Corp.     Capital Bank Corp.     Green Bankshares, Inc.     NAFH, Inc.  

(Dollars in thousands except
per share data)

  Year Ended
December 31,
2010
(As Reported)
    Nine Months
Ended
September 30,
2010
(As Reported)
    Adjustments     Year Ended
December 31,
2010
(As Reported)
    Adjustments     Year Ended
December 31,
2010
(As Reported)
    Adjustments(1)     Adjustments
for the
Reorganization
    Year Ended
December 31,
2010
(Pro Forma)
 

Interest income:

                 

Loans, including fees

  $ 36,429      $ 45,471      $ (1,641 )(2)    $ 68,474      $ 3,809 (2)    $ 113,721      $ 800 (2)    $ —        $ 267,063   

Investment securities

    2,713        6,616        —          9,079        —          6,179        —          —          24,587   

Interest-bearing deposits in other banks

    3,462        204        —          89        —          434        —          —          4,189   

FHLB and other stock dividends

    141        26        —          80        —          530        —          —          777   
                                                                       

Total interest income

    42,745        52,317        (1,641     77,722        3,809        120,864        800        —          296,616   
                                                                       

Interest expense:

                 

Deposits

    4,656        13,803        (3,179 )(3)      21,082        (6,675 )(3)      28,434        (5,000 )(3)      —          53,121   

Borrowings and other debt

    1,578        5,632        (2,841 )(4)      5,677        (1,412 )(4)      8,837        (720 )(4)      —          16,751   
                                                                       

Total interest expense

    6,234        19,435        (6,020     26,759        (8,087     37,271        (5,720     —          69,872   
                                                                       

Net interest income

    36,511        32,882        4,379        50,963        11,896        83,593        6,520        —          226,744   

Provision for loan losses

    753        29,697        (29,697 )(5)      58,545        (58,545 )(5)      71,107        (71,107 )(5)      —          753   
                                                                       

Net interest income (loss) after provision for loan losses

    35,758        3,185        34,076        (7,582     70,441        12,486        77,627        —          225,991   
                                                                       

Noninterest income:

                 

Service charges on deposit accounts

    1,992        2,585        —          3,311        —          24,179        —          —          32,067   

Mortgage banking income

    449        1,219        —          1,640        —          703        —          —          4,011   

Investment advisory and trust fees

    354        948        —          963        —          2,842        —          —          5,107   

Investment securities gains (losses), net

    —          2,635        (2,635 )(6)      5,855        (5,855 )(6)      (93     93 (6)      —          —     

Gain on acquisition of banks

    15,175        —          —          —          —          —          —          —          15,175   

Other income

    1,689        1,939        —          3,780        —          4,913        —          —          12,321   
                                                                       

Total non-interest income

    19,659        9,326        (2,635     15,549        (5,855     32,544        93        —          68,681   
                                                                       

Noninterest expense:

                 

Salaries and employee benefits

    17,229        19,859        —          22,675        —          35,368        —          —          95,131   

Net occupancy and equipment expense

    4,673        6,948        —          9,089        —          13,277        —          —          33,987   

Professional fees

    11,721        2,866        —          2,514        —          2,777        —          —          19,878   

Other real estate owned losses and related expenses

    —          21,687        (19,171 )(7)      5,006        (2,536 )(7)      35,447        (29,895 )(7)      —          10,538   

Other expense

    10,798        13,956        (76 )(8)      15,025        209 (8)      23,946        —   (9)      —          63,858   
                                                                       

Total non-interest expense

    44,421        65,316        (19,247     54,309        (2,327     110,815        (29,895     —          223,392   
                                                                       

Income (loss) before income taxes

    10,996        (52,805     50,688        (46,342     66,913        (65,785     107,615        —          71,280   

Income tax expense (benefit)

    (1,041     —          (804 )(10)      15,124        (7,307 )(10)      14,910        985 (10)      —          21,867   
                                                                       

Net income (loss)

    12,037        (52,805     51,492        (61,466     74,220        (80,695     106,630        —          49,413   

 

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Table of Contents
    NAFH, Inc.     TIB Financial Corp.     Capital Bank Corp.     Green Bankshares, Inc.     NAFH, Inc.  
(Dollars in thousands except
per share data)
  Year Ended
December 31,
2010
(As Reported)
    Nine Months
Ended
September 30,
2010
(As Reported)
    Adjustments     Year Ended
December 31,
2010
(As Reported)
    Adjustments     Year Ended
December 31,
2010
(As Reported)
    Adjustments(1)     Adjustments
for the
Reorganization
    Year Ended
December 31,
2010
(Pro Forma)
 

Dividends and accretion on preferred stock

    —          2,009        (2,009 )(11)      2,355        (2,355 )(11)      5,001        (5,001 )(11)      —          —     

(Gain) loss on retirement of preferred stock

    —          (24,276     572 (12)      —          1,152 (12)      —          5,543 (12)        (17,009
                                                                       

Net income (loss) attributable to common stockholders

    12,037        (30,538     52,929        (63,821     75,423        (85,696     106,088          66,422   

Net income (loss) attributable to noncontrolling interests

    7        —          1,238 (13)      —          1,967 (13)      —          2,019 (13)      (5,231 )(14)      —     
                                                                       

Net income (loss) attributable to North American Financial Holdings, Inc.

  $ 12,030      $ (30,538   $ 51,691      $ (63,821   $ 73,456      $ (85,696   $ 104,069      $ 5,231      $ 66,422   
                                                                       

Earnings per share —   basic

  $ 0.31      $ (0.80   $ 1.35      $ (1.67   $ 1.92      $ (2.24   $ 2.72      $        $     
                                                                      &n