Capital Bank's game-changing plan to sell a majority stake in the business is moving forward without controversial provisions that would have cost taxpayers millions of dollars at the same time that it enriched top bank executives.
Following a round of negotiations with the U.S. Treasury, the Raleigh bank now intends to repay all of the $41.3 million in stimulus money it owes the federal government. North American Financial Holdings, an investment firm led by former Bank of America executives that has agreed to purchase an 85 percent stake in Capital for $181 million, initially conditioned its deal on the bank paying back its debt to the government at a steep discount.
That contingency, however, was deleted from an amended agreement filed with the Securities and Exchange Commission.
"One hundred percent of the principal is going to be repaid," Grant Yarber, CEO of Capital, said in an interview Tuesday morning. "The major point here is the American public isn't losing any money."
Yarber said the federal government will end up making a profit because Capital has been making interest payments since it received the stimulus money in late 2008.
Yarber said he didn't know the details of the negotiations with Treasury, which were led by North American.
Tony Plath, a finance professor at UNC Charlotte who called the initial proposal "a lousy deal for taxpayers," said the changes make the deal a good one for everyone - North American, Capital's shareholders and taxpayers alike.
"I didn't like the [former] terms and, apparently, neither did Treasury," Plath said. "Sometimes justice gets done."
Chris Marshall, North American's chief financial officer, declined to comment when contacted by a reporter for the Charlotte Observer. Treasury spokesman Mark Paustenbach also declined to comment.
The Treasury Department's policy is that "in limited cases" it will accept a discounted sale of its bank holdings as part of a restructuring or "on the basis of enabling the bank to get new investors to provide additional capital" that would strengthen a bank.
North American apparently didn't come away empty-handed from its negotiations with Treasury officials. Yarber said that the government waived the future right to purchase Capital stock that it received when it handed over stimulus funds to the bank.
The North American deal has been approved by federal regulators and shareholders and is expected to close by the end of the month. Capital was under pressure from regulators to raise new capital after the recession hurt the real estate market and triggered defaults by the bank's borrowers.
North American plans to combine Capital, which will remain headquartered in Raleigh, with four out-of-state-banks it purchased last year. The combined bank, which will retain the Capital name, will have 84 branches. Capital now has 32.
"We have the opportunity to be one of the strongest banks in America, and we'll be right here in Raleigh," Yarber said.
The retirement plans
The North American deal also was poised to trigger a "change of control" clause in the retirement plans of four top executives. That would have accelerated their vesting in the plans, generating lucrative lump-sum payments totaling $5.7 million, including $3.4 million to Yarber.
Yarber and the other executives agreed to alter their employment contracts. Now they will receive only what they already are entitled to under their retirement plans, Yarber said. He estimated that will amount to "far less than $1 million" for himself and less than $1.4 million overall.
"I just get what already was set aside, what I have already earned," he said.
In his case, Yarber said, that amounts to 80 percent of the "present value" of his retirement plan since he is about 80 percent vested. The company's latest annual proxy reported that the present value of his plan stood at $561,254 in 2009.
Although Yarber ends up losing millions of dollars on paper, he said he made the decision to alter his contract in less than 30 seconds.
Going forward with the North American deal, he said, "was the right [thing] to do, notwithstanding what we may or may not receive on a personal basis."
Yarber's future role
After the deal is complete, Yarber will no longer be CEO. Instead, he will become Capital's market president for North Carolina - which puts him in charge of all of the bank's current branches.
Plath, who once called the pension payouts "a sweetheart deal," called the change in the retirement plans a "fair and equitable solution."
Members of Capital's board of directors, meanwhile, still will receive the lump sum retirement payments previously disclosed as a result of a "change in control" clause in their benefits. Those payments will range as high as $891,104 for Chairman O.A. "Buddy" Keller III, who is CEO of Earthtec of NC, an environmental treatment facility in Sanford.
Yarber said that all of the directors already are fully vested and therefore are receiving only what they already were entitled to.
Gene Taylor, a former vice chairman of Bank of America and CEO of North American, is to become CEO of Capital, and Marshall would become the bank's chief financial officer after the deal is completed. Both are based in Charlotte.
North American has agreed to pay $2.55 per share for newly issued shares of Capital. That's more than 50 percent above what the bank's shares fetched just before the offer was made in early November but is well off the $15 that shares traded for in 2007.
Capital shares closed Tuesday at 2.91.
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