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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 June 30, 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 August 14, 2003, there were 6,476,251 shares outstanding of the
registrant's common stock, no par value.
Capital Bank Corporation
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated statements of financial condition at
June 30, 2003 (Unaudited) and December 31, 2002 1
Condensed consolidated statements of income for the three
months ended June 30, 2003 and 2002 (Unaudited) 2
Condensed consolidated statements of income for the six months
ended June 30, 2003 and 2002 (Unaudited) 3
Condensed consolidated statements of comprehensive income
for the three and six months ended June 30, 2003 and
2002 (Unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2003 and 2002 (Unaudited) 5 - 6
Notes to condensed consolidated financial statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 23 - 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2003 and December 31, 2002
June 30, December 31,
2003 2002
--------- ---------
(Dollars in thousands) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 13,289 $ 13,925
Noninterest earning 26,063 18,912
Federal funds sold 22,152 18,696
Investment securities - available for sale, at fair value 161,938 155,304
Loans-net of unearned income and deferred fees 645,525 600,609
Allowance for loan losses (9,454) (9,390)
--------- ---------
Net loans 636,071 591,219
--------- ---------
Premises and equipment, net 13,386 13,399
Accrued interest receivable 3,393 3,455
Deposit premium and goodwill, net 14,696 14,884
Deferred tax assets 4,956 5,174
Other assets 12,733 6,008
--------- ---------
Total assets $ 908,677 $ 840,976
========= =========
LIABILITIES
Deposits:
Demand, noninterest bearing $ 58,985 $ 50,238
Savings and interest bearing demand deposits 212,017 224,208
Time deposits 413,178 370,441
--------- ---------
Total deposits 684,180 644,887
--------- ---------
Accrued interest payable 1,300 1,450
Repurchase agreements 15,753 13,081
Borrowings 114,725 97,858
Trust preferred securities 10,000 --
Other liabilities 7,575 8,229
--------- ---------
Total liabilities 833,533 765,505
--------- ---------
SHAREHOLDERS' EQUITY
Common stock; 20,000,000 shares authorized; shares issued
2003 - 7,077,125 and 2002 - 7,022,468 74,763 74,338
Retained earnings, substantially restricted 6,389 5,481
Accumulated other comprehensive income 1,547 1,293
Treasury stock at cost, no par value; 2003 - 556,811 shares
and 2002 - 426,684 shares (7,555) (5,641)
--------- ---------
Total shareholders' equity 75,144 75,471
--------- ---------
Total liabilities and shareholders' equity $ 908,677 $ 840,976
========= =========
See Notes to Condensed Consolidated Financial Statements
-1-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2003 and 2002
2003 2002
-------- ------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 8,723 $7,470
Investment securities 1,356 1,546
Federal funds and other interest income 56 124
-------- ------
Total interest income 10,135 9,140
-------- ------
Interest expense:
Deposits 3,074 3,207
Borrowings and repurchase agreements 1,089 794
-------- ------
Total interest expense 4,163 4,001
-------- ------
Net interest income 5,972 5,139
Provision for loan losses 2,696 705
-------- ------
Net interest income after provision for loan losses 3,276 4,434
-------- ------
Noninterest income:
Mortgage origination fees 1,297 433
Service charges and other fees 746 602
Net gain on sale of securities available for sale 191 159
Other noninterest income 505 354
-------- ------
Total noninterest income 2,739 1,548
-------- ------
Noninterest expenses:
Salaries and employee benefits 3,236 2,239
Occupancy 528 378
Data processing 309 212
Directors fees 78 77
Advertising 189 123
Furniture and equipment 361 270
Amortization of deposit premium 80 45
Other expenses 996 818
-------- ------
Total noninterest expenses 5,777 4,162
-------- ------
Net income before income tax expense 238 1,820
Income tax (benefit) expense (47) 603
-------- ------
Net income $ 285 $1,217
======== ======
Earnings per share - basic $ 0.04 $ 0.22
======== ======
Earnings per share - diluted $ 0.04 $ 0.21
======== ======
See Notes to Condensed Consolidated Financial Statements
-2-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2003 and 2002
2003 2002
------- -------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $17,201 $14,256
Investment securities 2,984 3,049
Federal funds and other interest income 127 207
------- -------
Total interest income 20,312 17,512
------- -------
Interest expense:
Deposits 6,230 6,058
Borrowings and repurchase agreements 2,175 1,546
------- -------
Total interest expense 8,405 7,604
------- -------
Net interest income 11,907 9,908
Provision for loan losses 3,296 1,230
------- -------
Net interest income after provision for loan losses 8,611 8,678
------- -------
Noninterest income:
Mortgage origination fees 2,503 1,088
Service charges and other fees 1,402 1,107
Net gain on sale of securities available for sale 442 243
Other noninterest income 997 695
------- -------
Total noninterest income 5,344 3,133
------- -------
Noninterest expenses:
Salaries and employee benefits 6,664 4,442
Occupancy 1,060 746
Data processing 588 462
Directors fees 156 136
Advertising 380 322
Furniture and equipment 729 565
Amortization of deposit premium 154 75
Other expenses 1,994 1,500
------- -------
Total noninterest expenses 11,725 8,248
------- -------
Net income before income tax expense 2,230 3,563
Income tax expense 664 1,328
------- -------
Net income $ 1,566 $ 2,235
======= =======
Earnings per share - basic $ 0.23 $ 0.42
======= =======
Earnings per share - diluted $ 0.23 $ 0.40
======= =======
See Notes to Condensed Consolidated Financial Statements
-3-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2003 and 2002
2003 2002
------- -------
(In thousands) (Unaudited)
Three month period ended June 30, 2003 and 2002:
Net income $ 285 $ 1,217
Reclassification of gains recognized in net income (191) (159)
Unrealized gains (losses) on securities available for sale,
net of deferred tax effect 534 1,516
------- -------
Comprehensive income $ 628 $ 2,574
======= =======
Six month period ended June 30, 2003 and 2002:
Net income $ 1,566 $ 2,235
Reclassification of gains recognized in net income (442) (243)
Unrealized gains (losses) on securities available for sale,
net of deferred tax effect 696 779
------- -------
Comprehensive income $ 1,820 $ 2,771
======= =======
See Notes to Condensed Consolidated Financial Statements
-4-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002
2003 2002
-------- --------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 1,566 $ 2,235
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deposit premium 154 75
Depreciation 751 673
Gain on sale of equipment (3) --
Gains on sale of securities available for sale (442) (243)
Amortization of premiums on
securities, net 1,042 244
Deferred income tax (benefit) expense 59 53
Provision for loan losses 3,296 1,230
Changes in assets and liabilities:
Accrued interest receivable 62 170
Other assets (113) (648)
Accrued interest payable and other liabilities (798) (252)
-------- --------
Net cash provided by operating
activities 5,574 3,537
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (48,388) (25,476)
Additions to premises and equipment (742) (809)
Proceeds from sale of equipment 7 --
Net (purchase) sale of Federal Home Loan Bank stock (682) 858
Purchase of securities available for sale (67,720) (23,018)
Purchase of bank owned life insurance (6,000) --
Proceeds from maturities of securities available for sale 45,722 8,926
Proceeds from sale of securities available for sale 15,858 12,771
Capitalized purchase costs (37) (29)
Net cash acquired from purchase of subsidairy -- 8,649
-------- --------
Net cash used in investing activities (61,982) (18,128)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 39,293 42,337
Net increase in repurchase agreements 2,672 1,714
Net increase in borrowings 16,867 (5,013)
Issuance of trust preferred securities 10,000 --
Payment of trust issuance cost (300) --
Cash dividends paid (664) (267)
Issuance of common stock for options 425 665
Purchase of common stock (1,914) (3,421)
-------- --------
Net cash provided by financing activities $ 66,379 $ 36,015
-------- --------
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
-5-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended June 30, 2003 and 2002
2003 2002
------- -------
(In thousands) (Unaudited)
Net change in cash and cash equivalents $ 9,971 $21,424
Cash and cash equivalents:
Beginning 51,533 16,117
------- -------
Ending $61,504 $37,541
======= =======
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 240 $ 802
======= =======
Dividends payable $ 326 $ 267
======= =======
Cash paid for:
Income taxes $ 1,008 $ 1,583
======= =======
Interest $ 8,555 $ 7,143
======= =======
See Notes to Condensed Consolidated Financial Statements
-6-
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"), Capital Bank Investment Services
("CBIS"), and Capital Bank Statutory Trust I (the "Trust"), an issuer of the
Company's trust preferred securities. 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 six month period ended June 30, 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 and six month periods ended June 30, 2003 and 2002 are as shown in the
Company's Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 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 and six
month periods ended June 30, 2003 and 2002.
-7-
2003 2002
---------- ----------
(Dollars in thousands) (Unaudited)
Three month periods ended June 30, 2003 and 2002:
Income available to shareholders - basic and diluted $ 285 $ 1,217
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,684,327 5,457,320
Incremental shares from assumed exercise of stock
options 188,401 228,214
---------- ----------
Weighted average number of shares outstanding - diluted 6,872,728 5,685,534
========== ==========
Six month periods ended June 30, 2003 and 2002:
Income available to shareholders - basic and diluted $ 1,566 $ 2,235
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,706,791 5,330,157
Incremental shares from assumed exercise of stock
options 181,711 198,225
---------- ----------
Weighted average number of shares outstanding - diluted 6,888,502 5,528,382
========== ==========
Options to purchase 704,000 shares of common stock were used in the diluted
calculation. An aggregate of approximately 22,000 options were not included in
the diluted calculation because the option price exceeded the average fair
market value of the associated common shares of stock.
On December 31, 2002, the Financial Accounting Standards Board ("FASB" or the
"Board") issued Statement of Financial Accounting Standards ("SFAS") 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
-8-
for recognition purposes. The Company implemented the disclosure provisions of
FAS 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 six months of 2003. For the three and six month period ended
June 30, 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:
2003 2002
---------------------------
(Dollars in thousands) (Unaudited)
Three month periods ended June 30, 2003 and 2002:
Net income, as reported $ 285 $ 1,217
Add: Stock-based employee compensation expense included
in reported net income, net of tax effects -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (45) (209)
---------------------------
Pro forma net income $ 240 $ 1,008
===========================
Earnings per share:
Basic - as reported $ 0.04 $ 0.22
Basic - pro forma $ 0.04 $ 0.18
Diluted - as reported $ 0.04 $ 0.21
Diluted - pro forma $ 0.04 $ 0.18
Six month periods ended June 30, 2003 and 2002:
Net income, as reported $ 1,566 $ 2,235
Add: Stock-based employee compensation expense included
in reported net income, net of tax effects -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (93) (417)
---------------------------
Pro forma net income $ 1,473 $ 1,818
===========================
Earnings per share:
Basic - as reported $ 0.23 $ 0.42
Basic - pro forma $ 0.23 $ 0.34
Diluted - as reported $ 0.22 $ 0.40
Diluted - pro forma $ 0.22 $ 0.33
4. New Pronouncements
During the first half of 2003, the Securities and Exchange Commission
promulgated several rules to implement certain provisions of the Sarbanes-Oxley
Act of 2002. These rules include conditions for using financial measures that
exclude information that would be required under generally accepted accounting
principles (so-called "non-GAAP financial measures"). Furthermore, new rules
have been issued pertaining to an audit committee and its need for a financial
expert and code of ethics for senior management.
-9-
Also, new rules were issued defining audit committee responsibility for external
auditor retention and determination of external auditor independence. Additional
rules have been promulgated with respect to management's certification of the
Company's disclosure controls and procedures and internal controls. Management
anticipates additional costs to implement the various provisions of this law;
however, it is difficult to determine the full impact of implementation until
such time as all rules have been promulgated and necessary changes, if any, have
been made to the Company's policies and procedures.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are consistent
with the Board's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. While the Board still plans to revise that definition
through an amendment to Concepts Statement 6, the Board decided to defer issuing
that amendment until it has concluded its deliberations on the next phase of
this project. That next phase will deal with certain compound financial
instruments including puttable shares, convertible bonds, and dual-indexed
financial instruments. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. Management does not anticipate the implementation
of this statement to have a material impact on the Company's consolidated
financial position or consolidated results of operations.
5. Trust Preferred Securities
In June 2003, the Company formed the Trust, which issued 10,000 of its Floating
Rate Capital Securities (the "trust preferred securities"), with a liquidation
amount of $1,000 per capital security, in a pooled offering of trust preferred
securities. The Trust also sold its common securities to the Company for an
aggregate of $310,000, resulting in total proceeds from the offering equal to
$10,310,000. The Trust then used these proceeds to purchase $10,310,000 in
principal amount of the Company's Floating Rate Junior Subordinated Deferrable
Interest Debentures (the "Debentures"). Following payment by the Company of a
placement fee and other expenses of the offering, the Company's net proceeds
from the offering equaled $10 million.
The trust preferred securities have a 30 year maturity and are redeemable after
5 years with certain exceptions. Prior to the redemption date, the trust
-10-
preferred securities may be redeemed at the option of the Company after the
occurrence of certain events, including without limitation events that would
have a negative tax effect on the Company or the Trust, would cause the trust
preferred securities to no longer qualify as Tier 1 capital, or would result in
the Trust being treated as an investment company. The Trust's ability to pay
amounts due on the trust preferred securities is solely dependent upon the
Company making payment on the Debentures. The Company's obligation under the
Debentures constitutes a full and unconditional guarantee by the Company of the
Trust's obligations under the trust preferred securities.
The Debentures, which are subordinate and junior in right of payment to all
present and future senior indebtedness and certain other financial obligations
of the Company, are the sole assets of the Trust and the Company's payment under
the Debentures is the sole source of revenue for the Trust.
Dividends to the holders of the trust preferred securities are included in the
Company's Condensed Consolidated Statements of Income as interest expense. The
trust preferred securities are presented as a separate category of long-term
debt on the Condensed Consolidated Statements of Financial Condition entitled
"Trust Preferred Securities." The trust preferred securities are not included as
a component of shareholders' equity in the Condensed Consolidated Statements of
Financial Condition. For regulatory purposes, the $10 million total of trust
preferred securities qualifies as Tier 1 capital in accordance with regulatory
reporting requirements.
The Company used approximately $1.9 million of the proceeds from the issuance of
the Debentures to repurchase 127,500 shares of the Company's common stock during
the three months ended June 30, 2003. The Company plans to use approximately
$1.1 million of the remaining proceeds to repurchase additional shares of its
common stock and the remainder to support additional earning asset growth.
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 and six month periods ended June 30, 2003 and 2002 for
Capital Bank Corporation and its wholly owned subsidiaries, Capital Bank,
Capital Bank Investment Services, Inc and Capital Bank Statutory Trust I. 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",
"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
-11-
this discussion and analysis, 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"), Capital Bank Investment
Services, Inc. ("CBIS") and Capital Bank Statutory Trust I (the "Trust"). 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. The Trust was formed on June 26, 2003 for
the purpose of issuing trust preferred securities to provide additional Tier I
capital for the Company.
Subsequent to June 30, 2003, management initiated an investigation into one
significant commercial loan relationship inherited by the Company in its
acquisition of High Street Corporation, consisting of three commercial loans to
one entity in an aggregate amount of approximately $2.5 million. This
investigation was initiated as a result of a review of the impairment of this
relationship in accordance with the requirements of Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS 114") which requires that loans deemed to be impaired be measured using
one of several methods described in SFAS 114 and the carrying value of those
loans be adjusted to the lower of the carrying value or the measured value
either through a specific valuation allowance or a direct charge off of the
applicable amount. The investigation revealed that attempts to obtain
significant additional collateral from the borrower and guarantors have failed
to date and management has been unable to identify a likely source of
repayment. As a result, management concluded that each of the three commercial
loans should be charged off during the three month period ended June 30, 2003.
Given that the commercial loans in question are being charged off during the
three month period ended June 30, 2003, the Company's financial statements for
the three month period ended June 30, 2003, previously disclosed in a press
release issued on July 17, 2003 (which press release was filed with the
Securities and Exchange Commission on July 23, 2003 under Item 12 of Current
Report on Form 8-K "Results of Operations and Financial Condition"), have been
revised to reflect a total commercial loan charge off of approximately $2.5
million. The general effect of these charge offs will be to reduce the Company's
reported results for the three month period ended June 30, 2003. The after tax
impact on the Company's Condensed Consolidated Statement of Income for the three
month period ended June 30, 2003 is approximately $1.3 million.
In the Company's previously issued second quarter 2003 financial statements
(attached to the July 17 press release and July 23 Current Report on Form 8-K),
the $2.5 million loan amount associated with this relationship was included in
the balance in the loan category on the Condensed Consolidated Statement of
Financial Condition. Of that balance, $1.9 million was classified as a
nonperforming loan.
The Company's revised financial statements, and notes thereto, included herein
reflect the upward
-12-
adjustment of loan charge offs in the amount of $2.5 million for the three and
six month periods ended June 30, 2003, respectively, as well as the upward
adjustment to the Company's provision for loan losses in the amount of $2.1
million during the same periods. In addition, the Company's net income and
income tax expense have been decreased in the amounts of $1.3 million and
$827,000, respectively, to account for this significant commercial loan charge
off during the three month period ended June 30, 2003.
After the revisions made to the financial statements included herein, the
Company continues to be in well-capitalized as defined by applicable regulatory
standards. In addition, management continues to believe that the current 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.
See "Condensed Consolidated Financial Statements," "Notes to Condensed
Consolidated Financial Statements," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information
regarding this significant commercial loan loss and its effect on the Company's
financial performance for the three and six month periods ended June 30, 2003.
As of June 30, 2003, the Company had assets of approximately $908.7 million,
gross loans outstanding of approximately $645.5 million and deposits of
approximately $684.2 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.
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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 its own
insurance agency. These services are available in the offices of the Bank
through registered investment representatives.
The Trust is a wholly owned subsidiary formed for the sole purpose of issuing
trust preferred securities. The proceeds from such issuances were loaned to the
Company in exchange for the Debentures, which are the sole assets of the Trust.
A portion of the proceeds from the issuance of the Debentures was used by the
Company to purchase 127,500 shares of Company common stock. The Company's
obligation under the Debentures constitutes a full and unconditional guarantee
by the Company of the Trust's obligations under the trust preferred securities.
The Trust has no operations other than those that are incidental to the issuance
of the trust preferred securities. See Condensed Consolidated Financial
Statements - Notes to Condensed Consolidated Financial Statements - Note 5 -
Trust Preferred Securities.
Financial Condition
Total consolidated assets of the Company at June 30, 2003 were $908.7 million
compared to $841.0 million at December 31, 2002, an increase of $67.7 million,
or 8%. This increase was primarily due to normal internal growth. On June 30,
2003, loans, including loans held for sale of $20.5 million, were $645.5
million, up $44.9 million, or 7%, compared to December 31, 2002. At June 30,
2003, investment securities were $161.9 million and federal funds sold were
$22.2 million, up $6.6 million and $3.5 million, respectively, from December 31,
2002.
Other assets at June 30, 2003 were $12.7 million compared to $6.0 million at
December 31, 2002, an increase of $6.7 million, or 112%. This increase is
primarily attributable to the purchase by the Company of $6.0 million of Bank
Owned Life Insurance ("BOLI"). This BOLI was purchased as an additional
investment for the Company.
Earning assets represented 93.04% of total assets as of June 30, 2003. The
allowance for loan losses as of June 30, 2003 was $9.5 million and represented
approximately 1.46% of total loans. Management believes that the amount of the
allowance is adequate to absorb probable losses inherent in the current loan
portfolio.
Deposits as of June 30, 2003 were $684.2 million, an increase of $39.3 million
or 6% from December 31, 2002, primarily as a result of internal growth. During
the first six months of this year, the Company experienced a shift of
approximately $12.2 million from money markets and interest checking into time
deposits. 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. At June 30, 2003, certificates of
deposit represented 60.4%
-14-
of total deposits compared to 57.4% at December 31, 2002. During the six month
period ended June 30, 2003, certificates of deposit increased to $413.2 million,
an increase of $42.7 million, or 12% from $370.4 million at December 31, 2002.
At the same time, non-interest bearing demand deposit accounts increased to
$59.0 million at June 30, 2003, an increase of $8.8 million, or 17%, from $50.2
million at December 31, 2002. Savings, interest bearing demand deposit, and
money market accounts decreased to $212.0 million at June 30, 2003, a decrease
of $12.2 million, or 5%, from $224.2 million at December 31, 2002. Borrowings
increased to $114.7 million, or 17%, at June 30, 2003 from $97.9 million as of
December 31, 2002. Additional borrowings were used to fund strong loan growth.
Total consolidated shareholders' equity was $75.1 million as of June 30, 2003, a
decrease of $327,000 from December 31, 2002. The decrease can be primarily
attributed to the repurchase of approximately 130,127 shares of common stock,
which decreased overall shareholders' equity by $1.9 million. This decrease was
offset by net income of $1.6 million, minus dividends paid during the first and
second quarters.
Results of Operations
Three month period ended June 30, 2003
For the three month period ended June 30, 2003, the Company reported net income
of $285,000, or $.04 per diluted share, compared to $1.2 million, or $.21 per
diluted share, for the same three month period ended June 30, 2002. The decrease
of $932,000, or -77%, is primarily the result of one significant commercial loan
relationship originated by the former High Street Bank that was charged off
during the three month period ended June 30, 2003. As described above, this
relationship, comprised of three commercial loans to one entity, totaled
approximately $2.5 million and resulted in an after tax impact on the Condensed
Consolidated Statements of Income for the three and six month periods ended June
30, 2003 of approximately $1.3 million. The results for the three month period
ended June 30, 2002 do not include the relative impact of High Street
Corporation, which the Company acquired on December 1, 2002.
Net interest income rose 16%, or $833,000, from the three month period ended
June 30, 2002, from $5.1 million to $6.0 million, despite a 50 basis point drop
in the prime rate in November 2002 which negatively impacted the yield on loans.
The rise in net interest income is primarily the result of a $243.9 million
increase in earning assets due to internal growth as well as additional earning
assets added as a result of the acquisition of High Street Corporation. The net
interest margin on a fully taxable equivalent basis dropped 36 basis points
year-over-year to 3.07% for the three months ended June 30, 2003 from 3.43% 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.
For the three month period ended June 30, 2003, the provision for loan losses
was $2.7 million versus $705,000 for the same period in 2002, an increase of
$2.0 million. The increase in the provision during the quarter was necessary to
offset the large decrease in the allowance for loan losses as a result of the
significant commercial loan charge-off discussed above. At June 30, 2003, the
allowance for loan losses was 1.46% of total loans compared with 1.56% at
December 31, 2002.
-15-
Non-interest income for the three month period ended June 30, 2003, was $2.7
million compared to $1.5 million for the same period in 2002, an increase of
77%. The $1.2 million growth 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. Mortgage
origination fees jumped 200% to $1.3 million in the recent quarter from the
$433,000 earned in the three month period ended June 30, 2002. The Company also
recorded $191,000 in securities gains in the three month period ended June 30,
2003.
Fees for non-sufficient funds increased to $466,000 during the three months
ended June 30, 2003 from $380,000 during the same period in 2002, primarily as a
result of the growth in the number of deposit accounts on which these fees are
charged. Other categories that improved include service charges on checking
accounts, which jumped 39% from $147,000 in 2002 to $204,000 in the recent three
month period, and other non-interest income, which includes fees earned by the
government lending department and the Company's investment subsidiary. Other
non-interest income grew from $354,000 in the second quarter of 2002 to $505,000
in the same period of 2003.
Non-interest expense for the three month period ended June 30, 2003 was $5.8
million compared to $4.2 million for the corresponding period in 2002. Salaries
and employee benefits, representing the largest non-interest expense category,
increased to $3.2 million, for the three month period ended June 30, 2003 from
$2.2 million for the same period in 2002. This increase reflects an increase in
the number of personnel employed by the Company due to the 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 June 30,
2003, the Company had 230 full-time equivalent employees compared to 175 for the
same date in 2002.
Occupancy costs, the second largest component of non-interest expenses,
increased 40%, or $150,000, to $528,000 for the three month period ended June
30, 2003 from $378,000 for the same period in 2002. This increase is primarily
associated with the addition of three branches in connection with the
acquisition of High Street Corporation in December 2002.
The Company recorded an income tax benefit of $47,000 during the three month
period ended June 30, 2003 compared to an expense of $603,000 during the same
period in 2002. The benefit recorded during the period was primarily the result
of the tax effect of the significant commercial loan charge-off discussed above
and the related loan loss provision recorded during the period. At June 30,
2003, the Company had net deferred tax assets of $5.0 million resulting from
timing differences associated primarily with the deductibility of certain
expenses reflected on the financial statements.
Six month period ended June 30, 2003
For the six month period ended June 30, 2003, the Company reported net income of
$1.6 million, or $.23 per diluted share, compared to $2.2 million, or $.40 per
diluted share, for the first six months of 2002. Income during the 2003 period
was negatively impacted by the significant commercial loan charge-off made
during the second quarter as discussed above. The results for the first six
months of 2002 do not include the impact of High Street Corporation, which was
not acquired until December of 2002.
For the six month period ended June 30, 2003, net interest income grew 20%
year-over-year, from $9.9 million in 2002 to $11.9 million for the recent
period. During the same period, earning
-16-
assets grew $243.9 million, or 41%. Net interest income grew at a slower rate
due to the compression of the net interest margin over the last twelve months.
Declines in short term interest rates combined with an asset-sensitive balance
sheet also impacted the net interest margin for the first six months which
dropped from 3.28% during 2002 to 3.08% for 2003.
For the six month period ended June 30, 2003, the provision for loan losses was
$3.3 million versus $1.2 million for the first six months of 2002. The increase,
$2.1 million or 168%, was a direct result of the significant commercial loan
charge-off discussed above. Loans 90 days or more past due or in nonaccrual
status totaled $3.6 million. Non-performing loans, together with foreclosed
properties, totaled $4.3 million and represented 0.49% of total assets as of
June 30, 2003 compared to $4.0 million and 0.48% at December 31, 2002.
Non-interest income for the six month period ended June 30, 2003, was $5.3
million compared to $3.1 million for the same period in 2002, an increase of
71%. The $2.2 million growth 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. Mortgage
origination fees increased 130% to $2.5 million in the recent six month period
from the $1.1 million earned in the six months ended June 30, 2002. For the
first six months of 2003, the Company recorded $442,000 in securities gains
compared to $243,000 for the same period in 2002.
Deposit service charges and other fees increased from $1.1 million to $1.4
million during the six month periods ended June 30, 2002 and 2003, respectively.
This increase, $295,000 or 27%, is primarily due to the increase in volume of
the associated accounts as a result of internal growth and acquisitions. Other
non-interest income, including fees earned by the government lending department
and the Company's investment subsidiary, grew from $695,000 in the June quarter
of 2002 to $997,000 in the same period of 2003.
Non-interest expense for the six month period ended June 30, 2003 was $11.7
million compared to $8.2 million for the corresponding period in 2002. Salaries
and employee benefits, representing the largest non-interest expense category,
increased to $6.7 million, for the six month periods ended June 30, 2003 from
$4.4 million for the same period in 2002. This increase reflects an increase in
the number of personnel employed by the Company due to the 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 previously
discussed.
Occupancy costs, the second highest component of noninterest expenses, increased
to $1.1 million for the six month period ended June 30, 2003 from $746,000 for
the same period in 2002. This increase is primarily associated with the
integration of the four additional branches in connection with the acquisition
of First Community Corporation in early 2002 and three additional branches in
connection with the acquisition of High Street Corporation in December 2002.
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 $664,000 during the six month period ended June 30, 2003
compared to $1.3 million during the same period in 2002.
-17-
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 Company'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
Company's risk assessments are accurate and that its loan review process is
appropriate.
The Company 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 and taking into consideration the
significant commercial loan charge-off occurring in the second quarter,
management charged operations in the amount of $2.7 million and $3.3 million,
respectively, for the three and six month periods ended June 30, 2003 to provide
for probable losses related to uncollectible loans. Loan loss reserves were
1.46% and 1.47% of gross loans, respectively, as of June 30, 2003 and 2002. The
following table presents an analysis of changes in the allowance for loan losses
for the three and six month periods ended June 30, 2003 and 2002:
-18-
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in thousands)
Allowance for loan losses, beginning of period $9,919 $6,750 $9,390 $4,287
Net charge-offs:
Loans charged off:
Commercial 3,262 556 3,325 1,216
Consumer 80 165 155 213
Mortgage 1 46 39 46
------ ------ ------ ------
Total charge-offs 3,343 767 3,519 1,475
------ ------ ------ ------
Recoveries of loans previously charged off:
Commercial 172 155 276 156
Consumer 10 32 11 37
------ ------ ------ ------
Total recoveries 182 187 287 193
------ ------ ------ ------
Total net charge-offs 3,161 580 3,232 1,282
------ ------ ------ ------
Loss provisions charged to operations 2,696 705 3,296 1,230
Allowances transferred during acquisition -- -- -- 2,640
------ ------ ------ ------
Allowance for loan losses, end of period $9,454 $6,875 $9,454 $6,875
====== ====== ====== ======
Net charge-offs to average loans during the
period (annualized) 1.02% 0.13% 0.52% 0.29%
Allowance as a percent of gross loans 1.46% 1.47% 1.46% 1.47%
On June 30, 2003, nonperforming assets were $4.3 million, a $426,000 decrease
from the same date in 2002. Nonperforming assets, which includes nonperforming
loans and foreclosed property, decreased on both an absolute basis and as a
percent of total assets. Nonperforming assets as a percent of total assets
decreased to .48% as of June 30, 2003 from .74% as of June 30, 2002.
Foreclosed property increased to $745,000 at June 30, 2003 from $669,000 at June
30, 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 June 30, 2003 and 2002:
-19-
Period
Ended June 30,
2003 2002
------ ------
(Dollars in thousands)
Nonperforming assets:
Nonaccrual loans:
Commercial real estate $ 864 $1,716
Construction 298 395
Commercial 517 322
Consumer 270 49
Mortgage 1,637 1,606
------ ------
Total nonaccrual loans 3,586 4,088
Loans past due 90 days or more and still
accruing interest -- --
------ ------
Total nonperforming loans 3,586 4,088
Foreclosed property held 745 669
------ ------
Total nonperforming assets $4,331 $4,757
====== ======
Nonperforming loans to total loans 0.56% 0.88%
Nonperforming assets to total assets 0.48% 0.74%
Allowance coverage of nonperforming loans 264% 168%
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 $61.5 million in its most liquid assets, cash and cash equivalents,
as of June 30, 2003. The Company's principal sources of funds are loan
repayments, 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 69.2% of total assets at June 30, 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.
During the second quarter, the Trust issued 10,000 trust preferred securities
with a liquidation amount of $1,000 per capital security in a pooled offering of
trust preferred securities. The Company expects to use approximately $3.0
million of the proceeds to repurchase shares of the Company's common stock, with
the remaining $7.0 million to be used as additional capital to fund earning
asset growth. As of June 30, 2003, the Company had used approximately $1.9
million to repurchase 127,500 shares of the Company's common stock. In addition,
in early July 2003, the Company repurchased an additional 50,000 shares using
another $750,000 of the proceeds. See Condensed Consolidated Financial
Statements - Notes to Condensed Consolidated Financial Statements - Note 5 -
Trust Preferred Securities.
Shareholders' equity was $75.1 million or $11.52 per share at June 30, 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 June 30,
-20-
2003, the Company had a Tier 1 capital ratio of 9.63%, a total risk-based
capital ratio of 10.88% and a leverage ratio of 8.08%. These ratios exceed the
federal regulatory minimum requirements for a "well-capitalized" bank. Tangible
equity, which subtracts goodwill and other intangibles from shareholders' equity
but includes the trust preferred debt, was $68.9 million at June 30, 2003.
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
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.
-21-
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
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:
-22-
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
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 June 30, 2003.
Item 4 Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer provide that, as of the end of the
period covered by this Quarterly Report on Form 10-Q, the Company's disclosure
controls and procedures are effective, in that they provide reasonable assurance
that the 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 periods required by the United States Securities
and Exchange Commission's rules and forms. There have been no changes in the
Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f)
-23-
and 15d-15(f) under the Exchange Act) during the period covered by this
Quarterly Report on Form 10-Q that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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
On May 29, 2003, the annual meeting of stockholders of the Company was held to
consider and vote upon two issues; the election of Class III directors and the
ratification of the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ended December 31, 2003. All items were
approved by the stockholders. Of the 6,632,523 shares eligible to vote,
5,774,780 were voted as shown on the following tables:
For Withheld Total
-----------------------------------------------
Class III Directors:
William C. Burkhardt 5,607,554 167,226 5,774,780
L.I. Cohen 5,608,751 166,029 5,774,780
O.A. Keller, III 5,585,403 189,377 5,774,780
Carl H. Ricker, Jr. 5,608,551 166,229 5,774,780
Vote concerning the ratification of the appointment of PricewaterhouseCoopers
LLP as the independent auditors for the fiscal year ended December 31, 2003:
For Against Abstain Total
-----------------------------------------------------------------
5,755,305 12,032 7,443 5,774,780
In both cases, the vote required to approve the action was obtained.
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Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 In accordance with Item 601(b)(4)(iii)(A) of
Regulation S-K, certain instruments respecting
long-term debt of the registrant have been
omitted but will be furnished to the
Commission upon request.
Exhibit 31.1 Certification of James A. Beck pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of Allen T. Nelson, Jr. pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of James A. Beck pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
[This exhibit is being furnished pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002
and shall not, except to the extent required
by that act, be deemed to be incorporated by
reference into any document or filed herewith
for purposes of liability under the Securities
Exchange Act of 1934, as amended or the
Securities Act of 1933, as amended, as the
case may be.]
Exhibit 32.2 Certification of Allen T. Nelson, Jr pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002 [This exhibit is being furnished pursuant
to Section 906 of the Sarbanes- Oxley Act of
2002 and shall not, except to the extent
required by that act, be deemed to be
incorporated by reference into any document or
filed herewith for purposes of liability under
the Securities Exchange Act of 1934, as
amended or the Securities Act of 1933, as
amended, as the case may be.]
(b) Reports on Form 8-K
From April 1, 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 25, 2003, as amended
by Current Report on Form 8-K/A (Amendment No. 1) filed on May
1, 2003 reporting financial results for the quarter ended
March 31, 2003.
(3) Current Report on Form 8-K filed on July 23, 2003 reporting
financial results for the quarter ended June 30, 2003.
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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: August 14, 2003 By:________________________
Allen T. Nelson, Jr.,
Executive Vice President and CFO
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Exhibit Index
Exhibit 4.1 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long-term debt of the
registrant have been omitted but will be furnished to the
Commission upon request.
Exhibit 31.1 Certification of James A. Beck pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Allen T. Nelson, Jr. pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of James A. Beck pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 [This exhibit is being furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by that act, be deemed to be
incorporated by reference into any document or filed herewith
for purposes of liability under the Securities Exchange Act of
1934, as amended, or the Securities Act of 1933, as amended,
as the case may be.]
Exhibit 32.2 Certification of Allen T. Nelson, Jr. pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 [This exhibit is being furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by that act, be
deemed to be incorporated by reference into any document or
filed herewith for purposes of liability under the Securities
Exchange Act of 1934, as amended, or the Securities Act of
1933, as amended, as the case may be.]
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