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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: 0-18460
COMMUNITY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
South Carolina 57-0866395
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1402-C Highway 72 West
Greenwood, South Carolina 29649
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 941-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class On Which Reported
- ------------------- ---------------------
Common Stock, par value $1. 00 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 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 to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 21, 2003 was approximately $42.5 million based upon the last
sale price reported for such date on the American Stock Exchange, which was
$14.20 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On March 21, 2003, the number of shares outstanding of the Registrant's
common stock, $1.00 par value, was 3,490,208.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 2003 Annual
Meeting of Stockholders (Part III).
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this report on Form 10-K that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this report that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of us to be materially different from those
expressed or implied by such forward-looking statements. Although we believe
that our expectations of future performance is based on reasonable assumptions
within the bounds of our knowledge of our business and operations, we have no
assurance that actual results will not differ materially from our expectations.
Factors that could cause actual results to differ from expectations include,
among other things: (1) the challenges, costs, and complications associated with
the continued development of our branches; (2) the potential that loan
charge-offs may exceed the allowance for loan losses or that such allowance will
be increased as a result of factors beyond the control of us; (3) our dependence
on senior management; (4) competition from existing financial institutions
operating in our market areas as well as the entry into such areas of new
competitors with greater resources, broader branch networks, and more
comprehensive services; (5) adverse conditions in the stock market, the public
debt market, and other capital markets (including changes in interest rate
conditions); (6) changes in deposit rates, the net interest margin, and funding
sources; (7) inflation, interest rate, market, and monetary fluctuations; (8)
risks inherent in making loans including repayment risks and value of
collateral; (9) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a deterioration in credit
quality or a reduced demand for credit, including the resultant effect on our
loan portfolio and allowance for loan losses; (10) fluctuations in consumer
spending and saving habits; (11) the demand for our products and services; (12)
technological changes; (13) the challenges and uncertainties in the
implementation of our expansion and development strategies; (14) the ability to
increase market share; (15) the adequacy of expense projections and estimates of
impairment loss; (16) the impact of changes in accounting policies by the
Securities and Exchange Commission; (17) unanticipated regulatory or judicial
proceedings; (18) the potential negative effects of future legislation affecting
financial institutions (including without limitation laws concerning taxes,
banking, securities, and insurance); (19) the effects of, and changes in, trade,
monetary and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System; (20) the timely development
and acceptance of products and services, including products and services offered
through alternative delivery channels such as the Internet; (21) the impact on
our business, as well as on the risks set forth above, of various domestic or
international military or terrorist activities or conflicts; (22) other factors
described in this report and in other reports we have filed with the Securities
and Exchange Commission; and (23) our success at managing the risks involved in
the foregoing.
PART I
Item 1. Business.
General
Community Capital Corporation is a bank holding company headquartered in
Greenwood, South Carolina. We were incorporated under the laws of the State of
South Carolina on April 8, 1988 as a holding company for Greenwood Bank & Trust,
which opened in 1989.
We were formed principally in response to perceived opportunities resulting from
takeovers of several South Carolina-based banks by large southeastern regional
bank holding companies. In many cases, when these consolidations occur, local
boards of directors are dissolved, and local management is relocated or
terminated. We believe this situation creates favorable opportunities for new
community banks with local management and local directors. Management believes
that such banks can be successful in attracting individuals and small to
medium-sized businesses as customers who wish to conduct business with a locally
owned and managed institution that demonstrates an active interest in their
business and personal financial affairs.
In 1994, we made the strategic decision to expand beyond the Greenwood County
area by creating an organization of independently managed community banks that
serve their respective local markets, but which share a common vision and
benefit from the strength, resources and economies of a larger institution. In
1995, we opened Clemson Bank & Trust in Clemson, South Carolina. In 1997, we
opened Community Bank & Trust in Barnwell, South Carolina, TheBank in
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Belton, South Carolina, and Mid State Bank in Newberry, South Carolina. During
2000, each of these five community banks operated as a wholly-owned subsidiary
of the Company and engaged in a general commercial banking business, emphasizing
the banking needs of individuals and small to medium-sized businesses in each
bank's primary service area. Each of the five community banks was a state
chartered Federal Reserve member bank. On January 1, 2001, we merged the five
community banks into one bank known as CapitalBank.
Market Areas
At December 31, 2002, CapitalBank had banking locations in Greenwood, Clemson,
Abbeville, Belton, Greenville, Honea Path, Anderson, Newberry, and Saluda, South
Carolina.
The following table sets forth certain information concerning CapitalBank at
December 31, 2002:
Number of Total Total Total
Locations Assets Loans Deposits
--------- -------- -------- --------
(Dollars in thousands)
CapitalBank....................... 13 $380,771 $288,842 $276,561
CapitalBank offers a full range of commercial banking services, including
checking and savings accounts, NOW accounts, IRA accounts, and other savings and
time deposits of various types ranging from money markets to long-term
certificates of deposit. CapitalBank also offers a full range of consumer credit
and short-term and intermediate-term commercial and personal loans. CapitalBank
conducts residential mortgage loan origination activities pursuant to which
mortgage loans are sold to investors in the secondary markets. Servicing of such
loans is not retained by CapitalBank.
CapitalBank also offers trust and related fiduciary services. Discount
securities brokerage services are available through a third-party brokerage
service that has contracted with CapitalBank.
Lending Activities
General. Through CapitalBank, we offer a range of lending services, including
real estate, consumer, and commercial loans, to individuals and small business
and other organizations that are located in or conduct a substantial portion of
their business in CapitalBank's market areas. Our total loans at December 31,
2002, were $288.8 million, or 83.14% of total earning assets. The interest rates
charged on loans vary with the degree of risk, maturity, and amount of the loan,
and are further subject to competitive pressures, availability of funds, and
government regulations. We have no foreign loans or loans for highly leveraged
transactions.
Our primary focus has been on commercial and installment lending to individuals
and small to medium-sized businesses in its market areas, as well as residential
mortgage loans. These loans totaled approximately $204.9 million, and
constituted approximately 70.27% of our loan portfolio, at December 31, 2002.
The following table sets forth the composition of our loan portfolio for each of
the five years in the period ended December 31, 2002.
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Loan Composition
(Dollars in thousands)
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Commercial, financial and agricultural........ 10.48% 13.26% 18.54% 13.58% 16.80%
Real estate:
Construction............................ 4.48 5.26 7.27 13.09 13.72
Mortgage:
Residential............................. 52.91 49.25 39.89 30.17 30.51
Commercial (1).......................... 25.25 23.58 21.45 26.67 20.87
Consumer and other............................ 6.88 8.65 12.85 16.49 18.10
Total loans................................... 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
Total loans (dollars)......................... $288,842 $248,390 $280,506 $219,054 $172,545
======== ======== ======== ======== ========
(1) The majority of these loans are made to operating businesses where real
property has been taken as additional collateral.
Loan Approval. Certain credit risks are inherent in the loan making process.
These include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions, and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility. We attempt to minimize loan losses
through various means and use standardized underwriting criteria. During 2002,
these means included the use of policies and procedures that impose officer and
customer lending limits and require loans in excess of certain limits to be
approved by the Board of Directors of CapitalBank.
Loan Review. We have a continuous loan review process designed to promote early
identification of credit quality problems. All loan officers are charged with
the responsibility of reviewing all past due loans in their respective
portfolios. CapitalBank establishes watch lists of potential problem loans.
Deposits
The principal sources of funds for CapitalBank are core deposits, consisting of
demand deposits, interest-bearing transaction accounts, money market accounts,
saving deposits, and certificates of deposit. Transaction accounts include
checking and negotiable order of withdrawal (NOW) accounts that customers use
for cash management and that provide CapitalBank with a source of fee income and
cross-marketing opportunities, as well as a low-cost source of funds. Time and
savings accounts also provide a relatively stable source of funding. The largest
source of funds for CapitalBank is certificates of deposit. Certificates of
deposit in excess of $100,000 are held primarily by customers in CapitalBank's
market areas. Deposit rates are set weekly by senior management of CapitalBank,
subject to approval by our management. Management believes that the rates
CapitalBank offers are competitive with other institutions in CapitalBank's
market areas.
Competition
CapitalBank generally competes with other financial institutions through the
selection of banking products and services offered, the pricing of services, the
level of service provided, the convenience and availability of services, and the
degree of expertise and the personal manner in which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. South Carolina law
also permits regional interstate banking whereby out-of-state banks and bank
holding companies are allowed to acquire and merge with South Carolina banks and
bank holding companies, as long as the South Carolina South Carolina State Board
of Financial Institutions of Financial Institutions gives prior approval for the
acquisition or merger. Many large banking organizations currently operate in the
market areas of CapitalBank, several of which are controlled by out-of-state
ownership. In addition, competition between commercial banks and thrift
institutions (savings institutions and credit unions) has been intensified
significantly by the
4
elimination of many previous distinctions between the various types of financial
institutions and the expanded powers and increased activity of thrift
institutions in areas of banking that previously had been the sole domain of
commercial banks. Recent legislation, together with other regulatory changes by
the primary regulators of the various financial institutions, has resulted in
the almost total elimination of practical distinctions between a commercial bank
and a thrift institution. Consequently, competition among financial institutions
of all types is largely unlimited with respect to legal ability and authority to
provide most financial services. See "Government Supervision and Regulation. "
CapitalBank faces increased competition from both federally-chartered and
state-chartered financial and thrift institutions, as well as credit unions,
consumer finance companies, insurance companies and other institutions in
CapitalBank's market areas. Some of these competitors are not subject to the
same degree of regulation and restriction imposed upon CapitalBank. Many of
these competitors also have broader geographic markets and substantially greater
resources and lending limits than CapitalBank and offer certain services that
CapitalBank does not currently provide. In addition, many of these competitors
have numerous branch offices located throughout the extended market areas of
CapitalBank that we believe may provide these competitors with an advantage in
geographic convenience that CapitalBank does not have at present. Such
competitors may also be in a position to make more effective use of media
advertising, support services, and electronic technology than can CapitalBank.
Employees
Including the employees of CapitalBank, we currently have in the aggregate 138
full-time employees and 22 part-time employees.
Government Supervision and Regulation
General
We, along with CapitalBank, are subject to an extensive collection of state and
federal banking laws and regulations that impose specific requirements and
restrictions on, and provide for general regulatory oversight with respect to,
virtually all aspects of our and CapitalBank's operations. These regulations are
generally intended to provide protections for CapitalBank's depositors and
borrowers, rather than for our shareholders. We, along with CapitalBank, are
also affected by government monetary policy and by regulatory measures affecting
the banking industry in general. The actions of the Federal Reserve System
affect the money supply and, in general, CapitalBank's lending abilities in
increasing or decreasing the cost and availability of funds to CapitalBank.
Additionally, the Federal Reserve System 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 the reserve
requirements against bank deposits, and limitations on interest rates that banks
may pay on time and savings deposits.
The following is a brief summary of certain statutes, rules, and regulations
affecting CapitalBank and us. 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 our and CapitalBank's business. Any change in
applicable laws or regulations may have a material adverse effect on our and
CapitalBank's business and prospects.
The Company
We are a bank holding company within the meaning of the Federal Bank Holding
Company Act of 1956, as amended, and the South Carolina Banking and Branching
Efficiency Act of 1996, as amended. We are registered with both the Federal
Reserve System and the South Carolina State Board of Financial Institutions. We
are required to file with both of these agencies annual reports and other
information regarding our business operations and those of our subsidiaries. We
are also subject to the supervision of, and to regular examinations by, these
agencies. The regulatory requirements to which we are subject also set forth
various conditions regarding the eligibility and qualifications of our directors
and officers.
The Federal Bank Holding Company Act of 1956, as amended, requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it (i) or any of its subsidiaries (other than a bank) acquires substantially all
of the assets of any bank, (ii) acquires ownership or control of any voting
shares of any bank if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank, or (iii) merges
or
5
consolidates with any other bank holding company. Under the South Carolina
Banking and Branching Efficiency Act of 1996, as amended, a South Carolina bank
holding company shall not, without the prior approval of the South Carolina
State Board of Financial Institutions, (i) acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank or any other bank
holding company, (ii) acquire all or substantially all of the assets of a bank
or any other bank holding company, or (iii) merge or consolidate with any other
bank holding company.
The Federal Bank Holding Company Act of 1956, as amended, generally prohibits a
bank holding company from engaging in, or acquiring direct or indirect control
of more than 5% of the voting shares of any company engaged in, nonbanking
activities unless the Federal Reserve Board, by order or regulation, has found
those activities to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include making or servicing loans and certain
types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial adviser, owning savings
associations and making investments in certain corporations or projects designed
primarily to promote community welfare.
In determining whether an activity is so closely related to banking as to be
permissible for bank holding companies, the Federal Reserve Board must consider
whether the performance of the particular activities by a bank holding company
or its subsidiaries can reasonably be expected to produce benefits to the public
(such as greater convenience, increased competition, and gains in efficiency)
that outweigh possible adverse effects (such as undue concentration of
resources, decreased or unfair competition, conflicts of interests, and unsound
banking practices). Generally, bank holding companies must obtain prior approval
of the Federal Reserve Board to engage in any new activity not previously
approved by the Federal Reserve Board. Despite prior approval, the Federal
Reserve Board may order a bank holding company or its subsidiaries to terminate
any activity or to terminate its ownership or control of any subsidiary when the
Federal Reserve Board has reasonable cause to believe that the holding company's
continued ownership, activity, or control constitutes a serious risk to the
financial safety, soundness, or stability of any of its bank subsidiaries.
The Federal Bank Holding Company Act of 1956, as amended, and the Federal Change
in Bank Control Act, together with regulations promulgated by the Federal
Reserve Board, require that, depending on the particular circumstances, either
the Federal Reserve Board's approval must be obtained or notice must be
furnished to the Federal Reserve Board and not disapproved prior to any person
or company acquiring control of a bank holding company, such as us, subject to
certain exemptions. Control is conclusively presumed to exist when an individual
or company acquires 25 percent or more of any class of voting securities of the
bank holding company. Control is rebuttably presumed to exist if a person
acquires 10 percent or more, but less than 25 percent, of any class of voting
securities and either the bank holding company has registered securities under
Section 12 of the Securities Exchange Act of 1934 or no other person owns a
greater percentage of that class of voting securities immediately after the
transaction.
The Federal Reserve Board, pursuant to regulation and published policy
statements, has maintained that a bank holding company must serve as a source of
financial strength to its subsidiary banks. In adhering to the Federal Reserve
Board policy, we may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, we may not deem
it advisable to provide such assistance. Under Federal Bank Holding Company Act
of 1956, as amended, the Federal Reserve Board may also require a bank holding
company to terminate any activity or relinquish control of a nonbank subsidiary,
other than a nonbank subsidiary of a bank, upon the Federal Reserve Board's
determination that the activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition.
CapitalBank
CapitalBank is subject to various statutory requirements and rules and
regulations promulgated and enforced primarily by the South Carolina State Board
of Financial Institutions, the Federal Reserve System, and the FDIC. The South
Carolina State Board of Financial Institutions and the FDIC regulate or monitor
all areas of CapitalBank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuances of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices.
6
The Federal Reserve System and the FDIC also require CapitalBank to maintain
certain capital ratios (see "Federal Capital Regulations"), and the provisions
of the Federal Reserve Act require CapitalBank to observe certain restrictions
on any extensions of credit to us, or with certain exceptions, other affiliates,
on investments in the stock or other securities of other banks, and on the
taking of such stock or securities as collateral on loans to any borrower. In
addition, CapitalBank may not engage in certain "tie-in" or "tying" arrangements
in connection with any extension of credit or the providing of any property or
service. Tying is generally defined as any arrangement in which a bank requires
a customer who wants one service, such as credit, to buy other products or
services from the bank or its affiliates as a condition of receiving the first
service. The regulatory requirements to which CapitalBank is subject also set
forth various conditions regarding the eligibility and qualification of their
directors and officers.
Dividends
Although we are not presently subject to any direct legal or regulatory
restrictions on dividends (other than the South Carolina state business
corporation law requirements that dividends may be paid only if such payment
would not render us insolvent or unable to meet our obligations as they come
due), our ability to pay cash dividends will depend primarily upon the amount of
dividends paid by CapitalBank and any other subsequently acquired entities.
CapitalBank is subject to regulatory restrictions on the payment of dividends,
including the prohibition of payment of dividends from CapitalBank's capital.
All dividends of CapitalBank must be paid out of the respective undivided
profits then on hand, after deducting expenses, including losses and bad debts.
In addition, as a member of the Federal Reserve System, CapitalBank may not
declare a dividend on its shares of common stock until its surplus equals its
stated capital, unless there has been transferred to surplus no less than
one-tenth of CapitalBank's net profits of the preceding two consecutive
half-year periods (in the case of an annual dividend). CapitalBank must obtain
the approval of the Federal Reserve Board if the total of all dividends declared
by CapitalBank in any calendar year exceeds the total of its net profits for
that year combined with CapitalBank's retained net profits for the preceding two
years, less any required transfers to surplus. CapitalBank is subject to various
other federal and state regulatory restrictions on the payment of dividends.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
established two insurance funds under the jurisdiction of the FDIC: the Savings
Association Fund and the Bank Insurance Fund (see "FDIC Regulations"). The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 also
imposed, with certain exceptions, a "cross guaranty" on the part of commonly
controlled depository institutions such as CapitalBank. Under this provision, if
one depository institution subsidiary of a multi-bank holding company fails or
requires FDIC assistance, the FDIC may assess a commonly controlled depository
institution for the estimated losses suffered by the FDIC. The FDIC's claim is
junior to the claims of nonaffiliated depositors, holders of secured
liabilities, general creditors, and subordinated creditors, but is superior to
the claims of shareholders.
FDIC Regulations
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. Deposits in CapitalBank are insured by
the FDIC up to a maximum amount (generally $100,000 per depositor, subject to
aggregation rules), and the FDIC maintains an insurance fund for commercial
banks with insurance premiums from the industry used to offset losses from
insurance payouts when banks fail. CapitalBank pays premiums to the FDIC on its
deposits. Under FDIC rules, a depository institution pays to the FDIC a premium
of from $0. 00 to $0. 31 per $100 of insured deposits, depending on its capital
levels and risk profile as determined by its primary federal regulator on a
semi-annual basis.
Federal Capital Regulations
In an effort to achieve a measure of capital adequacy that is more sensitive to
the individual risk profiles of financial institutions, the Federal Reserve
Board, the FDIC, and other federal banking agencies have adopted risk-based
capital adequacy guidelines for banking organizations insured by the FDIC,
including CapitalBank. The capital adequacy guidelines issued by the Federal
Reserve Board are applied to bank holding companies, such as us, on a
consolidated basis with the banks owned by the holding company. These guidelines
redefine traditional capital ratios to take into account assessments of risks
related to each balance sheet category, as well as off-balance sheet financing
activities. The guidelines define a two-tier capital framework. Tier 1 capital
consists of common and qualifying preferred shareholders' equity, excluding the
unrealized gain (loss) on available-for-sale securities, less goodwill and other
adjustments. Tier 2
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capital consists of mandatory convertible, subordinated and other qualifying
term debt, preferred stock not qualifying for Tier 1, and a limited allowance
for credit losses up to a designated percentage of risk-weighted assets. Under
the guidelines, institutions must maintain a specified minimum ratio of
"qualifying" capital to risk-weighted assets. At least 50% of an institution's
qualifying capital must be "core" or "Tier 1" capital, and the balance may be
"supplementary" or "Tier 2" capital. The guidelines imposed on us and
CapitalBank include a minimum leverage ratio standard of capital adequacy. The
leverage standard requires top-rated institutions to maintain a minimum Tier 1
capital to assets ratio of 3%, with institutions receiving less than the highest
rating required to maintain a minimum ratio of 4% or greater, based upon their
particular circumstances and risk profiles. Each of our and CapitalBank's
leverage and risk-based capital ratios at December 31, 2002 exceeded their
respective fully phased-in minimum requirements.
Other Regulations
Interest and certain other charges collected or contracted for by CapitalBank
are subject to state usury laws and certain federal laws concerning interest
rates. CapitalBank's loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Community
Reinvestment Act of 1977 requiring financial institutions to meet their
obligations to provide for the total credit needs of the communities they serve,
including investing their assets in loans to low- and moderate-income borrowers,
the Home Mortgage Disclosure Act of 1975 requiring financial institutions to
provide information to enable public officials to determine whether a financial
institution is fulfilling its obligations to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed, or other prohibited factors in extending credit,
the Fair Credit Reporting Act governing the manner in which consumer debts may
be collected by collection agencies, and the rules and regulations of the
various federal agencies charged with the responsibility of implementing such
federal laws. The deposit operations of CapitalBank also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that Act,
which govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Interstate and Intrastate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
eligible bank holding companies in any state are permitted, with Federal Reserve
Board approval, to acquire banking organizations in any other state. As such,
all existing regional compacts and substantially all regional limitations on
interstate acquisitions of banking organizations have been eliminated. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 also removed
substantially all of the existing prohibitions on interstate branching by banks.
A bank operating in any state is now entitled to establish one or more branches
within any other state without, as formerly required, the establishment of a
separate banking structure within the other state. The South Carolina Banking
and Branching Efficiency Act of 1996, as amended permits the acquisition of
South Carolina banks and bank holding companies by, and mergers with,
out-of-state banks and bank holding companies with the prior approval of the
South Carolina State Board of Financial Institutions. The South Carolina Banking
and Branching Efficiency Act of 1996, as amended also permits South Carolina
state banks, with prior approval of the South Carolina State Board of Financial
Institutions, to operate branches outside the State of South Carolina. Although
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 has the
potential to increase the number of competitors in the marketplace of
CapitalBank, we cannot predict the actual impact of such legislation on the
competitive position of CapitalBank.
Gramm-Leach Bliley Act
The Gramm-Leach-Bliley Act (popularly referred to as the Financial Services
Modernization Act of 1999 prior to enactment) became effective March 11, 2000.
The Gramm-Leach-Bliley Act accomplished a variety of purposes, including
facilitating the affiliation among banks, securities firms, and insurance
companies and providing privacy protections for customers. Specifically, the
Gramm-Leach-Bliley Act (a) amends the Banking Act of 1933 (the Glass-Steagall
Act) to repeal the prohibitions against affiliation of any Federal Reserve
member bank, such as CapitalBank, with an entity engaged principally in
securities activities, and to repeal the prohibitions against simultaneous
service by any officer, director, or employee of a securities firm as an
officer, director, or employee of any member bank; (b) amends the Federal Bank
Holding Company Act of 1956, as amended, to permit bank holding companies to own
shares in non-banking organizations whose activities have been determined by the
Federal Reserve System to be permissible for bank
8
holding companies; (c) creates a new type of bank, wholesale financial
institutions (also referred to as "woofies"), that are regulated by the Federal
Bank Holding Company Act of 1956, as amended, and are not able to accept insured
deposits, potentially giving holding companies with woofies greater flexibility
to engage in non-financial investments; (d) subject to specified exemptions,
pre-empts state anti-affiliation laws restricting transactions among insured
depository institutions, wholesale financial institutions, insurance concerns,
and national banks; (e) amends the Federal Bank Holding Company Act of 1956, as
amended, and the Federal Deposit Insurance Act to mandate public meetings
concerning proposed large bank mergers and acquisitions; (f) amends the
Electronic Fund Transfer Act to mandate certain fee disclosures related to
electronic fund transfer services; and (g) imposes certain obligations on
financial institutions to protect the privacy and confidentiality of customer
nonpublic personal information, including the requirements that financial
institutions establish standards for safeguards to protect privacy and
confidentiality, provide the standards to customers at the time of establishing
the customer relationship and annually during the continuation of the
relationship, condition disclosure of the private information to nonaffiliated
third parties on the giving of specific disclosures to consumers, and giving
consumers the opportunity to prevent such disclosure to third parties.
Although the Gramm-Leach-Bliley Act has the potential to mix commerce and
banking and increase our and CapitalBank's abilities to diversify into a variety
of areas, we cannot predict the actual impact of such legislation on CapitalBank
or us.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. It
mandated sweeping reforms and implemented a number of requirements for public
companies. Among the reforms and new requirements, some of which are not yet
effective based on implementing rules, are the following:
o Creation of the Public Company Accounting Oversight Board to oversee
audits of public companies.
o Implementation of a variety of requirements designed to ensure greater
auditor independence, including the prohibition of certain services
that auditors had traditionally provided to clients.
o Implementation of a variety of requirements regarding audit
committees, including that they be entirely independent; that they
establish procedures for the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters; and that issuers disclose whether at least one member of the
committee is a "financial expert."
o Requirement that changes in equity ownership by directors, officers,
and 10% stockholders be reported more promptly, generally by the end
of the second business day following the trade (subject to limited
exceptions).
o Requirement that CEOs and CFOs certify that the financial information
in each annual and quarterly report fairly presents in all material
respects the financial condition and results of operations of the
issuer as of, and for, the periods presented in the report, and
establish and maintain internal controls designed to ensure discovery
of material information.
o Implementation of rules relating to disclosure of all material
off-balance sheet transactions and obligations and regarding the
presentation of pro-forma financial information in any press release
or other public disclosure that was "non-GAAP."
o Requirement that issuers disclose whether they have adopted a code of
ethics for senior executives and any waivers or changes in the code.
o Requirement that CEOs and CFOs disgorge incentive compensation and
profits from their sales of company securities after restatement of
financial information.
o Prohibition against directors and executive officers from transacting
in company equity securities received in connection with employment
during any pension fund blackout of such equity.
o Requirement that SEC review each issuer's periodic reports at least
once every three years.
o Acceleration of the time schedule during which Forms 10-K and 10-Q and
8-K must be filed for certain issuers and expansion of the items
reportable under Form 8-K.
o Issuance of new requirements regarding the obligations of attorneys to
report evidence of a material violation of securities law or breach of
fiduciary duty to the issuer's chief legal counsel or chief executive
officer and ultimately to the Board of Directors.
o Adoption of new rules regarding statutes of limitation and penalties
with respect to securities law violations.
Though the Sarbanes-Oxley Act will have a meaningful impact on our operations,
we do not believe that we will be affected by Sarbanes-Oxley in ways that are
materially different or more onerous than other public companies of similar size
and nature.
Item 2. Properties.
We operate out of an approximately 3,000 square foot building located on
approximately one acre of land leased from a third party in Greenwood, South
Carolina. At December 31, 2002, CapitalBank operated thirteen full service
branches in South Carolina, three of which are located in Greenwood and one of
which is located in each of Anderson, Newberry, Belton, Greenville, Clemson,
Saluda, Prosperity, Honea Path, and Calhoun Falls. Of CapitalBank's branches,
seven are located on land owned by CapitalBank, four are located on land owned
by us and leased to CapitalBank, one is located on land CapitalBank leases from
one of our former directors, and one is located on land CapitalBank leases from
a third party.
Item 3. Legal Proceedings.
We and CapitalBank are parties to legal proceedings that have arisen in the
ordinary course of our respective businesses. None of these proceedings is
expected to have a material effect on our consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Our common stock is listed for trading on the American Stock Exchange under the
symbol "CYL". The following table reflects the high and low sales price per
share for our common stock reported on the American Stock Exchange for the
periods indicated.
Year Quarter High Low
- ---- ------- ------ ------
2002 Fourth .......................... $14.50 $12.00
Third ........................... 15.60 11.95
Second .......................... 14.75 12.25
First ........................... 12.70 11.25
2001 Fourth .......................... $11.24 $10.25
Third ........................... 11 50 9.45
Second .......................... 10.10 8.10
First ........................... 8.75 5.38
9
As of March 21, 2003, there were 3,490,208 shares of our common stock
outstanding held by approximately 1,200 shareholders of record.
Until September 17, 2001, we had not declared or distributed any cash dividends
to our shareholders since our organization in 1988. On September 17, 2001 and on
December 10, 2001, the Company paid cash dividends to its shareholders of record
as of August 31, 2001, and November 19, 2001 respectively, at $0.03 per share.
On January 16, 2002, the Board of Directors declared a cash dividend of $0.03
per share, which was paid to shareholders on March 8, 2002. On April 17, 2002,
the Board of Directors declared a cash dividend of $0.04 per share, which was
paid to shareholders on June 7, 2002. On July 18, 2002, the Board of Directors
declared a cash dividend of $0.05 per share, which was paid to shareholders on
September 6, 2002. On October 16, 2002, the Board of Directors declared a cash
dividend of $0.05 per share, which was paid to shareholders on December 6, 2002.
Our Board of Directors expects comparable dividends to be paid to our
shareholders for the foreseeable future. Notwithstanding the foregoing, our
future dividend policy is subject to the discretion of the Board of Directors
and will depend upon a number of factors, including future earnings, financial
condition, cash requirements, and general business conditions. Our ability to
distribute cash dividends will depend entirely upon CapitalBank's ability to
distribute dividends to us. As a state bank, CapitalBank is subject to legal
limitations on the amount of dividends each is permitted to pay. In particular,
CapitalBank must receive the approval of the South Carolina State Board of
Financial Institutions prior to paying dividends to us. Furthermore, neither we
nor CapitalBank may declare or pay a cash dividend on any of our capital stock
if we are insolvent or if the payment of the dividend would render us insolvent
or unable to pay our obligations as they become due in the ordinary course of
business. See "Government Supervision and Regulation -- Dividends. "
Equity Compensation Plan Information
The following table sets forth, as of the end of December 31, 2002, certain
information relating to our compensation plans (including individual
compensation arrangements) under which our common stock are authorized for
issuance.
Number of shares of our
common stock remaining
and available for future
Number of shares of our issuance under equity
common stock to be issued Weighted-average exercise compensation plans
upon exercise of price of outstanding (excluding shares of our
outstanding options, options, warrants, common stock reflected in
Plan Category(1) warrants, and rights rights column (a))
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 548,852 $9.34 111,807
Equity compensation plans not
approved by security holders -0- $ 0 -0-
Total 548,852 $9.34 111,807
(1) Disclosures are provided with respect to any compensation plan and
individual compensation arrangement of us or of our subsidiaries or
affiliates) under which our common stock are authorized for issuance to
employees or non-employees (such as directors, consultants, advisors,
vendors, customers, suppliers, or lenders) in exchange for consideration in
the form of goods or services as described in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
10
Item 6. Selected Financial Data
Selected Financial Data
The following selected consolidated financial data for the five years ended
December 31, 2002 are derived from our consolidated financial statements and
other data. The selected consolidated financial data should be read in
conjunction with our consolidated financial statements, including the
accompanying notes, included elsewhere herein.
Year Ended December 31,
(Dollars in thousands, except per share) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Income Statement Data:
Interest income $ 22,204 $ 26,961 $ 29,722 $ 23,199 $ 21,043
Interest expense 7,793 13,675 16,636 11,850 11,198
-------- -------- -------- -------- --------
Net interest income 14,411 13,286 13,086 11,349 9,845
Provision for loan losses 773 1,920 471 1,037 1,836
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 13,638 11,366 12,615 10,312 8,009
Net securities gains 106 290 -- 175 220
Noninterest income 4,433 9,824 3,303 3,005 2,797
Noninterest expense 11,892 15,102 13,976 12,014 10,228
-------- -------- -------- -------- --------
Income before income taxes 6,285 6,378 1,942 1,478 798
Income tax expense 1,683 1,900 290 150 34
-------- -------- -------- -------- --------
Net income $ 4,602 $ 4,478 $ 1,652 $ 1,328 $ 764
======== ======== ======== ======== ========
Balance Sheet Data:
Assets $380,765 $340,682 $422,250 $359,668 $321,031
Earning assets 347,377 314,769 387,146 328,478 295,213
Securities (1) 55,812 62,806 106,041 108,926 120,695
Loans (2) 288,842 248,390 280,506 219,054 172,545
Allowance for loan losses 4,282 4,103 3,060 2,557 2,399
Deposits 276,561 258,330 332,976 257,247 260,120
Federal Home Loan Bank advances 31,140 31,270 32,399 20,729 9,434
Shareholders' equity 44,408 39,273 35,144 31,218 33,430
Per Share Data (3):
Basic earnings per share $ 1.34 $ 1.31 $ 0.48 $ 0.40 $ 0.24
Diluted earnings per share 1.26 1.26 0.48 0.40 0.23
Book value (period end) (4) 12.71 11.66 10.79 10.10 10.81
Tangible book value (period end) (4) 11.57 10.37 8.72 8.48 9.01
Cash dividends 0.17 0.06 -- -- --
Performance Ratios:
Return on average assets 1.28% 1.19% 0.41% 0.40% 0.27%
Return on average equity 11.11 11.68 4.57 3.90 2.33
Net interest margin (5) 4.50 4.08 3.83 3.96 3.77
Efficiency (6) 61.45 72.71 81.75 79.55 78.50
Allowance for loan losses to loan 1.48 1.65 1.09 1.17 1.39
Net charge-offs to average loans 0.22 0.34 0.12 0.47 0.62
Nonperforming assets to period end loans (2)(7) 0.71 0.68 0.25 0.56 0.78
Capital and Liquidity Ratios:
Average equity to average assets 11.71 10.22 9.07 10.22 11.47
Leverage (4.00% required minimum) 10.59 10.21 7.02 8.37 8.89
Tier 1 risk-based capital ratio 14.16 14.26 10.05 11.85 13.78
Total risk-based capital ratio 15.41 15.53 11.12 12.90 15.00
Average loans to average deposits 103.86 90.03 86.46 72.97 69.65
- ----------
Securities held-to-maturity are stated at amortized cost, and securities
available-for-sale are stated at fair value.
Loans are stated before the allowance for loan losses and include loans held for
sale.
All share and per-share data have been adjusted to reflect the 5% common stock
dividends in September 1998, June 2000 and June 2001.
Excludes the effect of any outstanding stock options.
Tax equivalent net interest income divided by average earning assets.
Noninterest expense divided by the sum of tax equivalent net interest income and
noninterest income, excluding gains and losses on sales of assets and the
writedown of intangible assets related to the sale of those assets.
Nonperforming loans and nonperforming assets do not include loans past due 90
days or more that are still accruing interest.
11
Selected Financial Data (continued)
(Dollars in thousands) 2002 Quarter ended 2001 Quarter ended
-------------------------------------- --------------------------------------
except per share Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Net interest income $3,567 $3,644 $3,634 $3,566 $3,392 $3,212 $3,266 $3,416
Provision for loan losses 110 340 213 110 820 600 400 100
Noninterest income 1,335 1,102 1,005 1,097 1,341 1,215 6,666 892
Noninterest expense 3,086 3,000 2,869 2,937 3,131 2,941 5,522 3,508
Net income 1,273 1,026 1,149 1,154 600 666 2,662 550
Basic earnings per share 0.36 0.29 0.34 0.35 0.18 0.19 0.77 0.17
Diluted earnings per share 0.35 0.28 0.31 0.32 0.17 0.18 0.74 0.17
Basis of Presentation
The following discussion should be read in conjunction with the preceding
"Selected Financial Data" and our Financial Statements and the Notes thereto and
the other financial data included elsewhere in this Annual Report. The financial
information provided below has been rounded in order to simplify its
presentation. However, the ratios and percentages provided below are calculated
using the detailed financial information contained in the Financial Statements,
the Notes thereto and the other financial data included elsewhere in this Annual
Report.
General
Community Capital Corporation serves as a bank holding company for CapitalBank.
CapitalBank was formed on January 1, 2001 during a restructuring that
consolidated our operations into a single subsidiary. CapitalBank operates
thirteen branches throughout South Carolina. CapitalBank offers a full range of
banking services, including a wealth management group featuring a wide array of
financial services, with personalized attention, local decision making and
strong emphasis on the needs of individuals and small to medium-sized
businesses.
We were formed in 1988 to serve as a holding company for Greenwood National
Bank, which later changed its name to Greenwood Bank & Trust. In 1994 we made
the decision to expand beyond Greenwood County by creating an organization of
independent banks in four additional markets. In June 1995, we opened Clemson
Bank and Trust in Clemson, South Carolina. In 1996 and 1997, we opened Community
Bank and Trust, TheBank, and Mid State Bank. We formed a separate trust
organization in 1997 known as Community Trust Company. In May 2000, Community
Trust Company was sold. During 1997 and 1998, we also acquired several Carolina
First branches.
As discussed, on January 1, 2001, we merged the five subsidiary banks into one
bank charter known as CapitalBank. We made the decision to restructure the
organization into one bank in order to improve operational efficiencies, provide
new opportunities for employees, and improve service to customers. Customers are
able to receive the benefit of being able to transact business at any of
CapitalBank's branches, through the ATM network, and through the internet
banking products. Additionally, we believe that the new centralized credit
function provides additional controlled decisions while streamlining the credit
process. Centralized deposit pricing supports management's strategy from market
to market. We also believe that the name recognition has enhanced our business.
On January 29, 2001, CapitalBank, the new bank subsidiary, announced that it had
signed a definitive agreement with Enterprise Bank of South Carolina to sell its
five branch offices located in Barnwell, Blackville, Williston, Springfield and
Salley, South Carolina. On May 14, 2001, CapitalBank sold the five branches,
which had approximately $67.1 million in deposits.
Results of Operations
Year ended December 31, 2002, compared with year ended December 31, 2001
Net interest income increased $1.1 million, or 8.47%, to $14.4 million in 2002
from $13.3 million in 2001. The increase in net interest income was due
primarily to an increase in the volume of average loans and the decrease in
yields on average interest bearing liabilities. Average earning assets decreased
$13.7 million, or 3.96%, and average interest-bearing liabilities decreased
$18.5 million, or 6.04%, due primarily to the sale of the five branches in 2001.
12
Results of Operations (continued)
Our tax equivalent net interest spread and tax equivalent net interest margin
were 4.14% and 4.50%, respectively, in 2002 compared to 3.58% and 4.08% in 2001.
The increase in the net interest spread was primarily the result of the decrease
in yields on interest-bearing liabilities used to fund loans and securities.
Yields on interest-bearing liabilities decreased from 4.46% in 2001 to 2.70% in
2002. Yields on interest-earning assets decreased 120 basis points. However,
yields on interest-bearing liabilities decreased 176 basis points.
The provision for loan losses was $773,000 in 2002 compared to $1.9 million in
2001. The significant amount charged to the provision in 2001 was primarily the
result of management's efforts to fund the allowance for potential problem loans
and to protect against a deteriorating economy. Our allowance for loan losses
was 1.48 of total loans outstanding at December 31, 2002. In addition, the
provision was funded to maintain the allowance for loan losses at a level
sufficient to cover known and inherent losses in the loan portfolio.
Noninterest income decreased $5.6 million, or 55.12%, to $4.5 million in 2002
from $10.1 million in 2001, which was primarily attributable to the premium on
the branches sold to Enterprise Bank in 2001. The premium totaled $5.8 million.
Service charges on deposit accounts increased $450,000, or 21.15% to $2.6
million in 2002. Residential mortgage origination fees decreased $96,000, or
11.68% to $726,000 in 2002 from $822,000 in 2001. Mortgage originations have
declined as rates leveled off and as fewer customers are refinancing their
mortgages. Noninterest income in 2002 included $106,000 from the gain on sales
of securities available for sale, whereas, noninterest income for 2001 included
$290,000 from the gain on sales of nonmarketable equity securities. Income from
fiduciary activities increased $150,000, or 114.50% to $281,000 in 2002 from
$131,000 in 2001. Commissions on the sale of mutual funds increased $74,000, or
231.25% to $106,000 in 2002 compared to $32,000 in 2001.
Noninterest expense decreased $3.2 million, or 21.26%, to $11.9 million in 2002
from $15.1 million in 2001. The primary component of noninterest expense was
salaries and employee benefits, which decreased $104,000, or 1.59%, to $6.4
million in 2002 from $6.5 million in 2001. Many of the categories of expenses
decreased in 2002 compared to 2001 because of the sale of the branches to
Enterprise Bank in 2001. Other categories of expenses decreased due to the sale
of the branches and improved efficiency from the consolidation of the subsidiary
banks. Net occupancy expense was $697,000 in 2002 compared to $749,000 in 2001,
and furniture and equipment expense was $1.0 million in 2002 compared to $1.4
million in 2001. Another significant decrease in noninterest expense was in the
amortization of intangible assets. Total amortization of intangible assets was
$346,000 in 2002, as compared to $2.4 million in 2001. This significant decrease
was also due to the sale of the five branches to Enterprise Bank. Our efficiency
ratio was 61.45% in 2002 compared to 72.71% in 2001.
Net income increased $124,000, or 2.77%, to $4.6 million in 2002 from $4.5
million in 2001. Basic earnings per share was $1.34 in 2002, compared to $1.31
in 2001. Diluted earnings per share was $1.26 in 2002, compared to $1.26 in
2001. Return on average assets during 2002 was 1.28% compared to 1.19% during
2001, and return on average equity was 10.93% during 2002 compared to 11.68%
during 2001.
Year ended December 31, 2001, compared with year ended December 31, 2000
Net interest income increased $200,000, or 1.53%, to $13.3 million in 2001 from
$13.1 million in 2000. The increase in net interest income was due primarily to
an increase in net interest margin. Average earning assets decreased $18.9
million, or 5.19%, and average interest-bearing liabilities decreased $23.7
million, or 7.17%, due primarily to the sale of the five branches.
Our tax equivalent net interest spread and tax equivalent net interest margin
were 3.58% and 4.08%, respectively, in 2001 compared to 3.36% and 3.83% in 2000.
The increase in the net interest spread was primarily the result of the decrease
in yields on interest-bearing liabilities used to fund loans and securities.
Yields on interest-bearing liabilities decreased from 5.03% in 2000 to 4.46% in
2001. Yields on interest-earning assets decreased 35 basis points. However,
yields on interest-bearing liabilities decreased 57 basis points.
The provision for loan losses was $1.9 million in 2001 compared to $471,000 in
2000. The significant amount charged to the provision in 2001 was primarily the
result of management's efforts to fund the allowance for potential
13
Results of Operations (continued)
problem loans and to protect against a deteriorating economy. Our allowance for
loan losses was 1.63% of total loans outstanding at December 31, 2001. In
addition, the provision was funded to maintain the allowance for loan losses at
a level sufficient to cover known and inherent losses in the loan portfolio.
Noninterest income increased $6.8 million, or 206.06%, to $10.1 million in 2001
from $3.3 million in 2000, which was primarily attributable to the premium on
the branches sold to Enterprise Bank. The premium totaled $5.8 million. Service
charges on deposit accounts increased $422,000, or 24.74%, to $2.1 million in
2001. Residential mortgage origination fees increased $319,000, or 63.41% to
$822,000 in 2001. Noninterest income in 2001 included $290,000 from the gain on
sales of nonmarketable equity securities as compared to no gains in 2000.
Noninterest income for the year ended December 31, 2000 included $150,000 from
the gain on the sale of Community Trust Company.
Noninterest expense increased $1.1 million, or 7.86%, to $15.1 million in 2001
from $14.0 million in 2000. The primary component of noninterest expense was
salaries and employee benefits, which decreased $265,000, or 3.90%, to $6.5
million in 2001 from $6.8 million in 2000. The decrease is attributable to a
decrease in the number of employees due to the sale of the branches to
Enterprise Bank. Other categories of expenses decreased due to the sale of the
branches and improved efficiency from the consolidation of the subsidiary banks.
Net occupancy expense was $749,000 in 2001 compared to $880,000 in 2000, and
furniture and equipment expense was $1.4 million in 2001 compared to $1.6
million in 2000. The most significant increase in noninterest expense was in the
amortization of intangible assets. We recorded amortization of intangible assets
related to the sale of branches to Enterprise Bank of $1.9 million. Total
amortization of intangible assets was $2.4 million in 2001, as compared to
$612,000 in 2000. Our efficiency ratio was 72.71% in 2001 compared to 81.75% in
2000.
Net income increased $2.8 million, or 164.71%, to $4.5 million in 2001 from $1.7
million in 2000. Basic earnings per share was $1.31 in 2001, compared to $0.48
in 2000. Diluted earnings per share was $1.26 in 2001, compared to $0.48 in
2000. Return on average assets during 2001 was 1.19% compared to 0.41% during
2000, and return on average equity was 11.68% during 2001 compared to 4.57%
during 2000.
Net Interest Income
General. The largest component of our net income is our net interest income,
which is the difference between the income earned on assets and interest paid on
deposits and borrowings used to support such assets. Net interest income is
determined by the yields earned on our interest-earning assets and the rates
paid on our interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch and the maturity and repricing characteristics of our interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents our net interest margin.
14
Net Interest Income (continued)
Average Balances, Income and Expenses, and Rates
Year ended December 31, 2002 2001 2000
--------------------------- --------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- ------- ------ -------- ------- ------ -------- ------- ------
Assets:
Earning Assets:
Loans/(1)(3)/ $274,365 $19,338 7.05% $259,661 $22,404 8.63% $254,064 $23,552 9.27%
Securities, taxable/(2)/ 26,461 1,494 5.65 52,302 3,053 5.84 78,246 4,593 5.87
Securities, nontaxable/(2)(3)/ 25,372 1,687 6.65 25,878 2,018 7.80 26,671 2,119 7.95
Nonmarketable equity
securities 5,345 188 3.52 5,583 226 4.05 5,329 308 5.78
Federal funds sold
and other 261 4 1.53 2,078 75 3.61 87 6 6.90
-------- -------- ------- -------- -------
Total earning assets 331,804 22,711 6.84 345,502 27,776 8.04 364,397 30,578 8.39
-------- ------- -------- ------- -------- -------
Cash and due from banks 7,897 8,859 9,728
Premises and equipment 10,113 12,140 14,024
Other assets 13,529 12,028 13,109
Allowance for loan losses (4,213) (3,316) (2,814)
-------- -------- --------
Total assets $359,130 $375,213 $398,444
======== ======== ========
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction
accounts 95,323 1,068 1.12% $100,319 2,463 2.45% $ 99,718 $ 3,553 3.56%
Savings deposits 27,840 745 2.68 30,012 1,182 3.94 29,051 1,096 3.77
Time deposits 113,946 3,605 3.16 131,842 7,401 5.61 136,144 7,878 5.79
Other short-term borrowings 19,217 344 1.79 10,085 411 4.07 29,182 1,772 6.07
Federal Home Loan Bank
advances 31,198 1,947 6.24 31,408 1,958 6.23 31,943 1,931 6.05
Long-term debt -- -- 2,191 156 7.12 3,299 286 8.67
Obligations under capital
leases 836 84 10.05 1,036 104 10.04 1,239 120 9.69
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 288,360 7,793 2.70 306,893 13,675 4.46 330,576 16,636 5.03
-------- ------- -------- ------- -------- -------
Demand deposits 27,044 26,248 28,925
Accrued interest and other
liabilities 2,321 3,742 2,813
Shareholders' equity 41,405 38,330 36,130
-------- --------
Total liabilities and
shareholders' equity $359,130 $375,213 $398,444
======== ======== ========
Net interest spread 4.14% 3.58% 3.36%
Net interest income $ 14,918 $ 14,101 $ 13,942
======== ======== ========
Net interest margin 4.50% 4.08% 3.83%
- ----------
/(1)/ The effect of loans in nonaccrual status and fees collected is not
significant to the computations. All loans and deposits are domestic.
/(2)/ Average investment securities exclude the valuation allowance on
securities available-for-sale.
/(3)/ Fully tax-equivalent basis at 38% tax rate for nontaxable securities and
loans.
15
Net Interest Income (continued)
Average Balances, Income and Expenses, and Rates. The previous table sets forth,
for the periods indicated, certain information related to our average balance
sheet and our average yields on assets and average costs of liabilities. Such
yields are derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from the
daily balances throughout the periods indicated.
Analysis of Changes in Net Interest Income. The following table sets forth the
effect that the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 2002 to 2001 and 2001 to 2000.
Analysis of Changes in Net Interest Income
2002 Compared With 2001 2001 Compared With 2000
--------------------------------- ---------------------------------
Variance Due to Variance Due to
--------------------------------- ---------------------------------
(Dollars in thousands) Volume/(1)/ Rate/(1)/ Total Volume/(1)/ Rate/(1)/ Total
- ---------------------- ----------- --------- ------- ----------- --------- -------
Earning Assets
Loans $ 1,214 $(4,280) $(3,066) $ 509 $(1,657) $(1,148)
Securities, taxable (1,463) (96) (1,559) (1,517) (23) (1,540)
Securities, nontaxable (38) (293) (331) (64) (37) (101)
Nonmarketable equity securities (10) (28) (38) 14 (96) (82)
Federal funds sold and other (43) (28) (71) 73 (4) 69
------- ------- ------- ------- ------- -------
Total interest income (340) (4,725) (5,065) (985) (1,817) (2,802)
------- ------- ------- ------- ------- -------
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts (117) (1,278) (1,395) 21 (1,111) (1,090)
Savings and market rate investments (81) (356) (437) 36 50 86
Time deposits (900) (2,896) (3,796) (240) (237) (477)
------- ------- ------- ------- ------- -------
Total interest-bearing deposits (1,098) (4,530) (5,628) (183) (1,298) (1,481)
Other short-term borrowings 244 (311) (67) (907) (454) (1,361)
Federal Home Loan Bank advances (14) 3 (11) (31) 58 27
Long-term debt (78) (78) (156) (85) (45) (130)
Obligations under capital leases (20) -- (20) (20) 4 (16)
------- ------- ------- ------- ------- -------
Total interest expense (966) (4,916) (5,882) (1,226) (1,735) (2,961)
------- ------- ------- ------- ------- -------
Net interest income $ 626 $ 190 $ 817 $ 244 $ (82) $ 159
======= ======= ======= ======= ======= =======
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
Interest Sensitivity. We monitor and manage the pricing and maturity of our
assets and liabilities in order to diminish the potential adverse impact that
changes in interest rates could have on our net interest income. The principal
monitoring technique we employ is the measurement of our interest sensitivity
"gap," which is the positive or negative dollar difference between assets and
liabilities that are subject to interest rate repricing within a given period of
time. Interest rate sensitivity can be managed by repricing assets or
liabilities, selling securities available-for-sale, replacing an asset or
liability at maturity, or adjusting the interest rate during the life of an
asset or liability. Managing the amount of assets and liabilities repricing in
the same time interval helps to hedge the risk and minimize the impact on net
interest income of rising or falling interest rates.
16
Net Interest Income (continued)
The following table sets forth our interest rate sensitivity at December 31,
2002.
Interest Sensitivity Analysis
Greater
After One After Three Than One
Within Through Through Within Year or
December 31, 2002 One Three Twelve One Non-
(Dollars in thousands) Month Months Months Year Sensitive Total
- ---------------------- -------- --------- ----------- -------- --------- --------
Assets
Earning assets:
Loans/(1)/ $ 90,189 $ 13,707 $ 40,332 $144,228 $145,405 $289,633
Securities 502 617 7,627 8,746 47,066 55,812
Federal funds sold and other 39 -- -- 39 -- 39
-------- -------- -------- -------- -------- --------
Total earning assets 90,730 14,324 47,959 153,013 192,471 345,484
-------- -------- -------- -------- -------- --------
Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits 102,416 -- -- 102,416 -- 102,416
Savings deposits 27,948 -- -- 27,948 -- 27,948
Time deposits 13,911 21,126 50,716 85,753 31,022 116,775
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 144,275 21,126 50,716 216,117 31,022 247,139
Other short-term borrowings 25,850 -- -- 25,850 -- 25,850
Federal Home Loan Bank advances -- 10,015 -- 10,015 21,125 31,140
Obligations under capital leases 18 37 173 228 505 733
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 170,043 31,178 50,889 252,210 52,652 304,862
-------- -------- -------- -------- -------- --------
Period gap $(79,413) $(16,854) $ (2,930) $(99,197) $139,819
======== ======== ======== ======== ========
Cumulative gap $(79,413) $(96,267) $(99,197) $(99,197) $ 40,622
======== ======== ======== ======== ========
Ratio of cumulative gap to total earnings
assets (22.99)% (27.86)% (28.71)% (28.71)% 11.76%
/(1)/ Excludes nonaccrual loans and includes loans held for sale.
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements that give us the opportunity to vary the rates paid on
those deposits within a thirty-day or shorter period. Fixed rate time deposits,
principally certificates of deposit, are reflected at their contractual maturity
date. Other short-term borrowings consist of federal funds purchased and
securities sold under agreements to repurchase. Federal funds purchased are
reflected at the earliest pricing interval because funds can be repriced daily.
Securities sold under agreements to repurchase are reflected at the maturity
date of each repurchase agreement that generally matures within one day.
Advances from the Federal Home Loan Bank are reflected at their contractual
maturity dates. Obligations under capital leases are reflected at each payment
date.
17
Net Interest Income (continued)
We generally would benefit from increasing market rates of interest when we have
an asset-sensitive gap position and generally would benefit from decreasing
market rates of interest when we are liability sensitive. We are liability
sensitive within the one year period. However, our gap analysis is not a precise
indicator of our interest sensitivity position. The analysis presents only a
static view of the timing of maturities and repricing opportunities, without
taking into consideration that changes in interest rates do not affect all
assets and liabilities equally. For example, rates paid on a substantial portion
of core deposits may change contractually within a relatively short time frame,
but those rates are viewed by us as significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Accordingly, we
believe a liability-sensitive gap position is not as indicative of our true
interest sensitivity as it would be for an organization that depends to a
greater extent on purchased funds to support earning assets. Net interest income
may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
Provision and Allowance for Loan Losses
General. We have developed policies and procedures for evaluating the overall
quality of our credit portfolio and the timely identification of potential
problem credits. On a quarterly basis, the Board of Directors reviews and
approves the appropriate level for CapitalBank's allowance for loan losses based
upon our recommendations, the results of the internal monitoring and reporting
system, analysis of economic conditions in its markets, and a review of
historical statistical data for both us and other financial institutions.
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on our income statement, are made periodically to maintain the
allowance at an appropriate level based on our analysis of the potential risk in
the loan portfolio. Loan losses and recoveries are charged or credited directly
to the allowance. The amount of the provision is a function of the level of
loans outstanding, the level of nonperforming loans, historical loan loss
experience, the amount of loan losses actually charged against the reserve
during a given period, and current and anticipated economic conditions.
Our allowance for loan losses is based upon judgments and assumptions of risk
elements in the portfolio, future economic conditions, and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, we monitor the overall portfolio quality through observable trends in
delinquency, charge offs, and general and economic conditions in the service
area. The adequacy of the allowance for loan losses and the effectiveness of our
monitoring and analysis system are also reviewed periodically by the banking
regulators and our independent auditors.
Based on present information and an ongoing evaluation, we consider the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Our judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events that we believe to be
reasonable but that may or may not be valid. Thus, we have no assurance that
charge offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance for loan losses will not be required.
We do not allocate the allowance for loan losses to specific categories of loans
but evaluates the adequacy on an overall portfolio basis utilizing a risk
grading system.
18
Provision and Allowance for Loan Losses (continued)
The following table sets forth certain information with respect to our allowance
for loan losses and the composition of charge offs and recoveries for each of
the last five years.
Allowance for Loan Losses
Year Ended December 31,
(Dollars in thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Total loans outstanding at end of year $288,842 $248,390 $280,506 $219,054 $172,545
======== ======== ======== ======== ========
Average loans outstanding $274,365 $259,661 $254,064 $188,672 $161,695
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of period $ 4,103 $ 3,060 $ 2,557 $ 2,399 $ 1,531
Allowance for loan losses from acquisitions -- -- 335 -- 38
Loan losses:
Commercial and industrial 337 406 113 287 135
Real estate - mortgage 131 160 122 306 43
Consumer 255 409 305 449 885
-------- -------- -------- -------- --------
Total loan losses 723 975 540 1,042 1,063
-------- -------- -------- -------- --------
Recoveries of previous loan losses:
Commercial and industrial 45 8 73 -- --
Real estate - mortgage 15 16 14 17 --
Consumer 69 74 150 146 57
-------- -------- -------- -------- --------
Total recoveries 129 98 237 163 57
-------- -------- -------- -------- --------
Net loan losses 594 877 303 879 1,006
Provision for loan losses 773 1,920 471 1,037 1,836
-------- -------- -------- -------- --------
Balance of allowance for loan losses
at end of period $ 4,282 $ 4,103 $ 3,060 $ 2,557 $ 2,399
======== ======== ======== ======== ========
Allowance for loan losses to period end loans 1.48% 1.65% 1.09% 1.17% 1.39%
Net charge offs to average loans 0.22 0.34 0.12 0.47 0.62
Nonperforming Assets. The following table sets forth our nonperforming assets
for the dates indicated.
Nonperforming Assets
December 31,
----------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------ ------ ---- ------ ------
Nonaccrual loans $1,893 $1,567 $637 $1,223 $1,348
Restructured or impaired loans -- -- -- -- --
------ ------ ---- ------ ------
Total nonperforming loans 1,893 1,567 637 1,223 1,348
Other real estate owned 150 148 58 -- --
------ ------ ---- ------ ------
Total nonperforming assets $2,043 $1,715 $695 $1,223 $1,348
====== ====== ==== ====== ======
Loans 90 days or more past due and
still accruing interest $ 128 $ -- $164 $ 109 $ 112
Nonperforming assets to period end loans 0.71% 0.69% 0.25% 0.56% 0.78%
19
Provision and Allowance for Loan Losses (continued)
Accrual of interest is discontinued on a loan when we believe, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that the collection of interest is doubtful. A
delinquent loan is generally placed in nonaccrual status when it becomes 90 days
or more past due. When a loan is placed in nonaccrual status, all interest that
has been accrued on the loan but remains unpaid is reversed and deducted from
current earnings as a reduction of reported interest income. No additional
interest is accrued on the loan balance until the collection of both principal
and interest becomes reasonably certain. When a problem loan is finally
resolved, we may ultimately write-down or charge off of the principal balance of
the loan that would necessitate additional charges to earnings. For all periods
presented, the additional interest income, which would have been recognized into
earnings if our nonaccrual loans had been current in accordance with their
original terms, is immaterial.
Total nonperforming assets increased to $2.0 million at December 31, 2002, from
$1.7 million at December 31, 2001. This amount consists primarily of nonaccrual
loans that totaled $1.9 million at December 31, 2002. Nonperforming assets were
0.70% of total loans at December 31, 2002. The allowance for loan losses to
period end nonperforming assets was 209.6% at December 31, 2002.
Potential Problem Loans. At December 31, 2002, through our internal review
mechanisms, we had identified $3.4 million of criticized loans and $9.4 million
of classified loans. The results of this internal review process are the primary
determining factor in our assessment of the adequacy of the allowance for loan
losses.
Our criticized loans decreased from $9.2 million at December 31, 2001 to $3.4
million at December 31, 2002. The decrease was due to the improvement in credit
quality of several large loans that allowed us to upgrade these loans. Total
classified loans decreased from $10.5 million at December 31, 2001 to $9.4
million at December 31, 2002. We are committed to addressing potential problem
loans.
Noninterest Income and Expense
Noninterest Income. Noninterest income decreased $5.6 million, or 55.12%, to
$4.5 million in 2002 from $10.1 million in 2001, which was primarily
attributable to the gain recognized on the sale of the five branches to
Enterprise Bank in 2001. The premium on this sale totaled $5.8 million. We had
$106,000 in gains on the sale of securities available for sale, whereas in 2001
we realized a gain of $290,000 on the sales of nonmarketable equity securities.
Residential mortgage origination fees decreased $96,000, or 11.68% to $726,000
in 2002 from $822,000 in 2001. Mortgage originations have declined as rates
leveled off and as fewer customers are refinancing their mortgages. Income from
fiduciary activities increased $150,000, or 114.50% to $281,000 in 2002 from
$131,000 in 2001. Commissions on the sale of mutual funds increased $74,000, or
231.25% to $106,000 in 2002 compared to $32,000 in 2001.
20
Noninterest Income and Expense (continued)
The following table sets forth, for the periods indicated, the principal
components of noninterest income:
Noninterest Income
Year Ended December 31,
-------------------------
(Dollars in thousands) 2002 2001 2000
------ ------- ------
Service charges on deposit accounts $2,578 $ 2,128 $1,706
Residential mortgage origination fees 726 822 503
Gains on sales of securities available-for-sale 106 -- --
Gains on sales of nonmarketable equity securities -- 290 --
Commissions from sales of mutual funds 106 32 105
Income from fiduciary activities 281 131 129
Gain on sale of branches -- 5,791 --
Gain on sale of Community Trust Company -- -- 150
Other income 742 920 710
------ ------- ------
Total noninterest income $4,539 $10,114 $3,303
====== ======= ======
Noninterest Expense. Noninterest expense decreased $3.2 million, or 21.26%, to
$11.9 million in 2002 from $15.1 million in 2001. The primary component of
noninterest expense was salaries and benefits, which decreased $104,000, or
1.59%, to $6.4 million in 2002 from $6.5 million in 2001. Many of the categories
of expenses decreased in 2002 compared to 2001 because of the sale of the
branches to Enterprise Bank in 2001. Net occupancy expense was $697,000 in 2002
compared to $749,000 in 2001, and furniture and equipment expenses was $1.0
million in 2002 compared to $1.4 million in 2001. Another significant decrease
in noninterest expense was in the amortization of intangible assets. Total
amortization of intangible assets was $346,000 in 2002, as compared to $2.4
million in 2001. We recorded amortization of intangible assets related to the
sale of branches to Enterprise Bank of $1.9 million in 2001. Our efficiency
ratio was 61.45% in 2002 compared to 72.71% in 2001.
The following table sets forth, for the periods indicated, the primary
components of noninterest expense:
Noninterest Expense
Year Ended December 31,
---------------------------
(Dollars in thousands) 2002 2001 2000
------- ------- -------
Salaries and employee benefits $ 6,418 $ 6,522 $ 6,787
Net occupancy expense 697 749 880
Furniture and equipment expense 1,050 1,440 1,631
Amortization of intangible assets 346 2,440 612
Director and committee fees 167 130 202
Data processing and supplies 578 410 361
Mortgage loan department expenses 122 278 130
Banking assessments 45 57 131
Professional fees and services 287 404 476
Postage and freight 205 339 380
Supplies 283 424 419
Credit card expenses 36 188 201
Telephone expenses 268 288 402
Other 1,390 1,433 1,364
------- ------- -------
Total noninterest expense $11,892 $15,102 $13,976
======= ======= =======
Efficiency ratio 61.45% 72.71% 81.75%
Income Taxes. Our income tax expense was $1.7 million, a decrease of $217,000
from the 2001 amount of $1.9 million. The slight decrease was partially due to
the decrease in income before taxes.
21
Earning Assets
Loans. Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the higher
yields are the inherent credit and liquidity risks that we attempt to control
and counterbalance. Loans averaged $274.4 million in 2002 compared to $259.6
million in 2001, an increase of $14.8 million, or 5.7%. At December 31, 2002,
total loans were $288.8 million compared to $248.3 million at December 31, 2001.
The following table sets forth the composition of the loan portfolio by category
at the dates indicated and highlights our general emphasis on mortgage lending.
Composition of Loan Portfolio
December 31, 2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
(Dollars in of of of of of
thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial
and industrial $ 30,092 10.42% $ 33,395 13.26% $ 52,005 18.54% $ 29,740 13.58% $ 28,991 16.80%
Real estate
Construction 13,049 4.52 13,252 5.26 20,393 7.27 28,664 13.09 23,665 13.72
Mortgage -
residential 154,257 53.41 124,091 49.25 111,897 39.89 66,092 30.17 52,635 30.51
Mortgage-
nonresidential 73,610 25.48 59,417 23.58 60,159 21.45 58,419 26.67 36,017 20.87
Consumer and
other 17,834 6.17 18,235 8.65 36,052 12.85 36,139 16.49 31,237 18.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 288,842 100.00% 248,390 100.00% 280,506 100.00% 219,054 100.00% 172,545 100.00%
====== ====== ====== ====== ======
Allowance for
loan losses (4,282) (4,103) (3,060) (2,557) (2,399)
-------- -------- -------- -------- --------
Net loans $284,560 $244,287 $277,446 $216,497 $170,146
======== ======== ======== ======== ========
The principal component of our loan portfolio is real estate mortgage loans. At
December 31, 2002, this category totaled $227.9 million and represented 78.2% of
the total loan portfolio, compared to $183.5 million, or 72.8%, at December 31,
2001.
In the context of this discussion, a "real estate mortgage loan" is defined as
any loan, other than loans for construction purposes, secured by real estate,
regardless of the purpose of the loan. Financial institutions in our market
areas typically obtain a security interest in real estate, whenever possible, in
addition to any other available collateral. This collateral is taken to
reinforce the likelihood of the ultimate repayment of the loan and tends to
increase the magnitude of the real estate loan portfolio component.
Real estate construction loans decreased $203,000, or 1.53%, to $13.0 million at
December 31, 2002, from $13.3 million at December 31, 2001. Residential mortgage
loans, which is the largest category of our loans, increased $30.2 million, or
24.31%, to $154.3 million at December 31, 2002, from $124.1 million at December
31, 2001. Residential real estate loans consist of first and second mortgages on
single or multi-family residential dwellings. Nonresidential mortgage loans,
which include commercial loans and other loans secured by multi-family
properties and farmland, increased $14.2 million or 23.89%, to $73.6 million at
December 31, 2002 from $59.4 million at December 31, 2001. The overall increase
in real estate lending was attributable to the continued demand for residential
and commercial real estate loans in our markets. CapitalBank has been able to
compete favorably for residential mortgage loans with other financial
institutions by offering fixed rate products having three and five year call
provisions.
Commercial and industrial loans decreased $2.8 million, or 8.52%, to $30.6
million at December 31, 2002, from $33.4 million at December 31, 2001.
22
Earning Assets (continued)
Consumer and other loans decreased $401,000, or 2.20%, to $17.8 million at
December 31, 2002, from $18.2 million at December 31, 2001.
Our loan portfolio reflects the diversity of our markets. Our thirteen branches
are located from the northern Midlands of South Carolina through the Upstate.
Primary market areas include Anderson, Belton, Clemson, Greenwood, Newberry and
Saluda. The economies of these markets are varied and represent different
industries including medium and light manufacturing, higher education, regional
health care, and distribution facilities. These areas are expected to remain
stable with continual growth. The diversity of the economy creates opportunities
for all types of lending. We do not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a source of
our liquidity. The following table sets forth our loans maturing within
specified intervals at December 31, 2002.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
Over
One Year
December 31, 2002 One Year Through Over Five
(Dollars in thousands) or Less Five Years Years Total
-------- ---------- --------- --------
Commercial and industrial $ 17,374 $ 13,445 $ 1,250 $ 32,069
Real estate 89,574 127,383 23,960 240,917
Consumer and other 5,215 10,253 388 15,856
-------- -------- ------- --------
$112,163 $151,081 $25,598 $288,842
======== ======== ======= ========
Loans maturing after one year with:
Fixed interest rates $176,213
Floating interest rates 466
--------
$176,679
========
The information presented in the above table is based on the cont ractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is s ubject to
review and credit approval as well as modification of terms upon their maturity.
Consequently, we believe this treatment presents fairly the maturity and
repricing structure of the loan portfolio shown in the above table.
Investment Securities. The investment securities portfolio is a significant
component of our total earning assets. Total securities averaged $57.2 million
in 2002, compared to $83.8 million in 2001 and $110.2 million in 2000. At
December 31, 2002, the total securities portfolio was $55.8 million. Securities
designated as available-for-sale totaled $50.1 million and were recorded at
estimated fair value. Securities designated as held-to-maturity totaled $550,000
and were recorded at amortized cost. The securities portfolio also includes
nonmarketable equity securities totaling $5.2 million which are carried at cost
because they are not readily marketable or have no quoted market value. These
include investments in Federal Reserve Bank stock, Federal Home Loan Bank stock,
the stock of four unrelated financial institutions, and the stock of a financial
services company that offers internet banking.
The following table sets forth the book value of the securities held by us at
the dates indicated.
23
Earning Assets (continued)
Book Value of Securities
December 31, 2002 2001
------- -------
(Dollars in thousands)
U.S. Government agencies and corporations $13,756 $13,148
State, county, and municipal securities 26,283 25,338
Other (trust preferred securities) 750 750
------- -------
40,789 39,236
Mortgage-backed securities 9,857 18,165
Nonmarketable equity securities 5,166 5,405
------- -------
Total securities $55,812 $62,806
======= =======
The following table sets forth the scheduled maturities a nd average yields of
securities held at December 31, 2002.
Investment Securities Maturity Distribution and Yields
After One But After Five But
December 31, 2002 Within One Year Within Five Years Within Ten Years Over Ten Years
--------------- ----------------- ---------------- ---------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------- -----
U.S. Government agencies $7,747 5.44% $6,009 3.65 $ -- -- $ -- --
Obligations of state and
local governments/(2)/ 999 6.57 447 6.69 7,196 7.09 18,391 6.85
------ ------ ------ -------
Total securities/(1)/ $8,746 5.57 $6,456 3.86 $7,196 7.09 $18,391 6.85
====== ====== ====== =======
/(1)/Excludes mortgage-backed securities totaling $9.9 million with a yield of
6.13% and nonmarketable equity securities.
/(2)/The yield on state and local governments is presented on a tax equivalent
basis using a federal income tax rate of 34%.
Other attributes of the securities portfolio, including yields and maturities,
are discussed above in "--Net Interest Income-- Interest Sensitivity."
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold and interest-bearing deposits with other banks, averaged
$261,000 in 2002, compared to $2.1 million in 2001 and $87,000 in 2000. At
December 31, 2002, short-term investments totaled $39,000. These funds are a
source of our liquidity. Federal funds are generally invested in an earning
capacity on an overnight basis.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities decreased $18.5 million, or 6.03%, to
$288.4 million in 2002, from $306.9 million in 2001. Average interest-bearing
deposits decreased $25.1 million, or 9.57%, to $237.1 million in 2002, from
$262.2 million in 2001.
Deposits. Average total deposits decreased $24.3 million, or 8.42%, to $264.1
million during 2001, from $288.4 million during 2001. At December 31, 2002,
total deposits were $276.6 million compared to $258.3 million a year earlier, an
increase of 7.06%.
The following table sets forth the deposits by category at the dates indicated.
24
Deposits and Other Interest-Bearing Liabilities (continued)
Deposits
December 31, 2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Dollars in of of of of of
thousands) Amount Deposits Amount Deposits Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Demand deposit
accounts $ 29,422 10.64% $ 25,083 9.70% $ 32,197 9.67% $ 27,422 10.66% $ 23,491 9.03%
NOW accounts 36,121 13.06 32,504 12.58 53,959 16.20 45,560 17.71 45,854 17.63
Money market
accounts 66,295 23.97 61,863 23.95 55,007 16.52 38,419 14.93 30,161 11.60
Savings accounts 27,948 10.11 26,653 10.32 30,543 9.17 26,642 10.36 25,202 9.69
Time deposits
less than
$100,000 74,763 27.03 72,636 28.12 114,454 34.38 91,671 35.64 104,491 40.17
Time deposits
of $100,000
or over 42,012 15.19 39,591 15.33 46,826 14.06 27,533 10.70 30,921 11.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total deposits $276,561 100.00% $258,330 100.00% $332,986 100.00% $257,247 100.00% $260,120 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for our loan portfolio and other
earning assets. Our core deposits increased $15.8 million to $234.5 million at
December 31, 2002.
Deposits, and particularly core deposits, have historically been our primary
source of funding and have enabled us to meet successfully both our short-term
and long-term liquidity needs. We anticipate that such deposits will continue to
be our primary source of funding in the future. Our loan-to-deposit ratio was
105.41% at December 31, 2002, and 97.53% at the end of 2001. The maturity
distribution of our time deposits of $100,000 or more at December 31, 2002 is
set forth in the following table.
Maturities of Certificates of Deposit of $100,000 or More
After Six
Within After Three Through After
Three Through Six Twelve Twelve
(Dollars in thousands) Months Months Months Months Total
------- ----------- --------- ------ -------
Certificates of deposit
of $100,000 or more $13,514 $8,049 $10,511 $9,938 $42,012
Approximately 32.2% of our time deposits of $100,000 or more had scheduled
maturities within three months and 51.3% had maturities within six months. Large
certificate of deposit customers tend to be extremely sensitive to interest rate
levels, making these deposits less reliable sources of funding for liquidity
planning purposes than core deposits. Some financial institutions partially fund
their balance sheets using large certificates of deposit obtained through
brokers. These brokered deposits are generally expensive and are unreliable as
long-term funding sources. Accordingly, we do not solicit brokered deposits.
Borrowed Funds. Borrowed funds consist of short-term borrowings and advances
from the Federal Home Loan Bank. Short-term borrowings are primarily federal
funds purchased from correspondent banks and securities sold under agreements to
repurchase.
Average short-term borrowings were $19.2 million in 2002, an increase of $9.1
million from 2001. Federal funds purchased from correspondent banks averaged
$13.9 million in 2002. At December 31, 2002, federal funds purchased totaled
$21.2 million. Securities sold under agreements to repurchase averaged $5.3
million in 2002. At December 31, 2002, securities sold under agreements to
repurchase totaled $4.61 million.
25
Deposits and Other Interest-Bearing Liabilities (continued)
Average Federal Home Loan Bank advances during 2002 were $31.2 million compared
to $31.4 million during 2001, a decrease of $200,000. Advances from the Federal
Home Loan Bank are collateralized by one-to-four family residential mortgage
loans and our investment in Federal Home Loan Bank stock. At December 31, 2002,
borrowings from the Federal Home Loan Bank were $31.1 million compared to $31.3
million a year earlier. Although we expect to continue using short-term
borrowing and Federal Home Loan Bank advances as secondary funding sources, core
deposits will continue to be our primary funding source. Of the $31.1 million
advances from the Federal Home Loan Bank outstanding at December 31, 2002,
$10,015,000 mature in 2003, $8,000,000 mature in 2005, $1,500,000 mature in
2008, $625,000 in 2009, and $11,000,000 in 2010.
Capital
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance-sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Our Tier 1 capital consists of common shareholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus intangible assets. Our Tier 2 capital consists of the allowance for loan
losses subject to certain limitations. A bank holding company's qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for
Tier 1 and 8% for total risk-based capital.
We and CapitalBank are also required to maintain capital at a minimum level
based on average total assets (as defined), which is known as the leverage
ratio. Only the strongest bank holding companies and banks are allowed to
maintain capital at the minimum requirement of 3%. All others are subject to
maintaining ratios 1% to 2% above the minimum.
We and CapitalBank exceeded the Federal Reserve's fully phased-in regulatory
capital ratios at December 31, 2002, 2001, and 2000, as set forth in the
following table.
Analysis of Capital
2002 2001 2000
-------- -------- --------
Tier 1 capital $ 39,427 $ 34,767 $ 28,943
Tier 2 capital 3,490 3,101 3,060
-------- -------- --------
Total qualifying capital $ 42,917 $ 37,868 $ 32,003
======== ======== ========
Risk-adjusted total assets
(including off-balance-sheet exposures) $278,430 $241,202 $287,856
======== ======== ========
Tier 1 risk-based capital ratio 14.16% 14.26% 10.05%
Total risk-based capital ratio 15.41% 15.53% 11.12%
Tier 1 leverage ratio 10.59% 10.21% 7.02%
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
---------- ---------- --------
CapitalBank's capital ratios at
December 31, 2002 were: 12.75% 14.00% 9.51%
Liquidity Management and Capital Resources
Liquidity management involves monitoring our sources and uses of funds in order
to meet our day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Without proper
26
Liquidity Management and Capital Resources (continued)
liquidity management, we would not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities we serve.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control.
Our loans-to-assets ratio and loans-to-funds ratio increased from 2001 to 2002.
The loans-to-assets ratio at December 31, 2002 was 76.56% compared to 73.95% at
December 31, 2001, and the loans-to-funds ratio at December 31, 2002 was 87.40%
compared to 84.81% at December 31, 2001. The amount of advances from the Federal
Home Loan Bank were approximately $31.1 million at December 31, 2002 compared to
$31.3 million at December 31, 2001. We expect to continue using these advances
as a source of funding. Additionally, we had approximately $35.8 million of
unused lines of credit for federal funds purchases and $50.1 million of
securities available-for-sale at December 31, 2002 as sources of liquidity. We
also have the ability to receive an additional $29.4 million in advances under
the term of our agreement with the Federal Home Loan Bank.
We depend on dividends from CapitalBank as our primary source of liquidity. The
ability of CapitalBank to pay dividends is subject to general regulatory
restrictions that may, but are not expected to, have a material impact on the
liquidity available to us. We paid stock dividends in September 1998, June 2000,
and May 2001 and may do so in the future. We have paid cash dividends on a
quarterly basis since September 2001and anticipate continuing to do so.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements at December 31, 2002
as filed on our annual report on Form 10-K. Certain accounting policies involve
significant judgments and assumptions by us that have a material impact on the
carrying value of certain assets and liabilities. We consider these accounting
policies to be critical accounting policies. The judgments and assumptions we
use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions we make, actual results could differ from these judgments and
estimates that could have a material impact on our carrying values of assets and
liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portion of this discussion that
addresses our allowance for loan losses for a description of our processes and
methodology for determining our allowance for loan losses.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions such as ours and our subsidiary are primarily monetary in nature.
Therefore, interest rates have a more significant effect on our performance than
do the effects of changes in the general rate of inflation and change in prices.
In addition, interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. As discussed previously,
we seek to manage the relationships between interest sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Impact of Off-Balance Sheet Instruments
We are a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend credit are legally binding agreements
to lend to a customer at
27
Impact of Off-Balance Sheet Instruments (continued)
predetermined interest rates as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. A commitment
involves, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The exposure to credit
loss in the event of nonperformance by the other party to the instrument is
represented by the contractual amount of the instrument. Because certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued to guarantee a customer's
performance to a third party and have essentially the same credit risk as other
lending facilities. Standby letters of credit often expire without being used.
We use the same credit underwriting procedures for commitments to extend credit
and standby letters of credit as we do for our on-balance sheet instruments. The
credit worthiness of each borrower is evaluated and the amount of collateral, if
deemed necessary, is based on the credit evaluation. Collateral held for
commitments to extend credit and standby letters of credit varies but may
include accounts receivable, inventory, property, plant, equipment, and
income-producing commercial properties.
We are not involved in off-balance sheet contractual relationships, other than
those disclosed in this report, that could result in liquidity needs or other
commitments or that could significantly impact earnings.
As of December 31, 2002 our commitments to extend credit totaled $47,218,000,
and our standby letters of credit totaled $1,102,000. We believe that through
various sources of liquidity, we have the necessary resources to meet
obligations arising from these financial commitments. Our experience has been
that a significant portion of these commitments often expire without being used.
Through its operations, CapitalBank was made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments are
legally binding agreements to lend money to CapitalBank's customers at
predetermined interest rates for a specified period of time. At December 31,
2002, CapitalBank had issued commitments to extend credit of $50,199,000 and
standby letters of credit of $1,102,000 through various types of commercial
lending arrangements. Approximately $20,155,000 of these commitments to extend
credit had variable rates.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at December 31, 2002.
After One After Three
Through Through Greater
Within One Three Twelve Within One Than
(Dollars in thousands) Month Months Months Year One Year Total
---------- --------- ----------- ---------- -------- -------
Unused commitments to extend credit $1,175 $2,014 $19,758 $22,947 $27,252 $50,199
Standby letters of credit -- 96 1,006 1,102 -- 1,102
------ ------ ------- ------- ------- -------
Totals $1,175 $2,110 $20,764 $24,049 $27,252 $51,301
====== ====== ======= ======= ======= =======
CapitalBank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on its credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plants, equipment and commercial and residential real estate.
Industry Developments
On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 2000. The Act was signed into law by President Clinton in
November 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in Sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new "financial holding company" under
the Bank Holding Company Act, which will permit holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant
28
Industry Developments (continued)
banking, and insurance company portfolio investment activities. The Act also
authorizes activities that are "complementary" to financial activities. The Act
is intended to grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act
may have the result of increasing the amount of competition that we face from
larger institutions and other types of companies. We cannot predict the full
effect that the Act will have on us.
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. We cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect us.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss from adverse changes in market prices and rates.
Our market risk arises principally from interest rate risk inherent in our
lending, deposit, and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. In addition to other risks which we
manage in the normal course of business, such as credit quality and liquidity,
management considers interest rate risk to be a significant market risk that
could potentially have a material effect on our financial condition and results
of operations. The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Net
Interest Income" is incorporated herein by reference. Other types of market
risks, such as foreign currency risk and commodity price risk, do not arise in
the normal course of our business activities.
Item 8. Financial Statements and Supplementary Data.
The financial statements identified in Item 15 of this Report on Form 10-K are
included herein beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Legislation and Securities Exchange Commission rules adopted in 2002 have
significantly increased, and will continue to increase, the regulatory burdens
on audit firms that audit the financial statements of companies that are subject
to the reporting requirements of the Securities Exchange Act of 1934.
Consequently, many smaller audit firms are deciding to limit their audit
practice to companies that are not subject to the 1934 Act. Tourville, Simpson &
Caskey, L.L.P., which served as our principal independent accountant since our
inception, is one such firm. Accordingly, effective January 2, 2003, Tourville,
Simpson & Caskey, L.L.P. resigned as our principal independent public
accountant. The Board of Directors, upon recommendation of the Audit Committee,
engaged Elliott Davis, LLC on January 2, 2003 to audit financial statements for
the year ended December 31, 2002 and for the year ending December 31, 2003. We
have not consulted Elliott Davis, LLC regarding any of the matters set forth in
Item 304(a)(2)(i) or (ii) of Regulation S-K.
Tourville, Simpson & Caskey, L.L.P.'s reports on our financial statements for
each of the years ended December 31, 2001 and 2000 did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles. We had no disagreements with
Tourville, Simpson & Caskey, L.L.P. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Tourville, Simpson & Caskey, L.L.P.'s satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in its reports.
PART III
Information called for by PART III (Items 10, 11, 12 and 13) of this Report on
Form 10-K has been omitted as we intend to file with the Securities and Exchange
Commission not later than 120 days after the close of our fiscal year ended
December 31, 2002 a definitive Proxy Statement pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934. Such information will be
set forth in such Proxy Statement.
29
Item 10. Directors and Executive Officers of the Company.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
Item 14. Controls and Procedures
Annual Evaluation of Our Disclosure Controls and Internal Controls. Within the
90 days prior to the date of this Annual Report on Form 10-K, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures" (Disclosure Controls), and our "internal controls and procedures for
financial reporting" (Internal Controls). This controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer. Rules adopted by the SEC
require that in this section of the Annual Report we present the conclusions of
our Chief Executive Officer and Chief Financial Officer about the effectiveness
of our Disclosure Controls and Internal Controls based on and as of the date of
the controls evaluation.
Certifications. A form of certification appears immediately following the
signatures section of this Annual Report. The form of certification is required
in accord with Section 302 of the Sarbanes-Oxley Act of 2002. This section of
the Annual Report that you are currently reading is the information concerning
the controls evaluation referred to in such certifications, and this information
should be read in conjunction with such certifications for a more complete
understanding of the topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, such
as this Annual Report, is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms. Disclosure Controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures that are
designed with the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. Our management, including our
Chief Executive Officer and Chief Financial Officer, does not expect that our
Disclosure Controls or our Internal Controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and we have
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Scope of the Controls Evaluation. The Chief Executive Officer/Chief Financial
Officer evaluation of our Disclosure Controls and our Internal Controls included
a review of the controls' objectives and design, the controls' implementation by
us and the effect of the controls on the information generated for use in this
Annual Report. In the course of the controls evaluation, we sought to identify
data errors, controls problems, or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our Quarterly Reports on
Form 10-Q and Annual Report on Form 10-K. Our Internal Controls are also
evaluated on an ongoing basis by other personnel in our company and by our
independent auditors in connection with their audit and review activities. The
overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls and to make
30
modifications as necessary. Our intent in this regard is that the Disclosure
Controls and the Internal Controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether any
"significant deficiencies" or "material weaknesses" exist in our Internal
Controls or whether we had identified any acts of fraud involving personnel who
have a significant role in our Internal Controls. This information was important
both for the controls evaluation generally and because items 5 and 6 in the
certifications of our Chief Executive Officer and Chief Financial Officer
require that our Chief Executive Officer and Chief Financial Officer disclose
that information to our Board's Audit Committee and to our independent auditors
and to report on related matters in this section of the Annual Report. In the
professional auditing literature, "significant deficiencies" are referred to as
"reportable conditions." These are control issues that could have a significant
adverse effect on the ability to record, process, summarize, and report
financial data in the financial statements. A "material weakness" is defined in
the auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. We also sought to deal with other controls matters in the controls
evaluation, and in each case if a problem was identified, we considered what
revision, improvement, and/or correction to make in accord with our on-going
procedures.
In accordance with SEC requirements, our Chief Executive Officer and Chief
Financial Officer note that, since the date of the controls evaluation to the
date of this Annual Report, we have not made any significant changes in Internal
Controls or in other factors that could significantly affect Internal Controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Conclusions. Based upon the Controls Evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, subject to the limitations noted
above, our Disclosure Controls are effective to ensure that material information
relating to us is made known to management, including our Chief Executive
Officer and Chief Financial Officer, particularly during the period when our
periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)-(2) Financial Statements and Schedules:
Our consolidated financial statements and schedules identified in the
accompanying Index to Financial Statements at page F-1 herein are filed as part
of this Report on Form 10-K.
(3) Exhibits:
The accompanying Exhibit Index on page E-1 sets forth the exhibits that are
filed as part of this Report on Form 10-K.
(b) Reports on Form 8-K:
On November 25, 2002, we filed a Form 8-K relating to a News Release
issued on November 20, 2002 announcing that our Board of Directors has approved
a stock buyback program contemplating Rule 10b5-1 of the Securities Exchange Act
of 1934.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant, Community Capital Corporation, has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY CAPITAL CORPORATION
Dated: March 27, 2003 By: /s/ William G. Stevens
----------------------------------
William G. Stevens
President and Chief Executive Officer
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 and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------ -------------------------------------- --------------
/s/ William G. Stevens President, Chief Executive Officer, March 27, 2003
- ------------------------------ and Director
William G. Stevens
/s/ R. Wesley Brewer Chief Financial Officer, Executive March 27, 2003
- ------------------------------ Vice President, and Secretary
R. Wesley Brewer
* Assistant Secretary and Director March 27, 2003
- ------------------------------
Patricia C. Edmonds
* Director March 27, 2003
- ------------------------------
David P. Allred
* Director March 27, 2003
- ------------------------------
Harold Clinkscales, Jr.
* Director March 27, 2003
- ------------------------------
Wayne Q. Justesen, Jr.
* Director March 27, 2003
- ------------------------------
B. Marshall Keys
* Director March 27, 2003
- ------------------------------
Clinton C. Lemon, Jr.
* Director March 27, 2003
- ------------------------------
Miles Loadholt
* Director March 27, 2003
- ------------------------------
Thomas C. Lynch, Jr.
* Director March 27, 2003
- ------------------------------
H. Edward Munnerlyn
32
* Director March 27, 2003
- ------------------------------
George B. Park
* Director March 27, 2003
- ------------------------------
George D. Rodgers
* Director March 27, 2003
- ------------------------------
Charles J. Rogers
* Director March 27, 2003
- -----------------------------
Thomas E. Skelton
* Director March 27, 2003
- -----------------------------
Lex D. Walters
*By: /s/ William G. Stevens March 27, 2003
--------------------------
(William G. Stevens)
(As Attorney-in-Fact for each
of the persons indicated)
33
CERTIFICATION
I, William G. Stevens, certify that:
1. I have reviewed this annual report on Form 10-K of Community Capital
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 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 27, 2003 /S/ WILLIAM G. STEVENS
-----------------------------------
William G. Stevens
President & Chief Executive Officer
34
CERTIFICATION
I, R. Wesley Brewer, certify that:
1. I have reviewed this annual report on Form 10-K of Community Capital
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;
6. 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 27, 2003 S/ R. WESLEY BREWER
--------------------------
R. Wesley Brewer
Chief Financial Officer, Executive
Vice President & Secretary
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY CAPITAL CORPORATION AND
EMPLOYEE STOCK OWNERSHIP PLAN WITH 401(K) PROVISIONS
Independent Accountants' Reports......................................................................F-2
Consolidated Balance Sheets at December 31, 2001 and 2000.............................................F-4
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, 2000, and 1999.....F-5
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the Years Ended December 31, 2002, 2001, 2000, and 1999........................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, 2000, and 1999.....F-7
Notes to Consolidated Financial Statements............................................................F-8
Independent Accountants' Reports Re: Employee Stock Ownership Plan with 401(k) Provisions............F-28
Statements of Net Assets Available for Benefits .....................................................F-29
Statement of Changes in Net Assets Available for Benefits............................................F-30
Notes to Consolidated Financial Statements...........................................................F-31
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Community Capital Corporation
Greenwood, South Carolina
We have audited the accompanying consolidated balance sheet of Community Capital
Corporation as of December 31, 2002, and the related consolidated statement of
operations, changes in shareholders' equity and comprehensive income, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Community Capital Corporation as of December 31, 2001, were audited by other
auditors whose report dated January 18, 2002, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the consolidated financial position of Community Capital Corporation
as of December 31, 2002, and the consolidated results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Elliott Davis, LLC
Columbia, South Carolina
January 24, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Community Capital Corporation
Greenwood, South Carolina
We have audited the accompanying consolidated balance sheets of Community
Capital Corporation as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the years in the two year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community Capital
Corporation as of December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
Tourville, Simpson & Caskey, L.L.P.
Columbia, South Carolina
January 18, 2002
The above report of Tourville, Simpson & Caskey, L.L.P. is a copy of the
previously issued report, and the report has not been reissued by Tourville,
Simpson & Caskey, L.L.P.
F-3
Consolidated Balance Sheets
December 31,
-------------------
(Dollars in thousands, except share information) 2002 2001
-------- --------
Assets:
Cash and cash equivalents:
Cash and due from banks $ 9,648 $ 9,275
Interest-bearing deposit accounts 39 16
-------- --------
Total cash and cash equivalents 9,687 9,291
-------- --------
Investment securities:
Securities available-for-sale 50,096 56,851
Securities held-to-maturity (estimated fair value of $550
at December 31, 2002 and 2001) 550 550
Nonmarketable equity securities 5,166 5,405
-------- --------
Total investment securities 55,812 62,806
-------- --------
Loans held for sale 2,684 3,557
Loans receivable 288,842 248,390
Less allowance for loan losses (4,282) (4,103)
-------- --------
Loans, net 284,560 244,287
Premises and equipment, net 9,850 10,372
Accrued interest receivable 1,907 2,008
Intangible assets 3,992 4,338
Cash surrender value of life insurance 10,289 2,212
Other assets 1,984 1,811
-------- --------
Total assets $380,765 $340,682
======== ========
Liabilities:
Deposits:
Noninterest-bearing transaction accounts $ 29,422 $ 25,083
Interest-bearing transaction accounts 247,139 233,247
-------- --------
Total deposits 276,561 258,330
-------- --------
Federal funds purchased and securities sold under agreements to repurchase 25,850 7,464
Advances from the Federal Home Loan Bank 31,140 31,270
Obligations under capital leases 733 940
Accrued interest payable 649 1,052
Other liabilities 1,424 2,353
-------- --------
Total liabilities 336,357 301,409
-------- --------
Commitments and contingencies - Notes 5, 12, and 16
Shareholders' equity:
Common stock, $1.00 par value; 10,000,000 shares authorized; 3,860,790 and
3,559,309 shares issued and outstanding at December 31, 2002 and 2001,
respectively 3,861 3,559
Capital surplus 34,754 32,548
Accumulated other comprehensive income 989 168
Retained earnings 8,947 4,933
Treasury stock, at cost (2002 - 367,875 shares, 2001 - 189,024 shares) (4,143) (1,935)
-------- --------
Total shareholders' equity 44,408 39,273
-------- --------
Total liabilities and shareholders' equity $380,765 $340,682
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
Consolidated Statements of Income
For the years ended December 31,
(Dollars in thousands, --------------------------------
except for per share data amounts) 2002 2001 2000
------- ------- -------
Interest income:
Loans, including fees $19,296 $22,356 $23,501
Investment securities:
Taxable 1,494 3,053 4,593
Tax-exempt 1,222 1,251 1,314
Nonmarketable equity securities 188 226 308
Federal funds sold and other 4 75 6
------- ------- -------
Total interest income 22,204 26,961 29,722
------- ------- -------
Interest expense:
Deposits 5,418 11,046 12,527
Advances from the Federal Home Loan Bank 1,947 1,958 1,931
Federal funds purchased and securities sold under
agreements to repurchase 344 411 1,772
Long-term debt -- 156 286
Obligations under capital leases 84 104 120
------- ------- -------
Total interest expense 7,793 13,675 16,636
------- ------- -------
Net interest income 14,411 13,286 13,086
Provision for loan losses 773 1,920 471
------- ------- -------
Net interest income after provision for loan losses 13,638 11,366 12,615
------- ------- -------
Noninterest income:
Service charges on deposit accounts 2,578 2,128 1,706
Gain on sale of nonmarketable equity securities -- 290 --
Gain on sales of securities available-for-sale 106 -- --
Residential mortgage origination fees 726 822 503
Commissions from sales of mutual funds 106 32 105
Income from fiduciary activities 281 131 129
Gain on sale of branches -- 5,791 --
Gain on sale of Community Trust Company -- -- 150
Gain on sale of premises and equipment -- 37 --
Other operating income 742 883 710
------- ------- -------
Total noninterest income 4,539 10,114 3,303
------- ------- -------
Noninterest expenses:
Salaries and employee benefits 6,418 6,522 6,787
Net occupancy 697 749 880
Amortization of intangible assets 346 2,440 612
Furniture and equipment 1,050 1,440 1,631
Other operating expenses 3,381 3,951 4,066
------- ------- -------
Total noninterest expenses 11,892 15,102 13,976
------- ------- -------
Income before income taxes 6,285 6,378 1,942
Income tax expense 1,683 1,900 290
------- ------- -------
Net income $ 4,602 $ 4,478 $ 1,652
======= ======= =======
Earnings per share:
Basic earnings per share $ 1.34 $ 1.31 $ 0.48
======= ======= =======
Diluted earnings per share $ 1.26 $ 1.26 $ 0.48
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income for the years ended December 31, 2002, 2001, and 2000
Accumulated
Common stock other
(Dollars in thousands, ------------------ Capital comprehensive Retained Treasury
except share data) Shares Amount surplus income (loss) earnings stock Total
- ------------------------------------ --------- ------ -------- ------------- -------- -------- -------
Balance, December 31, 1999 3,122,811 $3,123 $29,846 $(2,802) $1,336 $ (285) $31,218
Net income 1,652 1,652
Other comprehensive income, net of
tax effects 2,224 2,224
-------
Comprehensive income 3,876
Sales of stock to ESOP 21,447 21 122 143
5% stock dividend and cash paid in
lieu of fractional shares 156,137 156 858 (1,004) (14) (4)
Purchase of treasury stock (12,238
shares) (89) (89)
--------- ------ ------- ------- ------ ------- -------
Balance, December 31, 2000 3,300,395 3,300 30,826 (578) 1,984 (388) 35,144
Net income 4,478 4,478
Other comprehensive income, net of
tax effects 746 746
-------
Comprehensive income 5,224
Dividends paid ($0.06 per share) (209) (209)
Stock options exercised 94,526 95 555 650
5% stock dividend and cash paid in
lieu of fractional shares 164,388 165 1,167 (1,320) (18) (7)
Purchase of treasury stock (143,265
shares) (1,529) (1,529)
--------- ------ ------- ------- ------ ------- -------
Balance, December 31, 2001 3,559,309 3,559 32,548 168 4,933 (1,935) 39,273
Net income 4,602 4,602
Other comprehensive income, net of
tax effects 821 821
-------
Comprehensive income 5,423
Dividends paid ($0.17 per share) (588) (588)
Stock options exercised 301,481 302 2,206 2,508
Purchase of treasury stock (178,851
shares) (2,208) (2,208)
--------- ------ ------- ------- ------ ------- -------
Balance, December 31, 2002 3,860,790 $3,861 $34,754 $ 989 $8,947 $(4,143) $44,408
========= ====== ======= ======= ====== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
Consolidated Statements of Cash Flows
For the years ended December 31,
--------------------------------
(Dollars in thousands) 2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 4,602 $ 4,478 $ 1,652
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 1,101 1,476 1,638
Provision for loan losses 773 1,920 471
Deferred income tax benefit 562 (404) (180)
Amortization of intangible assets 346 2,440 612
Premium amortization less discount accretion on securities
available-for-sale 38 164 152
Amortization of deferred loan costs and fees, net 2 155 (163)
Net gain on sales or calls of securities available-for-sale (106) -- --
Net gain on sales of nonmarketable equity securities -- (290) --
Proceeds of sales of residential mortgages 28,375 27,140 15,567
Disbursements for residential mortgages held-for-sale (27,365) (29,323) (16,425)
(Increase) decrease in interest receivable 101 1,134 (563)
Increase (decrease) in interest payable (403) (1,102) 727
Gain on sale of premises and equipment -- (37) --
(Gain) loss on sale of other real estate 90 -- (2)
(Increase) decrease in other assets (1,319) 382 62
Increase (decrease) in other liabilities (1,136) 1,069 1,132
-------- -------- --------
Net cash provided (used) by operating activities 5,661 9,202 4,680
-------- -------- --------
Cash flows from investing activities:
Net increase in loans made to customers (41,671) (19,372) (39,013)
Proceeds from sales of securities available-for-sale 5,147 -- --
Proceeds from maturities of securities available-for-sale 13,650 44,816 6,638
Purchases of securities available-for-sale (10,730) (750) --
Proceeds from maturities of securities held-to-maturity -- 40 30
Proceeds from sales of nonmarketable equity securities 239 385 16
Purchase of nonmarketable equity securities -- -- (581)
Purchase of premises and equipment (573) (309) (3,146)
Proceeds from sales of premises and equipment 157 128 363
Proceeds from sales of other real estate 394 58 574
Purchase of cash surrender value of life insurance (8,077) (411) (380)
Proceeds from the sale of Community Trust Company -- -- 150
Acquisition of branches -- -- 13,570
Net cash outflow from sale of branches -- (14,196) --
-------- -------- --------
Net cash provided (used) by investing activities (41,464) 10,389 (21,779)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand and savings accounts 13,683 18,826 20,226
Net increase (decrease) in time deposits 4,548 (26,683) 19,773
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 18,386 (4,709) (37,277)
Proceeds from advances from the Federal Home Loan Bank -- -- 37,600
Repayments of advances from the Federal Home Loan Bank (130) (1,129) (25,930)
Proceeds from advances from long-term debt -- 300 7,770
Repayments of advances from long-term debt -- (5,145) (4,500)
Dividends paid (588) (209) --
Proceeds from exercise of stock options 2,508 650 --
Proceeds from stock sales to ESOP -- -- 142
Cash paid in lieu of fractional shares -- (7) (3)
Purchase of treasury stock (2,208) (1,529) (89)
-------- -------- --------
Net cash provided (used) by financing activities 36,199 (19,635) 17,712
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 396 (44) 613
Cash and cash equivalents, beginning of year 9,291 9,335 8,722
-------- -------- --------
Cash and cash equivalents, end of year $ 9,687 $ 9,291 $ 9,335
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Community Capital Corporation (the Company) serves as a
bank holding company for CapitalBank (the Bank). The Bank was formed on January
1, 2001, during a restructuring that consolidated the Company's operations into
a single subsidiary. CapitalBank operates thirteen branches throughout South
Carolina. The Bank offers a full range of banking services, including a wealth
management group featuring a wide array of financial services, with personalized
attention, local decision making and strong emphasis on the needs of individuals
and small to medium-sized businesses.
The Company was formed in 1988 to serve as a holding company for Greenwood
National Bank, which later changed its name to Greenwood Bank & Trust. In 1994
the Company made the decision to expand beyond Greenwood County by creating an
organization of independent banks in four additional markets. In June 1995, the
Company opened Clemson Bank and Trust in Clemson, South Carolina. In 1996 and
1997, the Company opened Community Bank and Trust, TheBank, and Mid State Bank.
The restructuring on January 1, 2001 consolidated these banks into and under
CapitalBank. The Company formed a separate trust organization in 1997 known as
Community Trust Company. In May 2000, Community Trust Company was sold.
The accounting and reporting policies of the Company reflect industry practices
and conform to generally accepted accounting principles in all material
respects. The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates - In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the balance sheet date and
income and expenses for the period. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses, including
valuation allowances for impaired loans, the carrying amount of real estate
acquired in connection with foreclosures or in satisfaction of loans, and the
assumptions used in computing the fair value of stock options granted and the
pro forma disclosures required by Statement of Financial Accounting Standards
(SFAS) No. 123. Management must also make estimates in determining the estimated
useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowance may be necessary based
on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Securities Available-for-sale - Securities available-for-sale by the Company are
carried at amortized cost and adjusted to estimated fair value by recording the
aggregate unrealized gain or loss in a valuation account. Management does not
actively trade securities classified as available-for-sale. Reductions in fair
value considered by management to be other than temporary are reported as a
realized loss and a reduction in the cost basis in the security. Generally,
amortization of premiums and accretion of discounts are charged or credited to
earnings on a straight-line basis over the life of the securities. The adjusted
cost basis of securities available-for-sale is determined by specific
identification and is used in computing the gain or loss from a sales
transaction.
Securities Held-To-Maturity - Securities held-to-maturity are those securities
which management has the intent and the Company has the ability to hold until
maturity. Securities held-to-maturity are carried at cost and adjusted for
amortization of premiums and accretion of discounts, both computed by the
straight-line method. Reductions in fair value considered by management to be
other than temporary are reported as a realized loss and a reduction in the cost
basis of the security.
Nonmarketable Equity Securities - Nonmarketable equity securities include the
costs of the Company's investments in the stock of the Federal Reserve Bank and
the Federal Home Loan Bank. The stocks have no quoted market value and no ready
market exists. Investment in Federal Reserve Bank stock is required for
state-chartered member banks. Investment in Federal Home Loan Bank stock is a
condition of borrowing from the Federal Home Loan Bank, and the stock is pledged
to secure the borrowings. At both December 31, 2002 and 2001, the investment in
Federal Reserve Bank stock was $1,037,150. At December 31, 2002 and 2001, the
investment in Federal Home Loan Bank stock was $1,808,300 and $2,047,700,
respectively.
F-8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company has invested in the stock of several unrelated financial
institutions. The Company owns less than five percent of the outstanding shares
of each institution, and the stocks either have no quoted market value or are
not readily marketable. At December 31, 2002 and 2001, the investments in the
stock of the unrelated financial institutions, at cost, were $1,820,144. The
Company also invested in a financial services company that offers internet
banking. The Company's investment in the stock of this institution was $500,000
at December 31, 2002 and 2001.
Loans receivable - Loans are recorded at their unpaid principal balance. Direct
loan origination costs and loan origination fees are deferred and amortized over
the lives of the loans as an adjustment to yield. Unamortized net deferred loans
costs included in loans at December 31, 2002 and 2001 were $136,053 and
$134,008, respectively.
Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and the Company's
recorded investment in the related loan. The corresponding entry is to a related
valuation account. Interest is discontinued on impaired loans when management
determines that a borrower may be unable to meet payments as they become due.
Interest income is computed using the simple interest method and is recorded in
the period earned. When serious doubt exists as to the collectibility of a loan
or a loan is 90 days past due, the accrual of interest income is generally
discontinued unless the estimated net realizable value of the collateral is
sufficient to assure collection of the principal balance and accrued interest.
When interest accruals are discontinued, unpaid accrued interest is reversed and
charged against current year income.
Allowance for Loan Losses - Management provides for losses on loans through
specific and general charges to operations and credits such charges to the
allowance for loan losses. Specific provision for losses is determined for
identified loans based upon estimates of the excess of the loan's carrying value
over the net realizable value of the underlying collateral. General provision
for loan losses is estimated by management based upon factors including industry
loss experience for similar lending categories, actual loss experience,
delinquency trends, as well as prevailing and anticipated economic conditions.
While management uses the best information available to make evaluations, future
adjustment to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. Delinquent
loans are charged against the allowance at the time they are determined to be
uncollectible. Recoveries are added to the allowance.
Residential Mortgages Held-For-Sale - The Company's mortgage activities are
comprised of accepting residential mortgage loan applications, qualifying
borrowers to standards established by investors, funding residential mortgages
and selling mortgages to investors under pre-existing commitments. Funded
residential mortgages held temporarily for sale to investors are recorded at
cost which approximates the market value. Application and origination fees
collected by the Company are recognized as income upon sale to the investor.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. Gain or loss on retirement of premises and equipment
is recognized in the statements of operations when incurred. Expenditures for
maintenance and repairs are charged to expense; betterments and improvements are
capitalized. Depreciation charges are computed principally on the straight-line
method over the estimated useful lives as follows: building and improvements -
40 years; furniture, fixtures and equipment - 3 to 15 years.
Other Real Estate Owned - Other real estate owned includes real estate acquired
through foreclosure. Other real estate owned is carried at the lower of cost
(principal balance at the date of foreclosure) or fair value minus estimated
costs to sell. Any write-downs at the date of foreclosure are charged to the
allowance for loan losses. Expenses to maintain such assets, subsequent changes
in the valuation allowance, and gains and losses on disposal are included in
other expenses.
Intangible Assets - Intangible assets consist of goodwill and core deposit
premiums resulting from the Company's acquisitions. The core deposit premiums
are being amortized over fifteen years using the straight-line method. Goodwill
is being evaluated for impairment on annual basis in accordance with SFAS No.
147.
Stock-Based Compensation - The Company has a stock-based employee compensation
plan which is further described in Note 14. The Company accounts for the plan
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all stock options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair
F-9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
value recognition provisions of Financial Accounting Standards Board ("FASB")
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
(Dollars in thousands, Year ended December 31,
except for per share data) ------------------------
2002 2001 2000
------ ----- ------
Net income, as reported $4,602 $4,478 $1,652
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects 301 452 378
------ ------ ------
Pro forma net income $4,301 $4,026 $1,274
====== ====== ======
Earnings per share:
Basic - as reported $ 1.34 $ 1.31 $ 0.48
====== ====== ======
Basic - pro forma $ 1.25 $ 1.18 $ 0.39
====== ====== ======
Diluted - as reported $ 1.26 $ 1.26 $ 0.48
====== ====== ======
Diluted - pro forma $ 1.18 $ 1.13 $ 0.39
====== ====== ======
Income Taxes - The income tax provision is the sum of amounts currently payable
to taxing authorities and the net changes in income taxes payable or refundable
in future years. Income taxes deferred to future years are determined utilizing
a liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax bases of certain assets and liabilities, principally the allowance for loan
losses and depreciable premises and equipment.
Cash Flow Information - For purposes of reporting cash flows, the Company
considers certain highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents include amounts
due from depository institutions, interest-bearing deposit accounts, and federal
funds sold. Generally, federal funds are sold for one-day periods.
The following summarizes supplemental cash flow information:
(Dollars in thousands) Year ended December 31,
--------------------------
2002 2001 2000
------ ------- -------
Cash paid for interest $8,196 $15,088 $15,469
Cash paid for income taxes 3,404 690 346
Supplemental noncash investing and financing
activities:
Foreclosures on loans 486 148 577
Transfer from retained earnings to common stock and
capital surplus to record stock dividends -- 1,331 1,014
Change in unrealized gain or loss on securities
available-for sale, net of tax 821 746 2,224
Concentrations of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of loans
receivable, securities, federal funds sold and amounts due from banks.
Management is not aware of any concentrations of loans to classes of borrowers
or industries that would be similarly affected by economic conditions. Although
the Company's loan portfolio is diversified, a substantial portion of its
borrowers' ability to honor the terms of their loans is dependent on business
and economic conditions in the upstate region of South Carolina. Management does
not believe credit risk is associated with obligations of the United States, its
agencies or its corporations. The Company places its deposits and correspondent
accounts with and sells its federal funds to high credit quality institutions.
By policy, time deposits are limited to amounts insured by the Federal Deposit
Insurance Corporation. Management believes credit risk associated with
correspondent accounts is not significant.
Per-Share Data - Basic earnings per share is computed by dividing net income by
the weighted-average number of shares outstanding for the period. Diluted
earnings per share is similar to the computation of basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued using the treasury stock method.
F-10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Share and per-share data have been restated to reflect the 5% stock dividends
issued in May 2001 and June 2000.
Comprehensive Income - Accounting principles generally require that recognized
income, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Year ended December 31,
-------------------------
(Dollars in thousands) 2002 2001 2000
------ ------ -------
Unrealized holding gains (losses) on available-for-
sale securities $1,350 $1,130 $ 3,370
Reclassification adjustment for (gains) losses
realized in income (106) -- --
------ ------ -------
Net unrealized gains on securities 1,244 1,130 3,370
Tax effect (423) (384) (1,146)
------ ------ -------
Net-of-tax amount $ 821 $ 746 $ 2,224
====== ====== =======
Common Stock Owned by the Employee Stock Ownership Plan (ESOP) - ESOP purchases
and redemptions of the Company's common stock are at estimated fair value.
Dividends on ESOP shares are charged to retained earnings. All shares held by
the ESOP are treated as outstanding for purposes of computing earnings per
share.
Off-Balance-Sheet Financial Instruments - In the ordinary course of business,
the Company enters into off-balance-sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments
are recorded in the financial statements when they become payable by the
customer.
Recent Accounting Pronouncements - In October 2002, the FASB issued SFAS No.
147, Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9, which brings all
business combinations involving financial institutions, except mutual financial
institutions, into the scope of SFAS No. 141, Business Combinations. This
statement requires that all acquisitions of financial institutions that meet the
definition of a business, including acquisitions of part of a financial
institution that meet the definition of a business, must be accounted for in
accordance with SFAS No. 141 and the related intangibles accounted for in
accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the
scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope
long-term customer relationship intangibles of financial institutions. SFAS No.
147 was effective upon issuance and had no material impact on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted this standard effective December 31, 2002 and has included the required
disclosures in the footnotes to the financials. The Company has not elected the
fair value treatment of stock-based compensation and the adoption of this
standard had no impact on its financial position.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Reclassifications - Certain captions and amounts in the 2001 and 2000 financial
statements were reclassified to conform with the 2002 presentation.
Accounting for Transfers of Financial Assets - A sale is recognized when the
Company relinquishes control over a financial asset and is compensated for such
asset. The difference between the net proceeds received and the carrying amount
of the financial asset being sold or securitized is recognized as a gain or loss
on the sale.
NOTE 2 - SALE OF BRANCHES
On January 29, 2001, CapitalBank entered into a Purchase and Assumption
Agreement to sell certain assets and deposits of five of its branches to
Enterprise Bank of South Carolina. The branches included in the transaction were
Barnwell, Blackville,
F-11
Springfield, Salley, and Williston. As of May 14, 2001, CapitalBank sold the
five branches, which had approximately $67,100,000 in deposits.
At the closing, and subject to the terms of the Purchase and Assumption
Agreement, CapitalBank received from Enterprise Bank a premium of 8.63% on the
deposits.
The principal assets and liabilities disposed of in the sale are summarized as
follows:
(Dollars in thousands)
Deposits, including accrued interest payable less premium $(61,309)
Premises and equipment 3,568
Loans, including accrued interest receivable 49,346
Other, net (11)
--------
Cash paid for net liabilities sold $ (8,406)
========
The gain recognized on the sale of the branches totaled $5,791,000 for the year
ended December 31, 2001.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances computed as a
percentage of deposits. At December 31, 2002, the required cash reserves were
satisfied by vault cash on hand and amounts due from correspondent banks.
NOTE 4 - INVESTMENT SECURITIES
Securities available-for-sale at December 31, 2002 and 2001 consisted of the
following:
Gross Unrealized
Amortized ---------------- Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
--------- ------ ------ ----------
December 31, 2002
U.S. Government agencies and corporations $13,540 $ 216 $ -- $13,756
Obligations of state and local governments 24,774 959 -- 25,733
Obligations of corporations 750 -- -- 750
------- ------ ---- -------
39,064 1,175 -- 40,239
Mortgage-backed securities 9,534 323 -- 9,857
------- ------ ---- -------
Total $48,598 $1,498 $ -- $50,096
======= ====== ==== =======
December 31, 2001
U.S. Government agencies and corporations $12,770 $ 378 $ -- $13,148
Obligations of state and local governments 24,965 314 491 24,788
Obligations of corporations 750 -- -- 750
------- ------ ---- -------
38,485 692 491 38,686
Mortgage-backed securities 18,112 142 89 18,165
------- ------ ---- -------
Total $56,597 $ 834 $580 $56,851
======= ====== ==== =======
Securities held-to-maturity as of December 31, 2002 and 2001 consisted of the
following:
Gross Unrealized
Amortized ---------------- Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
--------- ------ ------ ----------
December 31, 2002
Obligations of state and local governments $550 $-- $-- $550
==== === === ====
December 31, 2001
Obligations of state and local governments $550 $-- $-- $550
==== === === ====
F-12
NOTE 4 - INVESTMENT SECURITIES (continued)
The following table summarizes the maturities of securities available-for-sale
and held-to-maturity as of December 31, 2002, based on the contractual
maturities. Actual maturities may differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalty.
Securities Securities
Available-For-Sale Held-To-Maturity
---------------------- ----------------------
Amortized Estimated Amortized Estimated
(Dollars in thousands) Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
Due in one year or less $ 8,531 $ 8,746 $ -- $ --
Due after one year but within five years 6,423 6,456 -- --
Due after five years but within ten years 6,233 6,646 550 550
Due after ten years 17,877 18,391 -- --
------- ------- ---- ----
39,064 40,239 550 550
Mortgage-backed securities 9,534 9,857 -- --
------- ------- ---- ----
Total $48,598 $50,096 $550 $550
======= ======= ==== ====
Proceeds from sales of securities available-for-sale during 2002 were
$5,147,372, resulting in gross realized gains of $105,814. There were no sales
of securities available-for-sale in 2001 or 2000. There were no sales of
securities held-to-maturity in 2002, 2001, or 2000.
At December 31, 2002 and 2001, securities having amortized costs of
approximately $46,403,207 and $51,234,360, respectively, and estimated fair
values of $47,849,745 and $51,967,647, respectively, were pledged as collateral
for short-term borrowings, to secure public and trust deposits, and for other
purposes as required and permitted by law.
NOTE 5 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
(Dollars in thousands) 2002 2001
-------- --------
Commercial and industrial $ 30,092 $ 33,395
Real estate 219,821 177,821
Home equity 21,095 18,939
Consumer - installment 16,323 16,923
Consumer - credit card and checking 1,511 1,312
-------- --------
Total gross loans $288,842 $248,390
======== ========
At December 31, 2002 and 2001, the Company had sold participations in loans
aggregating $14,425,000 and $9,518,000, respectively, to other financial
institutions on a nonrecourse basis. Collections on loan participations and
remittances to participating institutions conform to customary banking
practices.
The Bank accepts residential mortgage loan applications and fund loans of
qualified borrowers (see Note 1). Funded loans are sold without recourse to
investors at face value under the terms of pre-existing commitments. The Company
does not sell residential mortgages having market or interest rate risk. The
Company does not service residential mortgage loans for the benefit of others.
At December 31, 2002 and 2001, the Company had pledged approximately $83,489,000
and $41,693,000, respectively, of loans on residential real estate as collateral
for advances from the Federal Home Loan Bank (see Note 10).
Loans are defined as impaired when "based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement." All loans are subject to this
criteria except for: "smaller-balance homogeneous loans that are collectively
evaluated for impairment" and loans "measured at fair value or at the lower of
cost or fair value." The Company considers its consumer installment portfolio,
credit cards, and home equity lines as meeting this criteria. Therefore, the
real estate and commercial loan portfolios are primarily subject to possible
impairment.
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether
F-13
NOTE 5 - LOANS RECEIVABLE (continued)
all outstanding principal and interest are expected to be collected. Loans are
not considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected. At December 31, 2002 and 2001, management reviewed its
problem loan watch list and determined that no impairment on loans existed. At
December 31, 2002 and 2001, the Company had nonaccrual loans of approximately
$1,893,000 and $1,567,000, respectively, for which impairment had not been
recognized.
An analysis of the allowance for loan losses for the years ended December 31,
2002, 2001, and 2000, is as follows:
(Dollars in thousands) 2002 2001 2000
------ ------ ------
Balance, beginning of year $4,103 $3,060 $2,557
Provision charged to operations 773 1,920 471
Recoveries on loans previously charged-off 129 98 237
Loans charged-off (723) (975) (540)
Reserves related to acquisitions -- -- 335
------ ------ ------
Balance, end of year $4,282 $4,103 $3,060
====== ====== ======
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments are
commitments to extend credit, commitments under credit card arrangements and
letters of credit and have elements of risk in excess of the amount recognized
in the balance sheet. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of nonperformance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued to guarantee a customer's
performance to a third party and have essentially the same credit risk as other
lending facilities. The Company uses the same credit policies in making
commitments to extend credit as it does for on-balance-sheet instruments.
At December 31, 2002 and 2001, the Company had unfunded commitments, including
standby letters of credit, of $52,403,000 and $45,676,000, of which $7,704,331
and $2,348,000, respectively, were unsecured. At December 31, 2002, the Company
was not committed to lend additional funds to borrowers having loans in
nonaccrual status.
Loans sold with limited recourse are 1-4 family residential mortgages originated
by the Company and sold to various other financial institutions. Various
recourse agreements exist, ranging from forty-five days to twelve months. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the loan is represented by the contractual notional amount of the loan.
Since none of the loans sold have ever been returned to the Company, the total
loans sold with limited recourse amount does not necessarily represent future
cash requirements. The Company uses the same credit policies in making loans
held for sale as it does for on-balance-sheet instruments. Total loans sold with
limited recourse in 2002 was $38,613,000.
NOTE 6- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
------------------
(Dollars in thousands) 2002 2001
------- -------
Land $ 2,111 $ 2,132
Building and land improvements 6,986 6,844
Furniture and equipment 6,145 5,862
------- -------
Total 15,242 14,838
Less, accumulated depreciation (5,392) (4,466)
------- -------
Premises and equipment, net $ 9,850 $10,372
======= =======
Depreciation and amortization expense was $1,101,000, $1,476,000 and $1,638,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
F-14
NOTE 7 - INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization are summarized as follows:
December 31,
---------------
(Dollars in thousands) 2002 2001
------ ------
Core deposit premium $3,939 $4,285
Goodwill 53 53
------ ------
$3,992 $4,338
====== ======
In accordance with SFAS No. 147, the Company evaluated its goodwill and
determined that no impairment existed at December 31, 2002 and 2001. Therefore,
there was no amortization of goodwill for the year ended December 31, 2002.
Amortization expense related to the core deposit premium was $346,000,
$2,440,000 and $612,000, for the years ended December 31, 2002, 2001 and 2000,
respectively.
NOTE 8 - DEPOSITS
The following is a summary of deposit accounts:
December 31,
-------------------
(Dollars in thousands) 2002 2001
-------- --------
Noninterest-bearing demand deposits $ 29,422 $ 25,083
Interest-bearing demand deposits 36,121 32,503
Money market accounts 66,295 61,863
Savings 27,948 26,653
Certificates of deposit and other time deposits 116,775 112,228
-------- --------
Total deposits $276,561 $258,330
======== ========
At December 31, 2002 and 2001, certificates of deposit of $100,000 or more
totaled approximately $42,012,000 and $39,592,000, respectively. Interest
expense on these deposits was approximately $1,259,000, $2,231,000, and
$2,133,000 in 2002, 2001 and 2000, respectively.
Scheduled maturities of certificates of deposit and other time deposits as of
December 31, 2002 were as follows:
(Dollars in thousands)
Maturing in Amount
- ----------- --------
2003 $ 85,753
2004 14,668
2005 16,338
2006 16
--------
Total $116,775
========
NOTE 9 - FEDERAL FUND PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
The Company had federal funds purchased and securities sold under agreements to
repurchase which generally mature within one day. At December 31, 2002 and 2001,
the securities sold under agreements to repurchase totaled $4,645,000 and
$5,062,000, respectively. At December 31, 2002 and 2001, the amortized costs of
securities pledged to collateralize the repurchase agreements were $5,283,000
and $6,755,000, respectively, and estimated fair values were $5,457,000 and
$6,849,000, respectively. The securities underlying the agreements are held by a
third-party custodian. At December 31, 2002 and 2001, federal funds purchased
were $21,205,000 and $2,402,000, respectively.
F-15
NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of the following:
(Dollars in thousands) December 31,
-----------------
Description Interest Rate 2002 2001
- ----------- ------------- ------- -------
Fixed rate advances maturing:
February 3, 2003 5.97% $ 15 $ 45
March 17, 2003 6.41 10,000 10,000
March 17, 2005 6.60 5,000 5,000
October 13, 2005 5.84 3,000 3,000
March 26, 2008 5.51 1,500 1,500
February 2, 2009 4.95 625 725
March 17, 2010 5.92 5,000 5,000
March 30, 2010 6.02 2,000 2,000
March 30, 2010 6.02 4,000 4,000
------- -------
$31,140 $31,270
======= =======
Scheduled principal reductions of Federal Home Loan Bank advances are as
follows:
(Dollars in thousands) Amount
-------
2003 $10,015
2004 --
2005 8,000
2006 --
After five years 13,125
-------
Total $31,140
=======
As collateral, the Company had pledged first mortgage loans on one to four
family residential loans aggregating $83,489,000 (see Note 5) at December 31,
2002. In addition, the Company's Federal Home Loan Bank stock is pledged to
secure the borrowings. Certain advances are subject to prepayment penalties.
NOTE 11 - SHAREHOLDERS' EQUITY
The Company declared a 5% stock dividend for shareholders of record on May 30,
2001, June 30, 2000, and September 30, 1998. Amounts equal to the estimated fair
value of the additional shares issued have been charged to retained earnings and
credited to common stock and capital surplus. Dividends representing fractional
shares were paid in cash. Earnings per share, average shares outstanding,
treasury shares, employee stock ownership plan shares, and stock option plan
shares have been adjusted to reflect the stock dividends for all periods
presented.
As of December 31, 2002, the Board of Directors had approved a stock repurchase
plan whereby the Company could repurchase up to $5,500,000 of its outstanding
shares of common stock. As of December 31, 2002, the Company had purchased
367,875 shares at a cost of $4,111,000.
At December 31, 2002 and 2001, the Company had authorized 2,000,000 shares of a
special class of stock, par value $1.00 per share, the rights and preferences of
which were to be designated as the Board of Directors should determine. At
December 31, 2002 and 2001, no shares of the undesignated stock had been issued
or were outstanding.
NOTE 12 - LEASES
The Company leases part of a building and land as a branch banking location from
a former director. The operating lease has an initial ten-year term, which
expires July 31, 2006, and is renewable, at the Company's option, for four
five-year terms at an increased monthly rental. The lease requires monthly
payments of $3,500 with an increase to $3,850 per month during the last five
years of the initial lease term. The initial lease term ends on July 31, 2006.
The monthly payments upon renewal are $4,235. Rental expense under this
operating lease agreement was $46,200, $44,100, and $42,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-16
NOTE 12 - LEASES (continued)
The Company also leases a building for its Greenville branch location. The
operating lease which originated on October 1, 2002 has an initial three year
term. The lease is renewable at the Company's option for three one-year terms at
an increased monthly rental. The lease term requires monthly payments of $3,500
per month. The initial lease term ends on September 30, 2005. Rental expense for
the year ended December 31, 2002 totaled $10,500.
Future obligations over the primary terms of the remaining long-term leases as
of December 31, 2002 are as follows:
(Dollars in thousands) Amount
------
2003 $ 88
2004 88
2005 88
2006 27
2007 --
----
Total $291
====
Both leases contain options to renew. The cost of such rentals is not included
above.
In 2000, the Company restructured two lease agreements for certain data
processing equipment. Both rental terms are for sixty months and provide for the
lessee to pay certain maintenance costs.
Assets recorded under capital leases and included in premises and equipment were
as follows at December 31, 2002:
(Dollars in thousands) Amount
------
Equipment $1,159
Less, accumulated depreciation 444
------
Net assets under capital leases $ 715
======
The future minimum capital lease payments were as follows at December 31, 2002:
(Dollars in thousands) Amount
------
2003 $ 382
2004 382
2005 384
------
Total payments 1,148
------
Less, amount representing interest 124
Less, amount representing maintenance 291
------
Total obligations under capital leases $ 733
======
NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal 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 material
effect on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk-weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios (set forth in the
table below) of Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 100%.
Tier 1 capital of the Company and the Bank consists of common shareholders'
equity, excluding the unrealized gain or loss on securities available-for-sale,
minus certain intangible assets. Tier 2 capital consists of the allowance for
loan losses subject to certain limitations. Total capital for purposes of
computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
F-17
NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS (continued)
The Company and the Bank are also required to maintain capital at a minimum
level based on average assets (as defined), which is known as the leverage
ratio. Only the strongest institutions are allowed to maintain capital at the
minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2%
above the minimum.
As of the most recent regulatory examination, the Bank was deemed
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized well capitalized, the Bank must maintain total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events that management believes have changed the Bank's
categories.
The following tables summarize the capital ratios and the regulatory minimum
requirements of the Company and the Bank at December 31, 2002 and 2001.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -------
December 31, 2002
The Company
Total capital (to risk-weighted assets) $42,917 15.41% $22,274 8.00% $ -- N/A
Tier 1 capital (to risk-weighted assets) 39,427 14.16 11,137 4.00 -- N/A
Tier 1 capital (to average assets) 39,427 10.59 14,898 4.00 -- N/A
CapitalBank
Total capital (to risk-weighted assets) 38,760 14.00% 22,150 8.00% $27,687 10.00%
Tier 1 capital (to risk-weighted assets) 35,289 12.75 11,075 4.00 16,612 6.00
Tier 1 capital (to average assets) 35,289 9.51 14,839 4.00 18,549 5.00
December 31, 2001
The Company
Total capital (to risk-weighted assets) $37,868 15.53% $19,502 8.00% $ -- N/A
Tier 1 capital (to risk-weighted assets) 34,767 14.26 9,751 4.00 -- N/A
Tier 1 capital (to average assets) 34,767 10.21 13,621 4.00 -- N/A
CapitalBank
Total capital (to risk-weighted assets) $34,737 14.30% $19,436 8.00% $24,294 10.00%
Tier 1 capital (to risk-weighted assets) 31,646 13.03 9,718 4.00 14,577 6.00
Tier 1 capital (to average assets) 31,646 9.33 13,565 4.00 16,957 5.00
NOTE 14 - STOCK COMPENSATION PLANS
On May 27, 1998, the Company terminated its Employee Incentive Stock Option Plan
and its Incentive and Nonstatutory Stock Option Plan (the "Plans"). These Plans
were replaced by the 1997 Stock Incentive Plan effective January 1, 1998.
Outstanding options issued under the former Plans will be honored in accordance
with the terms and conditions in effect at the time they were granted, except
that they are not subject to reissuance. At December 31, 2002, there were
164,408 options outstanding that had been issued under the terminated Plans.
The 1997 Stock Incentive Plan provides for the granting of statutory incentive
stock options within the meaning of Section 422 of the Internal Revenue Code as
well as nonstatutory stock options, stock appreciation rights, or restricted
stock of up to 600,000 shares (as amended January 27, 1999), adjusted for stock
dividends of the Company's common stock, to officers, employees, and directors
of and consultants for the Company. The Board voted to amend the number of
shares available for grant from 2,100,000 to 600,000 in January 1999. Awards may
be granted for a term of up to ten years from the effective date of grant. Under
this Plan, the Company's Board of Directors has sole discretion as to the
exercise date of any awards granted. The per-share exercise price of incentive
stock options may not be less than the fair value of a share of common stock on
the date the option is granted. The per-share exercise price of nonqualified
stock options may not be less than 50% of the fair value of a share on the
effective date of grant. Any options that expire unexercised or are canceled
become available for issuance. No awards may be made after January 27, 2008.
F-18
NOTE 14 - STOCK COMPENSATION PLANS (continued)
During 2002, the Company granted 60,250 options pursuant to the terms of the
Company's 1997 Stock Incentive Plan. The options are exercisable one year from
the date of grant at prices ranging between $12.50 and $14.10 per-share and
expire during 2007. As of December 31, 2002, there were 111,807 options
available for issuance under this Plan.
In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants:
2002 2001 2000
------- ------- -------
Dividend yield 1.36% 0.78% 0.00%
Expected volatility 22.87% 62.28% 22.20%
Risk-free interest rate 4.78% 4.49% 6.71%
Expected life 5 years 5 years 5 years
The weighted-average fair value of options, calculated using the Black-Scholes
option-pricing model, granted during 2002, 2001, and 2000 is $3.21, $4.18, and
$2.03, respectively.
A summary of the status of the Company's stock option plans as of December 31,
2002, 2001, and 2000 and changes during the years ended on those dates is
presented below:
2002 2001 2000
-------------------- -------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
(Dollars in thousands, except Exercise Exercise Exercise
per share data) Shares Price Shares Price Shares Price
-------- --------- -------- --------- ------- ---------
Outstanding at beginning of year 804,483 $ 8.76 944,202 $ 9.10 810,491 $9.78
Granted 60,250 12.54 137,241 7.71 166,643 5.90
Exercised (301,025) 8.32 (93,414) 6.86 -- --
Cancelled (14,856) 10.74 (183,546) 10.65 (32,932) 9.81
-------- -------- -------
Outstanding at end of year 548,852 9.34 804,483 8.76 944,202 9.10
======== ======== =======
Options exercisable at December 31, 2002, 2001, and 2000 were 490,402, 675,281,
and 784,390, respectively.
The following table summarizes information about the stock options outstanding
under the Company's plans at December 31, 2002:
Weighted Average
-------------------------------------
Options Remaining Exercise
Range of Exercise Prices Outstanding Life (years) Price
- ------------------------ ----------- ------------ --------
Exercisable:
$5.90 to $7.71 293,339 2.33 7.17
$8.62 to $9.42 106,268 1.97 9.29
$14.36 90,795 .48 14.36
-------
Total exercisable 490,402
Not Exercisable:
$12.50 to $14.10 58,450 4.23 12.55
-------
Total outstanding 548,852 2.16 9.34
=======
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain parties (primarily certain directors and executive officers, their
immediate families and business interests) were loan customers and had other
transactions in the normal course of business with the Company. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and generally do not involve more than normal risk of
collectibility. Total loans and commitments outstanding to related parties at
December 31, 2002, 2001 and 2000, were $9,704,027,
F-19
NOTE 15 - RELATED PARTY TRANSACTIONS (continued)
$9,232,569 and $7,946,301, respectively. During 2002, $1,334,671 of new loans
were made to related parties and repayments totaled $863,213. During 2001,
$7,854,068 of new loans were made to related parties and repayments totaled
$6,567,800.
The Company purchases various types of insurance from agencies that belong to
several directors. Amounts paid for insurance premiums were $139,000, $65,000,
and $75,000 in 2002, 2001, and 2000, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial condition of the Company.
NOTE 17 - RESTRICTION ON SUBSIDIARY DIVIDENDS
The ability of the Company to pay cash dividends to shareholders is dependent
upon receiving cash in the form of dividends from the Bank. However, certain
restrictions exist regarding the ability of the Bank to transfer funds in the
form of cash dividends, loans, or advances to the Company. Dividends are payable
only from the retained earnings of the Bank.
NOTE 18 - EARNINGS PER-SHARE
Earnings per share - basic is computed by dividing net income by the
weighted-average number of common shares outstanding. Earnings per share -
diluted is computed by dividing net income by the weighted-average number of
common shares outstanding and dilutive common share equivalents using the
treasury stock method.
Year ended December 31,
---------------------------------------
(Dollars in thousands, except share data) 2002 2001 2000
---------- ---------- ----------
Basic earnings per share:
Net income available to common shareholders $ 4,602 $ 4,478 $ 1,652
========== ========== ==========
Average basic common shares outstanding 3,447,395 3,423,131 3,407,899
========== ========== ==========
Basic earnings per share $ 1.34 $ 1.31 $ 0.48
========== ========== ==========
Diluted earnings per share:
Net income available to common shareholders $ 4,602 $ 4,478 $ 1,652
========== ========== ==========
Average common shares outstanding - basic 3,447,395 3,423,131 3,407,899
Incremental shares from assumed conversions:
Stock options 200,905 136,364 6,614
---------- ---------- ----------
Average diluted common shares outstanding 3,648,300 3,559,495 3,414,513
========== ========== ==========
Diluted earnings per share $ 1.26 $ 1.26 $ 0.48
========== ========== ==========
The above computation of diluted earnings per share does not include the
following options that were outstanding at year-end since their exercise price
was greater than the average market price of the common shares:
2002 2001 2000
-------- -------- --------
Number of options $162,552 $146,773 $784,390
Weighted-average of these options outstanding
during the year 95,978 204,491 773,891
Weighted-average exercise price $ 14.35 $ 12.71 $ 9.75
F-20
NOTE 19 - INCOME TAXES
Income tax expense consisted of the following:
Year ended December 31,
------------------------
(Dollars in thousands) 2002 2001 2000
------ ------ ------
Currently payable:
Federal $1,333 $1,964 $ 385
State 211 300 85
------ ------ ------
Total current 1,544 2,264 470
------ ------ ------
Change in deferred income taxes:
Federal 435 (22) 859
State 127 42 107
------ ------ ------
Total deferred 562 20 966
------ ------ ------
Income tax expense $2,106 $2,284 $1,436
====== ====== ======
Income tax expense is allocated as follows:
To continuing operations $1,683 $1,900 $ 290
To shareholders' equity 423 384 1,146
------ ------ ------
Income tax expense $2,106 $2,284 $1,436
====== ====== ======
The gross amounts of deferred tax assets and deferred tax liabilities were as
follows:
December 31,
---------------
(Dollars in thousands) 2002 2001
------ ------
Deferred tax assets:
Allowance for loan losses $1,204 $1,352
Net operating loss carryforward - state 108 108
Deferred compensation 149 139
Nonaccrual of interest 40 34
Other real estate owned 21 2
------ ------
Total deferred tax assets 1,522 1,635
------ ------
Deferred tax liabilities:
Accumulated depreciation 97 64
Available-for-sale securities 509 86
Loans fees and costs 46 51
Federal Home Loan Bank stock dividends 16 18
------ ------
Total deferred tax liabilities 668 219
------ ------
Net deferred tax asset recognized $ 854 $1,416
====== ======
Deferred tax assets represent the future tax benefit of deductible differences
and, if it is more likely than not that a tax asset will not be realized, a
valuation allowance is required to reduce the recorded deferred tax assets to
net realizable value. Management has determined that it is more likely than not
that the entire deferred tax asset at December 31, 2002 will be realized, and
accordingly, has not established a valuation allowance. Net deferred tax assets
are included in other assets.
F-21
NOTE 19 - INCOME TAXES (continued)
A reconciliation of the income tax provision and the amount computed by applying
the Federal statutory rate of 34% to income before income taxes follows:
Year ended December 31,
-----------------------
(Dollars in thousands) 2002 2001 2000
------ ------ -----
Income tax at the statutory rate $2,137 $2,168 $ 661
State income tax, net of federal income tax benefit 116 246 51
Tax-exempt interest income (440) (452) (474)
Disallowed interest expense 49 82 96
Stock option compensation (110) (60) --
Other, net (69) (84) (44)
------- ------ -----
Income tax expense $1,683 $1,900 $ 290
====== ====== =====
NOTE 20 - OTHER OPERATING EXPENSES
Other operating expenses are summarized below:
Year ended December 31,
------------------------
(Dollars in thousands) 2002 2001 2000
------ ------ ------
Banking and ATM supplies $ 416 $ 613 $ 630
Directors' fees 167 130 202
Mortgage loan department expenses 122 278 130
Data processing and supplies 578 410 361
Postage and freight 321 339 380
Professional fees 287 404 476
Credit card expenses 36 188 201
Telephone expenses 268 288 402
Other 1,186 1,301 1,284
------ ------ ------
Total $3,381 $3,951 $4,066
====== ====== ======
NOTE 21 - RETIREMENT AND BENEFIT PLANS
The Company sponsors a voluntary nonleveraged employee stock ownership plan
(ESOP) as part of a 401(k) savings plan covering substantially all full-time
employees. The Company matches 75 cents per dollar, up to a maximum of 6% of
employee compensation. Company contributions to the savings plan were $187,000,
$195,000 and $185,000 in 2002, 2001, and 2000, respectively. The Company's
policy is to fund amounts approved by the Board of Directors. At December 31,
2002 and 2001, the savings plan owned 141,559 and 124,544 shares of the
Company's common stock purchased at an average cost of $12.62 and $8.66 per
share, respectively, adjusted for the effects of stock dividends. The estimated
value of shares held at December 31, 2002 and 2001 was $2,010,138 and
$1,382,181, respectively.
The Company had an Incentive Plan for 2002 which provided incentive pay for
outstanding accomplishments of officers and employees of the Company. Cash
awards were based upon various performance measures, but primarily net income.
Incentive payments accrued at December 31, 2002 totaled $336,984. Incentive
payments accrued for the year ended December 31, 2001 totaled $193,012.
The Company has an Executive Supplemental Compensation Plan that provides
certain officers with salary continuation benefits upon retirement. The plan
also provides for benefits in the event of early retirement, death, or
substantial change of control of the Company. In connection with the Executive
Supplemental Compensation Plan, life insurance contracts were purchased on the
officers. No insurance premiums were paid in the years ended December 31, 2002,
2001, or 2000.
During 1999, certain officers opted out of the Executive Supplemental
Compensation Plan. Under a new agreement, split-dollar life insurance policies
were obtained on the lives of these officers. The officers are entitled to all
of the
F-22
NOTE 21 - RETIREMENT AND BENEFIT PLANS (continued)
benefits of these policies, with the exception of the premiums paid by the
Company. There was no expense associated with this plan in 2002, 2001, or 2000.
Insurance premiums of $318,000 were paid in each of the years ended December 31,
2002 2001, and 2000, and are included in other assets.
In 2002, the Company purchased Bank Owned Life Insurance (BOLI) Policies on
certain key officers of the Company. The cash values of such policies will be
used to fund retirement benefits of these officers. The total amount of premiums
paid on the policies during the year ended December 31, 2002 totaled $7,500,000.
The policies increased their cash values by $136,352 during 2002, resulting in
December 31, 2002 cash values totaling $7,636,352.
NOTE 22 - UNUSED LINES OF CREDIT
As of December 31, 2002, the subsidiary bank had unused lines of credit to
purchase federal funds from unrelated banks totaling $29,524,000. These lines of
credit are available on a one to fourteen day basis for general corporate
purposes. The lenders have reserved the right not to renew their respective
lines. The Company also has a line of credit to borrow funds from the Federal
Home Loan Bank up to 15% of the Bank's total assets which provided total
availability of $35,800,000 at December 31, 2002. As of December 31, 2002, the
Bank had borrowed $31,140,000 on this line.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Cash and Due from Banks and Interest-Bearing Deposit Accounts - The carrying
amount is a reasonable estimate of fair value.
Investment Securities - The fair values of securities held-to-maturity are based
on quoted market prices or dealer quotes. For securities available-for-sale,
fair value equals the carrying amount which is the quoted market price. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable securities.
Nonmarketable Equity Securities - Cost is a reasonable estimate of fair value
for nonmarketable equity securities because no quoted market prices are
available and the securities are not readily marketable. The carrying amount is
adjusted for any permanent declines in value.
Loans receivable - For certain categories of loans, such as variable rate loans
which are repriced frequently and have no significant change in credit risk and
credit card receivables, fair values are based on the carrying amounts. The fair
value of other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to the borrowers
with similar credit ratings and for the same remaining maturities.
Cash Surrender Value of Life Insurance - The carrying amount is a reasonable
estimate of fair value.
Accrued Interest Receivable and Payable - The carrying value of these
instruments is a reasonable estimate of fair value.
Deposits - The fair value of demand deposits, savings, and money market accounts
is the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies current interest rates to a schedule of aggregated expected
maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase - The
carrying amount is a reasonable estimate of fair value because these instruments
typically have terms of one day.
F-23
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Advances from the Federal Home Loan Bank - The carrying amounts of variable rate
borrowings are reasonable estimates of fair value because they can be repriced
frequently. The fair values of fixed rate borrowings are estimated using a
discounted cash flow calculation that applies the Company's current borrowing
rate from the Federal Home Loan Bank.
Off-Balance-Sheet Financial Instruments - The contractual amount is a reasonable
estimate of fair value for the instruments because commitments to extend credit
and standby letters of credit are issued on a short-term or floating rate basis.
Commitments to extend credit include commitments under credit card arrangements.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
December 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial Assets:
Cash and due from banks $ 9,648 $ 9,648 $ 9,275 $ 9,275
Interest-bearing deposit accounts 39 39 16 16
Securities available-for-sale 50,096 50,096 56,851 56,851
Securities held-to-maturity 550 550 550 550
Nonmarketable equity securities 5,166 5,166 5,405 5,405
Cash surrender value of life insurance 10,289 10,289 2,212 2,212
Loans receivable 291,526 293,681 251,947 249,678
Accrued interest receivable 1,907 1,907 2,008 2,008
Financial Liabilities:
Demand deposit, interest bearing
transaction, and savings accounts $159,786 $159,786 $146,102 $146,102
Certificates of deposit and other time deposits 116,775 117,708 112,228 113,238
Federal funds purchased and securities
sold under agreements to repurchase 25,850 25,850 7,464 7,464
Advances from the Federal Home Loan Bank 31,140 32,259 31,270 31,621
Accrued interest payable 649 649 1,052 1,052
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Off-Balance Sheet Financial Instruments:
Commitments to extend credit $51,301 $51,301 $45,345 $45,345
Standby letters of credit 1,102 1,102 331 331
F-24
NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY)
Condensed financial statements for Community Capital Corporation (Parent Company
Only) follow:
Condensed Balance Sheets
December 31,
-----------------
(Dollars in thousands) 2002 2001
------- -------
Assets
Cash and cash equivalents $ 2,823 $ 2,129
Investment in banking subsidiary 40,270 36,152
Nonmarketable equity securities 1,346 1,346
Premises and equipment, net 1,513 1,670
Other assets 793 439
------- -------
Total assets $46,745 $41,736
======= =======
Liabilities and Shareholders' Equity
Notes payable to subsidiary $ 1,977 $ 2,137
Other liabilities 360 326
------- -------
Total liabilities 2,337 2,463
------- -------
Common stock 3,861 3,559
Capital surplus 34,754 32,548
Retained earnings 8,947 4,933
Accumulated other comprehensive income 989 168
Treasury stock (4,143) (1,935)
------- -------
Total shareholders' equity 44,408 39,273
------- -------
Total liabilities and shareholders' equity $46,745 $41,736
======= =======
Condensed Statements of Income
For the years ended December 31,
--------------------------------
(Dollars in thousands) 2002 2001 2000
------ ------- -----
Income:
Dividend income from subsidiary $1,400 $ 7,635 $2,275
Dividend income from equity securities 20 27 31
Data processing and other fees from subsidiary -- -- 3,695
Net gain on sale of nonmarketable equity securities -- 290 --
Other interest income 49 18 11
Other income 241 357 --
------ ------- ------
Total income 1,710 8,327 6,012
------ ------- ------
Expenses:
Salaries 20 22 1,729
Net occupancy expense 128 130 80
Furniture and equipment expense 113 366 784
Interest expense 104 318 645
Other operating expenses 299 477 1,567
------ ------- ------
Total expense 664 1,313 4,805
------ ------- ------
Income before income taxes and equity in undistributed
earnings of subsidiary 1,046 7,014 1,207
Income tax expense (benefit) (258) 234 (370)
------ ------- ------
Income before equity in undistributed earnings of subsidiary 1,304 6,780 1,577
Equity in undistributed earnings and (losses) of subsidiary 3,298 (2,302) 75
------ ------- ------
Net income $4,602 $ 4,478 $1,652
====== ======= ======
F-25
NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY) (continued)
Condensed Statements of Cash Flows
For the years ended December 31,
--------------------------------
(Dollars in thousands) 2002 2001 2000
------- ------- -------
Operating activities:
Net income $ 4,602 $ 4,478 $ 1,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of banking subsidiary (3,297) 2,769 (66)
Depreciation and amortization expense 279 447 684
Deferred taxes 43 (65) (66)
Gain on sale of nonmarketable equity securities -- (290) --
Increase (decrease) in other liabilities 34 (1,085) 486
(Increase) decrease in other assets (501) 194 32
------- ------- -------
Net cash provided by operating activities 1,160 6,448 2,722
------- ------- -------
Investing activities:
Purchase of premises and equipment (18) (39) (1,371)
Proceeds from sales of premises and equipment -- 1,218 121
Net investment in subsidiary -- -- (4,554)
Proceeds from sales on nonmarketable equity securities -- 596 --
------- ------- -------
Net cash provided (used) by investing activities (18) 1,775 (5,804)
------- ------- -------
Financing activities:
Dividends paid (588) (209) --
Proceeds from exercise of stock options 2,508 650 --
Proceeds from stock sales to employee benefit plan -- -- 143
Cash paid in lieu of fractional shares -- (7) (4)
Proceeds of borrowings from subsidiary -- -- 1
Repayments on borrowings from subsidiary (160) (175) (218)
Proceeds from advances from long-term debt -- 300 7,770
Repayments of advances from long-term debt -- (5,145) (4,500)
Purchase of treasury stock (2,208) (1,529) (89)
------- ------- -------
Net cash provided (used) by financing activities (448) (6,115) 3,103
------- ------- -------
Net increase in cash and cash equivalents 694 2,108 21
Cash and cash equivalents, beginning of year 2,129 21 --
------- ------- -------
Cash and cash equivalents, end of year $ 2,823 $ 2,129 $ 21
======= ======= =======
Supplemental schedule of noncash investing and financing activities: In 2001 and
2000, the Company declared 5% stock dividends. For the 2001 stock dividend, the
Company transferred $1,313,000 from retained earnings and $18,000 from treasury
stock to common stock and capital surplus in the amounts of $164,000 and
$1,167,000, respectively. In 2000, the Company transferred $1,000,000 from
retained earnings and $14,000 from treasury stock to common stock and capital
surplus in the amounts of $156,000 and $858,000, respectively. No stock
dividends were paid during 2002.
F-26
NOTE 25 - QUARTERLY DATA (UNAUDITED)
December 31,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
(Dollars in thousands Fourth Third Second First Fourth Third Second First
except per share) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest income $5,476 $5,629 $5,546 $5,553 $5,824 $6,231 $7,025 $7,881
Interest expense 1,909 1,985 1,912 1,987 2,432 3,019 3,759 4,465
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 3,567 3,644 3,634 3,566 3,392 3,212 3,266 3,416
Provision for loan losses 110 340 213 110 820 600 400 100
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 3,457 3,304 3,421 3,456 2,572 2,612 2,866 3,316
Noninterest income 1,335 1,102 1,005 1,097 1,341 1,215 6,666 892
Noninterest expenses 3,086 3,000 2,869 2,937 3,131 2,941 5,522 3,508
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes 1,706 1,406 1,557 1,616 782 886 4,010 700
Income tax expense 433 380 408 462 182 220 1,348 150
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,273 $1,026 $1,149 $1,154 $ 600 $ 666 $2,662 $ 550
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share:
Basic 0.36 0.29 0.34 0.35 0.18 0.19 0.77 0.17
Diluted 0.35 0.28 0.31 0.32 0.17 0.18 0.74 0.17
F-27
INDEPENDENT AUDITORS' REPORT
Community Capital Corporation
Employee Stock Ownership Plan with 401(k) Provisions
Greenwood, South Carolina
We have audited the accompanying statements of net assets available for
benefits of Community Capital Corporation Employee Stock Ownership Plan with
401(k) Provisions as of December 31, 2002 and 2001, and the related statement of
changes in net assets available for benefits for the year ended December 31,
2002. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of Community
Capital Corporation Employee Stock Ownership Plan with 401(k) Provisions as of
December 31, 2002 and 2001, and the changes in net assets available for benefits
for the year ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
Elliott Davis, LLC
Greenville, South Carolina
March 20, 2003
F-28
Employee Stock Ownership Plan with 401(k) Provisions
Statements of Net Assets Available for Benefits
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Assets:
Receivables
Employer's contribution $ 6,775 $ --
Employees' contribution 11,630 --
Accrued income -- 106
Other receivable -- 3,783
---------- ----------
Total receivables 18,405 3,889
---------- ----------
Investments, at fair value
Community Capital Corporation common stock 2,010,135 1,370,160
Mutual Funds 924,444 965,392
Participant loans 7,781 --
---------- ----------
Total investments 2,942,360 2,335,552
---------- ----------
Total assets 2,960,765 2,339,441
Liabilities:
Accounts payable -- 15,622
---------- ----------
Net Assets Available for Benefits $2,960,765 $2,323,819
========== ==========
The accompanying notes are an integral part of the financial statements.
F-29
Employee Stock Ownership Plan with 401(k) Provisions
Statement of Changes in Net Assets Available for Benefits
For the year ended December 31, 2002
Additions to Net Assets Attributed to:
Employer contributions $ 210,760
Employee contributions 298,204
Other 16,653
----------
Total contributions 525,617
Net earnings and appreciation in fair value of investments 313,086
----------
Total additions 838,703
----------
Deductions from Net Assets Attributed to:
Distributions paid to participants 187,917
Refund of excess contributions 4,627
Administrative expenses 9,213
----------
Total deductions 201,757
----------
Net increase 636,946
Net Assets Available for Benefits:
Beginning of year 2,323,819
----------
End of year $2,960,765
==========
The accompanying notes are an integral part of the financial statements.
F-30
Employee Stock Ownership Plan with 401(k) Provisions
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF THE PLAN
Community Capital Corporation (the Company) established the Community Capital
Corporation Employee Stock Ownership Plan with 401(k) Provisions (the Plan)
effective as of January 1, 1991. The Plan operates as a leveraged employee stock
ownership plan (ESOP) that allows for salary-deferral contributions by the
Company's employees in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. The Plan is designed to comply with Section 4975(e)(7)
and the regulations thereunder of the Internal Revenue Code and is subject to
the applicable provisions of the Employee Retirement Income Security Act of
1974, as amended (ERISA). The following description of Community Capital
Corporation Employee Stock Ownership Plan with 401(k) Provisions provides only
general information. Participants should refer to the Plan agreement for a more
complete description of the Plan's provisions.
General - The Plan is a defined contribution plan covering all full-time
employees of the Company. Employees can enter the Plan at the beginning of the
month following start of employment.
Contributions - The Company may make three types of contributions to the Plan:
Basic Contributions (discretionary contributions made for all non-highly
compensated participants to satisfy the nondiscrimination requirements of the
Internal Revenue Code); Matching Contributions (Company matches 75 percent of
the Salary Reduction Contributions made by a participant, limited to 6 percent
of the participant's eligible compensation); and Optional Contributions
(additional discretionary contributions made to the Plan as determined by the
Board of Directors). These contributions may be accrued during the Plan year to
which the contribution is attributed. Participants may contribute up to 20
percent of pre tax annual compensation as defined in the Plan. In addition,
participants may contribute amounts representing rollovers from other qualified
retirement plans. Contributions are subject to certain limitations.
Participant Accounts - Each Participant's account is credited with the
participant's contribution, allocations of the Company's contribution, Plan
earnings, and forfeitures of terminated participants' nonvested accounts.
Allocation of Company Basic and Optional contributions is based on participants'
compensation, while allocation of Company Matching Contributions is based upon
participants' salary reduction contribution. A participant must be employed by
the Company on the last day of the Plan year and complete 1,000 hours to be
eligible to receive an allocation of Company Basic or Optional contributions.
Vesting - Participants are immediately vested in their contributions plus actual
earnings thereon. Vesting in the Company's Contribution portion of their
accounts plus actual earnings thereon is based on years of service. Vesting
commences after one year of credited service and a participant is 100 percent
vested after five years of credited service. Upon retirement, death, or total
disability, a participant is 100 percent vested.
Investment Options -The Plan currently offers twelve mutual funds and the
Company's common stock as investment options for participants. The matching
Company contribution is invested directly in Community Capital common stock.
Participant Loans - Participants may borrow from their fund accounts, with
certain restrictions, a minimum of $1,000 up to a maximum equal to the lesser of
$50,000 or 50 percent of their vested account balance, whichever is less. The
loans are secured by the balance in the participant's account and bear interest
rates at prime plus 1 percent at the time of the loan.
Payment of Benefits - On termination of service due to death, disability or
retirement, a participant may elect to receive either a lump-sum amount equal to
the value of the participant's vested interest in his or her account or annual
installments. For termination of services due to other reasons, a participant
may receive the value of the vested interest in his or her account as a lump-sum
distribution.
Voting Rights - With respect to any corporate matter which involves the voting
of Company stock relating to the approval or disapproval of any corporate
merger, consolidation, or similar matters, each participant is entitled to
exercise voting rights attributable to shares of the Company's stock allocated
to his or her account.
F-31
Employee Stock Ownership Plan with 401(k) Provisions
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF THE PLAN (continued)
Plan loans - The Plan may incur acquisition loans to finance the acquisition of
the Company's stock or to repay a prior loan. As of December 31, 2002 and 2001,
there were no loans outstanding.
Forfeited Accounts - As of December 31, 2002 and 2001, forfeited non-vested
accounts totaled $93,548 and $26,782, respectively. Forfeitures attributable to
matching contributions not used by the Plan for payment of Plan expenses will be
allocated to participants eligible to share in the Company's matching
contribution in the same proportion that their compensation bears to the total
compensation of all such participants. Forfeitures attributable to the Company's
discretionary contribution will be used to increase the Company's discretionary
contribution and allocated to participants eligible to share in such
contribution in the same manner as any such discretionary contribution is
allocated.
Plan Change - During the 2002 plan year, the Company changed third party
administrators.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Plan's financial statements are prepared using the
accrual method of accounting, except for the payment of participant benefits
which are recorded when paid.
Valuation of Investments - The Plan's investments are stated at fair value.
Shares of mutual funds are valued at quoted market prices which represent the
net asset value of shares held by the Plan at year-end. Shares of the Company
are valued at fair value, which was the closing quoted price of the Company's
stock as noted by the American Stock Exchange as of the close of business
December 31, 2002.
Purchases and sales of securities are recorded on a trade-date basis. Dividends
are recorded on the ex-dividend date.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires the plan administrator to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
changes therein, and disclosure of contingent assets and liabilities.
Accordingly, actual results may differ from those estimates.
Risk Concentration - Financial instruments, which potentially subject the Plan
to concentrations of credit risk, consist principally of investments in managed
funds and in stock of the Company. The Trustee diversifies, through
participants' directions, investments between separate funds in order to limit
the amount of credit exposure to any one fund. The underlying assets owned by
that fund collateralize each managed fund.
Payment of Benefits
Benefits are recorded when paid.
NOTE 3 - PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100% vested in their accounts.
NOTE 4 - ADMINISTRATION OF PLAN ASSETS
Investments in the Company's common shares are held and managed by the Trustee
of the Plan. Mutual funds are held and managed by the Custodian of the Plan.
Certain administrative functions are performed by officers of the Company. No
such officer receives compensation from the Plan. The Company pays the
administrative costs of the Plan with the exception of certain investment and
custodial fees, which are paid by the Plan.
F-32
Employee Stock Ownership Plan with 401(k) Provisions
Notes to Financial Statements
NOTE 5 - INVESTMENTS
At December 31, 2002 and 2001, the market value of the Plan's investments in the
Company's common shares were $2,010,135 and $1,370,160, respectively. Actual
common shares held of the Company's stock were 141,559 and 121,792,
respectively. All shares were allocated.
Investments that represent 5% or more of the Plan's net assets at December 31,
2002 and 2001 are as follows:
2002 2001
---------- ----------
Investments at fair value as determined by quoted market prices
Community Capital Corporation common shares $2,010,135 $1,370,160
Federated Max-Cap 463,593 --
BGI - Midcap -- 134,290
BGI - S&P 500 Value Fund -- 135,287
BGI - S&P Growth Fund -- 282,372
During 2002, the Plan's investments (including investments bought, sold, and
held during the year) appreciated in value as follows:
Realized and unrealized gains (losses) including dividends and interest
Mutual Funds $(104,091)
Community Capital Corporation common stock 417,177
---------
$ 313,086
=========
NOTE 6 - TAX STATUS
The Internal Revenue Service has determined and informed the Company by a letter
dated August 9, 2002 that the Plan and related trust are designed in accordance
with applicable sections of the Internal Revenue Code (IRC). Although the Plan
has been amended since receiving the determination letter, the Plan
administrator and the Plan's tax counsel believe that the Plan is designed and
is currently being operated in compliance with the applicable requirements of
the IRC.
NOTE 7 - PLAN AMENDMENTS
For the 2002 Plan year the Company's Board of Directors amended the Plan to name
the Compensation Committee as Trustee of the Plan.
F-33
Employee Stock Ownership Plan with 401(k) Provisions
Plan 001
EIN 57-0866395
Item 4i, Schedule H - Schedule of Assets (Held at End of Year)
December 31, 2002
(c)c
(a) (b) Description of investment (d) (e)
Identity of Identity of issue, including maturity date,
party borrower, lessor, rate of interest, collateral, Current
involved or similar party par or maturity value Cost value
- ----------- ------------------------------ ----------------------------- ---- ----------
* Community Capital Corporation 141,558.828 shares ** $2,010,135
Dodge & Cox Stock 430.053 shares ** 37,866
Federated Gov't Sec 1-3 Year 3,264.940 shares ** 35,359
Federated Gov't Ultrashort 2,702.824 shares ** 5,379
Federated Kaufmann A 112.286 shares ** 387
Federated Max-Cap 26,059.212 shares ** 463,593
Federated Mid-Cap Index 8,294.672 shares ** 118,282
Federated Mini-Cap Index 5,600.671 shares ** 51,414
Federated Prime Obligation SS 133,503.110 shares ** 133,504
Federated Short-Term Income 578.049 shares ** 4,994
Federated Total Return Bond IS 3,491,859 shares ** 37,677
Fidelity Adv Equity Growth 38.084 shares ** 1,286
Fidelity Low Priced Stock 1,278.726 shares ** 34,703
* Participant Loans 5.75 percent ** 7,781
----------
$2,942,360
==========
* Indicates a party-in-interest to the Plan.
** Cost information omitted due to participant-directed plan.
F-34
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1/1/ Articles of Incorporation of Registrant
3.2/1/ Articles of Amendment to Articles of Incorporation of Registrant
(re: Change of Name)
3.3/1/ Bylaws of Registrant
3.4 Amendment to Bylaws dated as of January 16, 2002
3.5/2/ Amendment to Bylaws dated as of September 18, 2002
4.1/3/ Form of Common Stock Certificate. (The rights of security holders
of the Registrant are set forth in the Registrant's Articles of
Incorporation and Bylaws included as Exhibits 3.1 through 3.5.)
10.3/1/ Registrant's Executive Supplemental Income Plan (Summary) and
form of Executive Supplemental Income Agreement
10.4/1/ Registrant's Management Incentive Compensation Plans (Summary)
10.5/1/ Lease Agreement dated July 8, 1994 between John W. Drummond and
the Registrant
10.6/3/ Lease Agreement With Options dated June 11, 1996 between Robert
C. Coleman and the Registrant
10.18/4/ 1997 Stock Incentive Plan, as amended
10.19/5/ Employment Agreement dated June 30, 2000 between Community
Capital Corporation and Ralph Wesley Brewer
10.21/6/ Salary Continuation Agreement between CapitalBank and William G.
Stevens dated October 17, 2002
10.22/6/ Salary Continuation Agreement between CapitalBank and Ralph W.
Brewer dated October 17, 2002
10.23/6/ Split Dollar Agreement between CapitalBank and Ralph W. Brewer
dated October 17, 2002
10.24/6/ Salary Continuation Agreement between CapitalBank and Helen A.
Austin dated October 17, 2002
10.25/6/ Split Dollar Agreement between CapitalBank and Helen A. Austin
dated October 17, 2002
10.26/6/ Salary Continuation Agreement between CapitalBank and James A.
Lollis dated October 17, 2002
10.27/6/ Split Dollar Agreement between CapitalBank and James A. Lollis
dated October 17, 2002
10.28/6/ Salary Continuation between CapitalBank and Taylor T. Stokes
dated October 17, 2002
10.29/6/ Split Dollar Agreement CapitalBank and Taylor T. Stokes dated
October 17, 2002
10.30/6/ Salary Continuation Agreement between CapitalBank and Walter G.
Stevens dated October 17, 2002
10.31/6/ Split Dollar Agreement between CapitalBank and Walter G. Stevens
dated October 17, 2002
10.32/6/ Salary Continuation Agreement between CapitalBank and Sonja Hazel
Hughes dated October 17, 2002
10.33/6/ Salary Continuation Agreement between CapitalBank and Steve O.
White dated October 17, 2002
10.34 Split Dollar Agreement between Greenwood Bank & Trust and William
G. Stevens dated November 16, 1998
10.35 Split Dollar Agreement between Greenwood Bank & Trust and Steve
White dated November 16, 1998
10.36 Split Dollar Agreement between Greenwood Bank & Trust and S.
Hazel Hughes dated November 16, 1998
16.1/7/ Letter re: Change in Certifying Accountant
21.1/8/ Subsidiaries of the Registrant
23.1 Consent of Elliott Davis, LLC
24.1 Directors' Powers of Attorney
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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/1/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's Form 10-K for the fiscal year ended
December 31, 1995
/2/ Incorporated by reference to Exhibit 3.4 filed in connection with the
Registrant's 10-Q for the quarter ended September 30, 2002 and filed on
November 13, 2002
/3/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's Registration Statement on Form S-2
initially filed on December 20, 1996 (File No. 333-18457)
/4/ Incorporated by reference to Registrant's Definitive Proxy Statement for
Annual Meeting of Shareholders held on May 26, 1999
/5/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's Form 10-Q for the quarter ended June 30,
2000 and filed on August 14, 2000
/6/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's 10-Q for the quarter ended September 30,
2002 and filed on November 13, 2002
/7/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's 8-K filed on January 7, 2003
/8/ Incorporated by reference to the Exhibit of the same number filed in
connection with the Registrant's 10-K for the fiscal year ended December
31, 2001 and filed on March 28, 2002
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