#Form 10-K.doc #Form 10-K.doc UNITED STATES OF AMERICA FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission File Number 0-30062 CAPITAL BANK CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-2101930 (State of incorporation) (I.R.S. Employer Identification Number) 4901 Glenwood Avenue 27612 Raleigh, North Carolina (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code: (919) 645-6400 Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share (Title of Class) 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 of this Form 10-K. The aggregate market value of the registrant's Common Stock, no par value per share, as of March 21, 2002, held by those persons deemed by the registrant to be non-affiliates was approximately $66,900,000. As of March 15, 2002, there were 5,485,668 shares of the registrant's Common Stock, no par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document Where Incorporated - -------- ------------------ 1. Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 2001 Part I and Part II 2. Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 23, 2002 Part III CAPITAL BANK CORPORATION Annual Report on Form 10-K INDEX PART I...................................................................................................1 Item 1. Business....................................................................................1 Item 2. Properties.................................................................................10 Item 3. Legal Proceedings..........................................................................11 Item 4. Submission of Matters to a Vote of Security Holders........................................11 PART II.................................................................................................11 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................11 Item 6. Selected Financial Data....................................................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......11 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................................11 Item 8. Financial Statements and Supplementary Data................................................12 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.......12 PART III................................................................................................12 Item 10. Directors and Executive Officers of the Registrant.........................................12 Item 11. Executive Compensation.....................................................................12 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................12 Item 13. Certain Relationships and Related Transactions.............................................12 PART IV.................................................................................................13 Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K..........................13 Forward-Looking Statements..............................................................................14 Signatures..............................................................................................15 PART I Item 1. Business. General Capital Bank Corporation (the "Company") is a financial holding company incorporated under the laws of North Carolina on August 10, 1998. The Company's primary function is to serve as the holding company for its wholly-owned subsidiaries, Capital Bank and Capital Bank Investment Services, Inc. Capital Bank (the "Bank") was incorporated under the laws of the State of North Carolina on May 30, 1997, and commenced operations as a state-chartered banking corporation on June 20, 1997. The Bank is not a member of the Federal Reserve System and has no subsidiaries. Capital Bank Investment Services, Inc. ("CBIS") was incorporated under the laws of the State of North Carolina on January 3, 2001 and commenced operations as a full service investment company on March 1, 2001. On January 18, 2002, the Company acquired First Community Financial Corporation ("First Community"), a bank holding company located in Burlington, North Carolina. First Community was incorporated on October 7, 1998 to serve as the holding company for Community Savings Bank, Inc. ("Community Savings Bank"). Community Savings Bank was originally chartered in 1934, and its market area consisted of the communities in Alamance County, North Carolina. Community Savings Bank operated four full service branches and primarily engaged in soliciting deposit accounts from businesses and the general public and making commercial loans, construction loans, residential real estate loans, home equity line of credit loans, consumer loans and various investments. The merger was approved by the shareholders of the Company and First Community in special meetings of shareholders held by each company on January 17, 2002 and consummated on January 18, 2002. On March 15, 2002, Community Savings Bank was merged into the Bank and the Bank thereby assumed all of the operations of Community Savings Bank. As used in this report, the term "Company" refers to Capital Bank Corporation and its subsidiaries. As of December 31, 2001, the Company had assets of approximately $406.7 million, gross loans outstanding of approximately $306.9 million and deposits of approximately $304.4 million. Immediately after the acquisition of First Community, the Company had assets of approximately $621.4 million, gross loans outstanding of approximately $443.5 million and deposits of approximately $480.9 million. The Company's corporate office is located at 4901 Glenwood Avenue, Raleigh, North Carolina 27612, and its telephone number is (919) 645-6400. In addition to the corporate office, the Company has three branch offices in Raleigh, two in Cary, one in Siler City, two in Oxford, one in Warrenton, one in Woodland, one in Seaboard, three in Sanford, three in Burlington, and one in Graham, North Carolina. The Company also has a loan origination office in Greensboro, NC. Capital Bank is a locally-owned community bank engaged in the general commercial banking business in Wake, Chatham, Northampton, Granville, Warren, Alamance and Lee Counties, North Carolina. Wake County has a diversified economic base, comprised primarily of services, retail trade, government and manufacturing and includes the City of Raleigh, the state capital. Lee, Northampton, Granville, Warren and Chatham counties are significant centers for various industries, including agriculture, manufacturing, lumber and tobacco. Alamance County has a diversified economic base, 1 comprised primarily of manufacturing, agriculture, retail and wholesale trade, government, services and utilities. The Bank offers a full range of banking services, including the following: checking accounts; savings accounts; NOW accounts; money market accounts; certificates of deposit; loans for real estate, construction, businesses, agriculture, personal uses, home improvement and automobiles; equity lines of credit; credit loans; consumer loans; credit cards; individual retirement accounts; safe deposit boxes; bank money orders; electronic funds transfer services including wire transfers; traveler's checks; various investments; and free notary services to all Bank customers. In addition, the Bank provides automated teller machine access to its customers for cash withdrawals through nationwide ATM networks. At present, the Bank does not provide the services of a trust department. The investment services subsidiary, Capital Bank Investment Services, Inc., makes available a full range of non-deposit investment services to individuals and corporations, including the customers of the Bank. These investment services include full-service securities brokerage, asset management, financial planning and retirement services, such as 401-k plans, all provided exclusively through a strategic alliance with Raymond James Financial Services, Inc. ("Raymond James"). Raymond James Financial Services is a wholly owned subsidiary of Raymond James Financial, Inc. (NYSE: RJF) and is a leading provider of third party investment services, serving more than 250 community banks nationwide. These services are available in the offices of Capital Bank through registered investment representatives. Lending Activities and Deposits Loan Types and Lending Policies. The Company makes a variety of loans, including loans secured by real estate, loans for construction, loans for commercial purposes and loans to individuals for personal and household purposes. There were no large concentrations of credit to any particular industry. The economic trends of the area served by the Company are influenced by the significant industries within the region. Consistent with the Company's emphasis on being a community-oriented financial institution, virtually all the Company's business activity is with customers located either in the Research Triangle Park area of North Carolina and surrounding counties or Alamance County. The ultimate collectibility of the Company's loan portfolio is susceptible to changes in the market conditions of these geographic regions. The Company uses a centralized risk management process to insure uniform credit underwriting that adheres to bank policy. Lending policies are reviewed on a regular basis to confirm that the Company is prudent in setting its underwriting criteria. Credit risk is managed through a number of methods including loan grading of commercial loans, committee approval of larger loans and class and purpose coding of loans. Management believes that early detection of credit problems through regular contact with the Company's clients coupled with consistent reviews of the borrowers' financial condition are important factors in overall credit risk management. The following table sets forth, as of December 31, 2001, the approximate composition of the Company's loan portfolio: 2 Loan Type Amount Percentage --------- ------ ---------- (in thousands) Commercial........................... $229,386 74.7% Consumer............................. 28,201 9.2 Real Estate.......................... 20,921 6.8 Equity Lines......................... 28,383 9.3 ------- --- Total.................... $306,891 100.0% ======== ===== Deposits. The majority of the Company's deposit customers are individuals and small to medium-size businesses located in Wake, Chatham, Granville, Warren, Northampton, Alamance, and Lee Counties, North Carolina and contiguous areas. The Company's deposit base is well diversified, with no material concentration in a single industry or group of related industries. The management of the Company does not believe that the deposits or the business of the Company in general are seasonal in nature. The deposits may, however, vary with local and national economic conditions but not enough, management believes, to have a material effect on planning and policy making. The Company attempts to control deposit flow through the pricing of deposits and promotional activities. Management believes that the Company's rates are competitive with those offered by other institutions in the same geographic area. The following table sets forth the mix of depository accounts at the Company as a percentage of total deposits as of December 31, 2001: Non-interest bearing demand ........... 9.4% Interest checking ..................... 12.4 Market rate investment ................ 19.0 Savings .............................. 2.0 Time deposits Under $100,000...................... 42.5 Equal to or over $100,000........... 14.7 ----- 100.0 % ===== Competition Commercial banking in North Carolina is extremely competitive in large part due to statewide branching. The Company competes in its market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of the Company's competitors have broader geographic markets and higher lending limits than the Company and are also able to provide more services and make greater use of media advertising. The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of the Company's competitors. In addition, as a result of interstate banking, out-of-state commercial banks may acquire North Carolina banks and heighten the competition among banks in North Carolina. 3 Despite the competition in its market area, the Company believes that it has certain competitive advantages that distinguish it from its competition. The Company believes that its primary competitive advantages are its strong local identity and affiliation with the communities it serves and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. The Company offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. The Company offers many personalized services and attracts customers by being responsive and sensitive to their individualized needs. The Company also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional media to attract new customers. To enhance a positive image in the community, the Company supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations. Employees At March 15, 2002, the Company employed 180 persons, of which 170 were full-time and 10 were part-time. None of its employees are represented by any collective bargaining unit. The Company considers relations with its employees to be good. Supervision and Regulation Holding companies, banks and many of their non-bank affiliates are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company's or the Bank's business. Supervision, regulation and examination of the Company and the Bank by bank regulatory agencies is intended primarily for the protection of the Bank's depositors rather than holders of the Common Stock of the Company. Holding Company Regulation General. The Company is a holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company and the Bank are subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the bank holding company, (iii) acquiring all or substantially all of the assets of any bank or (iv) merging or consolidating with any other bank holding company. The BHCA generally prohibits a bank holding company, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can 4 reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. For example, banking, operating a thrift institution, extending credit or servicing loans, leasing real or personal property, conducting discount securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities. Pursuant to delegated authority, the Federal Reserve Bank of Richmond has authority to approve certain activities of holding companies within its district, including the Company, provided the nature of the activity has been approved by the Federal Reserve. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company. Financial Holding Companies. The Gramm-Leach-Bliley Financial Modernization Act of 1999 ("GLB") was enacted on November 12, 1999. The GLB: o allows bank holding companies meeting management, capital and the Community Reinvestment Act of 1977 (the "CRA") standards to engage in a substantially broader range of nonbanking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies; o allows insurers and other financial services companies to acquire banks; o removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and o establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. This part of the GLB became effective on March 11, 2000. The Federal Reserve Board notified the Company that, effective April 23, 2001, the Company was authorized to operate as a financial holding company and therefore is eligible to engage in the broader range of activities that are permitted by the GLB. The GLB also is designed to modify other current financial laws, including laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial information to nonaffiliated third parties unless customers have the opportunity to "opt out" of the disclosure. Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions of banks and bank holding companies without geographic limitation, subject to any state requirement that the bank has been organized for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to, or following the proposed acquisition, controls no more than 5 10% of the total amount of deposits of insured depository institutions in the U.S. and no more than 30% of such deposits in any state (or such lesser or greater amount set by state law). In addition, the IBBEA permits a bank to merge with a bank in another state as long as neither of the states has opted out of the IBBEA prior to May 31, 1997. The state of North Carolina has "opted in" to such legislation, effective June 22, 1995. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo interstate branching. As a result of North Carolina's opt-in law, North Carolina law permits unrestricted interstate de novo branching. Additional Restrictions and Oversight. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie-in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding company or any of its other subsidiaries. The Federal Reserve may issue cease and desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve also regulates certain debt obligations, changes in control of bank holding companies and capital requirements. Under the provisions of the North Carolina law, the Company is registered with and subject to supervision by the North Carolina Commissioner of Banks (the "Commissioner"). Capital Requirements. The Federal Reserve has established risk-based capital guidelines for bank holding companies and state member banks. The minimum standard for the ratio of capital to risk-weighted assets (including certain off balance sheet obligations, such as standby letters of credit) is eight percent. At least half of this capital must consist of common equity, retained earnings and a limited amount of perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of mandatory convertible debt securities and a limited amount of other preferred stock, subordinated debt and loan loss reserves. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts ("Leverage Ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of between four percent and five percent. The guidelines also provide that bank holding companies experiencing significant growth, whether through internal expansion or acquisitions, will be expected to maintain strong capital ratios substantially above the minimum supervisory levels without significant reliance on intangible assets. The same heightened requirements apply to bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as to other banking 6 institutions if warranted by particular circumstances or the institution's risk profile. Furthermore, the guidelines indicate that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") will continue to consider a "tangible Tier 1 Leverage Ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised the Company of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to it. As of December 31, 2001, the Company had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 9.63%, 10.88% and 8.75%, respectively, all in excess of the minimum requirements. International Money Laundering Abatement and Financial Anti-Terrorism Act Of 2001. On October 26, 2001, the President signed the USA Patriot Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. As of the date of this filing, the Company has not determined the impact that IMLAFA will have on the Bank's operations but the impact is not expected to be material. The Bank will establish policies and procedures to ensure compliance with the IMLAFA. Bank Regulation The Bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the Commissioner and the Federal Reserve. The Federal Reserve and the Commissioner regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations and other similar corporate actions. They also have authority to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The Federal Reserve and the Commissioner regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, issuances of securities, capital adequacy, loss reserves and compliance with the CRA as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are also subject to state usury laws and certain federal laws concerning interest rates. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum of $100,000 per insured depositor. The FDIC issues regulations and conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties 7 or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose. Under the North Carolina corporation laws, the Company may not pay a dividend or distribution, if after giving it effect, the Company would not be able to pay its debts as they become due in the usual course of business or the Company's total assets would be less than its liabilities. In general, the Company's ability to pay cash dividends is dependent upon the amount of dividends paid by the Bank. The ability of the Bank to pay dividends to the Company is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under the North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the bank has surplus of a specified level. The Federal Reserve also imposes limits on the Bank's payment of dividends. Like the Company, the Bank is required by federal regulations to maintain certain minimum capital levels. The levels required of the Bank are the same as required for the Company. At December 31, 2001, the Bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 9.64%, 10.89% and 8.36%, respectively, all in excess of the minimum requirements. The Bank is subject to insurance assessments imposed by the FDIC. Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule providing for annual assessment rates ranging from 0% to 27% of an institution's average assessment base, applicable to institutions insured by both the BIF and the Savings Association Insurance Fund ("SAIF"). The actual assessment to be paid by each insured institution is based on the institution's assessment risk classification, which focuses on whether the institution is considered "well capitalized," "adequately capitalized" or "under capitalized," as such terms are defined in the applicable federal regulations. Within each of these three risk classifications, each institution will be assigned to one of three subgroups based on supervisory risk factors. In particular, regulators will assess supervisory risk based on whether the institution is financially sound with only a few minor weaknesses (Subgroup A), whether it has weaknesses which, if not corrected, could result in an increased risk of loss to the BIF (Subgroup B) or whether such weaknesses pose a substantial risk of loss to the BIF unless corrective action is taken (Subgroup C). The FDIC also is authorized to impose one or more special assessments in an amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Treasury Department and, beginning in 1997, all banks are required to pay additional annual assessments at rates set by the Financing Corporation, which was established by the Competitive Equality Banking Act of 1987. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provides for, among other things, (i) publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a "prompt corrective action" system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums. 8 A central feature of FDICIA is the requirement that the federal banking agencies take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. Banks are also subject to the CRA, which requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. Each institution is assigned one of the following four ratings of its record in meeting community credit needs: "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Effective May 12, 2000, the GLB's "CRA Sunshine Requirements" call for financial institutions to disclose publicly certain written agreements made in fulfillment of the CRA. Banks that are parties to such agreements also must report to federal regulators the amount and use of any funds expended under such agreements on an annual basis, along with such other information as regulators may require. This annual reporting requirement is effective for any agreements made after May 12, 2000. Monetary Policy and Economic Controls The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve Board, whose actions directly affect the money supply which, in turn, affects banks' lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve Board regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits and limitations on interest rates that banks may pay on time and savings deposits. Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks have eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit 9 interest rates has generally increased banks' cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins. Executive Officers The executive officers of the Company are as follows: Name Age Position With Company - ---- --- --------------------- James A. Beck 49 President and Chief Executive Officer Allen T. Nelson, Jr. 52 Executive Vice President, Chief Financial Officer and Secretary Franklin G. Shell 43 Executive Vice President and Chief Credit Officer James A. Beck is currently President and Chief Executive Officer of the Company, a position he has held since the Company commenced operations. Mr. Beck served as Chairman, President and Chief Executive Officer of SouthTrust Bank of North Carolina, N.A. from January 1991 until June 1996 when it was merged into the SouthTrust Charlotte-based bank. Mr. Beck thereafter served as President and a director of the combined bank until January 1997, when he resigned to join the Company. Allen T. Nelson, Jr. has been employed by the Company since February 2, 1998, as its Chief Financial Officer and Secretary. From December 1993 through January 1998, Mr. Nelson served as the Senior Vice President and Chief Financial Officer for Jefferson Bankshares, Inc. and its principal subsidiary, Jefferson National Bank, both based in Charlottesville, Virginia. Franklin G. Shell has been employed with the Company since April 14, 1997, as its Executive Vice President and Chief Credit Officer. Prior thereto, from 1989, Mr. Shell was employed by the North Carolina-based bank, Branch Banking and Trust Company, serving as a commercial loan officer in its Raleigh, North Carolina office. Item 2. Properties. The Company currently leases property located at 4901 Glenwood Avenue, Raleigh, North Carolina for the its principal offices and a branch office. The lease is for approximately 21,600 square feet, of which 10 approximately 19,600 square feet is for the Company's principal offices and the remainder for the branch office. In addition to this facility, the Company also has various branches and offices either owned or leased throughout its market area. See also Note 6 to the Company's Consolidated Financial Statements included on page 32 of the 2001 Annual Report, filed as Exhibit 13 to this report, which is incorporated herein by reference. Item 3. Legal Proceedings. There are no pending legal proceedings to which the Company is a party or of which any of its property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on the Company's business, operating results or financial condition. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the year ended December 31, 2001, there were no matters submitted to a vote of the Company's shareholders. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information relating to the market for the Company's Common Stock is incorporated by reference from page 44 of the 2001 Annual Report to Shareholders of Capital Bank Corporation, filed as Exhibit 13 to this report. Information relating to dividends on the Company's Common Stock is incorporated by reference from the section entitled "Capital Resources" on page 14 of the 2001 Annual Report, filed as Exhibit 13 to this report, and from Note 11 in the Notes to Consolidated Financial Statements on page 33 of the 2001 Annual Report, filed as Exhibit 13 to this report. Holders of Common Stock. The Company has 1,128 holders of record as of March 15, 2002. Recent Sales of Unregistered Securities. The Company did not sell any securities in the fiscal year ended December 31, 2001 which were not registered under the Securities Act of 1933, as amended, except that during such fiscal year the Company granted options to employees and directors to acquire an aggregate of 108,350 shares of its Common Stock at a weighted average exercise price of $10.62 per share pursuant to the Company's Stock Option Plans. Item 6. Selected Financial Data. This information is incorporated by reference from page 1 of the 2001 Annual Report, filed as Exhibit 13 to this report. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is incorporated by reference from pages 6 through 16 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 7A. Quantitative and Qualitative Disclosure About Market Risk This information is incorporated by reference from page 16 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 8. Financial Statements and Supplementary Data. This information is incorporated by reference from pages 17 through 40 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. None. PART III This Part incorporates certain information from the definitive proxy statement (the "2002 Proxy Statement") for the 2002 Annual Meeting of Shareholders of Capital Bank Corporation, to be filed with the Securities and Exchange Commission on April 8, 2002 which is not later than 120 days after the end of the Company's fiscal year covered by this Report on Form 10-K. Item 10. Directors and Executive Officers of the Registrant. Information concerning the Company's executive officers is included under the caption "Executive Officers" on pages 9 and 10 of this report. Information concerning the Company's directors and filing of certain reports of beneficial ownership is incorporated by reference to the 2002 Proxy Statement. Item 11. Executive Compensation. This information is incorporated by reference to the Company's 2002 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information is incorporated by reference to the Company's 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions. 12 This information is incorporated by reference to the Company's 2002 Proxy Statement. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K. (a)(1) Financial Statements. The following financial statements included in the 2001 Annual Report, filed as Exhibit 13 to this report, are incorporated by reference in Item 8 of this report: Annual Report to Financial Statements and Information Shareholders Page Consolidated Balance Sheets dated as of December 31, 2001 and 2000 17 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 18 Consolidated Statements of Changes in Shareholders' 19 Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended 20 - 21 December 31, 2001, 2000 and 1999 Notes to Consolidated Statements 22 - 40 Report of Independent Accountants 41 (a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X and pursuant to Industry Guide 3 under the Securities Act of 1933 have been included in the Notes to the Financial Statements. (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately following the signature pages to this report. (b) Reports on Form 8-K. The Company filed a report on Form 8-K on 14 October 12, 2001. FORWARD-LOOKING STATEMENTS Information set forth in this Annual Report on Form 10-K contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially from the forward looking statements. Such forward looking statements can be identified by the use of forward looking terminology such as "may," "will," "expect," "anticipate," "estimate," "believe," or "continue," or the negative thereof or other variations thereof or comparable terminology. The Company cautions that any such forward looking statements are further qualified by important factors that could cause the Company's actual operating results to differ materially from those in the forward looking statements, including without limitation, the Company's management of its growth, the risks associated with possible or completed acquisitions, competition within the industry, dependence on key personnel, government regulation and the other risk factors described in Exhibit 99 attached to this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 29th day of March, 2002. CAPITAL BANK CORPORATION By: /s/ James A. Beck ------------------------------------- James A. Beck President and Chief Executive Officer 16 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James A. Beck and Allen T. Nelson, Jr., and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on March 29, 2002. Signature Title --------- ----- /s/ James A. Beck - ------------------------ President, Chief Executive Officer and Director James A. Beck /s/ Allen T. Nelson, Jr. - ------------------------ Executive Vice President and Chief Financial Officer Allen T. Nelson, Jr. /s/ William C. Burkhardt - ------------------------ Director William C. Burkhardt /s/ William R. Gilliam - ------------------------ Vice Chairman of the Board of Directors William R. Gilliam /s/ Robert L. Jones - ------------------------ Director Robert L. Jones /s/ Oscar A. Keller, III - ------------------------ Chairman of the Board of Directors Oscar A. Keller, III /s/ Oscar A. Keller, Jr. - ------------------------ Director Oscar A. Keller, Jr. /s/ Charles LeGrand - ------------------------ Director Charles LeGrand /s/ James D. Moser - ------------------------ Director James D. Moser /s/ Samuel J. Wornom, III - ------------------------- Director Samuel J. Wornom, III 17 EXHIBIT INDEX - Exhibit No. Description - ----------- ----------- 2.01(1) Merger Agreement, dated October 4, 2001, between the Company and First Community Financial Corporation and Related Plan of Merger. 3.01(2) Articles of Incorporation of the Company 3.02 Bylaws of the Company, as amended to date 4.01(2) Specimen Common Stock Certificate of the Company 10.01(2,3) Amended and Restated Employment Agreement, dated May 22, 1997, between NB Acquisition Corp., as predecessor to the Company, and James A. Beck. 10.02(2,3) Incentive Stock Option Plan 10.03(2,3) Non-Qualified Stock Option Plan 10.04(2,3) Deferred Compensation Plan for Outside Directors 10.05(3,4) Change in Control Agreement, dated February 1, 2000 between Capital Bank and Allen T. Nelson, Jr. 10.06(3,4) Change in Control Agreement, dated February 27, 2000 between Capital Bank and Franklin G. Shell 10.07(4) Lease Agreement, dated November 16, 1999, between Crabtree Park, LLC and the Company. 10.08(5) Agreement, dated November 2001 between Fiserv Solutions, Inc. and the Company. 13 Portions of the Annual Report to Shareholders for fiscal year ended December 31, 2001. 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 99 Risk Factors Relating to the Company 19 __________________________ 1 Incorporated by reference to the Company's Registration Statement on Form S-4 filed with the SEC on November 14, 2001. 2 Incorporated by reference to the Company's Registration Statement on Form S-4 filed with the SEC on October 19, 1998, as amended on November 10, 1998, December 21, 1998 and February 8, 1999. 3 Denotes a management contract or compensatory plan, contract or arrangement. 4 Incorporated by reference to the Company's Form 10-K filed with the SEC on March 27, 2000. 5 Confidential treatment of portions of this document has been requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. 20