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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, 2004
|_| 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). |X| Yes |_| No
As of August 3, 2004, there were 6,587,068 shares outstanding of the
registrant's common stock, no par value.
Capital Bank Corporation
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated statements of financial condition at June 30, 2004
(Unaudited) and December 31, 2003 1
Condensed consolidated statements of income for the three months
ended June 30, 2004 and 2003 (Unaudited) 2
Condensed consolidated statements of income for the six months
ended June 30, 2004 and 2003 (Unaudited) 3
Condensed consolidated statements of changes in shareholders' equity for
the six months ended June 30, 2004 and 2003 (Unaudited) 4
Condensed consolidated statements of comprehensive income (loss) for the
three and six months ended June 30, 2004 and 2003 (Unaudited) 5
Condensed consolidated statements of cash flows for the six months
ended June 30, 2004 and 2003 (Unaudited) 6 - 7
Notes to condensed consolidated financial statements 8 - 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29 - 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30 - 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31 - 32
Signatures 33
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2004 and December 31, 2003
June 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 2,091 $ 569
Noninterest earning 26,729 21,839
Federal funds sold 6,497 3,202
Investment securities - available for sale, at fair value 150,340 165,913
Loans-net of unearned income and deferred fees 657,537 625,945
Allowance for loan losses (11,417) (11,613)
--------- ---------
Net loans 646,120 614,332
--------- ---------
Premises and equipment, net 14,968 14,190
Bank owned life insurance 9,754 9,429
Deposit premium and goodwill, net 14,404 14,530
Deferred tax assets 7,668 6,492
Other assets 7,183 7,238
--------- ---------
Total assets $ 885,754 $ 857,734
========= =========
LIABILITIES
Deposits:
Demand, noninterest bearing $ 62,726 $ 58,350
Savings and interest bearing demand deposits 214,452 200,452
Time deposits 394,618 370,817
--------- ---------
Total deposits 671,796 629,619
--------- ---------
Repurchase agreements 8,828 11,014
Borrowings 102,456 114,591
Subordinated debentures 20,620 20,620
Other liabilities 9,439 8,967
--------- ---------
Total liabilities 813,139 784,811
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares authorized;
6,586,216 and 6,541,495 issued and outstanding as of
June 30, 2004 and December 31, 2003, respectively 67,825 67,381
Retained earnings 6,778 5,165
Accumulated other comprehensive income (1,988) 377
--------- ---------
Total shareholders' equity 72,615 72,923
--------- ---------
Total liabilities and shareholders' equity $ 885,754 $ 857,734
========= =========
See Notes to Condensed Consolidated Financial Statements
-1-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2004 and 2003
2004 2003
- ------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 8,572 $ 8,723
Investment securities 1,552 1,356
Federal funds and other interest income 39 56
----------- -----------
Total interest income 10,163 10,135
----------- -----------
Interest expense:
Deposits 2,913 3,074
Borrowings and repurchase agreements 1,019 1,089
----------- -----------
Total interest expense 3,932 4,163
----------- -----------
Net interest income 6,231 5,972
Provision for loan losses 297 2,696
----------- -----------
Net interest income after provision for loan losses 5,934 3,276
----------- -----------
Noninterest income:
Deposit service charges and other fees 768 746
Mortgage origination fees and related gains 365 1,297
Investment securities gains, net -- 191
Other noninterest income 411 505
----------- -----------
Total noninterest income 1,544 2,739
----------- -----------
Noninterest expenses:
Salaries and employee benefits 3,061 3,236
Occupancy 582 528
Furniture and equipment 474 361
Data processing 301 309
Advertising 222 189
Amortization of deposit premium 61 80
Other expenses 1,369 1,074
----------- -----------
Total noninterest expenses 6,070 5,777
----------- -----------
Income before income tax expense 1,408 238
Income tax expense (benefit) 517 (47)
----------- -----------
Net income $ 891 $ 285
=========== ===========
Earnings per share - basic $ 0.13 $ 0.04
=========== ===========
Earnings per share - diluted $ 0.13 $ 0.04
=========== ===========
Weighted average shares
Basic 6,708,742 6,684,327
=========== ===========
Fully diluted 6,883,157 6,872,728
=========== ===========
See Notes to Condensed Consolidated Financial Statements
-2-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2004 and 2003
2004 2003
- ----------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 17,043 $ 17,201
Investment securities 3,270 2,984
Federal funds and other interest income 81 127
---------- ----------
Total interest income 20,394 20,312
---------- ----------
Interest expense:
Deposits 5,775 6,230
Borrowings and repurchase agreements 2,119 2,175
---------- ----------
Total interest expense 7,894 8,405
---------- ----------
Net interest income 12,500 11,907
Provision for loan losses 413 3,296
---------- ----------
Net interest income after provision for loan losses 12,087 8,611
---------- ----------
Noninterest income:
Deposit service charges and other fees 1,495 1,402
Mortgage origination fees and related gains 702 2,503
Investment securities gains, net 13 442
Other noninterest income 935 997
---------- ----------
Total noninterest income 3,145 5,344
---------- ----------
Noninterest expenses:
Salaries and employee benefits 5,903 6,664
Occupancy 1,154 1,060
Furniture and equipment 839 729
Data processing 623 588
Advertising 424 380
Amortization of deposit premium 126 154
Other expenses 2,638 2,150
---------- ----------
Total noninterest expenses 11,707 11,725
---------- ----------
Income before income tax expense 3,525 2,230
Income tax expense 1,254 664
---------- ----------
Net income $ 2,271 $ 1,566
========== ==========
Earnings per share - basic $ 0.34 $ 0.23
========== ==========
Earnings per share - diluted $ 0.33 $ 0.23
========== ==========
Weighted average shares
Basic 6,698,844 6,706,791
========== ==========
Fully diluted 6,884,862 6,888,502
========== ==========
See Notes to Condensed Consolidated Financial Statements
-3-
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 2004 and 2003
(Dollars in thousands)
Shares of Other
Common Common Comp. Retained
Stock Stock Income Earnings Total
---------- ---------- ---------- ---------- ----------
Balance at January 1, 2003 6,595,784 $ 68,697 $ 1,293 $ 5,481 $ 75,471
Repurchase of outstanding common stock (132,500) (1,938) -- -- (1,938)
Issuance of common stock
for compensation 2,373 24 24
Reissuance of common stock
for options exercised 54,657 425 -- -- 425
Net income -- -- -- 1,566 1,566
Other comprehensive income -- -- 254 -- 254
Cash dividends -- -- -- (658) (658)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2003 6,520,314 $ 67,208 $ 1,547 $ 6,389 $ 75,144
========== ========== ========== ========== ==========
Balance at January 1, 2004 6,541,495 $ 67,381 $ 377 $ 5,165 $ 72,923
Issuance of common stock
for options exercised 44,721 444 -- -- 444
Net income -- -- -- 2,271 2,271
Other comprehensive income -- -- (2,365) -- (2,365)
Cash dividends -- -- -- (658) (658)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2004 6,586,216 $ 67,825 $ (1,988) $ 6,778 $ 72,615
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
Three and Six Months Ended June 30, 2004 and 2003
2004 2003
- -----------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Three month period ended June 30, 2004 and 2003:
Net income $ 891 $ 285
Reclassification of gains recognized in net income -- (191)
Unrealized gains (losses) on securities available for sale (5,677) 750
Income tax benefit (expense) 2,189 (216)
-------- --------
Comprehensive income (loss) $ (2,597) $ 628
======== ========
Six month period ended June 30, 2004 and 2003:
Net income $ 2,271 $ 1,566
Reclassification of gains recognized in net income (13) (442)
Unrealized gains (losses) on securities available for sale (3,825) 880
Income tax benefit (expense) 1,473 (184)
-------- --------
Comprehensive income (loss) $ (94) $ 1,820
======== ========
See Notes to Condensed Consolidated Financial Statements
-5-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
2004 2003
- -------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 2,271 $ 1,566
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deposit premium 126 154
Depreciation 744 751
Investment securities gains, net (13) (442)
Change in loans held for sale (787) (10,239)
Amortization of premiums on securities, net 407 1,042
Deferred income tax expense 309 59
Provision for loan losses 413 3,296
Changes in assets and liabilities:
Accrued interest receivable and other assets 129 (51)
Accrued interest payable and other liabilities 472 (798)
Other operating activities, net 69 (3)
-------- --------
Net cash provided by (used in)
operating activities 4,140 (4,665)
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (31,813) (38,149)
Additions to premises and equipment (2,236) (742)
Net (purchase) sale of Federal Home Loan Bank stock 603 (682)
Purchase of securities available for sale (27,424) (67,720)
Purchase of bank owned life insurance -- (6,000)
Proceeds from sales of property and equipment 645 --
Proceeds from maturities of securities available for sale 22,137 45,722
Proceeds from sales of securities available for sale 16,013 15,858
Other investing activities, net -- (30)
-------- --------
Net cash used in investing activities (22,075) (51,743)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 42,177 39,293
Net increase (decrease) in repurchase agreements (2,186) 2,672
Net increase (decrease) in borrowings (12,135) 16,867
Proceeds from subordinated debentures, net
of issuance costs -- 9,700
Cash dividends paid (658) (664)
Issuance of common stock for options 444 425
Issuance of common stock for compensation -- 24
Purchase of common stock -- (1,938)
-------- --------
Net cash provided by financing activities 27,642 66,379
-------- --------
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
-6-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended June 30, 2004 and 2003
2004 2003
- --------------------------------------------------------------------------------
(In thousands) (Unaudited)
Net change in cash and cash equivalents 9,707 9,971
Cash and cash equivalents:
Beginning 25,610 51,533
-------- --------
Ending $ 35,317 $ 61,504
======== ========
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 399 $ 240
======== ========
Dividends payable $ 328 $ 326
======== ========
Cash paid for:
Income taxes $ 384 $ 1,008
======== ========
Interest $ 7,777 $ 8,555
======== ========
See Notes to Condensed Consolidated Financial Statements
-7-
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,
Inc. ("CBIS"). In addition, the Company has interest in two trusts, Capital Bank
Statutory Trust I and II (hereinafter collectively referred to as the "Trusts").
The Trusts have not been consolidated with the financial statements of the
Company. 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, 2003. 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, 2004 are not necessarily indicative of the results of operations that may be
expected for the year ended December 31, 2004.
The balance sheet at December 31, 2003 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, 2003.
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, 2004 and 2003 are as shown in the
Company's Condensed Consolidated Statements of Comprehensive Income (Loss) for
the three and six months ended June 30, 2004 and 2003 (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, 2004 and 2003.
-8-
2004 2003
------------------------
(Dollars in thousands) (Unaudited)
Three month periods ended June 30, 2004 and 2003:
Income available to shareholders - basic and diluted $ 891 $ 285
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,708,742 6,684,327
Incremental shares from assumed exercise of stock
options 174,415 188,401
---------- ----------
Weighted average number of shares outstanding - diluted 6,883,157 6,872,728
========== ==========
Six month periods ended June 30, 2004 and 2003:
Income available to shareholders - basic and diluted $ 2,271 $ 1,566
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,698,844 6,706,791
Incremental shares from assumed exercise of stock
options 186,018 181,711
---------- ----------
Weighted average number of shares outstanding - diluted 6,884,862 6,888,502
========== ==========
Options to purchase approximately 643,000 shares of common stock were used in
the diluted calculation. An aggregate of 7,000 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.
4. Stock Based Compensation
The Company has a stock option plan under which options to purchase Company
common stock may be granted periodically to certain employees. Grants of options
are made by the Board of Directors or its Compensation Committee. All grants
must be at no less than fair market value on the date of grant, must be
exercised no later than 10 years from the date of grant, and may be subject to
some vesting provisions.
The Company accounts for its stock options under the provisions of APB Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees. However, under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 ("FAS
123"), Accounting for Stock-Based Compensation, the Company is required to
disclose the pro forma effects on net income as if it had recorded compensation
based on the fair value of options granted. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with certain assumptions. Option pricing models require the use of highly
subjective assumptions, including expected stock price volatility, which if
changed can materially affect fair value estimates. Accordingly, the model does
not necessarily provide a reliable single measure of the fair value of the
Company's stock options.
Under SFAS No. 148 ("FAS 148"), Accounting for Stock-Based
Compensation--Transition and Disclosure, 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
-9-
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 granted 8,000 options to purchase its shares of common stock at a
weighted average price of $16.33 during the first six months of 2004. For the
three and six month periods ended March 30, 2004 and 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:
2004 2003
-----------------------
(Dollars in thousands) (Unaudited)
Three month periods ended June 30, 2004 and 2003:
Net income, as reported $ 891 $ 285
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (39) (45)
-----------------------
Pro forma net income $ 852 $ 240
=======================
Earnings per share:
Basic - as reported $ 0.13 $ 0.04
Basic - pro forma $ 0.13 $ 0.04
Diluted - as reported $ 0.13 $ 0.04
Diluted - pro forma $ 0.13 $ 0.04
Six month periods ended June 30, 2004 and 2003:
Net income, as reported $ 2,271 $ 1,566
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (81) (93)
-----------------------
Pro forma net income $ 2,190 $ 1,473
=======================
Earnings per share:
Basic - as reported $ 0.34 $ 0.23
Basic - pro forma $ 0.33 $ 0.23
Diluted - as reported $ 0.33 $ 0.22
Diluted - pro forma $ 0.32 $ 0.22
-10-
5. Investment Securities
The following table shows the gross unrealized losses and fair value of
Company's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category at June 30,
2004:
-----------------------
(Dollars in thousands) (Unaudited)
Gross
Unrealized
Description of security Fair Value Losses
---------- ----------
Direct obligations of U.S. government agencies $ 34,383 $ 1,113
Municipal bonds 24,470 69
Federal agency mortgage-backed securities 86,398 2,054
FHLB stock 5,089 --
-----------------------
$ 150,340 $ 3,236
=======================
Government Agency Obligations. The unrealized losses on the Company's
investments in direct obligations of U.S. government agencies were the result of
interest rate increases. The contractual terms of these investments do not
permit the issuer to settle the securities at a price materially less than the
amortized cost of the investment. Because the Company has the ability and intent
to hold these investments until a recovery of fair value, which may be maturity,
the Company does not consider these investments to be other-than-temporarily
impaired at June 30, 2004.
Federal Agency Mortgage-Backed Securities. The unrealized losses on the
Company's investment in agency mortgage-backed securities issued by FNMA, FHLMC,
and GNMA were caused by interest rate increases. The Company purchased most of
these investments at either a discount or a premium relative to their face
amount, and the contractual cash flows of each is guaranteed by the issuer
organization. Accordingly, it is expected that the securities would not be
settled at a price materially less than the amortized cost of the Company's
investment. Because the decline in market value is attributable to changes in
interest rates and not credit quality and because the Company has the ability
and intent to hold these investments until a recovery of fair value, which may
be maturity, the Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2004.
-11-
6. Loans
The composition of the loan portfolio by loan classification at June 30, 2004
and December 31, 2003 is as follows:
June 30, December 31,
(Dollars in thousands) 2004 2003
---------- ------------
Commercial $ 509,068 $ 474,104
Consumer 41,500 42,929
Home equity lines 59,724 58,430
Residential mortgages 47,232 50,437
---------- ----------
657,524 625,900
Less deferred loan fees (costs), net 13 45
---------- ----------
$ 657,537 $ 625,945
========== ==========
Loans held for sale, primarily from mortgage banking activities, as of June 30,
2004 and December 31, 2003 were $5.6 million and $4.8 million, respectively, and
were included in the residential mortgage category.
7. New Pronouncements
Revenue Recognition In December 2003, the SEC issued Staff Accounting Bulletin
No. 104 ("SAB 104"), Revenue Recognition, which supercedes Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements." The
primary purpose of SAB 104 is to rescind accounting guidance contained in SAB
101 related to multiple element revenue arrangements, which was superceded as a
result of the issuance of Emerging Issues Task Force 00-21 ("EITF 00-21"),
Accounting for Revenue Arrangements with Multiple Deliverables. SAB 104 also
incorporated certain sections of the SEC's "Revenue Recognition in Financial
Statements--Frequently Asked Questions and Answers" document. While the wording
of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104. The adoption of SAB 104 did not have a material impact on our
consolidated financial position, results of operations or cash flows.
Post Retirement Benefits In December 2003, the FASB revised SFAS No. 132,
Employer's Disclosures about Pensions and Other Post-retirement Benefits. The
revised standard requires new disclosures in addition to those required by the
original standard about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans. As revised, SFAS No. 132R, is effective for financial
statements with fiscal years ending after December 15, 2003. The interim-period
disclosures required by this standard are effective for interim periods
beginning after December 15, 2003. However, disclosure of the estimated future
benefit payments is effective for fiscal years ending after June 14, 2004. The
adoption of this SFAS did not have a material impact on our results of
operations or financial condition.
-12-
Investments In March 2004, the Emerging Issues Task Force (EITF) reached a
consensus on the remaining portions of EITF 003-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
effective for the first fiscal year or interim period beginning after June 15,
2004. EITF 003-01 provides new disclosure requirements for other-than-temporary
impairments on debt and equity investments. Investors are required to disclose
quantitative information about: (i) the aggregate amount of unrealized losses,
and (ii) the aggregate related fair values of investments with unrealized
losses, segregated into time periods during which the investment has been in an
unrealized loss position of less than 12 months and greater than 12 months. In
addition, investors are required to disclose the qualitative information that
supports their conclusion that the impairments noted in the qualitative
disclosure are not other-than-temporary. The adoption of this EITF is not
expected to have a material impact on our results of operations or financial
condition.
Loan Commitments In March 2004, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to
Loan Commitments. SAB 105 requires that the fair value measurement of mortgage
loan commitments, which are derivatives, exclude any expected future cash flows
related to the customer relationship or servicing rights. The guidance in SAB
105 must be applied to mortgage loan commitments entered into after March 31,
2004. The impact on the Company is not material given the declines in mortgage
banking volume but could be in the future. The impact is primarily the timing of
when gains should be recognized in the financial statements.
Purchased Loans In December 2003, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer, which addresses the accounting for differences between contractual
cash flows and expected cash flows for loans acquired in a transfer when those
differences are attributable at least in part to a decline in credit quality.
The scope of SOP 03-3 includes loans where there is evidence of deterioration in
credit quality since origination, and includes loans acquired individually, in
pools or as part of a business combination. Under SOP 03-3, the difference
between expected cash flows and the purchase price is accreted as an adjustment
to yield over the life. The Company does not expect its application to have a
material impact on our consolidated financial position or results of operations.
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 period ended June 30, 2004 and 2003 for
Capital Bank Corporation (the "Company") and its wholly owned subsidiaries. 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 (the "Exchange
Act"), which statements represent the
-13-
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 this
discussion and analysis, and the Company's periodic reports and other filings
with the Securities and Exchange Commission.
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, the Company's business, financial condition, or results
of operations could be materially adversely affected. In that event, the trading
price of the Company's 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 throughout Central and Western North Carolina.
As a result of this geographic concentration, our results may correlate to the
economic conditions in these areas. 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 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 have substantially greater
resources including higher total assets and capitalization, greater access to
capital markets and offering a broader array of financial services.
-14-
Our Trading Volume Has Been Low Compared With Larger Banks
The trading volume in the Company'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 the Company's common stock may be limited in
scope relative to other companies.
We Depend Heavily on Our Key Management Personnel
The Company'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. The Company'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
regulations or the effect that such changes may have on our future business and
earnings prospects. The cost of compliance with regulatory requirements
including those imposed by the Securities and Exchange Commission may adversely
affect our ability to operate profitably.
-15-
There Are Potential Risks Associated With Future Acquisitions and Expansions
We intend to continue to explore expanding our 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 the
Company's 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.
In addition, we may expand our branch network through de novo branches in
existing or new markets. These de novo branches will have expenses in excess of
revenues for varying periods after opening which could decrease the Company's
reported earnings.
Overview
Capital Bank Corporation 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").
In addition, the Company has interest in two trusts, Capital Bank Statutory
Trust I and II (hereinafter collectively referred to as the "Trusts"). The
Trusts have not been consolidated with the financial statements of the Company.
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. In the third quarter of 2003, the Company
discontinued the operations of CBIS.
Capital Bank is a community bank engaged in the general commercial banking
business in Wake, Chatham, Northampton, Granville, Warren, Alamance, Lee,
Buncombe, Guilford 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 and Guilford counties have an
diversified economic base, comprised primarily of manufacturing, agriculture,
retail and wholesale trade, government, services and utilities. Catawba County,
which includes Hickory, 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;
-16-
savings accounts; NOW accounts; money market accounts; certificates of deposit;
loans for real estate, construction, businesses, agriculture, personal uses,
home improvement and automobiles; home equity lines of credit; consumer loans;
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.
Beginning in the third quarter of 2004, the Bank plans to offer non-insured
investment products and services through a business relationship with a leading
Raleigh, North Carolina based broker-dealer. The Bank anticipates hiring four -
six predominately commission compensated investment representatives during the
remainder of 2004 to offer these products and services to its customers.
The Trusts were 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 were used by the Company to
repurchase 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 Trusts have no
operations other than those that are incidental to the issuance of the trust
preferred securities.
Executive Summary
As discussed in more detail within this Management's Discussion and Analysis,
the following is a brief summary of certain of our significant quarterly
results:
o The Company recorded an increase in net income for the second
quarter 2004 compared to the same period in the prior year. Profit
for the quarter was $891,000 or $.13 per fully diluted share
compared to $285,000 or $.04 per fully diluted share in the second
quarter of 2003. For the six months ended June 30, 2004, net income
was $2,271,000 or $.33 per fully diluted share compared to
$1,566,000 or $.23 per fully diluted share for the first six months
of 2003.
o The provision for loan losses was $297,000 and $2,696,000 for the
quarters ended June 30, 2004 and 2003, respectively. For the six
months ended June 30, 2004, the provision for loan losses was
$413,000 compared to $3,296,000 for the same period of 2003. Net
charge-offs for the six months ended June 30, 2004 were $609,000 or
.19% of average loans compared to $3,232,000 or 1.04% of average
loans for the six months ended June 30, 2003. The significant
declines in the provision expense and net charge-offs are the result
of credit issues reported during the second quarter of 2003.
o Net interest income increased from 2003 levels for both the quarter
and the six months ended June 30, 2004, increasing by $259,000 and
$593,000, respectively. The Company's net interest margin increased
compared to second quarter 2003 by 10 basis points to 3.14% in
second quarter of 2004. For the six months ended June 30, 2004 and
2003, the net interest margin was 3.17% and 3.07%, respectively.
-17-
o Mortgage production, a large component of noninterest income, was
impacted by industry wide lower origination volumes caused by higher
mortgage interest rates. The Company's noninterest income for both
the three months and six months ended June 30, 2004 declined
compared to the comparable periods of 2003, largely due to declines
in mortgage income and securities gains realized in 2003.
Noninterest income was $1,544,000 for the second quarter of 2004 and
$3,145,000 for the six months ended June 30, 2004 versus $2,739,000
and $5,344,000 for the comparable periods of 2003.
o Noninterest expense was $6,070,000 for the three months and
$11,707,000 for the six months ended June 2004 compared to
$5,777,000 and $11,725,000, respectively, for the same periods of
2003. Personnel expense, the largest component of noninterest
expense, declined in both periods as a result of declines in
commissions on mortgage production offset by increased salary
expense from newly hired associates.
Financial Condition
Total consolidated assets of the Company at June 30, 2004 were $885.8 million
compared to $857.7 million at December 31, 2003, an increase of $28.0 million,
or 3%. This increase was due to strong internal growth primarily due to a
successful certificate of deposit campaign during the first quarter and
annualized loan growth in excess of 10% on the asset side of the balance sheet.
On June 30, 2004, loans, including loans held for sale of $5.6 million, were
$657.5 million, up $31.6 million, or 5%, compared to December 31, 2003. Loan
growth increased in part due to the addition of new commercial lenders in the
Company's higher growth regions and the decision to expand the Company's market
around those high growth areas. At June 30, 2004, investment securities were
$150.3 million, down $15.6 million from December 31, 2003. Due to the current
fixed income market conditions, the Company made a decision to not reinvest the
principal cash flows from its investment portfolio in certain interest rate
environments. Federal funds sold were $6.5 million, up $3.3 million from
December 31, 2003. As the Company increased its cash position due to the
significant amount of funds brought in as a result of the deposit campaign, most
of that cash was invested in Federal Funds after repaying short-term borrowings
rather than being invested in long term securities. As loan demand increases,
the Company intends to use these short term investments to fund additional
loans.
Earning assets represented 92.18% of total assets as of June 30, 2004. The
allowance for loan losses as of June 30, 2004 was $11.4 million and represented
approximately 1.74% of total loans. The allowance for loan losses decreased
$196,000 or 2% from the December 31, 2003 balance of $11.6 million due to the
overall improvement in loan quality in the portfolio. Management believes that
the amount of the allowance is adequate to absorb probable losses inherent in
the current loan portfolio. See "Asset Quality" for additional discussion.
Deposits as of June 30, 2004 were $671.8 million, an increase of $42.2 million
or 7% from December 31, 2003, primarily as a result of strong internal growth
fueled by a successful certificate of deposit campaign run during the first
quarter and a demand deposit account campaign started in the latter part of the
second quarter. During the first six months of this year, the Company
experienced an increase of $23.8 million, or 6%, in certificates of deposit
compared to December 31, 2003. This movement was largely attributable to a
promotion running from January to March, 2004. At June 30, 2004, certificates of
deposit represented 58.74% of total deposits compared to 58.90% at December 31,
2003. At the same time, noninterest bearing demand deposit accounts increased to
$62.7 million at June 30, 2004, an increase of $4.4 million,
-18-
or 7%, from $58.4 million at December 31, 2003. The Company currently has a
focus on gathering these types of accounts and, beginning in the second quarter,
the Bank began an advertising and promotional campaign designed to attract more
of these deposits. Savings, interest bearing demand deposit, and money market
accounts increased to $214.5 million at June 30, 2004, an increase of $14.0
million, or 7%, from $200.5 million at December 31, 2003. Borrowings decreased
by $12.1 million, or 11%, to $102.5 million at June 30, 2004 from $114.6 million
as of December 31, 2003. The Company used some of the funds received from the
deposit campaign to pay off all of its short-term borrowings during the first
quarter.
Total consolidated shareholders' equity was $72.6 million as of June 30, 2004, a
decrease of $310,000 from December 31, 2003. The decrease can be attributed to a
$2.4 million decrease in accumulated other comprehensive income, reflecting a
decline in the fair value of the investment portfolio. This decline is partially
offset by an increase in retained earnings of $1.6 million, reflecting the net
income during the six month period ended June 30, 2004 less dividends paid
during that same time. See Part I - Financial Information - Item 1. - Financial
Statements - Consolidated Statements of Changes in Shareholders' Equity for
additional information.
Results of Operations
Three month period ended June 30, 2004
For the three month period ended June 30, 2004, the Company reported net income
of $891,000, or $0.13 per diluted share, compared to income of $285,000, or
$0.04 per diluted share, for the same three month period ended June 30, 2003.
Net interest income increased 4%, or $259,000 from $6.0 million for the three
month period ended June 30, 2003, to $6.2 million for the same period in 2004.
The rise in net interest income is primarily the result of a $13.8 million
increase in average earning assets due to internal growth funded in part by a
$9.7 million increase in average noninterest bearing deposits. The net interest
margin on a fully taxable equivalent basis increased 10 basis points
year-over-year to 3.14% for the three months ended June 30, 2004 from 3.04% for
the same time period for 2003. The increase in the net interest margin can be
largely attributed to a decrease in the rate paid on interest-bearing
liabilities and the benefit from noninterest bearing liabilities. The Company's
balance sheet remains asset-sensitive and, as a result, its interest earning
assets reprice quicker than its interest bearing liabilities after interest rate
movements. We believe this should help to increase our margin even more in the
third quarter in light of the Federal Reserve Open Market Committee's ("FOMC")
decision to increase the benchmark federal funds rate 25 basis points on June
30th of 2004. The Bank increased its prime rate June 30, 2004 by 25 basis points
in response to the FOMC rate increase to 4.25%.
The following table reflects the Company's effective yield on earning assets and
cost of funds. Yields and costs are computed by dividing income or expense for
the year by the respective daily average asset or liability balance.
-19-
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Three Months Ended June 30, 2004 and 2003
(Tax Equivalent Basis - Dollars in Thousands) (1)
2004 2003
-------------------------------------------------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
-------------------------------------------------------------------------------
Assets
Loans receivable: (2)
Commercial $ 504,802 $ 6,496 5.18% $ 473,008 $ 6,407 5.42%
Consumer 39,491 667 6.79% 50,729 849 6.69%
Home equity 60,195 724 4.84% 46,850 640 5.46%
Residential mortgages 47,586 685 5.79% 64,234 827 5.15%
-----------------------------------------------------------------------------
Total loans 652,074 8,572 5.29% 634,821 8,723 5.50%
Investment securities (3) 154,244 1,720 4.48% 151,134 1,511 4.00%
Federal funds sold and other
interest on short term investments 12,531 39 1.25% 19,099 56 1.17%
-----------------------------------------------------------------------------
Total interest earning assets 818,849 $ 10,331 5.07% 805,054 $ 10,290 5.11%
====================== ======================
Cash and due from banks 18,812 21,222
Other assets 51,813 48,995
Reserve for loan losses (11,391) (10,097)
--------- ---------
Total assets $ 878,083 $ 865,174
========= =========
Liabilities and Equity
Savings deposits $ 17,785 $ 11 0.25% $ 20,004 $ 23 0.46%
Interest-bearing demand deposits 187,029 522 1.12% 182,544 536 1.17%
Time deposits 401,755 2,380 2.38% 396,051 2,515 2.54%
-----------------------------------------------------------------------------
Total interest bearing deposits 606,569 2,913 1.93% 598,599 3,074 2.05%
Borrowed funds 97,698 796 3.28% 112,114 1,037 3.70%
Trust preferred debt 20,620 214 4.17% 4,437 26 2.34%
Repurchase agreements 9,563 9 0.38% 15,625 26 0.67%
-----------------------------------------------------------------------------
Total interest-bearing liabilities 734,450 $ 3,932 2.15% 730,775 $ 4,163 2.28%
====================== ======================
Non-interest bearing deposits 60,293 50,639
Other liabilities 9,039 8,033
--------- ---------
Total liabilities 803,782 789,447
Shareholders' equity 74,301 75,727
--------- ---------
Total liabilities and equity $ 878,083 $ 865,174
========= =========
Net interest spread (4) 2.92% 2.83%
Tax equivalent adjustment $ 168 $ 155
Net interest income and net
interest margin (5) $ 6,399 3.14% $ 6,127 3.04%
(1) The taxable equivalent basis is computed using a blended federal and state
rate of approximately 38%.
(2) Loans receivable include nonaccrual loans for which accrual of interest
has not been recorded.
(3) The average balance for investment securities exclude the effect of their
mark-to-market adjustment, if any.
(4) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents the net interest income divided by average
interest-earning assets.
-20-
Yields on commercial loans and equity loans declined 24 basis points and 62
basis points, respectively, from the second quarter of 2003 to the same period
in 2004. Lower yields in 2004 reflect the 25 basis point decline in the prime
rate charged by the Bank between those two periods. In July, 2003, the FOMC
dropped the benchmark federal funds rate by 25 basis points to 4.00%, where it
remained until June 30, 2004. In addition, yields earned by the Company have
declined somewhat as the Bank has moved toward making more variable rate loans
rather than fixed rate loans in light of the projected future additional
increases in the federal funds rate. Variable rate loans made up approximately
70% of the total loan portfolio at June 30, 2004 compared to 69% in the prior
year.
The yield on investment securities increased from 4.00% in the second quarter of
2003 to 4.48% in the same period of 2004. The investment yield in 2003 was
negatively affected by higher premium amortizations on mortgage backed
securities ("MBS") as the average expected lives of the MBS portfolio was
shortened due to significant refinancing of the underlying mortgage loans in the
low mortgage rate environment of that time.
The rate paid on certificates of deposit decreased from 2.54% to 2.38%, a 16
basis point drop, as new certificates were opened at lower rates as interest
rates were declining.
The rate on borrowings dropped year over year from 3.70% to 3.28%. In July of
2003, the Bank entered into interest rate swap agreements on $25.0 million of
the outstanding Federal Home Loan Bank advances to swap fixed rate borrowings to
a variable rate. The net effect of the swaps has been to reduce the interest
and, accordingly, the effective rate paid on those advances.
For the three month period ended June 30, 2004, the provision for loan losses
was $297,000 compared to $2.7 million for the same period in 2003, a decrease of
$2.4 million. The high provision recorded in 2003 is primarily the result of one
significant commercial loan relationship originated by the former High Street
Bank, acquired by the Company in the fourth quarter of 2002, that was charged
off during the three month period ended June 30, 2003. This relationship,
comprised of three commercial loans, 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. In 2004, the provision declined due to an overall improvement in
credit quality in the Company's loan portfolio and a reduction in charge offs
during the period, which dropped to $101,000 in 2004 from $3.2 million recorded
in the same period of 2003. At June 30, 2004, the allowance for loan losses was
1.74% of total loans. See "Asset Quality" for further discussion.
Noninterest income for the three month period ended June 30, 2004, was $1.5
million compared to $2.7 million for the same period in 2003, a decrease of $1.2
million or 44%. The decrease was primarily attributable to a substantial drop in
fee income recorded by the Bank's mortgage department as a result of
industry-wide decreased mortgage refinance business caused by increases in
mortgage loan interest rates. For the same reason, mortgage origination fees
fell 72% to $354,000 in the second quarter of 2004 from the $1.3 million earned
in the three month period ended June 30, 2003. In addition, during the second
quarter of 2003, the Company recorded securities gains of $191,000, compared to
no sales of investment securities during the same period of 2004.
-21-
NSF fees increased to $509,000 during the three months ended June 30, 2004 from
$466,000 during the same period in 2003, primarily as a result of the growth in
the number of deposit accounts on which these fees are charged. Other categories
that improved include ATM fees, which increased 13% from $77,000 in the three
month period ended June 30, 2003 to $87,000 in the three month period ended June
30, 2004, and other noninterest income, which includes fees earned by the
government lending department
Noninterest expense for the three month period ended June 30, 2004 was $6.1
million compared to $5.8 million for the corresponding period in 2003. Salaries
and employee benefits, representing the largest noninterest expense category,
decreased to $3.1 million for the three month period ended June 30, 2004, from
$3.2 million for the same period in 2003. This decrease reflects a drop in
commissions paid to the mortgage originators as a result of the decline in
business in that area. Commissions decreased from $632,000 in the second quarter
of 2003 to $192,000 for the same period in 2004, a drop of $440,000, or 70%.
This decline was partially offset by increased salary levels in other areas,
including the Mortgage Origination department, as the Company moves to build the
infrastructure needed to ensure success in that line of business going forward.
It remains management's intention to maintain adequate staffing levels to meet
customer needs and keep pace with expected growth. As of June 30, 2004, the
Company had 216 full-time equivalent employees compared to 230 for the same date
in 2003 and 190 at December 31, 2003.
Occupancy costs, the second largest component of noninterest expenses, increased
10%, or $54,000, to $582,000 for the three month period ended June 30, 2004 from
$528,000 for the same period in 2003. This increase is primarily the result of
an increased number of locations as the Company has expanded its branch market
into Greensboro, North Carolina and will open new locations in Wake Forest,
North Carolina and an additional branch in the Asheville, North Carolina area
during the third quarter. In addition, the Company has moved its operations to a
new facility to centralize the operations and credit administration functions.
Furniture and equipment increased from $361,000 in the three months ended June
30, 2003 to $474,000 for the same period in 2004, an increase of $113,000 or
31%. This increase reflects upgrades to the information technology area of the
Company to better position it for future growth.
Other expenses increased from $1.1 million for the three month period ended June
30, 2003 to $1.4 million for the same period in 2004. Largest components of
changes in other expenses for the second quarter of 2004 include telephone and
data line expense, which increased from $75,000 in 200 to $139,000 in 2004,
primarily due to the cost of additional bandwidth required for the data lines to
handle the increased network traffic as the Company continues to expand. Travel
and entertainment increased year-over-year from $51,000 in 2003 to $118,000 in
2004 as the footprint of the organization expanded and travel between locations
increased. Franchise taxes increased $16,000 to $46,000 from $30,000 in the
comparable prior year due to the increase in the net capital of the Company on
which the franchise tax is assessed.
The Company recorded an income tax expense of $517,000 during the three month
period ended June 30, 2004 compared to a benefit of $47,000 during the same
period in 2003. The benefit recorded during the second quarter of 2003 was
primarily the result of the decline in taxable income due to the significant
loan losses recorded during the period. At June 30, 2004, the Company had net
deferred tax assets of $7.7 million resulting from timing differences associated
-22-
primarily with the deductibility of certain expenses reflected on the financial
statements and the mark-to-market of unrealized security losses.
Six month period ended June 30, 2004
For the six month period ended June 30, 2004, the Company's net income was $2.3
million, or $0.33 per diluted share, compared to income of $1.6 million, or
$0.23 per diluted share, for the same three month period ended June 30, 2003.
Net interest income increased 5%, or $593,000 from $11.9 million for the six
month period ended June 30, 2003, to $12.5 million for the same period in 2004.
The rise in net interest income is primarily the result of a $15.7 million
increase in average earning assets due to internal growth funded in part by a
$9.5 million increase in average noninterest bearing deposits. The net interest
margin on a fully taxable equivalent basis increased 10 basis points
year-over-year to 3.17% for the six months ended June 30, 2004 from 3.07% for
the same time period for 2003. Similar to the three month period described
above, the increase in the net interest margin can be largely attributed to a
decrease in the rate paid on interest-bearing liabilities, which declined as a
percent of total interest-bearing liabilities from 2.34% in 2003 to 2.16% for
the same period in 2004. In addition, the Company received a benefit from growth
of $8.7 million in noninterest bearing liabilities.
The following table reflects the Company's effective yield on earning assets and
cost of funds. Yields and costs are computed by dividing income or expense for
the year by the respective daily average asset or liability balance.
-23-
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Six Months Ended June 30, 2004 and 2003
(Tax Equivalent Basis - Dollars in Thousands) (1)
2004 2003
------------------------------------------------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
------------------------------------------------------------------------------
Assets
Loans receivable: (2)
Commercial $ 493,823 $ 12,840 5.21% $ 458,648 $ 12,297 5.38%
Consumer 39,320 1,330 6.78% 50,208 1,700 6.79%
Home equity 59,747 1,446 4.85% 46,140 1,274 5.54%
Residential mortgages 47,779 1,427 5.99% 66,656 1,930 5.81%
-----------------------------------------------------------------------------
Total loans 640,669 17,043 5.33% 621,652 17,201 5.55%
Investment securities (3) 158,267 3,606 4.57% 153,396 3,275 4.28%
Federal funds sold and other
interest on short term investments 13,689 81 1.19% 21,874 127 1.16%
-----------------------------------------------------------------------------
Total interest earning assets 812,625 $ 20,730 5.12% 796,922 $ 20,603 5.18%
====================== ======================
Cash and due from banks 21,417 21,026
Other assets 51,789 46,118
Reserve for loan losses (11,553) (9,858)
--------- ---------
Total assets $ 874,278 $ 854,208
========= =========
Liabilities and Equity
Savings deposits $ 17,536 $ 22 0.25% $ 19,774 $ 45 0.46%
Interest-bearing demand deposits 185,629 1,015 1.10% 181,153 1,059 1.17%
Time deposits 394,676 4,738 2.41% 392,715 5,126 2.62%
-----------------------------------------------------------------------------
Total interest bearing deposits 597,841 5,775 1.94% 593,642 6,230 2.10%
Borrowed funds 104,229 1,665 3.20% 109,920 2,100 3.83%
Trust preferred debt 20,620 430 4.18% 2,218 26 2.35%
Repurchase agreements 10,373 24 0.46% 14,300 49 0.69%
-----------------------------------------------------------------------------
Total interest-bearing liabilities 733,063 $ 7,894 2.16% 720,080 $ 8,405 2.34%
====================== ======================
Non-interest bearing deposits 58,106 48,579
Other liabilities 8,719 9,560
--------- ---------
Total liabilities 799,888 778,219
Shareholders' equity 74,390 75,989
--------- ---------
Total liabilities and equity $ 874,278 $ 854,208
========= =========
Net interest spread (4) 2.96% 2.84%
Tax equivalent adjustment $ 336 $ 291
Net interest income and net
interest margin (5) $ 12,836 3.17% $ 12,198 3.07%
(1) The taxable equivalent basis is computed using a blended federal and state
rate of approximately 38%.
(2) Loans receivable include nonaccrual loans for which accrual of interest
has not been recorded.
(3) The average balance for investment securities exclude the effect of their
mark-to-market adjustment, if any.
(4) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents the net interest income divided by average
interest-earning assets.
-24-
For the six month period ended June 30, 2004, the provision for loan losses was
$413,000 compared to $3.3 million for the same period in 2003, a decrease of
$2.8 million. The provision in 2003 was adversely affected by the significant
charge-offs during that period as previously described. See "Asset Quality" for
further discussion.
Noninterest income for the six month period ended June 30, 2004, was $3.1
million compared to $5.3 million for the same period in 2003, a decrease of 41%.
Similar to the previous discussion for the three month period ended June 30,
2004, the decrease was primarily attributable to a substantial drop in fee
income recorded by the Bank's mortgage department as a result of industry-wide
decreased mortgage refinance business caused by increases in mortgage loan
interest rates. Mortgage origination fees fell 72% to $702,000 in the second
quarter of 2004 from the $2.5 million earned in the six month period ended June
30, 2003. Securities gains also fell 97% during the period from $442,000 during
the first six months of 2003 to $13,000 during the same period of 2004.
NSF fees increased to $983,000 during the six months ended June 30, 2004 from
$876,000 during the same period in 2003, primarily as a result of the growth in
the number of deposit accounts on which these fees are charged. Other categories
that improved include ATM fees, which increased 14% from $140,000 in the six
month period ended June 30, 2003 to $159,000 in the six month period ended June
30, 2004, and other noninterest income, which includes fees earned by the
government lending department. One other component of the year-over-year
increase in other noninterest income is a $108,000 gain on sale of repossessed
property recorded in first quarter of 2004.
Noninterest expense for the six month periods ended June 30, 2004 and 2003 were
$11.7 million during each period. Salaries and employee benefits, representing
the largest noninterest expense category, decreased to $5.9 million for the six
month period ended June 30, 2004 from $6.7 million for the same period in 2003.
This decrease reflects a significant drop in commissions paid to the mortgage
originators as a result of the decline in business in that area. Commissions
decreased from $1.2 million in the second quarter of 2003 to $352,000 for the
same period in 2004, a drop of $827,000 or 71%.
Occupancy costs, the second largest component of noninterest expenses, increased
9%, or $94,000 to $1.2 million for the six month period ended June 30, 2004 from
$1.1 million for the same period in 2003. This increase is primarily the result
of one time costs incurred to move the operations and credit administration
functions to a new facility to consolidate operations and locations during the
first quarter and due to an increased number of locations as the Company has
expanded its branch market as previously described.
Other expenses increased from $2.2 million for the six month period ended June
30, 2003 to $2.6 million for the same period in 2004. Largest components of
other expenses for the period in 2004 includes audit and accounting fees, which
increased from $90,000 in 2003 to $186,000 in 2004, primarily a result of
additional services required for the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") as a result of the Bank having reached over $500
million in assets as of January 1, 2003. As explained previously, travel and
entertainment increased year-over-year from $110,000 in 2003 to $207,000 in 2004
as the footprint of the organization expanded and travel between locations
increased. Although management expects noninterest expense to
-25-
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.
The Company recorded an income tax expense of $1.3 million during the six month
period ended June 30, 2004 compared to an expense of $664,000 during the same
period in 2003.
Asset Quality
Determining the allowance for loan losses is based on a number of factors. At
the origination of each commercial loan, management assesses the relative risk
of the loan and assigns a corresponding risk grade. To ascertain that the credit
quality is maintained after the loan is booked, the Bank has a procedure whereby
a loan review officer does an annual review of all loans over a certain
threshold, all unsecured loans over a certain loan amount, a sampling of loans
within a lender's authority, and a sampling of the entire loan pool. Loans are
reviewed for credit quality, sufficiency of credit and collateral documentation,
proper loan approval, covenant, policy and procedure adherence, and continuing
accuracy of the loan grade. This officer reports directly to the Chief Credit
Officer and will report on a sampling of loans each month to the Board of
Directors' Loan Committee. On an as needed basis, the Bank will hire an outside
third party firm to do a review of loans to ensure quality standards and
accurate risk assessment.
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. The reserve percentages have been
developed based on historical losses and industry trends. 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 to an amount that
management believes will be adequate to absorb probable losses on existing loans
that may become uncollectible.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. Based
on this allowance calculation, management charged operations in the amount of
$413,000 for the six month period ended June 30, 2004 to provide for probable
losses related to uncollectible loans. Loan loss reserves were 1.74% and 1.86%
of gross loans, respectively, as of June 30, 2004 and December 31, 2003. The
following table presents an analysis of changes in the allowance for loan losses
for the three and six month periods ended June 30, 2004 and 2003:
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Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
-------- -------- -------- --------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 11,221 $ 9,919 $ 11,613 $ 9,390
Net charge-offs:
Loans charged off:
Commercial 14 3,262 461 3,325
Consumer 134 80 319 155
Mortgage 70 1 70 39
-------- -------- -------- --------
Total charge-offs 218 3,343 850 3,519
-------- -------- -------- --------
Recoveries of loans previously charged off:
Commercial 33 172 87 276
Consumer 58 10 62 11
Mortgage 26 -- 92 --
-------- -------- -------- --------
Total recoveries 117 182 241 287
-------- -------- -------- --------
Total net charge-offs 101 3,161 609 3,232
-------- -------- -------- --------
Loss provisions charged to operations 297 2,696 413 3,296
-------- -------- -------- --------
Allowance for loan losses, end of period $ 11,417 $ 9,454 $ 11,417 $ 9,454
======== ======== ======== ========
Net charge-offs to average loans during the
period (annualized) 0.06% 1.99% 0.19% 1.04%
Allowance as a percent of gross loans 1.74% 1.46%
The following table presents an analysis of nonperforming assets as of June 30,
2004 and 2003 and December 31, 2003:
June 30, 2004 December 31,
2004 2003 2003
--------- --------- ------------
(Dollars in thousands)
Nonperforming assets:
Nonaccrual loans:
Commercial real estate $ 3,085 $ 864 $ 3,376
Construction 580 298 1,444
Commercial 655 517 390
Consumer 561 270 529
Mortgage 1,837 1,637 2,271
--------- --------- ---------
Total nonaccrual loans 6,718 3,586 8,010
Foreclosed property held 412 745 978
--------- --------- ---------
Total nonperforming assets $ 7,130 $ 4,331 $ 8,988
========= ========= =========
Nonperforming loans to total loans 1.02% 0.56% 1.44%
Nonperforming assets to total assets 0.80% 0.48% 1.05%
Allowance coverage of nonperforming loans 170% 264% 145%
Overall credit quality improved during the quarter, despite a modest increase in
nonperforming loans. We project the resolution of several significant
nonperforming loans during the second
-27-
half of 2004 with minimal loss, if any. The Company has experienced improvements
in both classified and watch list loans during the second quarter and the six
months ended June 30, 2004.
On June 30, 2004, nonperforming assets were $7.1 million, a $1.9 million
decrease from the balance at December 31, 2003. Nonperforming assets, which
includes nonperforming loans and foreclosed property, decreased both on an
absolute basis and as a percentage of total assets between those periods.
A loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Loans deemed to be impaired at June 30, 2004 and December 31, 2003 amounted to
$2.9 million and $3.0 million, respectively. Average impaired loans during the
second quarter of 2004 were $3.0 million.
The Bank uses several factors in determining if a loan is impaired. The internal
asset classification procedures include a review of significant loans and
lending relationships by both management and third party credit review firms and
includes the accumulation of related data. This data includes loan payment
status, borrowers' financial data and borrowers' operating factors such as cash
flows, operating income or loss, etc. It is possible that these factors and
management's evaluation of the adequacy of the allowance for loan losses will
change.
Foreclosed property decreased to $412,000 at June 30, 2004 from $745,000 million
at June 31, 2003. 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.
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 $35.3 million in its most liquid assets, cash and cash equivalents,
as of June 30, 2004. 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 69.92% of total assets at June 30, 2004. In addition, the
Company has the ability to take advantage of various other funding programs
available from the Federal Home Loan Bank of Atlanta, as well as access to
funding through various brokered deposit programs.
In the late part of the third quarter of 2004, the Company expects to close on
the sale of three branches to two other North Carolina financial institutions.
The cash requirements of this sale call for the Bank to pay approximately $25.0
million to the other parties to cover the net liabilities assumed by those
companies, primarily deposits, in excess of the net assets sold, primarily
loans.
-28-
In order to fund the sale, the Company expects to issue fixed rate brokered
certificates of deposit and will evaluate whether to enter into interest rate
swaps to effectively convert some of those brokered deposits to a floating rate.
The management of equity is a critical aspect of capital management in any
business. The determination of the appropriate amount of equity is affected by a
wide number of factors. The primary factor for a regulated financial institution
is the amount of capital needed to meet regulatory requirements, although other
factors, such as the "risk equity" the business requires and balance sheet
leverage, also will affect the determination.
During the second quarter of 2004, the Board of Directors approved a stock
repurchase plan authorizing the repurchase of up to 50,000 shares of the
Company's stock. The principal purpose of the stock repurchase program is to
manage the equity capital relative to the growth of the Company, to offset the
dilutive effect of employee equity-based compensation and to enhance long term
shareholder value. The repurchase program will be affected through regular
open-market purchases. Management currently has no immediate intent to
repurchase shares but instead, plans to monitor and evaluate the capital level
on an ongoing basis.
To be categorized as well capitalized, the Company and the Bank must maintain
minimum amounts and ratios. The Company's actual capital amounts and ratios as
of June 30, 2004 and the minimum requirements are presented in the following
table.
Minimum
Requirements To Be
Actual Well Capitalized
--------------------- ---------------------
(Dollars in thousands) Amount Ratio Amount Ratio
-------- --------- -------- ---------
Capital Bank Corporation
Total Capital (to Risk Weighted Assets) $ 86,684 11.78% $ 73,578 10.00%
Tier I Capital (to Risk Weighted Assets) 76,612 10.41% 44,147 6.00%
Tier I Capital (to Average Assets) 76,612 8.90% 43,047 5.00%
Capital Bank
Total Capital (to Risk Weighted Assets) $ 83,622 11.38% $ 73,505 10.00%
Tier I Capital (to Risk Weighted Assets) 74,406 10.12% 44,103 6.00%
Tier I Capital (to Average Assets) 74,406 8.62% 43,134 5.00%
Shareholders' equity was $72.6 million or $11.03 per share at June 30, 2004.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth and to maintain a well capitalized position.
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,
2003 to June 30, 2004.
Item 4 Controls and Procedures
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, the
Company's management, with the participation of the Chief Executive Officer and
the Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as
-29-
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 the Chief Financial Officer provide that,
as of the end of the period covered by this report, 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) and 15d-15(f) under the Exchange Act) during the period covered
by this report 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 June 24, 2004, the annual meeting of shareholders of the Company was held to
consider and vote upon two issues: (i) the election of Class I, II and III
directors and (ii) the ratification of the appointment of PricewaterhouseCoopers
LLP as the Company's independent auditors for the fiscal year ended December 31,
2004. Each item considered was approved by the shareholders. Of the 6,571,626
shares eligible to vote, 5,854,626 were voted as shown on the following tables:
-30-
For Withheld Total
-------------------------------------
Class I Directors:
Charles F. Atkins 5,757,668 96,958 5,854,626
B. Grant Yarber 5,706,714 147,912 5,854,626
Oscar A. Keller, Jr. 5,749,721 104,905 5,854,626
James D. Moser, Jr. 5,756,543 98,083 5,854,626
Don W. Perry 5,757,428 97,198 5,854,626
Class II Directors:
John F. Grimes, III 5,755,199 99,427 5,854,626
J. Rex Thomas 5,755,895 98,731 5,854,626
Class III Directors:
George R. Perkins, III 5,754,846 99,780 5,854,626
Vote concerning the ratification of the appointment of PricewaterhouseCoopers
LLP as the independent auditors for the fiscal year ended December 31, 2004:
For Against Abstain Total
-----------------------------------------
5,833,676 6,845 14,105 5,854,626
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 10.1 Change of Control agreement dated July 2, 2004
between Karen H. Priester and Capital Bank
Corporation
Exhibit 31.1 Certification of B. Grant Yarber 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 Richard W. Edwards 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 B. Grant Yarber 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
-31-
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 Richard W. Edwards 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
On April 22, 2004, the Company furnished a Current Report on Form
8-K attaching a press release announcing the appointment of Richard
W. Edwards as Chief Financial Officer and also reporting financial
results for the quarterly period ended March 31, 2004, which
included selected financial data for the quarter ended March 31,
2004 and for other selected periods. Information furnished in the
Form 8-K referenced in the prior sentence is not deemed to be filed
with the SEC.
On April 26, 2004, the Company filed a Current Report on Form 8-K
attaching a press release announcing the appointment of B. Grant
Yarber as Chief Executive Officer.
On July 20, 2004, the Company furnished a Current Report on Form 8-K
attaching a press release reporting financial results for the
quarterly period ended June 30, 2004, which included selected
financial data for the quarter ended June 30, 2004 and for other
selected periods. Information furnished in the Form 8-K referenced
in the prior sentence is not deemed to be filed with the SEC.
-32-
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 3, 2004 By: /s/ Richard W. Edwards
--------------------------
Richard W. Edwards
Chief Financial Officer
-33-
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 10.1 Employment agreement dated July 2, 2004 between Karen H.
Priester and Capital Bank Corporation
Exhibit 31.1 Certification of B. Grant Yarber 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 Richard W. Edwards 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 B. Grant Yarber 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 Richard W. Edwards 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.]
-34-