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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission File Number 0-30062
CAPITAL BANK CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4901 Glenwood Avenue
Raleigh, North Carolina 27612
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 645-6400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes | | No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). | | Yes |X| No
As of May 14, 2003, there were 6,634,840 shares outstanding of the registrant's
common stock, no par value.
Capital Bank Corporation
CONTENTS
Item 1. Financial Statements
Condensed consolidated statements of financial condition at March 31, 2003
(Unaudited) and December 31, 2002 1
Condensed consolidated statements of income for the three months ended
March 31, 2003 and 2002 (Unaudited) 2
Condensed consolidated statements of comprehensive income for the
three months ended March 31, 2003 and 2002 (Unaudited) 3
Condensed consolidated statements of cash flows for the three months
ended March 31, 2003 and 2002 (Unaudited) 4-5
Notes to consolidated financial statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
Certifications 21-22
Exhibits 23-24
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
ASSETS Cash and due from banks:
Interest earning $ 8,143 $ 13,925
Noninterest earning 23,084 18,912
Federal funds sold 13,561 18,696
Investment securities - available for sale, at fair value 155,835 155,304
Loans-net of unearned income and deferred fees 622,015 600,609
Allowance for loan losses (9,919) (9,390)
--------- ---------
Net loans 612,096 591,219
--------- ---------
Premises and equipment, net 13,269 13,399
Accrued interest receivable 3,365 3,455
Deposit premium and goodwill, net 14,775 14,884
Deferred tax assets 5,343 5,174
Other assets 6,605 6,008
--------- ---------
Total assets $ 856,076 $ 840,976
========= =========
LIABILITIES
Deposits:
Demand, noninterest bearing $ 58,995 $ 50,238
Savings and interest bearing demand deposits 198,824 224,208
Time deposits 394,871 370,441
--------- ---------
Total deposits 652,690 644,887
--------- ---------
Accrued interest payable 1,416 1,450
Repurchase agreements 11,993 13,081
Borrowings 104,791 97,858
Other liabilities 8,674 8,229
--------- ---------
Total liabilities 779,564 765,505
SHAREHOLDERS' EQUITY
Common stock; 20,000,000 shares authorized; shares issued
2003 - 7,057,776 and 2002 - 7,022,468 74,591 74,338
Retained earnings, substantially restricted 6,430 5,481
Accumulated other comprehensive income 1,204 1,293
Treasury stock; 2003 - 431,684 shares
and 2002 - 426,684 shares (5,713) (5,641)
--------- ---------
Total shareholders' equity 76,512 75,471
--------- ---------
Total liabilities and shareholders' equity $ 856,076 $ 840,976
========= =========
See Notes to Condensed Consolidated Financial Statements
- 1 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2003 and 2002
2003 2002
- -------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 8,478 $ 6,786
Investment securities 1,628 1,503
Federal funds and other interest income 71 83
------- -------
Total interest income 10,177 8,372
------- -------
Interest expense:
Deposits 3,156 2,851
Borrowings and repurchase agreements 1,086 752
------- -------
Total interest expense 4,242 3,603
------- -------
Net interest income 5,935 4,769
Provision for loan losses 600 525
------- -------
Net interest income after provision for loan losses 5,335 4,244
Noninterest income:
Mortgage origination fees 1,206 655
Service charges and other fees 656 505
Net gain on sale of securities available for sale 251 84
Other noninterest income 492 341
------- -------
Total noninterest income 2,605 1,585
------- -------
Noninterest expenses:
Salaries and employee benefits 3,428 2,203
Occupancy 532 368
Data processing 279 250
Directors fees 78 59
Advertising 191 199
Furniture and equipment 368 295
Amortization of deposit premium 74 30
Other expenses 998 682
------- -------
Total noninterest expenses 5,948 4,086
------- -------
Net income before income tax expense 1,992 1,743
Income tax expense 711 725
------- -------
Net income $ 1,281 $ 1,018
======= =======
Earnings per share - basic $ 0.19 $ 0.20
======= =======
Earnings per share - diluted $ 0.19 $ 0.19
======= =======
See Notes to Condensed Consolidated Financial Statements
- 2 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Three Months Ended March 31, 2003 and 2002
2003 2002
- -------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Three month periods ended March 31, 2003 and 2002:
Net income $ 1,281 $ 1,018
Reclassification of gains recognized in net income (251) (84)
Unrealized gains (losses) on securities available for sale,
net of deferred tax effect 162 (737)
------- -------
Comprehensive income $ 1,192 $ 197
======= =======
See Notes to Condensed Consolidated Financial Statements
- 3 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
2003 2002
- -------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 1,281 $ 1,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deposit premium 74 30
Depreciation 382 434
Gains on sale of securities available for sale (251) (84)
Amortization of premiums on
securities, net 462 4
Deferred income tax benefit (112) (248)
Provision for loan losses 600 525
Changes in assets and liabilities:
Accrued interest receivable 90 (96)
Other assets (285) (4,113)
Accrued interest payable and other liabilities 411 1,332
-------- --------
Net cash provided by (used in)
operating activities 2,652 (1,198)
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (21,717) (10,264)
Additions to premises and equipment (252) (337)
Net purchase of Federal Home Loan Bank stock (432) (250)
Purchase of securities available for sale (24,141) (5,387)
Proceeds from maturities of securities available for sale 15,384 4,491
Proceeds from sale of securities available for sale 8,301 1,442
Capitalized purchase costs (37) (20)
Net cash acquired from purchase of subsidairy -- 8,649
-------- --------
Net cash used in investing activities (22,894) (1,676)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 7,803 21,435
Net increase (decrease) in repurchase agreements (1,088) 2,445
Net increase in borrowings 6,933 14,994
Cash dividends paid (332) --
Issuance of common stock for options 253 564
Purchase of common stock (72) (2,988)
-------- --------
Net cash provided by financing activities $ 13,497 $ 36,450
-------- --------
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended March 31, 2003 and 2002
2003 2002
- -----------------------------------------------------------------------------------
(In thousands) (Unaudited)
Net change in cash and cash equivalents $ (6,745) $ 33,576
Cash and cash equivalents:
Beginning 51,533 16,117
--------- ---------
Ending $ 44,788 $ 49,693
========= =========
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 240 $ --
========= =========
Dividends payable $ 332 $ 269
========= =========
Cash paid for:
Income taxes $ 781 $ 438
========= =========
Interest $ 4,276 $ 3,343
========= =========
Purchase of First Community Financial Corp:
Loans, net of reserves $ -- $(134,149)
Investments -- (39,001)
Other assets acquired -- (11,957)
Goodwill and deposit premium -- (3,095)
Deposits -- 156,241
Borrowings -- 16,414
Other liabilities assumed -- 3,342
Issuance of stock -- 20,854
--------- ---------
Net cash and cash equivalents acquired $ -- $ 8,649
========= =========
See Notes to Condensed Consolidated Financial Statements
- 5 -
Notes to the Condensed Consolidated Financial Statements
1. Significant Accounting Policies and Interim Reporting
The accompanying unaudited condensed consolidated financial statements include
the accounts of Capital Bank Corporation (the "Company") and its wholly-owned
subsidiaries, Capital Bank (the "Bank") and Capital Bank Investment Services
("CBIS"). The interim financial statements have been prepared in accordance with
generally accepted accounting principles. They do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and therefore should be read in conjunction
with the audited financial statements and accompanying footnotes in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002. In
the opinion of management, all adjustments necessary for a fair presentation of
the financial position and results of operations for the periods presented have
been included and all significant intercompany transactions have been eliminated
in consolidation. The results of operations for the three month period ended
March 31, 2003 are not necessarily indicative of the results of operations that
may be expected for the year ended December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the Company's
audited consolidated financial statements.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
2. Comprehensive Income
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other comprehensive
income relate to unrealized gains and losses on securities available for sale,
net of the applicable income tax effect. The Company's comprehensive income and
information concerning the Company's other comprehensive income items for the
three month periods ended March 31, 2003 and 2002 are as shown in the Company's
Condensed Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2003 and 2002 (unaudited).
3. Earnings Per Share
The Company is required to report both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS assumes the conversion, exercise or
issuance of all potential common stock instruments, such as stock options,
unless the effect is to reduce a loss or increase earnings per share. For the
Company, EPS is adjusted for outstanding stock options using the Treasury Stock
method in order to compute diluted EPS. The following tables provide a
computation and reconciliation of basic and diluted EPS for the three month
periods ended March 31, 2003 and 2002.
- 6 -
Three month periods ended
March 31, 2002 and 2002:
2003 2002
--------------------------
(Dollars in thousands)
--------------------------
(Unaudited)
Income available to shareholders - basic and diluted $ 1,281 $ 1,018
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,729,505 5,201,581
Incremental shares from assumed exercise of stock
options 175,021 168,235
--------------------------
Weighted average number of shares outstanding - diluted 6,904,526 5,369,816
==========================
Options to purchase 673,000 shares of common stock were used in the diluted
calculation. All options currently issued under existing plans were included in
the diluted calculation because the average fair market value of a common share
of stock was greater than each option exercise price.
On December 31, 2002, the Financial Accounting Standards Board ("FASB" or the
"Board") issued Statement of Financial Accounting Standards ("SFAS") Statement
No. 148 ("FAS 148"), Accounting for Stock-Based Compensation--Transition and
Disclosure, which amends SFAS Statement No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation. FAS 148 allows for three methods of transition for
those companies that adopt FAS 123's provisions for fair value recognition. Two
new transition alternatives are the Modified Prospective Approach and Limited
Retrospective Approach. Under FAS 148, the prospective transition method in FAS
123 resulting in the "ramp-up" effect will not be available for enterprises that
elect to initially apply the fair value method of accounting for stock-based
employee compensation in fiscal years beginning after December 15, 2003. In
addition, the provisions of FAS 148 require that the accumulated liability or
equity balances accrued under APB Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees, be reversed through additional paid-in-capital as of
the beginning of the period that FAS 123 is adopted if those liabilities or
contra-equity balances would not have been recognized under FAS 123 (e.g.,
variable stock option awards under APB 25). Additionally, companies are required
to disclose for each period for which an income statement is presented an
accounting policy footnote that includes (i) the method of accounting for stock
options, (ii) total stock compensation cost that is recognized in the income
statement and would have been recognized had FAS 123 been adopted for
recognition purposes as of its effective date; and (iii) pro forma net income
and earnings per share (where applicable) that would have been reported had FAS
123 been adopted for recognition purposes as of its effective date.
These disclosures are required to be made in annual financial statements and in
quarterly information provided to shareholders without regard to whether the
entity has adopted FAS 123 for recognition purposes. The Company implemented the
disclosure provisions of FAS No. 148 beginning with its December 31, 2002
consolidated financial statements.
The Company did not grant any options to purchase its shares of common stock
during the first quarter of 2003, so no pro forma disclosures are required for
the quarter ended March 31, 2003.
- 7 -
For the quarter ended March 31, 2003, the following table summarizes the net
income and stock-based compensation expense, as reported, compared to pro forma
amounts had the fair value method been applied:
(In thousands, except per share data)
Net income attributable to common shareholders, as reported $1,281
Net income per basic and diluted share, as reported $ 0.19
Stock based compensation, as reported $ --
Stock based compensation based on fair value method $ 48
Pro forma net income using fair value method $1,233
Pro forma net income per basic and diluted share $ 0.18
4. New Pronouncements
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("FAS 149"). FASB Statements No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133") and No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", establish accounting and reporting
standards for derivative instruments including derivatives embedded in other
contracts (collectively referred to as "derivatives") and for hedging
activities. FAS 149 amends FAS 133 for certain decisions made by FASB as part of
the Derivatives Implementation Group ("DIG") process. FAS 149 contains
amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements", and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities", No. 91 "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases", No. 95, "Statement of Cash Flows", and No.
126, "Exemption from Certain Required Disclosures about Financial Instruments
for Certain Nonpublic Entities". The Company is presently evaluating the effect
of this pronouncement.
Item 2
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The following discussion presents an overview of the unaudited financial
statements for the three month periods ended March 31, 2003 and 2002 for Capital
Bank Corporation and its wholly owned subsidiaries, Capital Bank and Capital
Bank Investment Services, Inc. This discussion and analysis is intended to
provide pertinent information concerning financial position, results of
operations, liquidity, and capital resources for the periods covered. It should
be read in conjunction with the unaudited financial statements and related
footnotes contained in Part I, Item 1 of this report.
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which statements
represent the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause the Company's actual operating results to
differ materially. Such forward-looking statements can be identified by the use
of forward-looking terminology, such as "may", "will", "expect", "anticipate",
- 8 -
"estimate", "believe", or "continue", or the negative thereof or other
variations thereof or comparable terminology. The Company cautions that such
forward-looking statements are further qualified by important factors that could
cause the Company's actual operating results to differ materially from those in
the forward-looking statements, as well as the factors set forth in Exhibit 99.3
to this report, the Company's periodic reports and other filings with the
Securities and Exchange Commission.
Overview
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws of the state of North Carolina on August 10, 1998.
The Company's primary function is to serve as the holding company for its
wholly-owned subsidiaries, Capital Bank (the "Bank") and Capital Bank Investment
Services, Inc. ("CBIS"). The Bank was incorporated under the laws of the State
of North Carolina on May 30, 1997, and commenced operations as a state-chartered
banking corporation on June 20, 1997. The Bank is not a member of the Federal
Reserve System and has no subsidiaries. CBIS was incorporated under the laws of
the State of North Carolina on January 3, 2001 and commenced operations as a
full service investment company on March 1, 2001.
As of March 31, 2003, the Company had assets of approximately $856.1 million,
gross loans outstanding of approximately $622.0 million and deposits of
approximately $652.7 million. The Company's corporate office is located at 4901
Glenwood Avenue, Raleigh, North Carolina 27612, and its telephone number is
(919) 645-6400. In addition to the corporate office, the Company has three
branch offices in Raleigh, two in Cary, one in Siler City, two in Oxford, one in
Warrenton, one in Woodland, one in Seaboard, three in Sanford, three in
Burlington, one in Graham, two in Asheville and one in Hickory, North Carolina.
The Company also has a loan origination office in Greensboro, North Carolina.
Capital Bank is a community bank engaged in the general commercial banking
business in Wake, Chatham, Northampton, Granville, Warren, Alamance, Lee,
Buncombe, and Catawba Counties of North Carolina. Wake County has a diversified
economic base, comprised primarily of services, retail trade, government and
manufacturing and includes the City of Raleigh, the state capital. Lee,
Northampton, Granville, Warren and Chatham counties are significant centers for
various industries, including agriculture, manufacturing, lumber and tobacco.
Alamance County has a diversified economic base, comprised primarily of
manufacturing, agriculture, retail and wholesale trade, government, services and
utilities. Catawba County is a regional center for manufacturing and wholesale
trade. The economic base of Buncombe County is comprised primarily of services,
medical, tourism and manufacturing industries and includes the city of
Asheville.
The Bank offers a full range of banking services, including the following:
checking accounts; savings accounts; NOW accounts; money market accounts;
certificates of deposit; loans for real estate, construction, businesses,
agriculture, personal uses, home improvement and automobiles; equity lines of
credit; credit loans; consumer loans; credit cards; individual retirement
accounts; safe deposit boxes; bank money orders; internet banking; electronic
funds transfer services including wire transfers; traveler's checks; various
investments; and free notary services to all Bank customers. In addition, the
Bank provides automated teller machine access to its customers for cash
withdrawals through nationwide ATM networks. At present, the Bank does not
provide the services of a trust department.
- 9 -
The investment services subsidiary, CBIS, makes available a full range of
non-deposit investment and insurance services to individuals and corporations,
including the customers of the Bank. These investment services include
full-service securities brokerage, asset management, financial planning and
retirement services, such as 401(k) plans and annuities, all provided
exclusively through a strategic alliance with Raymond James Financial Services,
Inc. ("Raymond James"). Raymond James is a wholly owned subsidiary of Raymond
James Financial, Inc. (NYSE: RJF) and is a leading provider of third party
investment services, serving more than 250 community banks nationwide. CBIS also
provides a comprehensive suite of life, disability and long-term care products
to its customers, both through Raymond James and directly through it's own
insurance agency. These services are available in the offices of the Bank
through registered investment representatives.
Financial Condition
Total consolidated assets of the Company at March 31, 2003 were $856.1 million
compared to $841.0 million at December 31, 2002, an increase of $15.1 million,
or 1.8%. This increase was primarily due to normal internal growth. On March 31,
2003, loans, including loans held for sale of $12.5 million, were $622.0
million, up $21.4 million, or 3.6%, compared to December 31, 2002. At March 31,
2003, investment securities were $155.8 million and federal funds sold were
$13.6 million up $531,000, and down $5.1 million, respectively, from December
31, 2002. During the three month period ended March 31, 2003, cash and cash
equivalents, including federal funds sold, decreased by $6.7 million from
December 31, 2002. The decreases in cash and federal funds were caused in part
by the need to fund strong internal loan growth.
Earning assets represented 93.4% of total assets as of March 31, 2003. The
allowance for loan losses as of March 31, 2003 was $9.9 million and represented
approximately 1.59% of total loans. Management believes that the amount of the
allowance is adequate at this time.
Deposits as of March 31, 2003 were $652.7 million, an increase of $7.8 million
or 1.2% from December 31, 2002, due primarily as a result of internal growth.
During the three month period ended March 31, 2003, the Company experienced a
shift of approximately $25.0 million from money markets and interest checking
into time deposits from December 31, 2002. This movement was largely
attributable to a decrease in money market rates offered by the Company,
primarily as a result of a promotion started in 2002 that expired during the
first quarter of 2003. At March 31, 2003, certificates of deposit represented
60.5% of total deposits compared to 57.4% at December 31, 2002. During the three
month period ended March 31, 2003, certificates of deposit increased to $394.9
million, an increase of $24.4 million, or 6.6% from $370.4 million at December
31, 2002. At the same time, noninterest bearing demand deposit accounts
increased to $59.0 million at March 31, 2003, an increase of $8.8 million, or
17.4%, from $50.2 million at December 31, 2002. Savings, interest bearing demand
deposit, and money market accounts decreased to $198.8 million at March 31,
2003, a decrease of $25.4 million, or 11.3%, from $224.2 million at December 31,
2002, primarily as a result of the end of the promotion described above.
Borrowings increased to $104.8 million, or 7.1%, at March 31, 2003 from $97.9
million as of December 31, 2002. Additional borrowings were used to fund strong
loan growth.
Total consolidated shareholders' equity was $76.5 million as of March 31, 2003,
an increase of $1.0 million from December 31, 2002. The increase can be
primarily attributed to net income of $1.3 million, minus dividends paid during
the quarter.
- 10 -
Results of Operations
For the three month period ended March 31, 2003, the Company reported net income
of $1.3 million, or $.19 per diluted share, compared to $1.0 million, or $.19
per diluted share, for the same three month period ended March 31, 2002. The
results for the three month period ended March 31, 2002 do not include the
relative impact of High Street Corporation, which the Company acquired on
December 1, 2002.
Net interest income rose 24.4% from the three month period ended March 31, 2002,
from $4.8 million to $5.9 million, despite a 50 basis point drop in the prime
rate in November 2002 which negatively impacted interest-bearing accounts. The
rise in net interest income resulted from both internal growth as well as the
impact of the acquisition of High Street Corporation. The net interest margin
dropped 25 basis points year-over-year to 3.03% for the three months ended March
31, 2003 from 3.28% for the same time period for 2002. The drop in the net
interest margin can be largely attributed to an asset-sensitive balance sheet in
which the yield on the Company's earning assets adjusted downward at a faster
rate than the interest paid on deposits.
The provisions for loan losses were $600,000 and $525,000, respectively, for the
three month periods ended March 31, 2003 and 2002. At March 31, 2003, the
allowance for loan losses was 1.59% of total loans compared with 1.56% at
December 31, 2002. Loans 90 days or more past due or in nonaccrual status
totaled $6.2 million and represented 0.75% of total assets as of March 31, 2003.
Noninterest income for the three month period ended March 31, 2003, was $2.6
million compared to $1.6 million for the same period in 2002. The $1.0 million
increase in noninterest income to $1.2 million during the three month period
ended March 31, 2003 from $655,000 during the three month period ended March 31,
2002 was primarily attributable to a substantial rise in fee income recorded by
the Bank's mortgage department as a result of the lower interest rate
environment and increased mortgage refinance business. In addition, the Company
took security gains during the current quarter of $251,000 compared to $84,000
for the same period in 2002.
Fees for non-sufficient funds increased to $411,000 during the three months
ended March 31, 2003 from $295,000 during the same period in 2002. Other
increases in noninterest income from the three month period ended March 31, 2002
to the same period in 2003 include revenues generated by the government lending
department, which recorded fees of $236,000 in the three month period ended
March 31, 2003 compared to $36,000 in the three month period ended March 31,
2002 and increases in cash surrender values of bank owned life insurance
policies, which increased to $85,000 in the three month period ended March 31,
2003 from $7,000 in the three month period ended March 31, 2002 as a result of
additional policies acquired with the acquisition of First Community. Finally,
the deposit base on which fees are earned increased substantially during the
three month period ended March 31, 2003 as a result of acquisition of each of
First Community Corporation and High Street Corporation.
Noninterest expense for the three month period ended March 31, 2003 was $5.9
million compared to $4.1 million for the corresponding period in 2002. Salaries
and employee benefits, representing the largest expense category, increased to
$3.4 million, for the three month period ended March 31, 2003 from $2.2 million
for the three month period ended March 31, 2002. This increase reflects an
increase in the number of personnel employed by the Company due to the
- 11 -
acquisition of High Street Corporation and management's intention to maintain
adequate staffing levels to meet customer needs and keep pace with expected
growth. As of March 31, 2003, the Company had 231 full-time equivalent employees
compared to 179 for the same date in 2002.
Occupancy costs, the second highest component of noninterest expenses, increased
to $532,000 for the three month period ended March 31, 2003 from $368,000 for
the same period in 2002. This increase is primarily associated with the
acquisition of the four additional branches in connection with the acquisition
of First Community Corporation and three additional branches in connection with
the acquisition of High Street Corporation. Although management expects
noninterest expense to increase on an absolute basis as the Company continues
its growth, these expenses as a percentage of asset size and operating revenue
are anticipated to decrease over time.
Income tax expense was $711,000 during the three month period ended March 31,
2003 compared to $725,000 during the same period in 2002. At March 31, 2003, the
Company had net deferred tax assets of $5.3 million resulting from timing
differences associated primarily with the deductibility of certain expenses
reflected on the financial statements.
Asset Quality
Determining the allowance for loan losses is based on a number of factors. At
the inception of each commercial loan, management assesses the relative risk of
the loan and assigns a corresponding risk grade. To insure that credit quality
is maintained after a loan is booked, the Bank has a loan review department and
a loan review process which includes an internal senior level Loan Review
Committee which meets each month. Account officers obtain updated financial
information on all large commercial loan relationships and review each
relationship with the Loan Review Committee on an annual basis. In addition, an
outside consulting firm performs a review of the Bank's largest commercial
relationships as well as a sample of loans from the consumer, mortgage and
smaller commercial loan portfolios each year. The consulting firm also reviews
underwriting, documentation and risk grading analysis to determine if the Bank's
risk assessments are accurate and that its loan review process is appropriate.
The Bank calculates the amount of allowance needed to cover the probable losses
in the portfolio by applying a reserve percentage to each risk grade. Consumer
loans and mortgages are not risk graded but a percentage is reserved for these
loans based on historical losses. In addition to this quantitative analysis, a
qualitative assessment of the general economic trends, portfolio concentration
and the trend of delinquencies are taken into consideration. The allowance is
adjusted accordingly.
Based on this allowance calculation, management charged operations in the amount
of $600,000 for the three month period ended March 31, 2003 to provide for
probable losses related to uncollectible loans. Loan loss reserves were 1.59%
and 1.49% of gross loans, respectively, as of March 31, 2003 and 2002. The
following table presents an analysis of changes in the allowance for loan losses
for the three month period ended March 31, 2003 and 2002:
- 12 -
Three Months
Ended March 31,
2003 2002
------ ------
(Dollars in thousands)
Allowance for loan losses, beginning of period $9,390 $4,287
Net charge-offs:
Loans charged off:
Commercial 63 660
Consumer 75 48
Mortgage 38 --
------ ------
Total charge-offs 176 708
------ ------
Recoveries of loans previously charged off:
Commercial 104 1
Consumer 1 5
------ ------
Total recoveries 105 6
------ ------
Total net charge-offs 71 702
------ ------
Loss provisions charged to operations 600 525
Allowances transferred during acquisition -- 2,640
------ ------
Allowance for loan losses, end of period $9,919 $6,750
====== ======
Net charge-offs to average loans during the period 0.01% 0.17%
Allowance as a percent of gross loans 1.59% 1.49%
The Bank has experienced a slight increase in nonperforming assets, which
includes nonperforming loans and foreclosed property, on an absolute basis, but
an overall decrease in nonperforming assets as a percentage of total assets.
Nonperforming assets as a percent of total assets decreased to .84% as of March
31, 2003 from 1.03% as of March 31, 2002. The increase in nonperforming
commercial real estate loans in the three month period ended March 31, 2003 was
due almost entirely to one large commercial loan secured by real estate that was
placed on nonaccrual status. The decrease in nonperforming commercial loans from
March 31, 2002 to March 31, 2003 is largely the result of the charge-off of
several large commercial relationships during the third quarter of 2002 that
were included in the March 31, 2002 nonperforming assets totals.
Foreclosed property decreased to $888,000 at March 31, 2003 from $947,000 at
December 31, 2002. The Company is actively marketing all of its foreclosed
property. All nonperforming assets, including nonperforming loans and foreclosed
assets, are recorded at the lower of cost or market. The following table
presents an analysis of nonperforming assets as of March 31, 2003 and 2002:
- 13 -
Period
Ended March 31,
2003 2002
------ ------
(Dollars in thousands)
Nonperforming assets:
Nonaccrual loans:
Commercial real estate $4,105 $1,214
Commercial 546 2,395
Consumer 330 661
Mortgage 1,284 1,573
------ ------
Total nonaccrual loans 6,265 5,843
Loans past due 90 days or more and still
accruing interest:
Consumer -- 25
------ ------
Total nonperforming loans 6,265 5,868
Foreclosed property held 888 756
------ ------
Total nonperforming assets $7,153 $6,624
====== ======
Nonperforming loans to total loans 1.01% 1.29%
Nonperforming assets to total assets 0.84% 1.03%
Allowance coverage of nonperforming loans 158.32% 115.03%
Liquidity and Capital Resources
The Company's liquidity management involves planning to meet the Company's
anticipated funding needs at a reasonable cost. Liquidity management is guided
by policies formulated by the Company's senior management and the
Asset/Liability Management Committee of the Company's Board of Directors. The
Company had $44.8 million in its most liquid assets, cash and cash equivalents,
as of March 31, 2003. The Company's principal sources of funds are deposits,
Federal Home Loan Bank borrowings and capital. Core deposits (total deposits
less certificates of deposits in the amount of $100,000 or more), one of the
most stable sources of liquidity, together with equity capital, funded 70.1% of
total assets at March 31, 2003. In addition, the Company has the ability to take
advantage of various other funding programs available from the Federal Home Loan
Bank of Atlanta.
Shareholders' equity was $76.5 million or $11.55 per share at March 31, 2003.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth for at least the next 12 months and to maintain
a well-capitalized position. At March 31, 2003, the Company had a Tier 1 capital
ratio of 9.00%, a total risk-based capital ratio of 10.26% and a leverage ratio
of 7.30%. These ratios exceed the federal regulatory minimum requirements for a
"well-capitalized" bank.
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
- 14 -
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact, since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer-term interest-bearing assets
and liabilities, but the Company attempts to limit its long-term assets and
liabilities.
Risk Factors
You should consider the following material risk factors carefully before
deciding to invest in Capital Bank Corporation securities. If any of the events
described below occur, our business, financial condition, or results of
operations could be materially adversely affected. In that event, the trading
price of Capital Bank Corporation common stock may decline, in which case the
value of your investment may decline as well.
Our Results Are Impacted by the Economic Conditions of Our Principal Operating
Regions
Our operations are concentrated in Eastern and Piedmont North Carolina.
As a result of this geographic concentration, our results may correlate to the
economic conditions in these areas. A deterioration in economic conditions in
any of these market areas, particularly in the industries on which these
geographic areas depend, may adversely affect the quality of our loan portfolio
and the demand for our products and services, and accordingly, our results of
operations.
We Are Exposed to Risks in Connection with the Loans We Make
A significant source of risk for us arises from the possibility that losses will
be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. We have underwriting and
credit monitoring procedures and credit policies, including the establishment
and review of the allowance for loan losses, that we believe are appropriate to
minimize this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying our loan portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could adversely affect our
results of operations.
We Compete With Larger Companies for Some of the Same Business
The banking and financial services business in our market areas continues to be
a competitive field and is becoming more competitive as a result of:
o Changes in regulations;
o Changes in technology and product delivery systems; and
o The accelerating pace of consolidation among financial services
providers.
We may not be able to compete effectively in our markets, and our results of
operations could be adversely affected by the nature or pace of change in
competition. We compete for loans, deposits and customers with various bank and
nonbank financial services providers, many of which are larger in total assets
and capitalization, have greater access to capital markets and offer a broader
array of financial services.
Our Trading Volume Has Been Low Compared With Larger Banks
The trading volume in Capital Bank Corporation's common stock on the Nasdaq
National Market has been comparable to other similarly-sized banks.
Nevertheless, this trading is relatively low when compared with more seasoned
companies listed on the Nasdaq National Market or other consolidated reporting
- 15 -
systems or stock exchanges. Thus, the market in Capital Bank Corporation's
common stock may be limited in scope relative to other companies.
We Depend Heavily on Our Key Management Personnel
James A. Beck currently serves as Capital Bank Corporation's president and chief
executive officer. Capital Bank Corporation depends heavily on the services of
Mr. Beck, and a number of other key personnel. Even though Capital Bank
Corporation carries a $2 million key man life insurance policy on Mr. Beck, the
loss of his services or of other key personnel could have a material adverse
effect on Capital Bank Corporation's business, financial condition or results of
operations.
Capital Bank Corporation's success depends in part on its ability to retain key
executives and to attract and retain additional qualified management personnel
who have experience both in sophisticated banking matters and in operating a
small to mid-size bank. Competition for such personnel is strong in the banking
industry and we may not be successful in attracting or retaining the personnel
we require. We expect to effectively compete in this area by offering financial
packages that include incentive-based compensation and the opportunity to join
in the rewarding work of building a growing bank.
Technological Advances Impact Our Business
The banking industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Capital Bank
Corporation's future success will depend, in part, on our ability to address the
needs of our customers by using technology to provide products and services that
will satisfy customer demands for convenience as well as to create additional
efficiencies in our operations. Many of our competitors have substantially
greater resources than we do to invest in technological improvements. We may not
be able to effectively implement new technology-driven products and services or
successfully market such products and services to our customers.
Government Regulations May Prevent or Impair Our Ability to Pay Dividends,
Engage in Acquisitions or Operate in Other Ways
Current and future legislation and the policies established by federal and state
regulatory authorities will affect our operations. We are subject to supervision
and periodic examination by the Federal Deposit Insurance Corporation and the
North Carolina State Banking Commission. Banking regulations, designed primarily
for the protection of depositors, may limit our growth and the return to you,
our investors, by restricting certain of our activities, such as:
o The payment of dividends to our shareholders;
o Possible mergers with or acquisitions of or by other institutions;
o Our desired investments;
o Loans and interest rates on loans;
o Interest rates paid on our deposits;
o The possible expansion of our branch offices; and/or
o Our ability to provide securities or trust services.
We also are subject to capitalization guidelines set forth in federal
legislation, and could be subject to enforcement actions to the extent that we
are found by regulatory examiners to be undercapitalized. We cannot predict what
changes, if any, will be made to existing federal and state legislation and
- 16 -
regulations or the effect that such changes may have on our future business and
earnings prospects. The cost of compliance with regulatory requirements may
adversely affect our ability to operate profitably.
There Are Potential Risks Associated With Future Acquisitions
We intend to continue to explore expanding a branch system through selective
acquisitions of existing banks or bank branches in the Research Triangle area
and other North Carolina markets. We cannot say with any certainty that we will
be able to consummate, or if consummated, successfully integrate, future
acquisitions, or that we will not incur disruptions or unexpected expenses in
integrating such acquisitions. In the ordinary course of business, we evaluate
potential acquisitions that would bolster our ability to cater to the small
business, individual and residential lending markets in North Carolina. In
attempting to make such acquisitions, we anticipate competing with other
financial institutions, many of which have greater financial and operational
resources. In addition, since the consideration for an acquired bank or branch
may involve cash, notes or the issuance of shares of common stock, existing
shareholders could experience dilution in the value of their shares of Capital
Bank Corporation common stock in connection with such acquisitions. Any given
acquisition, if and when consummated, may adversely affect our results of
operations or overall financial condition.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has not experienced any material change in the risk of its portfolio
of interest earning assets and interest bearing liabilities from December 31,
2002 to March 31, 2003.
Item 4 Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Based on the Company's most recent evaluation, which was completed within 90
days of the filing of this Quarterly Report on Form 10-Q, the Company's Chief
Executive Officer and Chief Financial Officer believe the Company's disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) provide reasonable
assurances that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time period required by the United States
Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
most recent evaluation of the Company's internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
- 17 -
Part II - Other Information
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. In addition, the Company is not
aware of any threatened litigation, unasserted claims or assessments that could
have a material adverse effect on the Company's business, operating results or
condition.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On February 13, 2003, an amendment was filed which amended a Current
Report on Form 8-K filed on December 16, 2002, which included information
about the Company's acquisition of High Street Corporation. The amendment
included or incorporated by reference the following financial statements:
(i) unaudited consolidated condensed financial statements of High Street
including High Street's unaudited consolidated condensed balance sheet at
September 30, 2002 and September 30, 2001 and its unaudited consolidated
condensed statements of operations and cash flows for the nine months
ended September 30, 2002 and September 30, 2001 and the notes thereto and
(ii) unaudited pro forma combined condensed statements of operations for
the nine month period ended September 30, 2002.
- 18 -
From March 31, 2003 to the date hereof, the Company filed the following
Current Reports on Form 8-K:
(1) Current Report on Form 8-K filed on April 7, 2003, regarding an
upward revision to the Company's Fiscal year 2002 earnings.
(2) Current Report on Form 8-K filed on April 7, 2003 and amended on the
Amendment to the Current Report on Form 8-K/A filed on April 13,
2003 set forth the financial results for the quarter ended March 31,
2003.
- 19 -
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL BANK CORPORATION
Date: May 14, 2003 By:
--------------------------------
Allen T. Nelson, Jr.,
Executive Vice President and CFO
- 20 -
I, James A. Beck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Bank
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date:
---------------------- ----------------------------------
James A Beck
Chief Executive Officer
- 21 -
I, Allen T. Nelson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Bank
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date:
---------------------- ----------------------------------
Allen T. Nelson, Jr.
Chief Financial Officer