Back to GetFilings.com
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-30062
CAPITAL BANK CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
(State of incorporation) (I.R.S. Employer
Identification Number)
4901 Glenwood Avenue 27612
Raleigh, North Carolina (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (919) 645-6400
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share Nasdaq National Market
(Title of Class) (Name of Exchange on Which Registered)
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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, no par value per
share, as of June 30, 2002, held by those persons deemed by the registrant to be
non-affiliates was approximately $74,685,865.
As of March 28, 2003, there were 6,626,092 shares of the registrant's Common
Stock, no par value per share, outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Where
- --------------------- -----
1. Portions of the registrant's Proxy Statement for the Annual Part III
Meeting of Shareholders to be held on May 29, 2003
CAPITAL BANK CORPORATION
Annual Report on Form 10-K
INDEX
PART I.................................................................................. 2
Item 1. Business.................................................................... 2
Item 2. Properties.................................................................. 9
Item 3. Legal Proceedings........................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................... 10
PART II................................................................................. 10
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 10
Item 6. Selected Financial Data..................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................... 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................... 25
Item 8. Financial Statements and Supplementary Data................................. 25
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial
Disclosure. ............................................................. 51
PART III................................................................................ 51
Item 10. Directors and Executive Officers of the Registrant.......................... 51
Item 11. Executive Compensation...................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 51
Item 13. Certain Relationships and Related Transactions.............................. 51
Item 14. Controls and Procedures..................................................... 51
PART IV................................................................................. 52
Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K............. 52
Signatures........................................................................... 53
PART I
Item 1. Business.
General
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws 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 and Capital Bank Investment Services, Inc. Capital
Bank (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. Capital Bank Investment Services, Inc. ("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.
On December 1, 2002, the Company acquired 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 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 consisted of the communities of Asheville
and Hickory, North Carolina. High Street Bank 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 merger was
approved by
2
the shareholders of the Company and High Street in a special meeting of
shareholders held by the Company on September 24, 2002 and High Street on
September 23, 2002 and consummated on December 1, 2002. On December 6, 2002,
High Street Bank was merged into the Bank and the Bank thereby assumed all of
the operations of High Street Bank.
On January 18, 2002, the Company acquired First Community Financial Corporation
("First Community"), a bank holding company located in Burlington, North
Carolina. First Community was incorporated on October 7, 1998 to serve as the
holding company for Community Savings Bank, Inc. ("Community Savings Bank").
Community Savings Bank was originally chartered in 1934, and its market area
consisted of the communities in Alamance County, North Carolina. Community
Savings Bank operated four full service branches and 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 merger was
approved by the shareholders of the Company and First Community in special
meetings of shareholders held by each company on January 17, 2002 and
consummated on January 18, 2002. On March 15, 2002, Community Savings Bank was
merged into the Bank and the Bank thereby assumed all of the operations of
Community Savings Bank.
As of December 31, 2002, the Company had assets of approximately $841.0 million,
gross loans outstanding of approximately $600.6 million and deposits of
approximately $644.9 million. The Company's corporate office is located at 4901
Glenwood Avenue, Raleigh, North Carolina 27612, and its telephone number is
(919) 645-6400. In addition to the corporate office, the Company has three
branch offices in Raleigh, two in Cary, one in Siler City, two in Oxford, one in
Warrenton, one in Woodland, one in Seaboard, three in Sanford, three in
Burlington, one in Graham, two in Asheville and one in Hickory, North Carolina.
The Company also has a loan origination office in Greensboro, North Carolina.
Capital Bank is a community bank engaged in the general commercial banking
business in Wake, Chatham, Northampton, Granville, Warren, Alamance and Lee
Counties, North Carolina and the communities of Asheville and Hickory, North
Carolina. Wake County has a diversified economic base, comprised primarily of
services, retail trade, government and manufacturing and includes the City of
Raleigh, the state capital. Lee, Northampton, Granville, Warren and Chatham
counties are significant centers for various industries, including agriculture,
manufacturing, lumber and tobacco. Alamance County has a diversified economic
base, comprised primarily of manufacturing, agriculture, retail and wholesale
trade, government, services and utilities. The town of Hickory is a regional
center for manufacturing and wholesale trade. The economic base of the city of
Asheville is comprised primarily of services, medical, tourism and manufacturing
industries.
The Bank offers a full range of banking services, including the following:
checking accounts; savings accounts; NOW accounts; money market accounts;
certificates of deposit; loans for real estate, construction, businesses,
agriculture, personal uses, home improvement and automobiles; equity lines of
credit; credit loans; consumer loans; credit cards; individual retirement
accounts; safe deposit boxes; bank money orders; internet banking; electronic
funds transfer services including wire transfers; traveler's checks; various
investments; and free notary services to all Bank customers. In addition, the
Bank provides automated teller machine access to its customers for cash
withdrawals through nationwide ATM networks. At present, the Bank does not
provide the services of a trust department.
The investment services subsidiary, Capital Bank Investment Services, Inc.,
makes available a full range of non-deposit investment services to individuals
and corporations, including the customers of the Bank. These investment services
include full-service securities brokerage, asset management, financial planning
and retirement services, such as 401(k) plans, all provided exclusively through
a strategic alliance with Raymond James Financial Services, Inc. ("Raymond
James"). Raymond James Financial Services is a wholly owned subsidiary of
Raymond James Financial, Inc. (NYSE: RJF) and is a leading provider of third
party investment services, serving more than 250 community banks nationwide.
These services are available in the offices of Capital Bank through registered
investment representatives.
Lending Activities and Deposits
Loan Types and Lending Policies. The Company makes a variety of loans, including
loans secured by real estate, loans for construction, loans for commercial
purposes and loans to individuals for personal and household purposes. There
were no large concentrations of credit to any particular industry. The economic
trends of the area served by the Company are influenced by the significant
industries within the region. Consistent with the Company's emphasis on being a
community-oriented financial institution, virtually all the Company's business
activity is with customers
3
located either in the Research Triangle Park area of North Carolina and
surrounding counties or Alamance County. The ultimate collectibility of the
Company's loan portfolio is susceptible to changes in the market conditions of
these geographic regions.
The Company uses a centralized risk management process to insure uniform credit
underwriting that adheres to bank policy. Lending policies are reviewed on a
regular basis to confirm that the Company is prudent in setting its underwriting
criteria. Credit risk is managed through a number of methods including loan
grading of commercial loans, committee approval of larger loans and class and
purpose coding of loans. Management believes that early detection of credit
problems through regular contact with the Company's clients coupled with
consistent reviews of the borrowers' financial condition are important factors
in overall credit risk management.
The following table sets forth, as of December 31, 2002, the approximate
composition of the Company's loan portfolio:
Loan Type Amount Percentage
-------------- ----------
(In thousands)
Commercial $430,817 71%
Consumer 51,069 9%
Home Equity Lines 45,935 8%
Residential mortgages 72,788 12%
-------- ---
$600,609 100%
======== ===
Deposits. The majority of the Company's deposit customers are individuals and
small to medium-size businesses located in Wake, Chatham, Granville, Warren,
Northampton, Alamance, and Lee Counties, North Carolina and contiguous areas and
the Asheville and Hickory, North Carolina communities. The Company's deposit
base is well diversified, with no material concentration in a single industry or
group of related industries. The management of the Company does not believe that
the deposits or the business of the Company in general are seasonal in nature.
The deposits may, however, vary with local and national economic conditions but
not enough, management believes, to have a material effect on planning and
policy making. The Company attempts to control deposit flow through the pricing
of deposits and promotional activities. Management believes that the Company's
rates are competitive with those offered by other institutions in the same
geographic area.
The following table sets forth the mix of depository accounts at the Company as
a percentage of total deposits as of December 31, 2002:
Non-interest bearing demand 8%
Interest checking 16%
Market rate investment 16%
Savings 3%
Time deposits:
Under $100,000 38%
Equal to or over $100,000 19%
---
100%
===
Competition
Commercial banking in North Carolina is extremely competitive in large part due
to statewide branching. The Company competes in its market area with some of the
largest banking organizations in the state and the country and other financial
institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit. Many of
the Company's competitors have broader geographic markets and higher lending
limits than the Company and are also able to provide more services and make
greater use of media advertising.
The enactment of legislation authorizing interstate banking has caused great
increases in the size and financial resources of some of the Company's
competitors. In addition, as a result of interstate banking, out-of-state
commercial banks may acquire North Carolina banks and heighten the competition
among banks in North Carolina.
4
Despite the competition in its market area, the Company believes that it has
certain competitive advantages that distinguish it from its competition. The
Company believes that its primary competitive advantages are its strong local
identity and affiliation with the communities it serves and its emphasis on
providing specialized services to small and medium-sized business enterprises,
as well as professional and upper-income individuals. The Company offers
customers modern, high-tech banking without forsaking community values such as
prompt, personal service and friendliness. The Company offers many personalized
services and attracts customers by being responsive and sensitive to their
individualized needs. The Company also relies on goodwill and referrals from
shareholders and satisfied customers, as well as traditional media to attract
new customers. To enhance a positive image in the community, the Company
supports and participates in local events and its officers and directors serve
on boards of local civic and charitable organizations.
Employees
At March 1, 2003, the Company employed 242 persons, of which 220 were full-time
and 22 were part-time. None of its employees are represented by a collective
bargaining unit. The Company considers relations with its employees to be good.
Supervision and Regulation
Holding companies, banks and many of their non-bank affiliates are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes, rules and regulations affecting the Company and the Bank. This
summary is qualified in its entirety by reference to the particular statutory
and regulatory provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to the
Company's or the Bank's business. Supervision, regulation and examination of the
Company and the Bank by bank regulatory agencies is intended primarily for the
protection of the Bank's depositors rather than holders of the Common Stock of
the Company.
Holding Company Regulation
General. The Company is a holding company registered with the Federal Reserve
under the Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company
and the Bank are subject to the supervision, examination and reporting
requirements contained in the BHCA and the regulation of the Federal Reserve.
The BHCA requires that a bank holding company obtain the prior approval of the
Federal Reserve before (i) acquiring direct or indirect ownership or control of
more than five percent of the voting shares of any bank, (ii) taking any action
that causes a bank to become a subsidiary of the bank holding company, (iii)
acquiring all or substantially all of the assets of any bank or (iv) merging or
consolidating with any other bank holding company.
The BHCA generally prohibits a bank holding company, with certain exceptions,
from engaging in activities other than banking, or managing or controlling banks
or other permissible subsidiaries, and from acquiring or retaining direct or
indirect control of any company engaged in any activities other than those
activities determined by the Federal Reserve to be closely related to banking,
or managing or controlling banks, as to be a proper incident thereto. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. For example,
banking, operating a thrift institution, extending credit or servicing loans,
leasing real or personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance
underwriting activities have all been determined by regulations of the Federal
Reserve to be permissible activities.
Pursuant to delegated authority, the Federal Reserve Bank of Richmond has
authority to approve certain activities of holding companies within its
district, including the Company, provided the nature of the activity has been
approved by the Federal Reserve. Despite prior approval, the Federal Reserve has
the power to order a holding company or its subsidiaries to terminate any
activity or to terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that continuation of such activity or such ownership
or control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that bank holding company.
5
Financial Holding Companies. The Gramm-Leach-Bliley Financial Modernization Act
of 1999 ("GLB"):
. allows bank holding companies meeting management, capital and the
Community Reinvestment Act of 1977 (the "CRA") standards to engage in
a substantially broader range of nonbanking activities than was
permissible prior to enactment, including insurance underwriting and
making merchant banking investments in commercial and financial
companies;
. allows insurers and other financial services companies to acquire
banks;
. removes various restrictions that applied to bank holding company
ownership of securities firms and mutual fund advisory companies; and
. establishes the overall regulatory structure applicable to bank
holding companies that also engage in insurance and securities
operations.
Effective April 23, 2001, the Company was authorized to operate as a financial
holding company and therefore is eligible to engage in the broader range of
activities that are permitted by the GLB. The GLB also is designed to modify
other current financial laws, including laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally prohibit
financial institutions, including the Company, from disclosing nonpublic
personal financial information to nonaffiliated third parties unless customers
have the opportunity to "opt out" of the disclosure.
Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions of banks
and bank holding companies without geographic limitation, subject to any state
requirement that the bank has been organized for a minimum period of time, not
to exceed five years, and the requirement that the bank holding company, prior
to, or following the proposed acquisition, controls no more than 10% of the
total amount of deposits of insured depository institutions in the U.S. and no
more than 30% of such deposits in any state (or such lesser or greater amount
set by state law).
In addition, the IBBEA permits a bank to merge with a bank in another state as
long as neither of the states has opted out of the IBBEA prior to May 31, 1997.
The state of North Carolina has "opted in" to such legislation. In addition, a
bank may establish and operate a de novo branch in a state in which the bank
does not maintain a branch if that state expressly permits de novo interstate
branching. As a result of North Carolina's opt-in law, North Carolina law
permits unrestricted interstate de novo branching.
Additional Restrictions and Oversight. Subsidiary banks of a bank holding
company are subject to certain restrictions imposed by the Federal Reserve on
any extensions of credit to the bank holding company or any of its subsidiaries,
investments in the stock or securities thereof and the acceptance of such stock
or securities as collateral for loans to any borrower. A bank holding company
and its subsidiaries are also prevented from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. An example of a prohibited tie-in would be
any arrangement that would condition the provision or cost of services on a
customer obtaining additional services from the bank holding company or any of
its other subsidiaries.
The Federal Reserve may issue cease and desist orders against bank holding
companies and non-bank subsidiaries to stop actions believed to present a
serious threat to a subsidiary bank. The Federal Reserve also regulates certain
debt obligations, changes in control of bank holding companies and capital
requirements.
Under the provisions of the North Carolina law, the Company is registered with
and subject to supervision by the North Carolina Commissioner of Banks (the
"Commissioner").
Capital Requirements. The Federal Reserve has established risk-based capital
guidelines for bank holding companies. The minimum standard for the ratio of
capital to risk-weighted assets (including certain off balance sheet
obligations, such as standby letters of credit) is eight percent. At least half
of this capital must consist of common equity, retained earnings and a limited
amount of perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less certain goodwill items ("Tier 1
capital"). The remainder ("Tier 2 capital") may consist of mandatory convertible
debt securities and a limited amount of other preferred stock, subordinated debt
and loan loss reserves.
6
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent.
The guidelines also provide that bank holding companies experiencing significant
growth, whether through internal expansion or acquisitions, will be expected to
maintain strong capital ratios substantially above the minimum supervisory
levels without significant reliance on intangible assets. The same heightened
requirements apply to bank holding companies with supervisory, financial,
operational or managerial weaknesses, as well as to other banking institutions
if warranted by particular circumstances or the institution's risk profile.
Furthermore, the guidelines indicate that the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") will continue to consider a
"tangible Tier 1 Leverage Ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activity. The Federal Reserve has not advised the
Company of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio
applicable to it.
As of December 31, 2002, the Company had Tier 1 risk-adjusted, total regulatory
capital and leverage capital of approximately 9.03%, 10.28% and 8.18%,
respectively, all in excess of the minimum requirements.
International Money Laundering Abatement and Financial Anti-Terrorism Act Of
2001. Title III of the USA Patriot Act of 2001 contains the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA").
The anti-money laundering provisions of IMLAFA impose affirmative obligations on
a broad range of financial institutions, including banks, brokers, and dealers.
Among other requirements, IMLAFA requires all financial institutions to
establish anti-money laundering programs that include, at minimum, internal
policies, procedures, and controls; specific designation of an anti-money
laundering compliance officer; ongoing employee training programs; and an
independent audit function to test the anti-money laundering program. IMLAFA
requires financial institutions that establish, maintain, administer, or manage
private banking accounts for non-United States persons or their representatives
to establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering. Additionally, IMLAFA provides for the Department of Treasury to
issue minimum standards with respect to customer identification at the time new
accounts are opened. The Company has determined the impact that IMLAFA will have
on the Bank's operations is not material. The Bank has established policies and
procedures to ensure compliance with the IMLAFA that were approved by the Board
of Directors.
Bank Regulation
The Bank is subject to numerous state and federal statutes and regulations that
affect its business, activities, and operations, and is supervised and examined
by the Commissioner and the Federal Reserve. The Federal Reserve and the
Commissioner regularly examine the operations of banks over which they exercise
jurisdiction. They have the authority to approve or disapprove the establishment
of branches, mergers, consolidations and other similar corporate actions. They
also have authority to prevent the continuance or development of unsafe or
unsound banking practices and other violations of law. The Federal Reserve and
the Commissioner regulate and monitor all areas of the operations of banks and
their subsidiaries, including loans, mortgages, issuances of securities, capital
adequacy, loss reserves and compliance with the CRA as well as other laws and
regulations. Interest and certain other charges collected and contracted for by
banks are also subject to state usury laws and certain federal laws concerning
interest rates.
The deposit accounts of the Bank are insured by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum
of $100,000 per insured depositor. The FDIC issues regulations and conducts
periodic examinations, requires the filing of reports and generally supervises
the operations of its insured banks. This supervision and regulation is intended
primarily for the protection of depositors. Any insured bank that is not
operated in accordance with or does not conform to FDIC regulations, policies
and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.
Under the North Carolina corporation laws, the Company may not pay a dividend or
distribution, if after giving its
7
effect, the Company would not be able to pay its debts as they become due in the
usual course of business or the Company's total assets would be less than its
liabilities. In general, the Company's ability to pay cash dividends is
dependent upon the amount of dividends paid by the Bank. The ability of the Bank
to pay dividends to the Company is subject to statutory and regulatory
restrictions on the payment of cash dividends, including the requirement under
the North Carolina banking laws that cash dividends be paid only out of
undivided profits and only if the bank has surplus of a specified level. The
Federal Reserve also imposes limits on the Bank's payment of dividends.
Like the Company, the Bank is required by federal regulations to maintain
certain minimum capital levels. The levels required of the Bank are the same as
required for the Company. At December 31, 2002, the Bank had Tier 1
risk-adjusted, total regulatory capital and leverage capital of approximately
9.07%, 10.32% and 8.23%, respectively, all in excess of the minimum
requirements.
The Bank is subject to insurance assessments imposed by the FDIC. The FDIC has
adopted a risk-based assessment schedule providing for annual assessment rates
ranging from 0% to 27% of an institution's average assessment base, applicable
to institutions insured by both the BIF and the Savings Association Insurance
Fund ("SAIF"). The actual assessment to be paid by each insured institution is
based on the institution's assessment risk classification, which focuses on
whether the institution is considered "well capitalized," "adequately
capitalized" or "under capitalized," as such terms are defined in the applicable
federal regulations. Within each of these three risk classifications, each
institution will be assigned to one of three subgroups based on supervisory risk
factors. In particular, regulators will assess supervisory risk based on whether
the institution is financially sound with only a few minor weaknesses (Subgroup
A), whether it has weaknesses which, if not corrected, could result in an
increased risk of loss to the BIF (Subgroup B) or whether such weaknesses pose a
substantial risk of loss to the BIF unless corrective action is taken (Subgroup
C). The FDIC also is authorized to impose one or more special assessments in an
amount deemed necessary to enable repayment of amounts borrowed by the FDIC from
the United States Treasury Department and all banks are now required to pay
additional annual assessments at rates set by the Financing Corporation, which
was established by the Competitive Equality Banking Act of 1987.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
provides for, among other things, (i) publicly available annual financial
condition and management reports for certain financial institutions, including
audits by independent accountants, (ii) the establishment of uniform accounting
standards by federal banking agencies, (iii) the establishment of a "prompt
corrective action" system of regulatory supervision and intervention, based on
capitalization levels, with greater scrutiny and restrictions placed on
depository institutions with lower levels of capital, (iv) additional grounds
for the appointment of a conservator or receiver and (v) restrictions or
prohibitions on accepting brokered deposits, except for institutions which
significantly exceed minimum capital requirements. FDICIA also provides for
increased funding of the FDIC insurance funds and the implementation of
risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity. FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.
Banks are also subject to the CRA, which requires the appropriate federal bank
regulatory agency, in connection with its examination of a bank, to assess such
bank's record in meeting the credit needs of the community served by that bank,
including low and moderate-income neighborhoods. Each institution is assigned
one of the following four ratings of its record in meeting community credit
needs: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company,
8
and such records may be the basis for denying the application.
The GLB's "CRA Sunshine Requirements" call for financial institutions to
disclose publicly certain written agreements made in fulfillment of the CRA.
Banks that are parties to such agreements also must report to federal regulators
the amount and use of any funds expended under such agreements on an annual
basis, along with such other information as regulators may require.
Monetary Policy and Economic Controls
The Company and the Bank are directly affected by governmental policies and
regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the money
supply which, in turn, affects banks' lending abilities by increasing or
decreasing the cost and availability of funds to banks. The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in United
States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits and
limitations on interest rates that banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types of
deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates has generally increased banks' cost of funds and made them more
sensitive to fluctuations in money market rates. In view of the changing
conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or the
business and earnings of the Bank or the Company. As a result, banks, including
the Bank, face a significant challenge to maintain acceptable net interest
margins.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position With Company
- -------------------- --- -----------------------------------------
James A. Beck 50 President and Chief Executive Officer
Allen T. Nelson, Jr. 53 Executive Vice President, Chief Financial
Officer and Secretary
Franklin G. Shell 44 Executive Vice President and Chief Credit
Officer
James A. Beck is currently President and Chief Executive Officer of the Company,
a position he has held since the Company commenced operations. Mr. Beck served
as Chairman, President and Chief Executive Officer of SouthTrust Bank of North
Carolina, N.A. from January 1991 until June 1996 when it was merged into the
SouthTrust Charlotte-based bank. Mr. Beck thereafter served as President and a
director of the combined bank until January 1997, when he resigned to join the
Company.
Allen T. Nelson, Jr. has been employed by the Company since February, 1998, as
its Chief Financial Officer and Secretary. From December 1993 through January
1998, Mr. Nelson served as the Senior Vice President and Chief Financial Officer
for Jefferson Bankshares, Inc. and its principal subsidiary, Jefferson National
Bank, both based in Charlottesville, Virginia.
Franklin G. Shell has been employed with the Company since April, 1997, as its
Executive Vice President and Chief Credit Officer. Prior thereto, from 1989, Mr.
Shell was employed by the North Carolina-based bank, Branch Banking and Trust
Company, serving as a commercial loan officer in its Raleigh, North Carolina
office.
Item 2. Properties.
The Company currently leases property located at 4901 Glenwood Avenue, Raleigh,
North Carolina for its principal
9
offices and a branch office. The lease is for approximately 21,600 square feet,
of which approximately 18,600 square feet is for the Company's principal offices
and the remainder for the branch office. In addition to this facility, the
Company also has various branches and offices either owned or leased throughout
its market area.
Item 3. Legal Proceedings.
There are no pending material legal proceedings to which the Company is a party
or of 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
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 2002, there were no
matters submitted to a vote of the Company's shareholders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Shares of Capital Bank Corporation common stock are traded on the Nasdaq
National Market under the symbol "CBKN." As of March 21, 2003, the Company had
approximately 1,804 holders of record of its Common Stock. The following table
sets forth, for the indicated periods, the high and low closing prices for the
Common Stock and the cash dividend declared per share of the Company's common
stock:
Cash
Dividends
Per Share
2002 High Low Declared
---- ------ ------ ---------
First Quarter $15.50 $10.70 $0.05
Second Quarter $16.00 $14.10 $0.05
Third Quarter $15.30 $14.00 $0.05
Fourth Quarter $14.89 $12.25 $0.05
Cash
Dividends
Per Share
2001 High Low Declared
---- ------ ------ ---------
First Quarter $11.25 $ 8.63 N/A
Second Quarter $11.70 $10.25 N/A
Third Quarter $13.50 $11.05 N/A
Fourth Quarter $11.50 $10.40 N/A
Dividend Policy. The Company's shareholders are entitled to receive such
dividends or distributions as the Board of Directors authorizes in its
discretion. The Company's ability to pay dividends is subject to the
restrictions of the North Carolina Business Corporation Act. There are also
various statutory limitations on the ability of the Bank to pay dividends to the
Company. Subject to the legal availability of funds to pay dividends, during
fiscal year 2002, the Company declared and paid quarterly dividends at an annual
rate of $0.20 per share. The Company intends to pay approximately 20% of its
annual net earnings to shareholders in the form of annual cash dividends if such
cash dividends are in the best interest of the
10
Company in the business judgment of its Board of Directors and are consistent
with maintaining the Company's status as a "well-capitalized" institution under
applicable banking laws and regulations.
Recent Sales of Unregistered Securities. The Company did not sell any securities
in the fiscal year ended December 31, 2002 which were not registered under the
Securities Act of 1933, as amended.
11
Item 6. Selected Financial Data.
The following table sets forth selected financial information for the Company
that has been derived from the financial statements and notes thereto. This
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes thereto included elsewhere in this report.
(In thousands except share and per share data) As of or for the year ended December 31 (1)
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Selected Balance Sheet Data
Cash and Due From Banks $ 32,837 $ 15,173 $ 27,676 $ 9,702 $ 10,365
Federal Funds Sold 18,696 944 750 1,960 16,400
Securities 155,304 73,702 61,947 46,581 37,626
Gross Loans 600,609 306,891 242,275 159,329 110,779
Allowance for Loan Losses 9,390 4,286 3,463 2,328 1,457
Total Assets 840,976 406,741 343,620 222,337 179,993
Deposits 644,887 304,443 279,094 163,245 137,343
Borrowings 97,858 50,000 15,000 20,000 5,066
Repurchase Agreements 13,081 11,167 9,804 4,818 2,501
Shareholders' Equity 75,471 36,983 35,015 31,126 33,507
Summary of Operations
Interest Income $ 36,244 $ 26,173 $ 23,751 $ 14,553 $ 10,530
Interest Expense 15,895 14,701 13,101 7,656 5,527
---------- ---------- ---------- ---------- ----------
Net Interest Income 20,349 11,472 10,650 6,897 5,003
Provision for Loan Losses 4,190 1,215 1,110 924 792
---------- ---------- ---------- ---------- ----------
Net Interest Income After Provision For Loan Losses 16,159 10,257 9,540 5,973 4,211
Non-interest Income 7,987 4,490 2,193 1,260 716
Non-interest Expense Excluding Non-recurring
Merger Related Costs 17,465 11,847 9,506 6,477 5,525
Non-recurring Merger Related Costs -- -- 90 1,647 288
Income Tax Expense (Benefit) 2,374 480 (36) (40) 10
---------- ---------- ---------- ---------- ----------
Net Income (Loss) $ 4,307 $ 2,420 $ 2,173 $ (851) $ (896)
========== ========== ========== ========== ==========
Per Share Data
Net Income (Loss) - Basic $ .79 $ .65 $ .59 $ (.23) $ (.25)
Net Income (Loss) - Diluted .76 .65 .59 (.23) (.25)
Book Value 11.44 10.28 9.57 8.51 9.19
Number of Common Shares Outstanding 6,595,784 3,597,339 3,658,689 3,658,689 3,658,689
Selected Ratios
Return On Average Assets .66% .65% .73% (0.42)% (0.60)%
Return on Average Shareholders' Equity 7.43% 6.69% 6.21% (2.68)% (2.62)%
Average Shareholders' Equity to Average Total Assets 8.89% 9.69% 11.83% 15.81% 23.08%
Net Interest Margin 3.32% 3.26% 3.78% 3.61% 3.55%
(1) Capital Bank opened for business on June 20, 1997. Capital Bank Corporation
was formed on March 31, 1999. Balances for year ended December 31, 1998
have been restated to reflect the combined balances of Capital Bank and
Home Savings Bank of Siler City for that period.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information set forth in this Annual Report on Form 10-K 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 and financial position to differ materially from the forward
looking statements. 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 any 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,
including without limitation, the Company's management of its growth, the risks
associated with possible or completed acquisitions, competition within the
industry, dependence on key personnel, government regulation and the other risk
factors described herein.
The following discussion and analysis is intended to aid the reader in
understanding and evaluating the results of operations and financial condition
of the Company and its subsidiaries, Capital Bank (the "Bank") and Capital Bank
Investment Services, Inc. ("CBIS"). This discussion is designed to provide more
comprehensive information about the major components of the Company's results of
operations and financial condition, liquidity, and capital resources than could
be obtained from reading the financial statements alone. This discussion should
be read in conjunction with the Company's consolidated financial statements, the
related notes and the selected financial data presented elsewhere in this
report.
Overview. Capital Bank is a full-service state chartered community bank
conducting business primarily in the Research Triangle region and surrounding
areas of North Carolina. The Bank was incorporated on May 30, 1997 and opened
its first branch in June of that same year in Raleigh. In 1999, the shareholders
of the Bank approved the reorganization of Capital Bank into a bank holding
company named "Capital Bank Corporation". On March 1, 2001, Capital Bank
Corporation announced that it had formed Capital Bank Investment Services, Inc.,
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 the customers of the Bank. On April 23, 2001, the Company received
approval to become a financial holding company.
On January 18, 2002, the Company completed the acquisition of First Community
Financial Corporation in Burlington, NC ("First Community") and its sole
subsidiary, Community Savings Bank, Inc ("Community Savings Bank"). Community
Savings Bank operated four banking offices in Alamance County, North Carolina.
Community Savings Bank was originally chartered in 1934 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
transaction was accounted for as a purchase transaction. At the close of
business on March 15, 2002 Community Savings Bank was merged into Capital Bank
and the banking offices of Community Savings Bank opened for business on March
18, 2002 under the Capital Bank name.
On December 2, 2002, the Company completed the acquisition of High Street
Corporation in Asheville, NC ("High Street"), the holding company for High
Street Bank ("High Street Bank"). High Street Bank operated three banking
offices, two in Asheville, North Carolina and one in Hickory, North Carolina.
High Street Bank was originally chartered in 1997, 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 transaction
was accounted for as a purchase transaction. At the close of business on
December 6, 2002 High Street Bank was merged into Capital Bank and the banking
offices of High Street Bank opened for business on December 9, 2002 under the
Capital Bank name.
As of December 31, 2002 the holding company conducted no business other than
holding stock in Capital Bank and Capital Bank Investment Services, Inc. As a
community bank, the Bank's profitability depends primarily upon its levels of
net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's operations are also affected by its provision for loan losses,
non-interest income, and non-interest expenses. As an investment company, the
profitability of CBIS is fully dependant on the amount of commissions generated
from the sales of various investment products.
13
Critical Accounting Policies and Estimates. The Company's discussion and
analysis of its financial condition and results of operations are based upon the
Company's consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments regarding uncertainties that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to the reserve for loan losses,
investment and intangible asset values, income taxes, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements:
. Capital Bank records estimated loan loss reserves based on known
problem loans and estimated deficiencies in the existing loan
portfolio. The reserve calculation takes into account historic
write-off trends and current market and economic conditions. If
economic conditions were to decline significantly or the financial
condition of the Bank's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional reserves may
be required.
. The Company records an investment impairment charge when it believes
an investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions and associated
market values of investments could result in losses or an inability to
recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
. The Company assesses the need to record a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than
not to be realized. The Company considers anticipated future taxable
income and ongoing prudent and feasible tax planning strategies in
determining the need for the valuation allowance which, at this time,
it deems not to be necessary. In the event the Company were to
determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was
made.
. The Company accounts for all business combinations using the purchase
method of accounting. As a result, net assets acquired are recorded at
fair value at the date of acquisition, as such, the historical costs
basis of individual assets and liabilities are adjusted to reflect
their fair value.
. Goodwill is not amortized, but is reviewed for potential impairment on
an annual basis at the reporting unit level. Identified intangible
assets are amortized on a straight-line basis. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds
its implied value.
. Long-lived assets, including identified intangible assets, are
evaluated for impairment if events or circumstances indicate a
possible impairment. Such evaluations are based on undiscounted cash
flow projections. The disposal of long-lived assets is measured based
on the lower of the book or fair value less the costs to sell.
Results of Operations. Capital Bank Corporation reported net income of $4.3
million, $2.4 million, and $2.2 million for the years ended December 31, 2002,
2001 and 2000, respectively. On a fully diluted per share basis, net income for
2002, 2001, and 2000 was $.76, $.65 and $.59, respectively.
Net Interest Income. Net interest income is the difference between total
interest income and total interest expense and is the Company's principal source
of earnings. The amount of net interest income is determined by the volume of
interest-earning assets, the level of rates earned on those assets, and the
volume and cost of supporting funds. Net interest income increased from $11.5
million in 2001 to $20.3 million in 2002, an increase of $8.8 million or 77%.
Net interest income increased between 2000 and 2001 by $822,000 or 8% from the
2000 amount of $10.7 million. Increases during both periods are primarily due to
significant increases in the volume of interest-bearing assets and liabilities
as the Bank has experienced rapid growth both internally and through
acquisition. The increases for both years were negatively affected by a rapid
and significant decline in market rates during 2001. During 2001, the prime
14
rate dropped from 9.00% in January to 4.75% in December with a decline in rates
of at least 25 basis points in every month of 2001 except July as the Federal
Reserve made 11 separate moves to reduce interest rates in efforts to stimulate
the economy. In 2002, the Federal Reserve held interest rates steady for a
majority of the year, but made one move in November that resulted in an
additional 50 basis point drop in the prime rate to 4.25%. Though rates remained
somewhat steady during 2002, net interest income was affected by an entire year
of the lower rates put in place during 2001. Since the Bank's loan portfolio
adjusted with prime at a faster rate than the deposit portfolio, the rapidly
declining rate environment had a negative effect on net interest spread and net
interest margin. Net interest spread is the difference between rates earned on
interest-earning assets and the interest paid on deposits and other borrowed
funds. Net interest margin is the total of net interest income divided by
average earning assets. Average earning assets in 2002 were $612.2 million, up
74% when compared to $352.2 million for 2001. The net interest margin was 3.32%
in 2002, a 6 basis point rise from the 2001 net interest margin of 3.26%. Net
interest spread was 3.03% and 2.67% for 2002 and 2001, respectively.
Interest income increased 38% in 2002 to $36.2 million from $26.1 million in
2001. The amount recorded in 2001 represented a 10% increase from the $23.8
million earned in 2000. For each year, this increase is primarily due to the
significant growth in the Company's loan portfolio. The average yield on
interest-earning assets for 2002 was 5.92%, a decline of 151 basis points from
the 2001 yield of 7.43%. The average yield for 2001 was down 100 basis points
from 8.43% in 2000. The decreases in average yield during 2002 and 2001 were
primarily attributable to the overall decline in market rates as explained
above. The average loan portfolio as a percentage of earning assets was 77% in
2002, up 1% from 2001. The average balances of loans, which had yields of 6.30%
and 7.85% for 2002 and 2001, respectively, increased from $267 million in 2001
to $470 million in 2002. The average balances of federal funds and other
short-term investments grew from $13.2 million in 2001 to $22.3 million in 2002,
but the average yield in this category dropped 225 basis points from 3.91% to
1.66% over the same time period. Investment yield decreased from 6.51% in 2001
to 5.23% in 2002. This decrease also reflects the results of the decline in
market rates over the last two years. The yield on investments increased during
2001 as compared to the 2000 yield of 6.39%. This increase was attributable to a
large number of federal agency bonds with high yields that were purchased at
discounts in previous years being called during 2001 by the various agencies
associated with the investment. When those bonds were called, the associated
discounts were taken into income as yield adjustments. During 2001, investments
with a par value of $28.0 million were called with $243,000 in discounts
remaining at call date, all of which was taken into income as yield adjustments.
Interest expense increased 8% in 2002 to $15.9 million from the $14.7 million
recorded during 2001. The 2001 balance reflected a 12% increase from the $13.1
million expensed in 2000. This increase is primarily due to a significant
increase in average interest-bearing deposits, which went from $221.7 million in
2000 to $271.4 million in 2001 to $463.3 million in 2002. The average rates on
interest-bearing deposits decreased from 4.76% in 2001 to 2.71% in 2002. The
decrease in average rates during 2002 is reflective of the overall decrease in
market rates offered during 2002 as compared to the previous year. As previously
mentioned, the Bank's loan portfolio adjusted with prime at a faster rate than
the deposit portfolio as a result of the Federal Reserve's actions to decrease
interest rates in 2001. Much of the effect of their actions on the deposit
portfolio took place in 2002. In particular, the average rate on time deposits,
which represented 54% of all interest bearing liabilities during 2002, dropped
231 basis points from 5.56% in 2001 to 3.25% in 2002.
The following two tables set forth certain information regarding the Company's
yield on interest-earning assets and cost of interest-bearing liabilities and
the component changes in net interest income. The first 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. Changes in net interest income from year to
year can be explained in terms of fluctuations in volume and rate. The second
table presents information on those changes.
15
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
(Dollars in thousands)
Year Ended December 31, 2002 Year Ended December 31, 2001 Year Ended December 31, 2000
---------------------------- ---------------------------- ----------------------------
Average Amount Average Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate Balance Earned Rate
-------- ------- ------- -------- ------- ------- -------- ------- -------
Assets
Loans receivable: (1)
Commercial $324,900 $19,573 6.02% $191,215 $14,772 7.73% $140,319 $13,111 9.34%
Consumer 36,408 2,852 7.83% 25,467 2,267 8.90% 18,170 1,781 9.80%
Home equity 39,483 2,368 6.00% 26,323 2,012 7.64% 19,019 1,703 8.95%
Residential mortgages 69,267 4,808 6.94% 24,280 1,931 7.95% 30,598 2,474 8.09%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total loans 470,058 29,601 6.30% 267,285 20,982 7.85% 208,106 19,069 9.16%
Investment securities 119,925 6,273 5.23% 71,748 4,674 6.51% 53,541 3,419 6.39%
Federal funds sold and other
interest on short term investments 22,259 370 1.66% 13,207 517 3.91% 19,954 1,263 6.33%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning assets 612,242 $36,244 5.92% 352,240 $26,173 7.43% 281,601 $23,751 8.43%
======= ==== ======= ==== ======= ====
Cash and due from banks 15,965 9,679 4,946
Other assets 30,871 15,409 12,478
Reserve for loan losses (7,157) (3,980) (2,993)
-------- -------- --------
Total assets $651,921 $373,348 $296,032
======== ======== ========
Liabilities and Equity
Savings deposits $ 19,103 $ 170 0.89% $ 6,283 $ 92 1.46% $ 6,826 $ 172 2.52%
Interest-bearing demand deposits 147,427 2,746 1.86% 77,872 2,417 3.10% 50,295 1,934 3.85%
Time deposits 296,790 9,651 3.25% 187,207 10,416 5.56% 164,612 9,763 5.93%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing deposits 463,320 12,567 2.71% 271,362 12,925 4.76% 221,733 11,869 5.35%
Borrowed funds 72,714 3,118 4.29% 26,288 1,427 5.43% 13,861 861 6.21%
Repurchase agreements 14,254 210 1.47% 10,966 349 3.18% 7,346 371 5.05%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 550,288 $15,895 2.89% 308,616 $14,701 4.76% 242,940 $13,101 5.39%
======= ==== ======= ==== ======= ====
Non-interest bearing deposits 35,064 24,312 16,458
Other liabilities 8,610 4,231 4,499
-------- -------- --------
Total liabilities 593,962 337,159 263,897
Shareholders' equity 57,959 36,189 32,135
-------- -------- --------
Total liabilities and equity $651,921 $373,348 $296,032
======== ======== ========
Net interest spread (2) 3.03% 2.67% 3.04%
Net interest income and net
interest margin (3) $20,349 3.32% $11,472 3.26% $10,650 3.78%
(1) Loans receivable include nonaccrual loans for which accrual of interest has
not been recorded. See Note 1 to the Financial Statements, "Summary of
Significant Accounting Policies - Income Recognition on Impaired and
Nonaccrual Loans"
(2) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents the net interest income divided by average
interest-earning assets.
16
Rate & Volume Variance Analysis
Years Ended Years Ended
December 31, 2002 December 31, 2001
vs. 2001 vs. 2000
----------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
(Dollars in thousands) Variance Variance Variance Variance Variance Variance Variance Variance
-------- -------- -------- -------- -------- -------- -------- --------
Interest Income:
Loans receivable $15,918 $(4,150) $(3,149) $ 8,619 $5,423 $(2,733) $(777) $1,913
Investment securities 3,138 (921) (618) 1,599 1,163 69 23 1,255
Federal funds sold 354 (297) (204) (147) (427) (482) 163 (746)
------- ------- ------- ------- ------ ------- ----- ------
Total interest income 19,410 (5,368) (3,971) 10,071 6,159 (3,146) (591) 2,422
------- ------- ------- ------- ------ ------- ----- ------
Interest Expense:
Savings and interest-bearing
demand deposits and other 2,456 (1,035) (1,014) 407 997 (403) (191) 403
Time deposits 6,097 (4,328) (2,534) (765) 1,340 (604) (83) 653
Borrowed funds 2,520 (300) (529) 1,691 772 (109) (97) 566
Repurchase agreements 105 (187) (57) (139) 183 (137) (68) (22)
------- ------- ------- ------- ------ ------- ----- ------
Total interest expense 11,178 (5,850) (4,134) 1,194 3,292 (1,253) (439) 1,600
------- ------- ------- ------- ------ ------- ----- ------
Increase (decrease) in net interest
income $ 8,232 $ 482 $ 163 $ 8,877 $2,867 $(1,893) $(152) $ 822
======= ======= ======= ======= ====== ======= ===== ======
Provision for Loan Losses. The provision for loan losses is the amount charged
against earnings for the purpose of establishing an adequate allowance for
probable loan losses. Loan losses are, in turn, charged to this allowance rather
than being reported as a direct expense. In 2002, 2001 and 2000, amounts
expensed as loan loss provisions were $4.2 million, $1.2 million, and $1.1
million, respectively. The amount of the allowance for loan losses is
established based on management's estimate of the inherent risks associated with
lending activities, estimated fair value of collateral, past experience and
present indicators such as delinquency rates and current market conditions. This
estimate is regularly reviewed and modified, as necessary. Loans of $250,000 or
more are subject to specific review for impairment in accordance with Statement
of Financial Standards No. 114. The allowance for loan losses was $9.4 million
and $4.3 million on December 31, 2002 and 2001, respectively, and represented
approximately 1.56% and 1.40% of total loans outstanding on those dates.
The Company experienced higher loan charge offs during 2002 when compared to
previous years. Management believes that this is due in part to a weakened
economy. During 2002, the Company charged off $3.7 million in loans, net of
$336,000 in recoveries. Of that amount, $2.9 million related to four business
customer relationships. During 2001, the Company charged off $392,000 in loans,
net of $25,000 in recoveries. Charge-offs in 2000 amounted to $362,000, net of
$1,000 in recoveries.
Management has allocated the allowance for loan losses by category. This
allocation is based on management's assessment of the risk associated with the
different types of lending activities.
At December 31,
-----------------------------------------------------
2002 2001
------------------------- -------------------------
Allowance % of Loans to Allowance % of Loans to
(Dollars in thousands) Amount Total Loan Amount Total Loans
--------- ------------- --------- -------------
Commercial $7,309 71% $3,261 75%
Consumer 1,105 9% 438 9
Residential mortgages 468 12% 98 7
Equity lines 508 8% 373 9
Unallocated -- -- 116 --
------ --- ------ ---
$9,390 100% $4,286 100%
====== === ====== ===
The following table shows changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off by loan
category and additions to the allowance which have been charged to operating
expenses.
17
Analysis of Reserve for Loan Losses
As of and For the
Years Ended
December, 31
------------------------------
(In thousands) 2002 2001 2000
-------- -------- --------
Average amount of loans outstanding, net of unearned income $470,058 $267,285 $208,106
Amount of loans outstanding at year end, net of unearned income 600,609 306,891 242,275
Reserve for loan losses:
Balance at beginning of period $ 4,286 $ 3,463 $ 2,328
Adjustment for loans acquired 4,593 -- 387
Loans charged off:
Commercial 3,545 273 249
Consumer 470 144 114
-------- -------- --------
Total chargeoffs 4,015 417 363
-------- -------- --------
Recoveries of loans previously charged off:
Commercial 263 17 --
Consumer 73 8 1
-------- -------- --------
Total recoveries 336 25 1
-------- -------- --------
Net loans charged off 3,679 392 362
-------- -------- --------
Provision for loan losses 4,190 1,215 1,110
-------- -------- --------
Balance at December 31 $ 9,390 $ 4,286 $ 3,463
======== ======== ========
Ratio of net chargeoffs to average loans outstanding during the year 0.78% 0.15% 0.17%
======== ======== ========
The following table shows the total of the nonperforming assets in the Company's
portfolio as of December 31, 2002 and 2001. Loans deemed to be impaired at
December 31, 2002 and 2001 amounted to $1.2 million and $1.8 million,
respectively. Average impaired loans during 2002 and 2001 were $2.2 million and
$722,000, respectively.
(In thousands) 2002 2001
------ ------
Nonperforming assets:
Nonaccrual loans - Commercial $1,015 $2,380
Nonaccrual loans - Consumer 239 590
Nonaccrual loans - Mortgage 1,371 81
Nonaccrual loans - Equity lines 422 19
------ ------
Total nonaccrual loans 3,047 3,070
Foreclosed properties 947 --
------ ------
Total nonperforming assets $3,994 $3,070
====== ======
Nonperforming assets to:
Loans outstanding at end of year 0.66% 1.00%
Total assets at end of year 0.48% 0.75%
Non-interest Income. Non-interest income was $8.0 million, $4.5 million, and
$2.2 million for years ended December 31, 2002, 2001, and 2000, respectively.
The increases for those periods as a percentage of the prior year's amounts are
78% for 2002 and 105% for 2001. The increases in non-interest income for 2002
and 2001 are primarily attributable to increases in fees associated with deposit
accounts and a large increase in fees associated with the Company's mortgage
loan origination activities. The large increase in fees associated with the
mortgage loan origination activities was a direct result of attractive mortgage
rates during 2002 due to the lower interest rate environment. Mortgage loan
origination fees increased from $989,000 in 2000 to $2.0 million during 2001 to
$3.3 million for 2002. Fees associated with deposit accounts increased primarily
as a result of the increased volume of deposit accounts. In fact, total service
charges and fees as a percent of the deposit base dropped from .57% in 2001 to
..36% in 2002. However, the addition of a new overdraft checking privilege
program called Bounce Free checking, which the Company added during the second
quarter of 2001, substantially increased fee income from the previous year.
Service charges and fees, which
18
include the Bounce Free checking program, have increased from $925,000 in 2000
to $1.7 million in 2001 to $2.4 million in 2002. In addition, the Company
realized gains of $981,000 on the sale of investment securities during 2002
versus a realized gain of $190,000 in 2001. There were no securities gains or
losses taken in 2000.
Non-interest Expense. Non-interest expense represents the overhead expenses of
the Company. Management regularly monitors all categories of non-interest
expense in an attempt to improve productivity and operating performance.
Non-interest expense increased 52% to $18.0 million in 2002 from $11.8 million
in 2001. The expense recorded during 2001 was 25% higher than the $9.5 million
amount recorded in 2000. The increase in 2002 reflects the additional operating
costs associated with growth as the Bank added more staff to handle increases in
volume of business as a result of internal growth and the acquisition of two
other financial institutions during the year. At December 31, 2001 there were 14
branches and 127 full time equivalent employees. During 2002, the Bank added 7
branches through acquisition and accompanying support personnel, expanded both
the commercial lending area and the mortgage origination group, and had an
overall increase in the volume of transactions processed and the number of
customers. At December 31, 2002 there were 21 branches and 231 full time
equivalent employees.
Specific categories of expenses and related causes for increases are as follows:
Salary and benefit expense for the years ended December 31, 2002, 2001, and 2000
were $9.8 million, $6.3 million, and $4.9 million, respectively. Increases each
year were the result of additional personnel hired as new branches and
departments were added or obtained through acquisition each year as discussed
above. Occupancy expense increased from $800,000 in 2000 to $1.2 million in 2000
and to $1.6 million in 2002. The increases were primarily a result of lease
expenses associated with new locations and additional space needed for expansion
of existing departments. Furniture and equipment expense increased from $508,000
in 2000 to $703,000 in 2001 and to $1.1 million in 2002 due to the increase in
these assets needed for the new locations and general expansion. The increases
in other operating expenses from 2001 to 2002 included a 53% increase in
telephone expenses from $125,000 to $191,000, a 43% increase in postage from
$178,000 to $256,000, and a 68% increase in public relations and advertising
costs from $346,000 to $578,000. In addition, courier costs, or those costs
associated with getting customer transactions to the Bank's outside processing
center, increased due to the additional branches being serviced by such
couriers. All such increases were a direct result of the new branches or
expansion of existing departments and were within management's expected ranges.
Provision for Income Taxes. Current federal and state income tax expenses
resulting from operations during 2000 were offset by the reversal of valuation
allowances on deferred tax assets for that same amount during those same
periods. Accordingly, total income tax benefits recorded on the Consolidated
Statements of Operations during the year ended December 31, 2000 reflects only
the actual amounts received back from the federal and state taxing authorities
for refunds of prior year over payments. During 2001, the Company reversed all
of the remaining valuation allowances and the 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. That benefit was offset by additional tax
expenses during 2001 to leave a net tax expense during that year of $480,000.
Throughout 2002, the Company was fully taxable and recorded a tax expense of
$2.4 million.
Financial Condition. The Company's financial condition is measured in terms of
its asset and liability composition, asset quality, capital resources, and
liquidity. The growth and composition of assets and liabilities during 2002 and
2001 reflected the acquisitions of First Community and High Street and their
banking subsidiaries, as well as the Company's internal business development
activities. The Company has not engaged in investment strategies involving
derivative financial instruments. Asset and liability management is conducted
without the use of forward-based contracts, options, swap agreements, or other
synthetic financial instruments derived from the value of an underlying asset,
reference rate, or index.
Total assets were $841.0 million and $406.7 million at December 31, 2002 and
2001, respectively. The increase in total assets of $434 million in 2002, or
107%, reflects the two acquisitions the Company completed in 2002 as well as the
strong internal growth trend of the Bank since its incorporation in 1997. The
largest component of asset growth was the increase in loans.
Total liabilities increased from $369.8 million in 2001 to $765.5 million in
2002. The primary cause for the increase between the periods is an increase in
deposits as a result of the two acquisitions, internal growth and an increase in
borrowings. Increases in these liabilities were used to fund loan growth.
Stockholders' equity increased from $37.0 million in 2001 to $75.5 million in
2002. The increase is due primarily to
19
the two acquisitions the Company completed in 2002 as the bank issued $38.5
million in stock in connection with the acquisitions. In addition, retained
earnings increased as a result of the current period net income of $4.3 million
offset in part by dividends paid to shareholders and a reduction of equity as a
result of a stock buyback program whereby the Company acquired $4.9 million
worth of its outstanding stock. In addition, the market value of the Company's
investment portfolio increased $725,000 as a result of the changing interest
rate environment. These unrealized gains are included net of taxes in
stockholders' equity.
Assets
Cash and Cash Equivalents. Cash and cash equivalents, including
non-interest-bearing and interest-bearing cash and federal funds sold, increased
from $16.1 million in 2001 to $51.5 million in 2002. The increase is primarily
the result of funds received from the increases in deposits associated with the
two acquisitions not yet being invested in loans or in the investment portfolio.
In addition, the Company has to keep more cash on hand as a result of the seven
branches added through acquisition in 2002 and the increased reserve
requirements of the Federal Reserve associated with the Company's overall
increase in size.
Loan Portfolio. Total loans were $600.6 million and $306.9 million as of
December 31, 2002 and 2001, respectively. The acquisitions of First Community
and High Street and their additional branch facilities, low interest rates
during 2002, and the Company's business development activities were key factors
in the growth of the loan portfolio during those periods. At December 31, 2002,
commercial loans, mortgage loans, consumer loans, and equity lines were $430.9
million, $72.7 million, $51.1 million, and $45.9 million, respectively. At
December 31, 2001, commercial loans, mortgage loans, consumer loans, and equity
lines were $229.3 million, $20.9 million, $28.2 million, and $28.4 million,
respectively. The commercial loan portfolio is comprised mainly of loans to
small and mid-sized businesses with revenues up to $25 million. There were no
significant concentrations of credit to any one industry, class, or category.
The following tables reflects the maturities of the commercial loan portfolio
and the mix of the commercial loans that mature greater than one year in the
loan portfolio between fixed rate and adjustable rate notes.
(Dollars in thousands)
Commercial loans:
Due within one year $141,711
Due one through five years 245,841
Due after five years 43,325
--------
$430,877
========
Commercial loans due after 1 year:
Fixed rate $119,902
Variable rate 169,264
--------
$289,166
========
Although there were no large concentrations of credit to any particular
industry, the economic trends of the area served by the Company are influenced
by the significant industries within the region. The Company's primary business
activity is with customers located in the Research Triangle area of North
Carolina (Raleigh, Durham, and Chapel Hill) and its surrounding counties, the
Alamance County area (Burlington and Graham, North Carolina), and the Interstate
40 corridor between Asheville and Hickory, North Carolina. The ultimate
collectibility of the Company's loan portfolio is susceptible to changes in the
market conditions of this geographic region.
The Company uses a centralized risk management process to ensure uniform credit
underwriting that adheres to Company policy. Lending policies are reviewed on a
regular basis to confirm that the Company is prudent in setting its underwriting
criteria. Credit risk is managed through a number of methods including loan
grading of commercial loans, committee approval of larger loans, and class and
purpose coding of loans. Management believes that early detection of credit
problems through regular contact with the Company's customers coupled with
consistent reviews of the borrowers' financial condition are important factors
in overall credit risk management.
Management charged off loans totaling $3.7 million, $392,000, and $362,000 net
of recoveries, as uncollectible during 2002, 2001 and 2000, respectively. The
large increase in the 2002 amount was the result of four large commercial loan
relationships that totaled $2.9 million, or 73% of the total amount charged off,
as well as continued softening in the economy and isolated instances of specific
business problems. At December 31, 2002 and 2001, the allowance for
20
loan losses as a percentage of total loans was 1.56% and 1.40%, respectively.
Management believes the allowance for loan losses of $9.4 million at 2002
provides adequate coverage of the probable losses in the loan portfolio.
Investment Securities. Investment securities represent the second largest
component of earning assets. On December 31, 2002 and 2001, investments totaled
$150.3 million and $71.2 million, respectively. At December 31, 2002 and 2001,
all investments were classified as "available for sale". This classification
allows flexibility in the management of interest rate risk, liquidity, and loan
portfolio growth. The following table reflects the debt securities by
contractual maturities as of December 31, 2002. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Securities Available For Sale Portfolio
1 Year or Less 1 - 5 Years 5 - 10 Years 10 or More Years Total
-------------- --------------- --------------- ---------------- ----------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------- ------ ----- ------- ----- ------- ----- ------- ------ -------- -----
US Agency securities $-- -- $11,317 4.33% $ 4,014 5.00% $ -- -- $ 15,331 4.51%
Corporate bonds -- -- 1,017 6.75% -- -- -- -- 1,017 6.75%
Municipal bonds (1) -- -- -- -- 3,445 5.93% 16,605 6.71% 20,050 6.58%
Mortgage-backed securities 84 6.02% 15,363 5.16% 28,379 4.68% 70,063 5.24% 113,889 5.09%
--- ------- ------- ------- --------
$84 $27,697 $35,838 $86,668 $150,287
=== ======= ======= ======= ========
(1) Municipal bonds shown at tax equivalent yield.
Money Market Investments and Federal Funds. At December 31, 2002 and 2001, the
Company had $32.6 million and $3.7 million, respectively, in short-term money
market investments and federal funds. These figures include interest-bearing
cash accounts.
Liabilities. During 2002 and 2001, the Company relied on deposits, advances from
the Federal Home Loan Bank, repurchase agreements and excess liquidity to fund
its earning assets.
Deposits. Total deposits increased from $304.4 million at December 31, 2001 to
$644.9 million at December 31, 2002. Of these amounts, $28.5 million and $50.2
million were in the form of non-interest-bearing demand deposits at December 31,
2001 and 2002, respectively, and $275.9 million and $594.6 million were in the
form of interest-bearing deposits at December 31, 2001 and 2002, respectively.
Balances in certificates of deposit of $100,000 and over were $44.8 million and
$119.5 million at December 31, 2001 and 2002, respectively.
The following table reflects the maturities of certificates of deposit of
$100,000 and over as of December 31, 2002.
Maturity Average
(Dollars in thousands) Amount Rate
-------- -------
Three months or less $ 42,331 2.79%
Over three months to six months 28,730 2.74%
Over six months to twelve months 18,021 3.14%
Over twelve months 30,419 3.91%
-------- ----
$119,501 3.11%
======== ====
Debt. At December 31, 2002 and 2001, the Company's outstanding advances with the
Federal Home Loan Bank were $97.9 million and $50.0 million, respectively.
During the year ended December 31, 2002, the maximum outstanding advances were
$97.9 million, the balance at year end subsequent to the High Street
acquisition. The Company had average outstanding FHLB advances of $72.7 million
and $26.3 million with weighted average rates of 4.29% and 5.43% at December 31,
2002 and 2001, respectively. These advances were used to provide additional
funding at favorable rates to accommodate loan growth.
Capital Resources. Total shareholders' equity for 2002 and 2001, excluding
unrealized gains net of taxes on available for sale securities of $1.3 million
in 2002 and $568,000 in 2001, respectively, was $74.2 million and $36.4 million,
respectively. Equity increased primarily as a result of the issuance of
additional shares in connection with the two acquisitions occurring during 2002
as described above. The Company paid cash dividends of $0.20 per share during
21
2002. The Company did not pay any dividends to its shareholders during 2001. At
December 31, 2002, the Company had a leverage ratio of 8.18%, a Tier 1 capital
ratio of 9.03%, and a risk based capital ratio of 10.28%. These ratios exceed
the federal regulatory minimum requirements for a "well capitalized" bank.
Asset/Liability Management. Asset/liability management functions to maximize
profitability within established guidelines for interest rate risk, liquidity,
and capital adequacy. Measurement and monitoring of liquidity, interest rate
risk, and capital adequacy are performed centrally through the Asset/Liability
Management Committee, and reported under guidelines established by management,
the Board of Directors and regulators. Oversight on asset/liability management
matters is provided by the Board of Directors through its Asset/Liability
Management Committee.
Liquidity management involves the ability to meet the cash flow requirements of
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. To ensure the
Company is positioned to meet immediate and future cash demands, management
relies on internal analysis of its liquidity, knowledge of current economic and
market trends and forecasts of future conditions. Regulatory agencies set
certain minimum liquidity standards including the setting of a reserve
requirement by the Federal Reserve. The Company must submit weekly reports to
the Federal Reserve to ensure that it meets those requirements. At December 31,
2002, the Company met all of its liquidity requirements.
The Company had $51.5 million in its most liquid assets, cash and cash
equivalents at December 31, 2002. The Company's principal sources of funds are
deposits, short-term 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 $600.9 million
or 71.5% of total assets at December 31, 2002. At December 31, 2001, core
deposits and equity capital totaled $296.6 million or 72.9% of total assets.
The Company's liquidity can best be demonstrated by an analysis of its cash
flows. In addition to the increase in core deposits described above which were
primarily as a result of the two acquisitions, the Company had other financing
activities including additional borrowings from the Federal Home Loan Bank of
$19.2 million. Operating activities also provided $11.1 million of liquidity for
the year ended December 31, 2002, compared to $3.4 million and $3.3 million in
2001 and 2000, respectively. The principal elements of operating activities are
net income, increased for significant non-cash expenses for the provision for
loan losses and depreciation and amortization. In 2002, deposit growth and
increased borrowings were utilized to fund $34.2 million in new internal loan
growth excluding those loans added as a result of acquisitions.
A secondary source of liquidity for the Company comes from investing activities,
principally the sales of, maturities of and cash flows from investment
securities. During 2002 and 2001, due to the declining interest rate
environment, the cash flow from mortgage-backed securities accelerated and
certain securities with call features were called. The cash received from these
events, combined with maturities, amounted to $76.6 million, compared to $53.8
million in 2001 and $5.0 million in 2000. As of December 31, 2002, the Company
had approximately $84,000 of investment securities that mature in 12 months.
During 2002, the Company purchased $105.7 million of investment securities to
replace the securities sold, called or matured during the same period and to
meet liquidity needs.
Additional sources of liquidity are available to the Bank through the Federal
Reserve System and through membership in the Federal Home Loan Bank system. As
of December 31, 2002, the Bank had a maximum borrowing capacity of $168.1
million through the Federal Home Loan Bank of Atlanta. These funds can be made
available with various maturities and interest rate structures. Borrowings
cannot exceed twenty percent of total assets or twenty times the amount of
Federal Home Loan Bank stock owned by the borrowing bank. At December 31, 2002,
the Bank owned $5.0 million worth of Federal Home Loan Bank stock or five
percent of its outstanding advances of $97.9 million. Borrowings are
collateralized by a blanket lien by the Federal Home Loan Bank on the Bank's
qualifying assets.
The following table reflects expected maturities of contractual obligations and
expected expirations of ongoing commitments that affect the Company's liquidity.
22
Payments Due By Period
--------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
(Dollars in thousands) 1 Year Years Years 5 Years Total
--------- ------ ------ --------- --------
Contractual Obligations
FHLB Advances $5,000 $5,000 $5,873 $81,985 $ 97,858
Operating Leases 964 1,817 1,602 6,635 11,018
------ ------ ------ ------- --------
$5,964 $6,817 $7,475 $88,620 $108,876
====== ====== ====== ======= ========
Amount of Commitment Expiration by Period
---------------------------------------------------
Less Than 1 - 3 3 - 5 More Than Total
1 Year Years Years 5 Years Committed
--------- ------ ------ --------- ---------
Commercial Commitments
Commercial Letters of Credit $ 792 $ -- $ -- $ -- $ 792
Other Commercial Loan Commitments 32,908 2,569 4,764 703 40,944
------- ------ ------ ---- -------
$33,700 $2,569 $4,764 $703 $41,736
======= ====== ====== ==== =======
Effects of Inflation. The Company's financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historic
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The rate of inflation has been relatively
moderate over the past few years; however, the effect of inflation on interest
rates can materially impact bank operations, which rely on the spread between
the yield on earning assets and rates paid on deposits and borrowings as the
major source of earnings. Operating costs, such as salaries and wages, occupancy
and equipment costs, can also be negatively impacted by inflation.
Risk Factors
You should consider the following material risk factors carefully before
deciding to invest in the Company's securities. If any of the events described
below occur, our business, financial condition, or results of operations could
be materially adversely affected. In that event, the trading price of our 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 several regions in North
Carolina including the Central and Western parts of the state. As a result
of this geographic concentration, our results may correlate to the economic
conditions in these areas. A deterioration in economic conditions in any of
these market areas, particularly in the industries on which these
geographic areas depend, may adversely affect the quality of our loan
portfolio and the demand for our products and services, and accordingly,
our results of operations.
We Are Exposed to Risks in Connection with the Loans We Make
A significant source of risk for us arises from the possibility that losses
will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. We have
underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for loan losses,
that we believe are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying
our loan portfolio. Such policies and procedures, however, may not prevent
unexpected losses that could adversely affect our results of operations.
We Compete with Larger Companies for Some of the Same Business
The banking and financial services business in our market areas continues
to be a competitive field and is becoming more competitive as a result of:
. Changes in regulations;
. Changes in technology and product delivery systems; and
. The accelerating pace of consolidation among financial services
providers.
23
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 non-bank financial services providers, many of which are larger in
total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services.
Our Trading Volume Has Been Low Compared with Larger Banks
The trading volume in our 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 our common stock may be limited in scope
relative to other companies.
We Depend Heavily on Our Key Management Personnel
James A. Beck currently serves as our president and chief executive
officer. We depend heavily on the services of Mr. Beck, and a number of
other key personnel. Even though we carry a $2 million key man life
insurance policy on Mr. Beck, the loss of his services or of other key
personnel could have a material adverse effect on our business, financial
condition or results of operations.
Our success depends in part on our 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 new 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. Our 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:
. The payment of dividends to our shareholders;
. Possible mergers with or acquisitions of or by other institutions;
. Our desired investments;
. Loans and interest rates on loans;
. Interest rates paid on our deposits;
. The possible expansion of our branch offices; and/or
. 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 under capitalized. We cannot
predict what changes, if any, will be made to existing federal and state
legislation and regulations or
24
the effect that such changes may have on our future business and earnings
prospects. The cost of compliance with regulatory requirements may
adversely affect our ability to operate profitably.
There Are Potential Risks Associated with Future Acquisitions
We intend to continue to explore expanding 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 our
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.
Recent Accounting Developments. Please refer to Note 1 of the Company's
consolidated financial statements for the year ended December 31, 2002 for a
discussion of recent accounting developments.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company utilizes an outside asset liability management advisory firm to help
management evaluate interest rate risk and develop asset/liability management
strategies. One tool used is a computer simulation model which projects the
Company's performance under different interest rate scenarios. Analyses are
prepared quarterly which evaluate the Company's performance in a base strategy
which reflects the Company's 2002 and 2003 operating plan. Three interest rate
scenarios (Flat, Rising and Declining) are applied to the base strategy to
determine the effect of changing interest rates on net interest income. The
December 31, 2002 analysis of the Company indicates that interest rate risk
exposure over a twelve-month time horizon is within the guidelines established
by the Board of Directors.
For the upcoming twelve month period in the Flat rate scenario, Capital Bank
Corporation is projected to earn $27.0 million in net interest income. In the
rising rate scenario, which contemplates a 200 basis point increase in interest
rates over a twelve month period, the Company is expected to see its annualized
net interest income improve by $1.8 million, or 6.7%. Conversely, the Company
will see a decline in net interest income of $2.6, or 9.8%, if rates decline 200
basis points, as is contemplated in the declining rate scenario.
Item 8. Financial Statements and Supplementary Data.
25
Capital Bank Corporation
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)
2002 2001
-------- --------
Assets
Cash and due from banks:
Interest-earning $ 13,925 $ 2,793
Noninterest earning 18,912 12,380
Federal funds sold 18,696 944
Securities (Note 4):
Available for sale 36,398 28,217
Mortgage-backed securities available for sale (Note 4) 113,889 42,985
Federal Home Loan Bank stock (Note 5) 5,017 2,500
Loans (Note 6) 600,609 306,891
Less allowance for loan losses (9,390) (4,286)
-------- --------
Net loans 591,219 302,605
-------- --------
Accrued interest receivable 3,455 1,853
Premises and equipment, net (Note 7) 13,399 5,009
Deposit premium and goodwill, net (Note 3) 14,884 4,105
Deferred income tax 5,174 2,033
Other assets 6,008 1,317
-------- --------
Total assets $840,976 $406,741
======== ========
Liabilities and Shareholders' Equity
Deposits (Note 8):
Demand deposits $ 50,238 $ 28,470
Savings and interest bearing checking 120,472 43,716
Money market deposit accounts 103,736 57,837
Time deposits less than $100,000 250,940 129,575
Time deposits $100,000 and greater 119,501 44,845
-------- --------
Total deposits 644,887 304,443
-------- --------
Repurchase agreements 13,081 11,167
Federal Home Loan Bank advances (Note 9) 97,858 50,000
Accrued interest payable 1,450 792
Other liabilities 8,229 3,356
-------- --------
Total liabilities 765,505 369,758
-------- --------
Commitments and contingencies (Notes 11, 12, 13 and 14)
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized, issued 7,022,468 - 2002 and
3,658,689 - 2001; outstanding 6,595,784 - 2002
and 3,597,339 - 2001 74,338 34,805
Treasury stock, no par value; 426,684 - 2002 and
61,350 - 2001 (5,641) (696)
Accumulated other comprehensive income 1,293 568
Retained earnings 5,481 2,306
-------- --------
Total shareholders' equity 75,471 36,983
-------- --------
Total liabilities and shareholders' equity $840,976 $406,741
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
Capital Bank Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands except per share data)
2002 2001 2000
------- ------- -------
Interest income:
Loans and fees on loans $29,601 $20,982 $19,069
Investment securities 6,273 4,674 3,419
Federal funds and other interest income 370 517 1,263
------- ------- -------
Total interest income 36,244 26,173 23,751
------- ------- -------
Interest expense:
Deposits 12,567 12,925 11,869
Borrowings 3,118 1,427 861
Repurchase agreements 210 349 371
------- ------- -------
Total interest expense 15,895 14,701 13,101
------- ------- -------
Net interest income 20,349 11,472 10,650
Provision for loan losses 4,190 1,215 1,110
------- ------- -------
Net interest income after provision for loan losses 16,159 10,257 9,540
------- ------- -------
Other operating income:
Service charges and fees 2,350 1,735 925
Net gain on sale of securities 981 190 --
Mortgage origination fees 3,294 1,999 989
Other fees and income 1,362 566 279
------- ------- -------
Total other operating income 7,987 4,490 2,193
------- ------- -------
Other operating expenses:
Personnel 9,821 6,317 4,876
Occupancy 1,557 1,152 800
Data processing 917 649 526
Furniture and equipment 1,141 703 508
Amortization of intangibles 180 598 473
Advertising 578 346 454
Professional fees 304 350 240
Director fees 243 210 206
Other 2,724 1,522 1,513
------- ------- -------
Total other operating expenses 17,465 11,847 9,596
------- ------- -------
Net income before income tax expense (benefit) 6,681 2,900 2,137
Income tax expense (benefit) 2,374 480 (36)
------- ------- -------
Net income $ 4,307 $ 2,420 $ 2,173
======= ======= =======
Net income per share - basic $ .79 $ .65 $ .59
======= ======= =======
Net income per share - diluted $ .76 $ .65 $ .59
======= ======= =======
Dividends per share $ .20 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
27
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
Accumulated Retained
Other Earnings
Common Treasury Comprehensive (Accumulated
Stock Stock Income (Loss) Deficit) Total
------- -------- ------------- ------------ -------
Balance at January 1, 2000 $34,806 $ -- $(1,393) $(2,287) $31,126
Net income -- -- -- 2,173 2,173
Other comprehensive income -- -- 1,716 -- 1,716
-------
Comprehensive income 3,889
------- ------- ------- ------- -------
Balance at December 31, 2000 34,806 -- 323 (114) 35,015
Purchase of treasury stock -- (702) -- -- (702)
Reissuance of common stock
for options exercised (1) 6 -- -- 5
Net income -- -- -- 2,420 2,420
Other comprehensive income -- -- 245 -- 245
-------
Comprehensive income 2,665
------- ------- ------- ------- -------
Balance at December 31, 2001 34,805 (696) 568 2,306 36,983
Purchase of treasury stock -- (4,945) -- -- (4,945)
Issuance of common stock
for compensation 57 -- -- -- 57
Issuance of common stock
for options exercised 990 -- -- -- 990
Issuance of common stock
for acquisition of subsidiaries 38,486 -- -- -- 38,486
Net income -- -- -- 4,307 4,307
Other comprehensive income -- -- 725 -- 725
-------
Comprehensive income 5,032
-------
Cash dividends paid or accrued -- -- -- (1,132) (1,132)
------- ------- ------- ------- -------
Balance at December 31, 2002 $74,338 $(5,641) $ 1,293 $ 5,481 $75,471
======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
28
Capital Bank Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
-------- -------- --------
Net income $ 4,307 $ 2,420 $ 2,173
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deposit premium and goodwill 180 598 473
Depreciation 1,228 810 642
(Gain) loss on disposal of equipment -- (2) 6
Amortization (accretion) of premiums/discounts on securities, net 922 32 6
Gain on sale of investments (981) (190) --
Provision for loan losses 4,190 1,215 1,110
Deferred tax (benefit) expense 130 (978) (1,139)
Issuance of stock for compensation 57 -- --
Changes in assets and liabilities:
Accrued interest receivable 163 493 (1,102)
Accrued interest payable 131 (176) 297
Other assets 547 (404) (417)
Other liabilities 279 (383) 1,262
-------- -------- --------
Net cash provided by operating activities 11,153 3,435 3,311
-------- -------- --------
Cash flows from investing activities:
Net increase in loans (34,188) (65,008) (57,493)
Additions to premises and equipment (1,145) (706) (1,753)
Proceeds from sale of equipment 1 38 --
Net (purchase) sale of Federal Home Loan Bank stock 91 (1,500) --
Purchase of securities available for sale (33,851) (31,006) (8,457)
Purchase of mortgage-backed securities available for sale (71,883) (32,317) (10,154)
Proceeds from calls/maturities of securities available for sale 35,124 39,032 4,955
Proceeds from sales of securities available for sale 41,434 14,796 --
Capitalized purchase costs (47) (88) --
Net cash acquired from purchase of subsidiary 20,695 -- --
Net cash received from branch acquisitions -- -- 37,013
-------- -------- --------
Net cash used by investing activities (43,769) (76,759) (35,889)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 51,718 25,349 49,356
Net increase in repurchase agreements 1,914 1,363 4,986
Proceeds from Federal Home Loan Bank borrowings 86,123 45,000 15,000
Principal repayments of Federal Home Loan Bank borrowings (66,969) (10,000) (20,000)
Purchase of treasury stock (4,945) (702) --
Exercise of common stock options 990 5 --
Cash dividends paid (799) -- --
-------- -------- --------
Net cash provided by financing activities 68,032 61,015 49,342
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
29
Capital Bank Corporation
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
--------- -------- -------
Net change in cash and cash equivalents $ 35,416 $(12,309) $16,764
Cash and cash equivalents at beginning of year 16,117 28,426 11,662
--------- -------- -------
Cash and cash equivalents at end of year $ 51,533 $ 16,117 $28,426
========= ======== =======
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 15,237 $ 14,877 $12,804
========= ======== =======
Cash payments for income taxes $ 1,775 $ 1,392 $ 501
========= ======== =======
Transfers from loans to real estate acquired
through foreclosure $ 1,708 $ -- $ 32
========= ======== =======
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 $ -- $ --
========= ======== =======
Purchase of High Street Corporation:
Loans, net of reserves $(126,175) $ -- $ --
Investments (12,275) -- --
Other assets acquired (7,062) -- --
Goodwill and deposit premium (6,295) -- --
Deposits 132,485 -- --
Borrowings 12,290 -- --
Other liabilities assumed 1,446 -- --
Issuance of stock 17,632 -- --
--------- -------- -------
Net cash and cash equivalents acquired $ 12,046 $ -- $ --
========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
30
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Nature of Operations
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws 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 and Capital Bank Investment
Services, Inc. Capital Bank (the "Bank") was incorporated under the laws of
North Carolina on May 30, 1997 and commenced operations on June 20, 1997.
The Bank is not a member of the Federal Reserve System and has no
subsidiaries. The Bank is a community bank engaged in general commercial
banking, providing a full range of banking services. The majority of the
Bank's customers are individuals and small to medium-size businesses. The
Bank's primary source of revenue is interest earned from loans to customers
and from invested cash and securities and non-interest income derived from
various fees.
Prior to 2002, the Bank operated primarily throughout the central part of
North Carolina with branch facilities located in Raleigh (3), Cary (2),
Sanford (3), Siler City (1), Oxford (2), Warrenton (1), Seaboard (1), and
Woodland (1). The Company's corporate headquarters are located on Glenwood
Avenue in Raleigh, North Carolina.
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 the customers of the Bank. These
investment services include full-service securities brokerage, asset
management, financial planning and retirement services, such as 401(k)
plans, all provided exclusively through a strategic alliance with Raymond
James Financial Services, Inc. ("Raymond James"). These services are
available in the offices of Capital Bank through registered investment
representatives. CBIS is a full service brokerage firm whose profitability
depends on net commissions generated by investment sales and services
On January 18, 2002, the Company completed the acquisition of First
Community Financial Corporation ("First Community") and its subsidiary,
Community Savings Bank, Inc. ("Community Savings Bank"). Community Savings
Bank operated four banking offices in Alamance County, North Carolina. At
the close of business on March 15, 2002, Community Savings Bank was merged
into the Bank and the banking offices of Community Savings Bank opened for
business on March 18, 2002 under the Capital Bank name.
On December 1, 2002, the Company completed the acquisition of High Street
Corporation ("High Street"), the holding company for High Street Banking
Company ("High Street Bank"). High Street Bank operated three banking
offices, two in Asheville, North Carolina and one in Hickory, North
Carolina. At the close of business on December 6, 2002, High Street Bank
was merged into the Bank and the banking offices of High Street Bank opened
for business on December 9, 2002 under the Capital Bank name.
The Company has no operations other than those of its subsidiaries, Capital
Bank and Capital Bank Investment Services, Inc. The Company's profitability
depends principally upon the net interest income, provision for loan
losses, non-interest income and non-interest expenses of the Bank and the
net commissions generated by CBIS.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
31
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits (with original
maturities of 90 days or less) at other institutions and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
At times, the Bank places deposits with high credit quality financial
institutions in amounts which at may be in excess of federally insured
limits.
Securities
Investments in certain securities are classified into three categories and
accounted for as follows:
1. Securities Held to Maturity - Debt securities that the institution has
the positive intent and ability to hold to maturity are classified as
held to maturity and reported at amortized cost; or
2. Trading Securities - Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; or
3. Securities Available for Sale - Debt and equity securities not
classified as either held to maturity securities or trading securities
are classified as available for sale securities and reported at fair
value, with unrealized gains and losses reported as other
comprehensive income, a separate component of shareholders' equity.
The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of securities, computed based on
specific identification of the adjusted cost of each security, are included
in other income at the time of the sales.
Premiums and discounts on debt securities are recognized in interest income
using the level interest yield method over the period to maturity, or when
the debt securities are called.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and net deferred loan origination fees and costs. Interest
on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Deferred loan fees and costs
are amortized to interest income over the contractual life of the loan
using the level interest yield method.
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 December 31, 2002 and 2001 amounted to $1.2
million and $1.8 million, respectively. Average impaired loans during 2002
and 2001 were $2.2 million and $722,000, respectively.
The Bank uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include 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.
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
32
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb probable losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, and current
economic conditions and trends that may affect the borrowers' ability to
pay.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful or as partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained
period of repayment performance (generally a minimum of six months) of
interest and principal by the borrower in accordance with the contractual
terms.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled amortizations where
the payment is generally applied to the oldest payment due. When the future
collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a nonaccrual loan had
been partially charged-off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan
balance at the contractual interest rate. Receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
Foreclosed Assets
Any assets acquired as a result of foreclosure are valued at the lower of
the recorded investment in the loan or fair value less estimated costs to
sell. The recorded investment is the sum of the outstanding principal loan
balance and foreclosure costs associated with the loan. Any excess of the
recorded investment over the fair value of the property received is charged
to the allowance for loan losses. Valuations will be periodically performed
by management and any subsequent write-downs due to the carrying value of a
property exceeding its estimated fair value less estimated costs to sell
are charged against other expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the
straight-line method based on estimated service lives of assets. Useful
lives range from 3 to 10 years for furniture and equipment. The cost of
leasehold improvements is being amortized using the straight-line method
over the terms of the related leases. Repairs and maintenance are charged
to expense as incurred.
Upon disposition, the asset and related accumulated depreciation or
amortization are relieved and any gains or losses are reflected in
operations.
Income Taxes
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes
will become payable or receivable. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements that will result in taxable or
deductible amounts in future years. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax assets
if the Company cannot determine that the benefits will more likely than not
be realized.
33
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company applies a financial-components approach that focuses on control
when accounting and reporting for transfers and servicing of financial
assets and extinguishments of liabilities. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This approach provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
Net Income Per Share
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share". In accordance with SFAS No. 128, the Company
has presented both basic and diluted EPS on the face of the Consolidated
Statements of Operations. 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. The weighted average
number of shares outstanding for 2002, 2001, and 2000 were as follows:
2002 2001 2000
---------- ---------- ----------
(In thousands except number of shares)
Income available to stockholders - basic and diluted $ 4,307 $ 2,420 $ 2,173
========== ========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 5,467,735 3,712,280 3,709,070
Incremental shares from assumed exercise of stock
options 195,214 34,561 6,871
---------- ---------- ----------
Weighted average number of shares outstanding - diluted 5,662,949 3,746,841 3,715,941
========== ========== ==========
Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) in
general-purpose financial statements.
The Company's only components of other comprehensive income relate to
unrealized gains and losses on available for sale securities. Information
concerning the Company's other comprehensive income for the years ended
December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
------ ----- ------
(Dollars in thousands)
Unrealized gains on securities available for sale $1,706 $ 435 $1,716
Reclassification of gains recognized in net income (981) (190) --
------ ----- ------
Other comprehensive income $ 725 $ 245 $1,716
====== ===== ======
Segment Information
The Company follows the provisions of SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Statement requires
that public business enterprises report certain information about operating
segments in their annual financial statements and in condensed financial
statements of interim periods issued to shareholders. It also requires that
the public business enterprises report related disclosures and descriptive
information about products and services provided by significant segments,
geographic areas, and major customers, differences between the measurements
used in reporting segment information and those used in the enterprise's
general-purpose financial statements, and changes in the measurement of
segment amounts from period to period.
34
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources, and in
assessing performance. The Company has determined that it has one
significant operating segment, the providing of general commercial
financial services to customers located in the single geographic area of
central North Carolina. The various products are those generally offered by
community banks, and the allocation of resources is based on the overall
performance of the institution, versus the individual branches or products.
Employers Disclosures about Pensions and Other Postretirement Benefits
The Company follows the provisions of SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits". This Statement requires
certain disclosures about pension and other postretirement benefit plans.
New Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," which is effective for
fiscal years beginning after May 15, 2002. This statement rescinds the
indicated statements and amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The application of this statement
is not expected to have a material impact on the Company's financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit
or disposal activities that are initiated after December 31, 2002. This
statement nullifies Emerging Issues Task Force No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 requires that liabilities associated with exit or disposal
activities initiated after adoption be recognized and measured at fair
value when incurred as opposed to at the date an entity commits to the exit
or disposal plans. The application of this statement is not expected to
have a material impact on the Company's financial statements.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangibles Assets," which required the Company to
discontinue the amortization of goodwill associated with acquisitions
accounted for under the purchased method of accounting. In addition, in the
fourth quarter of 2002, the Company adopted the provisions of SFAS No. 147,
"Acquisition of Certain Financial Institutions," which required to the
Company to cease amortization of unidentifiable intangible assets
associated with certain branch acquisitions. SFAS No. 147 also required the
Company to reverse amortization expense within the scope of SFAS No. 147
that had been recorded in the first nine months of 2002. Accordingly, the
consolidated financial statements for each of the three quarters ended
September 30, 2002 have been restated to reflect the effects of adopting
SFAS No. 147 as if it had been adopted on January 1, 2002. The total amount
of amortization expense reversed for the nine months ended September 30,
2002 was $372,000.
2. Organization and Significant Activities
The Bank was organized on December 12, 1996 and commenced a public
subscription offering on February 17, 1997. The offering resulted in gross
proceeds of $27.3 million from the sale of 2,477,651 shares.
On June 20, 1997, the Bank acquired two branches located in Sanford, North
Carolina from a large community bank and began its banking operations.
In accordance with the rules and regulations of the North Carolina
Commissioner of Banks, all expenditures of the Bank prior to commencing
operations in June 1997 were charged against surplus. The operating
35
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
expenses, principally personnel and occupancy, amounted to $437,000, and
expenses related to the offering aggregated $1,069,000.
In late 1997, a branch was opened in Raleigh, North Carolina followed by
two branches in Cary, North Carolina in 1998 and one in Sanford in 1999.
On March 26, 1999, pursuant to the reorganization of the Bank into a
holding company structure, the common stock of the Bank was converted on a
share-for-share basis into common stock in the Company that have rights,
privileges and preferences identical to the common stock of the Bank. On
March 31, 1999, the Company completed its acquisition of Home Savings Bank
of Siler City SSB, Inc. ("Home Savings") through the issuance of 1.28
shares of the Company's common stock for each share of Home Saving's
outstanding common stock, or 1,181,038 shares. The acquisition was
accounted for as a pooling-of-interests. On July 16, 1999, Home Savings
merged with the Bank to form one subsidiary under the Company.
In April, 2000, the Bank acquired five 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 the same facility on Glenwood Avenue in Raleigh, North
Carolina. In January 2001, the Bank opened a new branch in Raleigh.
On March 1, 2001, the Company announced that it had formed Capital Bank
Investment Services, Inc., an investment services subsidiary and agreed to
acquire an independent branch brokerage office located in Raleigh. 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 are
available in the offices of Capital Bank through registered investment
representatives.
On April 23, 2001, the Company converted to a financial holding company.
On January 18, 2002, the Company acquired First Community Financial
Corporation ("First Community"), 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. As a result of the acquisition, the Company issued an
additional 1.9 million shares of common stock. The transaction was
accounted for under the purchase method and is intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code.
On December 1, 2002, the Company acquired High Street Corporation ("High
Street"), the holding company for High Street Banking Company ("High Street
Bank"). High Street 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 consisted of the
communities of Asheville and Hickory, North Carolina. High Street Bank's
activities were similar to those described above for Community Savings
Bank. As a result of the acquisition, the Company issued an additional 1.3
million shares of common stock. The transaction was accounted for under the
purchase method and is 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 these acquisitions had occurred at the beginning of
fiscal 2001:
2002 2001
------- -------
(In thousands except per share amounts)
Net interest income $24,436 $25,532
Net income 3,530 3,079
Net earnings per diluted share 0.51 0.44
36
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 acquisitions had been effective at the beginning of fiscal
2001.
A summary of estimated fair values of assets acquired and liabilities
assumed was as follows:
(Dollars in thousands) First High
Community Street Total
--------- --------- ---------
Loans receivable $ 134,149 $ 126,175 $ 260,324
Premises and equipment 5,424 3,050 8,474
Deposit premium 782 976 1,758
Goodwill 3,835 5,319 9,154
Other assets 52,661 28,333 80,994
Deposits (156,241) (132,485) (288,726)
Borrowings (16,414) (12,290) (28,704)
Other liabilities (3,342) (1,446) (4,788)
--------- --------- ---------
Investment in subsidiary, net
of dividends to shareholders and
capitalized acquisition costs $ 20,854 $ 17,632 $ 38,486
========= ========= =========
3. Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition, and as such, the historical cost
basis of individual assets and liabilities are adjusted to reflect their
fair value. Identified intangibles are amortized on a straight-line basis
over the period benefited. Before the adoption of SFAS No. 142 "Goodwill
and Other Intangible Assets", the Company amortized goodwill on a
straight-line basis over seven to ten years. Under SFAS No. 142, goodwill
is no longer amortized, but is reviewed for potential impairment in June of
each year at the reporting unit level. The impairment test is performed in
two phases. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired; however, if the carrying amount of the
reporting unit exceeds its fair value an additional procedure must be
performed. That additional procedure compares the implied fair value of the
reporting unit's goodwill (as defined in SFAS No. 142) with the carrying
amount of that goodwill. An impairment loss is recorded to the extent that
the carrying amount of goodwill exceeds its implied fair value. Other
intangible assets are evaluated for impairment if events and circumstances
indicate a possible impairment. Such evaluation of other intangible assets
is based on undiscounted cash flow projections.
As of December 31, 2002 and 2001, intangible assets, primarily deposit
premiums paid for acquisitions, and goodwill are as follows:
37
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Accumulated
Gross Amortization Net
------- ------------ -------
(In thousands)
At December 31, 2002
From January 2002 acquisition of First Community Financial Corp:
Deposit premium $ 782 $ (164) $ 618
Goodwill 3,835 -- 3,835
------- ------- -------
4,617 (164) 4,453
------- ------- -------
From December 2002 acquisition of High Street Corporation:
Deposit premium 976 (15) 961
Goodwill 5,319 -- 5,319
------- ------- -------
6,295 (15) 6,280
------- ------- -------
From March 2001 acquisition of CBIS:
Goodwill 121 (33) 88
Capitalized startup costs 15 (3) 12
------- ------- -------
136 (36) 100
------- ------- -------
From April 2000 branch acquisitions:
Goodwill 3,471 (604) 2,867
From June 1997 branch acquisitions:
Goodwill 2,164 (980) 1,184
------- ------- -------
$16,683 $(1,799) $14,884
======= ======= =======
At December 31, 2001
From March 2001 acquisition of CBIS:
Goodwill $ 74 $ (33) $ 41
Capitalized startup costs 14 (1) 13
------- ------- -------
88 (34) 54
------- ------- -------
From April 2000 branch acquisitions:
Goodwill 3,471 (604) 2,867
From June 1997 branch acquisitions:
Goodwill 2,164 (980) 1,184
------- ------- -------
$ 5,723 $(1,618) $ 4,105
======= ======= =======
Valuation of the Company's goodwill pursuant to this pronouncement resulted
in no write-downs for impairment. Additionally, SFAS No. 142 requires a
reconciliation of previously reported net income and earnings per share,
adjusted for changes pursuant to this statement. Following is the pro forma
effect of the adoption of SFAS No. 142:
38
Capital Bank Corporation
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
2001 2000
------ ------
(In thousands except per share data)
Reported net income $2,420 $2,173
Goodwill amortization, net of tax 371 293
------ ------
Adjusted net income $2,791 $2,466
====== ======
Basic earnings per share:
Reported net income $ 0.65 $ 0.59
Goodwill amortization, net of tax 0.10 0.08
------ ------
Adjusted net income $ 0.75 $ 0.67
====== ======
Diluted earnings per share:
Reported net income $ 0.65 $ 0.59
Goodwill amortization, net of tax 0.10 0.08
------ ------
Adjusted net income $ 0.75 $ 0.67
====== ======
4. Securities
Securities at December 31, 2002 and 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
2002
Available for sale:
U.S. Agency obligations $ 15,179 $ 152 $ -- $ 15,331
Corporate bonds 1,020 -- 3 1,017
Municipal bonds 19,879 296 125 20,050
-------- ------ ---- --------
36,078 448 128 36,398
Mortgage-backed securities 112,127 1,881 119 113,889
-------- ------ ---- --------
$148,205 $2,329 $247 $150,287
======== ====== ==== ========
2001
Available for sale:
U.S. Agency obligations $ 16,000 $ 456 $ -- $ 16,456
Corporate bonds 6,077 116 16 6,177
Municipal bonds 5,683 21 120 5,584
-------- ------ ---- --------
27,760 593 136 28,217
Mortgage-backed securities 42,516 557 88 42,985
-------- ------ ---- --------
$ 70,276 $1,150 $224 $ 71,202
======== ====== ==== ========
The amortized cost and estimated market values of securities at December
31, 2002 by contractual maturities are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
39
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Estimated
Amortized Market
(In thousands) Cost Value
--------- ---------
Available for sale:
Due in one year or less $ 83 $ 84
Due after one year through five years 27,244 27,697
Due after five years through ten years 35,285 35,838
Due after ten years 85,593 86,668
-------- --------
$148,205 $150,287
======== ========
During the years ended December 31, 2002 and 2001, the Company had gross
realized gains of $981,000 and $190,000, respectively, on sales of
available for sale securities with book values of $40.5 million and $14.6
million. There were no sales of securities during the year ended December
31, 2000.
Securities with an amortized cost of $60.9 million were pledged as of
December 31, 2002 to secure public deposits, repurchase agreements, and
Federal Home Loan Bank advances.
5. Federal Home Loan Bank Stock
The Company, as member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the FHLB in an amount equal to
the greater of 1% of its outstanding home loans or 5% of its outstanding
FHLB advances. No ready market exists for the FHLB stock, and it has no
quoted market value, therefore, cost approximates market at December 31,
2002 and 2001.
6. Loans and Allowance for Loan Losses
The composition of the loan portfolio by loan classification at December
31, 2002 and 2001 is as follows:
(In thousands) 2002 2001
-------- --------
Commercial $430,847 $229,305
Consumer 51,069 28,201
Home equity lines 45,935 28,383
Residential mortgages 73,146 20,921
-------- --------
600,997 306,810
Less deferred loan fees (costs), net 388 (81)
-------- --------
$600,609 $306,891
======== ========
A summary of activity in the allowance for loan losses for the years ended
December 31, 2002, 2001, and 2000 is as follows:
40
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
------- ------ ------
Balance at beginning of year $ 4,286 $3,463 $2,328
Allowance for loan losses transferred
from acquired companies 4,593 -- 387
Provision for loan losses 4,190 1,215 1,110
Loans charged-off, net of recoveries (3,679) (392) (362)
------- ------ ------
Balance at end of year $ 9,390 $4,286 $3,463
======= ====== ======
At December 31, 2002, nonperforming assets consisted of nonaccrual loans in
the amount of $3.0 million and foreclosed real estate of $947,000. At
December 31, 2001, nonperforming assets consisted of nonaccrual loans in
the amount of $3.1 million. Unrecognized income on nonaccrual loans at
December 31, 2002 and 2001 was $229,000 and $149,000, respectively. At
December 31, 2002, loans past due greater than 90 days and still accruing
interest amounted to $14,000. There were no such loans at December 31,
2001.
In the normal course of business, certain directors and executive officers
of the Company, including their immediate families and companies in which
they have an interest, may be loan customers. Total loans to such groups at
December 31, 2002 and activity during the year ended December 31, 2002, is
summarized as follows:
(In thousands)
Beginning balance $ 8,286
New loans 13,015
Principal repayments (6,013)
-------
Ending balance $15,288
=======
In addition, such groups had available lines of credit in the amount of
$1.9 million at December 31, 2002. The Company paid an aggregate of
approximately $705,000, $608,000, and $1.1 million to companies owned by
members of the board of directors for leased space, equipment, construction
and consulting services during 2002, 2001 and 2000, respectively.
7. Premises and Equipment
Premises and equipment at December 31, 2002 and 2001 are as follows:
2002 2001
------- -------
(In thousands)
Land $ 4,378 $ 744
Buildings and leasehold improvements 7,329 3,343
Furniture and equipment 7,589 3,011
Automobiles 303 187
Construction in progress 82 35
------- -------
19,681 7,320
Less accumulated depreciation and amortization (6,282) (2,311)
------- -------
$13,399 $ 5,009
======= =======
41
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Deposits
At December 31, 2002, the scheduled maturities of certificates of deposit
are as follows:
Weighted
Average
(In thousands) Balance Rate
-------- --------
2003 $256,377 2.75%
2004 81,113 3.55%
2005 10,083 3.65%
2006 21,242 4.05%
2007 and thereafter 1,626 3.95%
-------- ----
$370,441 3.03%
======== ====
9. Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank had a weighted average rate of
4.30% and 3.60% at December 31, 2002 and 2001, respectively, and were
collateralized by certain 1 - 4 family mortgages and qualifying commercial
loans totaling $95.1 million and $40.1 million at year-end 2002 and 2001,
respectively. In addition, the Company pledged certain investment
securities with an amortized cost of $26.0 million and $11.1 million at
December 31, 2002 and 2001 (Note 4). Advances outstanding at December 31,
2002 mature from March 2003 through November 2012.
At December 31, 2002, the Company had an additional $70.2 million of credit
available with the Federal Home Loan Bank.
10. Income Taxes
Income taxes charged to operations for the years ended December 31, 2002,
2001, and 2000 consist of the following components:
(In thousands) 2002 2001 2000
------ ------ -------
Current income tax expense $2,244 $1,458 $ 1,103
Deferred income tax expense (benefit) 130 (978) (1,139)
------ ------ -------
Total income tax expense (benefit) $2,374 $ 480 $ (36)
====== ====== =======
The difference between income tax and the amount computed by applying the
statutory federal income tax rate of 34% was primarily a result of the
change in the valuation allowance on the net deferred tax asset for the
years ended December 31, 2001 and 2000 and certain non-deductible merger
expenses in 2002.
Significant components of deferred tax assets and liabilities at December
31, 2002 and 2001 are as follows:
42
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 2002 2001
------- -------
Deferred tax assets:
Allowance for loan losses $ 3,620 $ 1,322
Deferred compensation 1,791 353
Net operating loss carryforwards 1,589 --
Directors fees 540 468
Contributions carryforwards 224 --
Other -- 314
------- -------
Total deferred tax assets 7,764 2,457
------- -------
Deferred tax liabilities:
Unrealized security gains (814) (357)
Depreciation (553) (16)
Purchase accounting adjustments (442) --
FHLB stock (302) (51)
Other (288) --
------- -------
Total deferred tax liabilites (2,399) (424)
------- -------
Net deferred tax assets $ 5,365 $ 2,033
======= =======
11. Leases
The Company has noncancelable operating leases for its corporate office and
branch locations that expire at various times through 2027. Future minimum
lease payments under the leases for years subsequent to December 31, 2002
are as follows:
(In thousands)
2003 $ 964
2004 911
2005 906
2006 805
2007 797
Thereafter 6,635
-------
$11,018
=======
During 2002, 2001, and 2000, payments under operating leases were $806,000,
$666,000, and $392,000, respectively.
12. Regulatory Matters and Restrictions
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the
consolidated financial statements. Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios, as set forth in the table below. As of June 30, 2002,
the most recent notification from regulators, the Bank was categorized as
"well capitalized" by regulatory authorities. There are no conditions or
events since that date that management believes could have an adverse
effect on the Bank's category. Management believes that as of December 31,
2002, the Company meets all capital requirements to which it is subject.
The Bank, as a North Carolina banking corporation, may pay dividends only
out of undivided profits as determined pursuant to North Carolina General
Statues Section 53-87. However, regulatory authorities may
43
Capital Bank Corporation
Notes to Consolidated Finicial Statements
- --------------------------------------------------------------------------------
limit payment of dividends by any bank when it is determined that such a
limitation is in the public interest and is necessary to ensure financial
soundness of the bank.
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 December 31, 2002 and 2001 and the minimum requirements
are presented in the following table.
Minimum Requirements To Be:
----------------------------------
Adequately
Actual Capitalized Well Capitalized
--------------- --------------- ----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- ------
2002
Total Capital (to Risk Weighted Assets) $66,329 10.28% $51,614 8.00% $64,157 10.00%
Tier I Capital (to Risk Weighted Assets) 58,248 9.03% 25,807 4.00% 38,710 6.00%
Tier I Capital (to Average Assets) 58,248 8.18% 28,502 4.00% 35,628 5.00%
2001
Total Capital (to Risk Weighted Assets) $36,507 10.88% $26,851 8.00% $33,564 10.00%
Tier I Capital (to Risk Weighted Assets) 32,309 9.63% 13,425 4.00% 20,138 6.00%
Tier I Capital (to Average Assets) 32,309 8.75% 14,766 4.00% 18,458 5.00%
13. Employee Benefit Plans
401(k) Plan
The Company instituted a 401(k) plan (the "Plan") for the benefit of its
employees, which includes provisions for employee contributions, subject to
limitation under the Internal Revenue Code, with the Company to match
contributions up to 6% of the employee's salary. The Plan provides that
employees' contributions are 100% vested at all times and the Company's
contributions vest 20% during the second year of service, an additional 20%
during the third and fourth years of service and the remaining 40% during
the fifth year of service. Further, the Company may make additional
contributions on a discretionary basis. Aggregate contributions for 2002,
2001, and 2000 were $342,000, $225,000, and $193,000, respectively.
14. Stock Options
At December 31, 2002, the Company had outstanding an aggregate of 785,605
options to purchase its common shares of which 720,394 are currently
exercisable. Of the 785,605 options currently outstanding, 418,755 were
assumed through merger & acquisition and 366,850 were issued under the
Company's stock option plan.
Grants of options are made by the Board or the 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.
A summary of the activity during the years ending December 31, 2002, 2001
and 2000 of the Company's stock option plan, including the weighted average
exercise price ("WAEP") is presented below:
44
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2002 2001 2000
----------------- ---------------- ----------------
Shares WAEP Shares WAEP Shares WAEP
-------- ------ ------- ------ ------- ------
Outstanding at beginning of year 415,944 $10.43 313,744 $10.36 215,251 $11.46
Granted 16,000 12.54 108,350 10.62 100,800 8.09
Assumed in connection with acquisitions 502,966 8.13 -- -- -- --
Exercised (147,645) 6.71 (650) 9.44 -- --
Terminated (1,660) 10.25 (5,500) 9.94 (2,307) 12.05
-------- ------ ------- ------ ------- ------
Outstanding at end of year 785,605 $ 9.70 415,944 $10.43 313,744 $10.36
======== ====== ======= ====== ======= ======
Options exercisable at year-end 720,394 $ 9.61 343,714 $10.52 223,514 $10.48
======== ====== ======= ====== ======= ======
The following table summarizes information about the stock options at
December 31, 2002:
Weighted
Average
Remaining
Number Contractual Number
Exercise Price Outstanding Life in Years Exercisable
--------------- ----------- ------------- -----------
$6.62 191,896 7.5 191,896
$7.20 24,231 8.2 24,231
$8.00 - $8.43 110,364 7.2 91,271
$8.70 - $8.98 68,375 4.4 62,107
$9.30 13,972 9.0 13,972
$10.08 - $10.25 25,586 7.0 20,754
$10.50 - $10.84 109,654 9.0 102,022
$11.00 - $11.13 71,250 5.2 59,750
$12.20 14,000 9.1 2,800
$13.25 61,628 4.7 61,628
$13.75 18,000 5.1 18,000
$14.00 - $14.46 55,072 5.6 53,372
$14.95 2,000 9.5 --
$15.06 - $15.21 17,934 5.6 17,522
$16.14 410 5.8 329
$16.57 1,233 6.1 740
------- -------
785,605 720,394
======= =======
The Company accounts for its stock options under the provisions of APB
Opinion No. 25. However, 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 the
following assumptions used for grants:
45
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2002 2001 2000
-------- ------- -------
Dividend yield $ 0.20 -- --
Expected volatility 29.7% 29.6% 29.2%
Riskfree interest rate 3.93% 4.95% 6.82%
Expected life 7 years 7 years 7 years
The weighted average fair value of options granted during 2002, 2001 and
2000 was $4.47, $4.57, and $3.84, respectively.
Had compensation cost for the Company's stock-based compensation plans, as
described above, been determined consistent with SFAS No. 123, the
Company's net income and income per share for the years ended December 31,
2002, 2001 and 2000 would have been decreased to the pro forma amounts
indicated below:
(In thousands, except per share data) 2002 2001 2000
------ ------ ------
Net income As reported $4,307 $2,420 $2,173
Pro forma 3,474 2,338 1,871
Net income per share - Basic As reported $ 0.79 $ 0.65 $ 0.59
Pro forma 0.64 0.63 0.50
Net income per share - Diluted As reported $ 0.76 $ 0.65 $ 0.59
Pro forma 0.62 0.63 0.50
15. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
To meet the financial needs of its customers, the Company is party to
financial instruments with off-balance sheet risk in the normal course of
business. At December 31, 2002, these financial instruments were comprised
entirely of unused lines of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making these commitments as
they do for on-balance sheet instruments. The amount of collateral
obtained, if deemed necessary by the Company, upon extension of credit is
based on management's credit evaluation of the borrower. Collateral held
varies but may include trade accounts receivable, property, plant, and
equipment and income-producing commercial properties. Since many unused
lines of credit expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Unused lines of credit were $133.8 million and $71.3 million, respectively,
at the end of 2002 and 2001. Outstanding letters of credit were $792,000
and $549,000, respectively, at December 31, 2002 and December 31, 2001.
The Bank's lending is concentrated primarily in Wake, Chatham, Northampton,
Alamance, Buncombe, Catawba, Granville, Warren, and Lee counties in North
Carolina.
16. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the disclosure of estimated fair values for financial instruments.
Quoted market prices, if available, are utilized as an estimate of the fair
46
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
value of financial instruments. Because no quoted market prices exist for a
significant part of the Company's financial instruments, the fair value of
such instruments has been derived based on management's assumptions with
respect to future economic conditions, the amount and timing of future cash
flows and estimated discount rates. Different assumptions could
significantly affect these estimates. Accordingly, the net amounts
ultimately collected could be materially different from the estimates
presented below. In addition, these estimates are only indicative of the
values of individual financial instruments and should not be considered an
indication of the fair value of the Company taken as a whole.
The fair values of cash and due from banks, Federal funds sold, interest
bearing deposits in banks and accrued interest receivable/payable are equal
to the carrying value due to the nature of the financial instruments. The
estimated fair values of investment securities and mortgage-backed
securities are provided in Note 4 to the Consolidated Financial Statements.
The fair value of the net loan portfolio has been estimated using the
present value of expected cash flows, discounted at an interest rate giving
consideration to estimated prepayment risk and credit loss factors. The
fair value of the Bank's loan portfolio at December 31, 2002 and 2001 were
as follows:
(In thousands) 2002 2001
-------- --------
Loans:
Carrying amount $591,219 $302,605
Estimated fair value 595,170 304,736
The fair values of deposit liabilities and repurchase agreements with no
stated maturities has been estimated to equal the carrying amount (the
amount payable on demand), totaling $287.5 million and $143.2 million at
December 31, 2002 and 2001, respectively. Therefore, the fair value
estimates for these products do not reflect the benefits that the Bank
receives from the low-cost, long-term funding they provide. These benefits
are considered significant.
The fair values of certificates of deposits and advances from the FHLB is
estimated by discounting the future cash flows using the current rates
offered for similar deposits and advances with the same remaining
maturities. The carrying value and estimated fair values of certificates of
deposit and FHLB advances at December 31, 2002 and 2001 were as follows:
(In thousands) 2002 2001
-------- --------
Certificates of deposits:
Carrying amount $370,441 $174,420
Estimated fair value 371,592 175,438
Advances from the FHLB:
Carrying amount $ 97,858 $ 50,000
Estimated fair value 98,472 50,284
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $134.6 million and $71.8
million at December 31, 2002 and 2001, respectively, which are primarily
comprised of unfunded loan commitments.
The Company's remaining assets and liabilities are not considered financial
instruments.
17. Parent Company Financial Information
Condensed financial information of the financial holding company of the
Bank at December 31, 2002 and 2001 and for the years ended December 31,
2002, 2001, and 2000 is presented below:
47
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 2002 2001
------- -------
Condensed Balance Sheets
Assets:
Cash $ 415 $ 3
Equity investment in subsidiary 76,553 37,336
------- -------
Total assets $76,968 $37,339
======= =======
Liabilities:
Deferred tax liabilities $ 814 $ 356
Dividends payable 333 --
Other liabilities 350 --
------- -------
Total liabilities 1,497 356
------- -------
Shareholders' equity:
Common stock 71,383 31,850
Treasury stock (5,641) (696)
Accumulated other comprehensive income 1,293 568
Retained earnings 8,436 5,261
------- -------
Total shareholders' equity 75,471 36,983
------- -------
Total liabilities and shareholders' equity $76,968 $37,339
======= =======
2002 2001 2000
------- ------- -------
Condensed Statements of Operations
Dividends from wholly-owned subsidiaries $ 2,750 $ 600 $ --
Equity in earnings of subsidiaries 1,570 1,820 2,173
Other expenses (13) -- --
------- ------- -------
Net income $4,307 $ 2,420 $ 2,173
======= ======= =======
Condensed Statements of Cash Flows
Operating activities:
Net income $ 4,307 $ 2,420 $ 2,173
Equity in undistributed earnings of subsidiary (1,570) (1,820) (2,173)
------- ------- -------
Cash flow provided by operating activities 2,737 600 --
------- ------- -------
Financing activities:
Proceeds from issuance of common stock 990 6 --
Payments to repurchase common stock (4,945) (703) --
Dividends paid (799) -- --
Net cash from acquisition 2,429 -- --
------- ------- -------
Cash flow used in financing activities (2,325) (697) --
------- ------- -------
Net increase (decrease) in cash and cash equivalents 412 (97) --
Cash and cash equivalents, beginning of period 3 100 100
------- ------- -------
Cash and cash equivalents, end of period $ 415 $ 3 $ 100
======= ======= =======
48
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly balances and results for the years ended
December 31, 2002 and 2001 are as follows:
2002
-----------------------------------------
Three Months Ended
-----------------------------------------
(In thousands except per share data) Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
Assets $840,976 $659,382 $642,126 $641,571
Loans 600,609 475,865 467,071 453,243
Investment securities 155,304 123,533 114,039 111,150
Deposits 644,887 521,930 503,021 482,119
Shareholders' equity 75,471 56,811 55,341 55,341
Net interest income $ 5,472 $ 4,969 $ 5,139 $ 4,769
Provision for loan losses 400 2,560 705 525
Other operating income 2,490 2,364 1,548 1,585
Other operating expenses 5,098 4,119 4,162 4,086
Income taxes 827 219 603 725
-------- -------- -------- --------
Net income $ 1,637 $ 435 $ 1,217 $ 1,018
======== ======== ======== ========
Net income per share - Basic $ .29 $ .08 $ .22 $ .20
======== ======== ======== ========
Net income per share - Diluted $ .28 $ .08 $ .21 $ .19
======== ======== ======== ========
2001
-----------------------------------------
Three Months Ended
-----------------------------------------
(In thousands except per share data) Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
Assets $406,741 $391,212 $377,362 $362,809
Loans 306,891 276,115 268,132 261,731
Investment securities 73,702 78,091 78,085 70,895
Deposits 304,443 309,776 296,088 289,008
Shareholders' equity 36,983 37,220 36,200 36,022
Net interest income $ 2,967 $ 2,806 $ 2,800 $ 2,899
Provision for loan losses 315 300 300 300
Other operating income 1,377 1,183 1,134 796
Other operating expenses 3,049 2,927 3,057 2,814
Income taxes 349 272 215 (356)
-------- -------- -------- --------
Net income $ 631 $ 490 $ 362 $ 937
======== ======== ======== ========
Net income per share - Basic and diluted $ .17 $ .13 $ .10 $ .25
======== ======== ======== ========
49
Report of Independent Accountants
The Board of Directors and Shareholders
Capital Bank Corporation
Raleigh, North Carolina
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Capital Bank Corporation at December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 and 3 to the consolidated financial statements in 2002,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets and Statement of
Financial Accounting Standards No. 147, Acquisition of Certain Financial
Institutions.
/s/ PricewaterhouseCoopers, LLP
January 24, 2003, except for Note 1
as to which the date is March 20, 2003
50
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.
None.
PART III
This Part incorporates certain information from the definitive proxy statement
(the "2003 Proxy Statement") for the Company's 2003 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission on or
about April 18, 2003 which is not later than 120 days after the end of the
Company's fiscal year covered by this Annual Report on Form 10-K.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Company's executive officers is included under the
caption "Executive Officers" on page 9 of this report. Information concerning
the Company's directors and filing of certain reports of beneficial ownership is
incorporated by reference to the Company's 2003 Proxy Statement.
Item 11. Executive Compensation.
This information is incorporated by reference to the Company's 2003 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is incorporated by reference to the Company's 2003 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Company's 2003 Proxy
Statement.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Based on the Company's most recent evaluation, which was completed within 90
days of the filing of this Annual Report on Form 10-K, the Company's Chief
Executive Officer and Chief Financial Officer believe the Company's disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) provide reasonable
assurances that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time period required by the United States
Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
most recent evaluation of the Company's internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K.
(a)(1) Financial Statements. The financial statements and information listed
below are included in this report in Part I, Item 8:
Financial Statements and Information
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules. All applicable financial statement
schedules required under Regulation S-X and pursuant to Industry Guide 3 under
the Securities Act of 1933 have been included in the Notes to the Consolidated
Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed
in the Exhibit Index immediately following the signature pages to this report.
(b) Reports on Form 8-K.
On December 16, 2002, a Current Report on Form 8-K was filed with the Securities
and Exchange Commission that included information about the Company's
acquisition of High Street Corporation. The report also included or incorporated
by reference the following financial statements: (i) consolidated financial
statements of High Street including High Street's consolidated balance sheet at
December 31, 2002 and December 31, 2001, and its consolidated statements of
operations, cash flows and changes in stockholders' equity for each of the years
ended December 31, 2002, December 31, 2001 and December 31, 2000 and the notes
thereto, (ii) unaudited consolidated condensed financial statements of High
Street including High Street's unaudited consolidated condensed balance sheet at
September 30, 2002 and September 30, 2001 and its unaudited consolidated
condensed statements of operations and cash flows for the nine months ended
September 30, 2002 and September 30, 2001 and the notes thereto (filed by
amendment); (iii) unaudited pro forma combined condensed statements of
operations for the year ended December 31, 2002 and the notes thereto and (iv)
unaudited pro forma combined condensed statements of operations for the nine
month period ended September 30, 2002 (filed by amendment).
On February 13, 2003, an amendment to the above mentioned Current Report on Form
8-K was filed that included required interim and pro forma financial statements
as also described above.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Raleigh, North
Carolina, on the 28th day of March, 2003.
CAPITAL BANK CORPORATION
By: /s/ James A. Beck
------------------------------------
James A. Beck
President and Chief Executive Officer
53
CERTIFICATIONS
I, James A. Beck, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Bank
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 annual 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: March 28, 2003
/s/ James A. Beck
-------------------------------------
James A. Beck
President and Chief Executive Officer
54
I, Allen T. Nelson, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of Capital Bank
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual 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: March 28, 2003
/s/ Allen T. Nelson, Jr.
-------------------------------
Allen T. Nelson, Jr.
Chief Financial Officer
55
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James A. Beck and Allen T. Nelson, Jr., and each of
them, with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated and on March 25, 2003.
Signature Title
--------- -----
/s/ James A. Beck President, Chief Executive Officer and Director
- -------------------------
James A. Beck
/s/ Allen T. Nelson, Jr. Executive Vice President and Chief Financial Officer
- ------------------------- (Principal Accounting Officer)
Allen T. Nelson, Jr.
/s/ William C. Burkhardt Director
- -------------------------
William C. Burkhardt
/s/ William R. Gilliam Vice Chairman of the Board of Directors
- -------------------------
William R. Gilliam
/s/ Robert L. Jones Director
- -------------------------
Robert L. Jones
/s/ Oscar A. Keller, III Chairman of the Board of Directors
- -------------------------
Oscar A. Keller, III
/s/ Oscar A. Keller, Jr. Director
- -------------------------
Oscar A. Keller, Jr.
56
/s/ Charles LeGrand Director
- -------------------------
Charles LeGrand
/s/ James D. Moser Director
- -------------------------
James D. Moser
/s/ Carl H. Ricker, Jr. Director
- -------------------------
Carl H. Ricker, Jr.
/s/ Samuel J. Wornom, III Director
- -------------------------
Samuel J. Wornom, III
57
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
2.01(1) Merger Agreement, dated October 4, 2001, between the Company and
First Community Financial Corporation and Related Plan of Merger.
2.02(2) Merger Agreement, dated as of May 1, 2002, between the Company
and High Street Corporation and Related Plan of Merger.
3.01(3) Articles of Incorporation of the Company
3.02(4) Bylaws of the Company, as amended to date
4.01(3) Specimen Common Stock Certificate of the Company
10.01(3,5) Amended and Restated Employment Agreement, dated May 22, 1997,
between NB Acquisition Corp., as predecessor to the Company, and
James A. Beck.
10.02(3,5) Equity Incentive Plan
10.03(3,5) Deferred Compensation Plan for Outside Directors
10.04(5,6) Change in Control Agreement, dated February 1, 2000 between
Capital Bank and Allen T. Nelson, Jr.
10.05(5,6) Change in Control Agreement, dated February 27, 2000 between
Capital Bank and Franklin G. Shell
10.06(6) Lease Agreement, dated November 16, 1999, between Crabtree Park,
LLC and the Company.
10.07(4) Agreement, dated November 2001 between Fiserv Solutions, Inc. and
the Company.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
99.01(7) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
99.02(7) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
1 Incorporated by reference to the Company's Current Report on Form 8-K filed
with the SEC on October 12, 2001.
2 Incorporated by reference to the Company's Current Report on Form 8-K filed
with the SEC on May 2, 2002.
3 Incorporated by reference to the Company's Registration Statement on Form S-4
filed with the SEC on October 19, 1998, as amended on November 10, 1998,
December 21, 1998 and February 8, 1999.
4 Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the SEC on March 29, 2002.
5 Denotes a management contract or compensatory plan, contract or arrangement.
6 Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the SEC on March 27, 2000.
7 Furnished as an exhibit in accordance with the interim guidance provided in
SEC Rel. No. 34-47551, dated March 21, 2003. The information contained in this
exhibit shall not be deemed to be "filed" for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Furthermore, the information contained in this
exhibit shall not be deemed to be incorporated by reference into the filings
under the Securities Act of 1933, as amended.
58