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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
[ ] 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. (check mark) Yes ____No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). ____Yes (check mark) No
As of November 14, 2002, there were 5,711,136 shares issued and 5,304,452 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 September 30, 2002
(Unaudited) and December 31, 2001 1
Condensed consolidated statements of income for the three months ended
September 30, 2002 and 2001 (Unaudited) 2
Condensed consolidated statements of income for the nine months ended
September 30, 2002 and 2001 (Unaudited) 3
Condensed consolidated statements of comprehensive income for the
three and nine months ended September 30, 2002 and 2001 (Unaudited) 4
Condensed consolidated statements of cash flows for the nine months
ended September 30, 2002 and 2001 (Unaudited) 5 - 6
Notes to consolidated financial statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 19 - 21
Exhibits 22 - 26
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 7,508 $ 2,793
Noninterest earning 21,304 12,380
Federal funds sold 5,582 944
Investment securities - available for sale, at fair value 123,533 73,702
Loans-net of unearned income and deferred fees 475,865 306,891
Allowance for loan losses (7,203) (4,286)
------------------- -------------------
Net loans 468,662 302,605
------------------- -------------------
Premises and equipment, net 10,345 5,009
Accrued interest receivable 2,983 1,853
Deposit premium and goodwill, net 8,268 4,105
Deferred tax assets 3,450 2,033
Other assets 7,519 1,317
------------------- -------------------
Total assets $ 659,154 $ 406,741
=================== ===================
LIABILITIES
Deposits:
Demand, noninterest bearing $ 38,011 $ 28,470
Savings and interest bearing demand deposits 188,520 101,553
Time deposits 295,399 174,420
------------------- -------------------
Total deposits 521,930 304,443
------------------- -------------------
Accrued interest payable
1,023 792
Repurchase agreements 13,348 11,167
Borrowings 59,395 50,000
Other liabilities 6,875 3,356
------------------- -------------------
Total liabilities 602,571 369,758
SHAREHOLDERS' EQUITY
Common stock; 20,000,000 shares authorized; shares issued
2002 - 5,676,776 and 2001 - 3,658,689 56,424 34,805
Retained earnings, substantially restricted 3,949 2,306
Accumulated other comprehensive income 1,455 568
Treasury stock; 2002 - 396,684 shares
and 2001 - 61,350 shares (5,245) (696)
------------------- -------------------
Total shareholders' equity 56,583 36,983
------------------- -------------------
Total liabilities and shareholders' equity $ 659,154 $ 406,741
=================== ===================
See Notes to Condensed Consolidated Financial Statements
- 1 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 2002 and 2001
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 7,407 $ 5,171
Investment securities 1,542 1,236
Federal funds and other interest income 98 134
------------------- -------------------
Total interest income 9,047 6,541
------------------- -------------------
Interest expense:
Deposits 3,274 3,246
Borrowings and repurchase agreements 804 489
------------------- -------------------
Total interest expense 4,078 3,735
------------------- -------------------
Net interest income 4,969 2,806
Provision for loan losses 2,560 300
------------------- -------------------
Net interest income after provision for loan losses 2,409 2,506
Noninterest income:
Service charges and other fees 594 517
Net gain on sale of securities available for sale 518 -
Other noninterest income 1,252 666
------------------- -------------------
Total noninterest income 2,364 1,183
------------------- -------------------
Noninterest expenses:
Salaries and employee benefits 2,313 1,634
Occupancy 399 284
Data processing 224 158
Directors fees 63 55
Advertising 67 86
Furniture and equipment 260 164
Amortization of intangibles 170 153
Other expenses 747 393
------------------- -------------------
Total noninterest expenses 4,243 2,927
------------------- -------------------
Net income before income tax expense 530 762
Income tax expense 171 272
------------------- -------------------
Net income $ 359 $ 490
=================== ===================
Earnings per share - basic $ 0.07 $ 0.13
=================== ===================
Earnings per share - diluted $ 0.06 $ 0.13
=================== ===================
See Notes to Condensed Consolidated Financial Statements
- 2 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 2002 and 2001
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 21,663 $ 16,111
Investment securities 4,591 3,560
Federal funds and other interest income 305 461
------------------- -------------------
Total interest income 26,559 20,132
------------------- -------------------
Interest expense:
Deposits 9,332 10,296
Borrowings and repurchase agreements 2,350 1,331
------------------- -------------------
Total interest expense 11,682 11,627
------------------- -------------------
Net interest income 14,877 8,505
Provision for loan losses 3,790 900
------------------- -------------------
Net interest income after provision for loan losses 11,087 7,605
Noninterest income:
Service charges and other fees 1,701 1,220
Net gain on sale of securities available for sale 761 77
Other noninterest income 3,035 1,816
------------------- -------------------
Total noninterest income 5,497 3,113
------------------- -------------------
Noninterest expenses:
Salaries and employee benefits 6,755 4,728
Occupancy 1,145 847
Data processing 686 470
Directors fees 199 160
Advertising 389 289
Furniture and equipment 825 536
Amortization of intangibles 493 444
Other expenses 2,247 1,324
------------------- -------------------
Total noninterest expenses 12,739 8,798
------------------- -------------------
Net income before income tax expense 3,845 1,920
Income tax expense 1,403 131
------------------- -------------------
Net income $ 2,442 $ 1,789
=================== ===================
Earnings per share - basic $ 0.46 $ 0.48
=================== ===================
Earnings per share - diluted $ 0.44 $ 0.48
=================== ===================
See Notes to Condensed Consolidated Financial Statements
- 3 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Three and Nine Months Ended September 30, 2002 and 2001
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Three month periods ended September 30, 2002 and 2001:
Net income $ 359 $ 490
Reclassification of gains recognized in net income (518) -
Unrealized gains on securities available for sale,
net of deferred tax effect 869 777
------------------- -------------------
Comprehensive income $ 710 $ 1,267
=================== ===================
Nine month periods ended September 30, 2002 and 2001:
Net income $ 2,442 $ 1,789
Reclassification of gains recognized in net income (761) (77)
Unrealized gains on securities available for sale,
net of deferred tax effect 1,648 920
------------------- -------------------
Comprehensive income $ 3,329 $ 2,632
=================== ===================
See Notes to Condensed Consolidated Financial Statements
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
2002 2001
- ---------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 2,442 $ 1,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deposit premium 493 444
Depreciation 996 612
Gain on sale of equipment - (2)
Gains on sale of securities available for sale (761) (77)
Amortization/(accretion) of premiums/(discounts) on
on securities, net 609 (144)
Deferred income tax expense (benefit) (56) (888)
Provision for loan losses 3,790 900
Changes in assets and liabilities:
Accrued interest receivable 34 33
Other assets (2,855) (190)
Accrued interest payable and other liabilities 144 (645)
------------------- --------------
Net cash provided by operating activities 4,836 1,832
------------------- --------------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (37,117) (34,026)
Additions to premises and equipment (909) (637)
Proceeds from sale of equipment 1 38
Net (purchase) sale of Federal Home Loan Bank stock 308 (1,495)
Purchase of securities available for sale (59,376) (56,535)
Proceeds from maturities of securities available for sale 19,630 34,670
Proceeds from sale of securities available for sale 30,205 9,014
Capitalized purchase costs (39) (69)
Net cash acquired from purchase of subsidairy
8,649 -
------------------- --------------
Net cash used in investing activities (38,648) (49,040)
------------------- --------------
Cash Flows From Financing Activities
Net increase in deposits 61,246 30,682
Net increase in repurchase agreements 2,181 350
Net increase (decrease) in borrowings (7,019) 15,000
Cash dividends paid (535) -
Issuance of common stock for options 765 -
Purchase of common stock (4,549) (427)
------------------- --------------
Net cash provided by financing activities $ 52,089 $ 45,605
------------------- --------------
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
- 5 -
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended September 30, 2002 and 2001
2002 2001
- -------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Net change in cash and cash equivalents $ 18,277 $ (1,603)
Cash and cash equivalents:
Beginning 16,117 28,426
------------------- -------------------
Ending $ 34,394 $ 26,823
=================== ===================
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 1,419 $ -
=================== ===================
Dividends payable $ 264 $ -
=================== ===================
Cash paid for:
Income taxes $ 1,775 $ 929
=================== ===================
Interest $ 11,451 $ 11,686
=================== ===================
Purchase of First Community Financial Corp:
Loans, net of reserves $ (134,149) $ -
Investments (39,001) -
Other assets acquired (10,435) -
Goodwill and deposit premium (4,617) -
Deposits 156,241 -
Borrowings 16,414 -
Other liabilities assumed 3,342 -
Issuance of stock 20,854 -
------------------- -------------------
Net cash and cash equivalents acquired $ 8,649 $ -
=================== ===================
- 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") and Capital Bank Investment Services
("CBIS"). The interim financial statements have been prepared in accordance with
generally accepted accounting principles. Accordingly, 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 2001 Annual Report on Form 10-K. 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 nine month period ended September 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 2002.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2001 Annual Report on Form 10-K.
2. Acquisition of First Community Financial Corporation
On January 18th, 2002, the Company acquired First Community Financial
Corporation ("First Community") in Burlington, North Carolina., the holding
company for Community Savings Bank, Inc. ("Community Savings Bank"). Community
Savings Bank was originally chartered in 1934, and its market area consists of
the communities in Alamance County, North Carolina. Community Savings Bank
primarily engaged in soliciting deposit accounts from businesses and the general
public and making commercial loans, construction loans, residential real estate
loans, home equity line of credit loans, consumer loans and various investments.
Each First Community share of common stock was exchanged for 1.30275 shares of
Capital Bank Corporation common stock plus $16.20 cash or alternatively for all
cash or all stock. As a result of the acquisition, the Company issued an
additional 1.9 million shares of stock. The transaction was accounted for under
the purchase method and was intended to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code.
The following table reflects the unaudited pro forma combined results of
operations, assuming the acquisition had occurred at the beginning of fiscal
2001:
2002 2001
------------------- -------------------
(In thousands except per share amounts)
Net interest income $ 15,174 $ 13,503
Net income 2,546 2,510
Net earnings per diluted share
0.46 0.44
In management's opinion, these unaudited pro forma amounts are not necessarily
indicative of what actual combined results of operations might have been if the
acquisition had been effective at the beginning of fiscal 2001.
A summary of estimated fair values of assets acquired and liabilities assumed
were as follows:
- 7 -
(In thousands)
Loans receivable $ 134,149
Investments 39,001
Premises and equipment 5,424
Goodwill 3,835
Deposit premium 782
Other assets 11,261
Deposits (156,241)
Borrowings (16,414)
Other liabilities (3,342)
---------------
Investment in subsidiary, net of dividends to shareholders
and capitalized acquisition costs $ 18,455
===============
3. 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 net income
and information concerning the Company's other comprehensive income items for
the three and nine month periods ended September 30, 2002 and 2001 are as shown
above in the Company's Condensed Consolidated Statements of Comprehensive
Income.
4. 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
Capital Bank Corporation, 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 nine month periods ended September 30, 2002 and 2001.
2002 2001
------------------- -------------------
(Dollars in thousands) (Unaudited)
Three month periods ended September 30, 2002 and 2001:
Income available to stockholders - basic and diluted
$ 359 $ 490
=================== ===================
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 5,375,899 3,711,284
Incremental shares from assumed exercise of stock
options 219,068 54,716
------------------- -------------------
Weighted average number of shares outstanding - diluted 5,594,967 3,766,000
=================== ===================
- 8 -
2002 2001
------------------- -------------------
(Dollars in thousands) (Unaudited)
Nine month periods ended September 30, 2002 and 2001:
Income available to stockholders - basic and diluted $ 2,442 $ 1,789
=================== ===================
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 5,345,572 3,722,557
Incremental shares from assumed exercise of stock
options 205,172 35,692
------------------- -------------------
Weighted average number of shares outstanding - diluted 5,550,744 3,758,249
=================== ===================
Options to purchase 689,000 shares of common stock were used in the diluted
calculation. All options currently issued under existing plans were included in
the diluted calculation because the average fair market value of a common share
of stock was greater than each option exercise price.
5. Income Taxes
Prior to the three month period ended March 31, 2001, the Corporation recorded
minimal net income tax expenses. This was due primarily to the generation of
consolidated net operating losses during the start up phase and the
establishment of a valuation allowance against deferred tax assets until such
time as the Company demonstrated the ability to utilize those deferred tax
assets in the future. Management determined during the three month period ended
March 31, 2001 that the Company would more likely than not be able to utilize
those assets in the future. Accordingly, during the period ended March 31, 2001,
the remaining valuation allowances were reversed and all reserved deferred tax
assets were recorded on the consolidated financial statements of the Company,
resulting in a one time net tax benefit of $356,000.
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 nine month periods ended September 30, 2002 and
2001 for Capital Bank Corporation and its wholly owned subsidiaries, Capital
Bank and Capital Bank Investment Services, Inc. This discussion and analysis is
intended to provide pertinent information concerning financial position, results
of operations, liquidity, and capital resources. 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 and Section 21E of the
Securities Exchange Act of 1934, 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
- 9 -
Company cautions that such forward-looking statements are further qualified by
important factors that could cause the Company's actual operating results to
differ materially from those in the forward-looking statements, as well as the
factors set forth in Exhibit 99.3 to this report, the Company's periodic reports
and other filings with the SEC.
Overview
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws of North Carolina on August 10, 1998. The Company's
election to become a financial holding company was effective April 23, 2001. 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. 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. At a special meeting of shareholders held on
March 26, 1999, the shareholders of the Bank approved the reorganization of the
Bank into Capital Bank Corporation. In the holding company reorganization, the
shareholders of the Bank each received a right to one share of Company stock for
each share of Bank stock that they owned.
Prior to April 14, 2000, the Bank operated primarily throughout the central part
of North Carolina with branch facilities located in Raleigh (1), Cary (2),
Sanford (3), and Siler City (1). In April, 2000, the Bank acquired 5 branches
from another area financial institution which was accounted for as a purchase
transaction. The transaction included branches in the eastern part of North
Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). In
June, 2000, the Bank opened a new branch and moved its corporate headquarters to
an office on Glenwood Avenue in Raleigh, North Carolina. In January 2001, the
Bank opened a third branch in Raleigh.
On March 1, 2001, Capital Bank Corporation announced that it had formed Capital
Bank Investment Services, Inc. ("CBIS"), an investment services subsidiary and
agreed to acquire an independent branch brokerage office located in Raleigh,
North Carolina.
CBIS makes available a full range of non-deposit investment services to
individuals and corporations, including customers of the Bank. These investment
services include full-service securities brokerage, asset management, financial
planning and retirement services, such as 401(k) plans, all provided exclusively
through a strategic alliance with Raymond James Financial Services, Inc.
("Raymond James"). These services will be available in the offices of the Bank
through registered investment representatives.
On October 5, 2001, the Company entered into a definitive agreement to acquire
First Community Financial Corporation ("First Community") in Burlington, North
Carolina, the holding company for Community Savings Bank, Inc. ("Community
Savings Bank"). Community Savings Bank operates in the communities in and around
Burlington and Graham (Alamance County), and was primarily engaged in soliciting
deposit accounts from businesses and the general public and making commercial
loans, construction loans, residential real estate loans, home equity line of
credit loans, consumer loans and various investments. The acquisition was
approved at a special shareholder meeting on January 17, 2002 and the
transaction took place effective the close of business on January 18, 2002. Each
First Community share of common stock was exchanged for 1.30275 shares of
Capital Bank Corporation common stock
- 10 -
plus $16.20 cash or, alternatively, for all cash or all stock. The transaction
was accounted for under the purchase method and was intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code.
On May 1, 2002, the Company entered into a definitive agreement to acquire High
Street Corporation ("High Street") in Asheville, North Carolina. High Street was
incorporated on October 30, 2001 to serve as the holding company for High Street
Banking Company ("High Street Bank"). High Street has had no significant assets
other than the outstanding capital stock of High Street Bank. High Street Bank
was originally incorporated on April 25, 1997, and its market area consists of
the communities of Asheville and Hickory, North Carolina. High Street Bank is
primarily engaged in soliciting deposit accounts from businesses and the general
public and making commercial loans, construction loans, residential real estate
loans, home equity line of credit loans, consumer loans and various investments.
The Company has received all required approvals and management anticipates that
the merger will be completed on or about December 1, 2002.
As of September 30, 2002, High Street Corporation had consolidated assets of
$161.1 million, consolidated loans of $127.7 million, consolidated deposits of
$134.5 million and consolidated shareholders' equity of $15.2 million.
The Company has no operations other than those of its subsidiaries, Capital Bank
and Capital Bank Investment Services, Inc. The Bank is a full-service community
bank and the CBIS is a full service brokerage firm. The Company's profitability
depends principally upon the net interest income, provision for loan losses,
noninterest income and noninterest expenses of the Bank and the net commissions
generated by CBIS.
Critical Accounting Policies
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2001 Annual Report on Form 10-K . The
Company has not experienced any material change in its critical accounting
policies since December 31, 2001.
Financial Condition
Total consolidated assets of the Company at September 30, 2002 were $659.2
million compared to $406.7 million at December 31, 2001, an increase of $252.5
million, or 62%. On September 30, 2002, loans, including loans held for sale of
$7.6 million, were $475.9 million, up $169.0 million, or 55%, compared to
December 31, 2001. Investment securities were $123.5 million and federal funds
sold were $5.6 million at September 30, 2002, up $49.8 million and $4.6 million,
respectively, from December 31, 2001. During the nine month period ended
September 30, 2002, cash and cash equivalents, including federal funds sold,
increased by $18.3 million. All increases were primarily the result of the
acquisition of First Community and its subsidiary bank, Community Savings Bank,
as of January 18, 2002 as described above and through internal growth of
existing branches. Loans and investments acquired were $173.1 million.
Earning assets represented 93% of total assets as of September 30, 2002. The
allowance for loan losses as of September 30, 2002 was $7.2 million and
represented approximately 1.51% of total loans. Management believes that the
amount of the allowance is adequate at this time.
- 11 -
Deposits as of September 30, 2002 were $521.9 million, an increase of $217.5
million or 71% from December 31, 2001, primarily the result of deposits acquired
from First Community of $156.2 million and through internal growth. As a result,
the acquired deposits caused the Company's deposit mix to change with higher
rate Certificates of Deposit ("CDs") representing a larger portion of total
deposits for part of the year. The increase in CDs partially offset a trend
towards lower rate funds that the Company had moved towards over the previous
year. However, due to the current low CD rate environment, many depositors have
shifted funds into money markets and interest bearing checking products causing
the portfolio mix as of September 30, 2002 to approximate the December 31, 2001
mix with CDs representing 57% of total deposits. During the nine month period
ended September 30, 2002, certificates of deposit increased by $121.0 million,
or 69% from $174.4 million to $295.4 million. At the same time, noninterest
bearing demand deposit accounts increased $9.5 million, or 34%, from $28.5
million to $38.0 million and savings and interest bearing demand deposit
accounts increased $87.0 million, or 86%, from $101.6 million to $188.5 million.
During 2001, the Company's dependency on CDs declined as the result of a
conscious effort on management's part to attract lower cost core deposits such
as money market and interest bearing checking accounts along with an effort to
reduce the overall rates paid on CDs while still remaining price competitive.
Management intends to continue with this strategy throughout the remainder of
2002.
Borrowings increased from $50.0 million as of December 31, 2001 to $59.4 million
as of September 30, 2002, as the Company assumed the outstanding borrowings of
First Community, amounting to approximately $16.4 million, along with its other
assets and liabilities. Both Capital Bank Corporation and First Community took
advantage of the low rates offered by the Federal Home Loan Bank during the
latter part of 2001 and leveraged those additional borrowings into higher
yielding investments.
Total consolidated shareholders' equity was $56.6 million as of September 30,
2002, an increase of $19.6 million from December 31, 2001, due primarily to the
issuance of additional common stock as a part of the acquisition of First
Community.
Results of Operations
For the three month period ended September 30, 2002, the Company reported net
income of $359,000 or $.06 per diluted share compared to $490,000 or $.13 per
diluted share for the same period in 2001. The decline in net income resulted
because significant improvements in other areas of operating performance were
offset by a $2.6 million provision for loan losses during the three month period
ended September 30, 2002, compared to a $300,000 provision for the same three
month period in 2001. This provision boosted the allowance for loan losses to
1.51% of total loans and covered charge-offs, net of recoveries, of
approximately $2.2 million in loans, most of which related to two large
commercial borrowers. While the higher provision negatively impacted
profitability, earnings benefited from strength in other key areas such as net
interest income, which increased 77% to $5.0 million from $2.8 million in the
same period of 2001, and noninterest income, which doubled from the same period
last year. Noninterest expense increased only 45% by comparison.
For the nine month period ended September 30, 2002, the Company reported net
income of $2.4 million or $.44 per diluted share compared to $1.8 million or
$.48 per diluted share for the same
- 12 -
period in 2001. Earnings for the year were also negatively impacted by the
increased loan loss provisions as a result of several isolated loan charge-offs.
Net interest income in the first nine months of 2002 was $14.9 million, up 75%
compared to $8.5 million in the same period of 2001 due primarily to increased
balances in loans and deposits. Pretax income for the nine month period ended
September 30, 2002 was $3.8 million, an increase of $1.9 million or 100% over
the $1.9 million recorded during the same period in 2001. During the period
ended March 31, 2001, the Company recorded a one time reversal of valuation
allowances on deferred income tax assets done as a result of continued trends of
profitability. See Note 4 in Part I, Item 1 of this report for additional
information. This reversal, net of current tax expense for the period, resulted
in a net tax benefit of $356,000 recorded in the first quarter of 2001. For the
nine month period ended September 30, 2002, income tax expense was $1.4 million
compared to $131,000 recorded for the same period in 2001.
During 2001, the rapid decline in short term interest rates had a negative
impact on interest margins as the yield on the Company's earning assets adjusted
downward at a faster rate than the interest rates paid on deposits. As rates
have stabilized during the first nine months of 2002, the average rate paid on
deposits has adjusted downward while the yields on assets have remained
relatively stable resulting in an increase in the overall net interest spread.
The Company's net interest margin (net interest income as a percentage of
average earning assets) for the three and nine month periods ended September 30,
2002 were 3.28% and 3.39%, compared to 3.08% and 3.27% respectively, in the
corresponding periods of 2001.
The provisions for loan losses were $2.6 and $3.8 million, respectively, for the
three and nine month periods ended September 30, 2002. These provisions were
used to maintain the allowance for loan losses at a prudent level considering
the charge-offs, net of recoveries, of approximately $2.2 million and $3.5
million in loans, respectively, for the three and nine month periods ended
September 31, 2002. At September 30, 2002, the allowance for loan losses was
1.51% of total loans. Loans 90 days or more past due or in nonaccrual status
totaled $3.6 million and represented .78% of total loans as of September 30,
2002.
Noninterest income for the three and nine month periods ended September 30,
2002, was $2.4 million and $5.5 million, respectively, compared to $1.2 million
and $3.1 million for the same periods in 2001. The $1.2 million increase in
noninterest income for the three month period ended September 30, 2002 over the
prior year was primarily attributable to securities gains taken in the third
quarter of 2002 of $518,000 compared to zero for the same period in 2001 and a
substantial rise in fees on sold loans recorded by the Bank's mortgage
origination department as a result of the lower interest rate environment and
increased mortgage refinance business. Mortgage loan origination fees increased
from $480,000 during the third quarter of 2001 to $784,000 for the same period
in 2002 primarily due to high refinancing activity. The $2.4 million increase in
noninterest income for the nine month period ended September 30, 2002 over the
same period in the prior year was primarily attributable to securities gains
taken throughout the 2002 year of $761,000 compared to $77,000 for the previous
year and increases in mortgage loan origination fees. Mortgage loan origination
fees for the nine month period ended September 30, 2002 were $1.9 million
compared to $1.4 million for the same period in 2001.
In addition, the Company started a new overdraft checking privilege program
called Bounce Free checking during the second quarter of 2001 which has resulted
in a substantial increase in fee income. Fees for non-sufficient funds, which
include the new Bounce Free checking program income, have increased from
$774,000 during the nine months ended September 30, 2001 to $1.1
- 13 -
million during the same period in 2002. Other increases in noninterest income
from the nine month period ended September 30, 2001 to the same period in 2002
include revenues generated by the government lending department which was formed
in early 2001, which recorded fees of $218,000 in 2002 compared to $71,000 in
2001 and increases in cash surrender values of bank owned life insurance
policies, which increased from $22,000 in 2001 to $164,000 in 2002 as a result
of additional policies acquired with the acquisition of First Community.
Finally, the deposit base on which fees are earned increased substantially
during the first quarter of 2002 as a result of the First Community acquisition.
Noninterest expense for the three and nine month periods ended September 30,
2002 was $4.2 million and $12.7 million, respectively, compared to $2.9 million
and $8.8 million, respectively, for the corresponding periods in 2001. Salaries
and employee benefits, representing the largest expense category, increased from
$1.6 million and $4.7 million, respectively, for the three and nine month
periods ended September 30, 2001 to $2.3 million and $6.8 million, respectively,
for the same periods in 2002. This increase reflects an increase in the number
of personnel employed by the Company due to the First Community acquisition and
management's intention to maintain adequate staffing levels to meet customer
needs and keep pace with expected growth. As of September 30, 2002, the Company
had 179 full-time equivalent employees compared to 127 for the same period in
2001.
Occupancy costs, the second highest component of noninterest expenses, increased
from $284,000 and $847,000, respectively, for the three and nine month periods
ended September 30, 2001 to $399,000 and $1.1 million, respectively, for the
same periods in 2002. This increase is primarily associated with the acquisition
of the 4 additional branches in connection with the First Community transaction.
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 $171,000 and $1.4 million, respectively, during the three
and nine month periods ended September 30, 2002 compared to $272,000 and
$131,000, respectively, during the same periods in 2001. At September 30, 2002,
the Company had net deferred tax assets of $3.5 million resulting from timing
differences associated primarily with the deductibility of certain expenses
reflected on the financial statements. Prior to 2001, the Company was unable to
use deferred tax benefits and recorded deferred tax assets only to the extent
those amounts offset current taxes. During March 2001, previously recorded
valuation allowances were reversed and deferred tax assets were recorded on the
consolidated financial statements of the Company, resulting in a one-time net
tax benefit of $356,000.
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 Committee on an annual basis. In addition, an outside
consulting firm performs a review of the Bank's largest commercial relationships
as well as a sample of loans from the consumer, mortgage and smaller commercial
loan portfolios each year. The consulting firm also reviews
- 14 -
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 Bank calculates the amount of allowance needed to cover the probable losses
in the portfolio by applying a reserve percentage to each risk grade. Consumer
loans and mortgages are not risk graded but a percentage is reserved for these
loans based on historical losses. In addition to this quantitative analysis, a
qualitative assessment of the general economic trends, portfolio concentration
and the trend of delinquencies are taken into consideration. The allowance is
adjusted accordingly.
Based on this allowance calculation, management charged operations in the amount
of $3.8 million for the nine months ended September 30, 2002 to provide for
probable losses related to uncollectible loans. In addition, an allowance of
$2.6 million was acquired by the Bank from Community Savings Bank. Loan loss
reserves were 1.51% and 1.54% of gross loans, respectively, as of September 30,
2002 and 2001. The following table presents an analysis of changes in the
allowance for loan losses for the three and nine month periods ended September
30, 2002 and 2001:
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------------ --------------- --------------- ------------
(In thousands)
Allowance for loan losses, beginning of period $ 6,873 $ 4,038 $ 4,286 $ 3,463
Net charge-offs:
Loans charged off:
Commercial 2,111 104 3,355 117
Consumer 218 59 449 78
------------ ---------------- -------------- ------------
Total charge-offs 2,329 163 3,804 195
------------ ---------------- -------------- ------------
Recoveries of loans previously charged off:
Commercial 88 1 244 1
Consumer 11 1 47 8
------------ ---------------- -------------- ------------
Total recoveries 99 2 291 9
------------ ---------------- -------------- ------------
Total net charge-offs 2,230 161 3,513 186
------------ ---------------- -------------- ------------
Loss provisions charged to operations 2,560 300 3,790 900
Allowances transferred during acquisition
- - 2,640 -
------------ ---------------- -------------- ------------
Allowance for loan losses, end of period $ 7,203 $ 4,177 $ 7,203 $ 4,177
============ ================ ============== ============
Net chargeoffs to average loans during the period 0.47% 0.06% 0.77% 0.07%
Allowance as a percent of gross loans 1.54% 1.51% 1.54% 1.51%
The Company experienced higher loan charge offs in the three and nine month
periods ended September 30, 2002 when compared to the corresponding periods of
the prior year. Management believes that this is due in part to a weakened
economy. In the third quarter of 2002, the Bank charged-off $2.3 million
compared to $163,000 for the same period of 2001. For the nine month period
ended September 30, 2002, the Company charged off $3.8 million. Of that amount,
$2.9 million related to four business customer relationships.
- 15 -
The Bank has also experienced an increase in nonperforming assets, which
includes nonperforming loans and foreclosed property. Nonperforming assets as a
percent of total assets increased from .55% as of September 30, 2001 to .84% for
the corresponding period in 2002, primarily the result of increases in
foreclosed property. In the third quarter of 2002, nonperforming loans as a
percentage of total loans increased to .78% from .77% as of the same period in
2001. Foreclosed property increased from zero at December 31, 2001 to $1.9
million. Of that amount, $1.4 million related to one residential property
recently acquired by the Company through foreclosure. The Company is actively
marketing all of its foreclosed property. However, due to the softness of the
upscale housing market, it is uncertain as to how long the larger of the
foreclosed properties will remain as an asset of the Company. 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 September 30, 2002 and 2001:
Period
Ended September 30,
2002 2001
------------ ------------
(In thousands)
Nonperforming assets:
Nonaccrual loans:
Commercial real estate $ 1,389 $ 1,738
Commercial 451 -
Consumer 362 209
Mortgage 1,446 187
------------ ------------
Total nonperforming loans 3,648 2,134
Foreclosed property held 1,866 -
------------ ------------
Total nonperforming assets $ 5,514 $ 2,134
============ ============
Nonperforming loans to total loans 0.78% 0.77%
Nonperforming assets to total assets 0.84% 0.55%
Allowance coverage of nonperforming loans 197% 196%
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 Board of Directors. The Company had
$34.4 million in its most liquid assets, cash and cash equivalents, at quarter
end. The Company's principal sources of funds are deposits, Federal Home Loan
Bank borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of
liquidity, together with equity capital, funded 75% of total assets at September
30, 2002. In addition, the Company has the ability to take advantage of various
other funding programs available from the Federal Home Loan Bank of Atlanta.
Shareholders' equity was $56.6 million or $10.72 per share at September 30,
2002. 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 September
- 16 -
30, 2002, Capital Bank Corporation had a Tier 1 capital ratio of 9.09%, a total
risk-based capital ratio of 10.35% and a leverage ratio of 7.25%. These ratios
exceed the federal regulatory minimum requirements for a "well-capitalized"
bank.
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
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.
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,
2001 to September 30, 2002.
Item 4 Controls and Procedures
- ------ -----------------------
Based on the Company's most recent evaluation, which was completed within 90
days of the filing of this Form 10-Q, the Company's Chief Executive Officer and
Chief Financial Officer believe the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended) are effective. There have been no significant changes in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the most recent evaluation of the Company's internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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
- 17 -
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On September 24, 2002, a special meeting of shareholders of the Company was held
to consider and vote upon two issues: (i) to approve the merger agreement and
related plan of merger between Capital Bank Corporation and High Street
Corporation and (ii) to approve the issuance of up to 1,700,000 shares of
Capital Bank Corporation common stock in connection with the merger. Both items
were approved by the Company's shareholders. Of the 5,341,247 shares eligible to
vote, 3,083,394 were voted as shown on the following tables:
(i) To approve the merger agreement and related plan of merger, dated as of May
1, 2002 between Capital Bank Corporation and High Street Corporation and
transactions contemplated thereby, by which Capital Bank Corporation will
acquire High Street Corporation through the merger of High Street Corporation
into Capital Bank Corporation, with Capital Bank Corporation being the surviving
corporation of such merger:
For Against Abstain Total
--------------------------------------------------------------------
3,046,558 30,054 6,782 3,083,394
(ii) To approve the issuance of up to 1,700,000 shares of Capital Bank
Corporation common stock to shareholders of High Street Corporation in
connection with Capital Bank Corporation's acquisition of High Street
Corporation in a merger transaction. The issuance of these shares is subject to
adjustment as described in detail in the Joint Proxy Statement/Prospectus:
For Against Abstain Total
--------------------------------------------------------------------
3,028,269 44,953 10,172 3,083,394
In each case, the vote required to approve the action was obtained.
Item 5 Other Information
- ------ ------------------
None
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
--------
Exhibit 99.1 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Risk Factors.
(b) Reports on Form 8-K
-------------------
None
- 18 -
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: November 14, 2002 By: /s/ Allen T. Nelson, Jr.
________________________
Allen T. Nelson, Jr.,
Executive Vice President and CFO
I, James A. Beck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital
Bank Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
- 19 -
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
_____________________
/s/ James A. Beck
----------------------------------
James A. Beck
Chief Executive Officer
I, Allen T. Nelson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital
Bank Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
- 20 -
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
_____________________
/s/ Allen T. Nelson
---------------------------------
Allen T. Nelson, Jr.
Chief Financial Officer
- 21 -