UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission File Number 0-30062
CAPITAL BANK CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
(State or other jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
4901 Glenwood Avenue
Raleigh, North Carolina 27612
------------------------------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 645-6400
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. a Yes [ X ] No [ ]
As of August 9, 2002, there were 5,661,845 shares issued and 5,265,161 shares
outstanding of the Registrant's common stock, no par value.
Capital Bank Corporation
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated statements of financial condition at June 30, 2002
(Unaudited) and December 31, 2001 1
Condensed consolidated statements of income for the three months ended
June 30, 2002 and 2001 (Unaudited) 2
Condensed consolidated statements of income for the six months ended
June 30, 2002 and 2001 (Unaudited) 3
Condensed consolidated statements of comprehensive income for the
three and six months ended June 30, 2002 and 2001 (Unaudited) 4
Condensed consolidated statements of cash flows for the six months
ended June 30, 2002 and 2001 (Unaudited) 5 - 6
Notes to consolidated financial statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17 - 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18 - 19
Signatures 20
Exhibits 21 - 22
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2002 and December 31, 2001
June 30, December 31,
2002 2001
- ---------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 12,138 $ 2,793
Non-interest earning 17,117 12,380
Federal funds sold 8,286 944
Investment securities - available for sale, at fair value 114,039 73,702
Loans-net of unearned income and deferred fees 467,071 306,891
Allowance for loan losses (6,873) (4,286)
--------- ---------
Net loans 460,198 302,605
--------- ---------
Premises and equipment, net 10,569 5,009
Accrued interest receivable 2,847 1,853
Deposit premium and goodwill, net 6,732 4,105
Deferred tax assets 4,407 2,033
Other assets 5,641 1,317
--------- ---------
Total assets $ 641,974 $ 406,741
========= =========
LIABILITIES
Deposits:
Demand, non-interest bearing $ 38,523 $ 28,470
Savings and interest bearing demand deposits 167,323 101,553
Time deposits 297,175 174,420
--------- ---------
Total deposits 503,021 304,443
--------- ---------
Accrued interest payable 983 792
Repurchase agreements 12,881 11,167
Borrowings 61,401 50,000
Other liabilities 6,522 3,356
--------- ---------
Total liabilities 584,808 369,758
SHAREHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares authorized;
shares issued 2002 - 5,661,845 and 2001 - 3,658,689 56,324 34,805
Retained earnings, substantially restricted 3,855 2,306
Accumulated other comprehensive income 1,104 568
Treasury stock at cost, no par value; 2002 - 321,684 shares
and 2001 - 61,350 shares (4,117) (696)
--------- ---------
Total shareholders' equity 57,166 36,983
--------- ---------
Total liabilities and shareholders' equity $ 641,974 $ 406,741
========= =========
See Notes to Condensed Consolidated Financial Statements
1
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2002 and 2001
2002 2001
- ------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $7,470 $5,402
Investment securities 1,546 1,145
Federal funds and other interest income 124 169
------ ------
Total interest income 9,140 6,716
------ ------
Interest expense:
Deposits 3,207 3,460
Borrowings and repurchase agreements 794 456
------ ------
Total interest expense 4,001 3,916
------ ------
Net interest income 5,139 2,800
Provision for loan losses 705 300
------ ------
Net interest income after provision for loan losses 4,434 2,500
Noninterest income:
Service charges and other fees 602 413
Net gain on sale of securities available for sale 159 27
Other noninterest income 787 694
------ ------
Total noninterest income 1,548 1,134
------ ------
Noninterest expenses:
Salaries and employee benefits 2,239 1,584
Occupancy 378 289
Data processing 212 160
Directors fees 77 50
Advertising 123 94
Furniture and equipment 270 188
Amortization of intangibles 169 150
Other expenses 818 542
------ ------
Total noninterest expenses 4,286 3,057
------ ------
Net income before income tax expense 1,696 577
Income tax expense 555 215
------ ------
Net income $1,141 $ 362
====== ======
Earnings per share - basic $ 0.21 $ 0.10
====== ======
Earnings per share - diluted $ 0.20 $ 0.10
====== ======
See Notes to Condensed Consolidated Financial Statements
2
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2002 and 2001
2002 2001
- -----------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
Loans and loan fees $ 14,256 $ 10,940
Investment securities 3,049 2,324
Federal funds and other interest income 207 327
-------- --------
Total interest income 17,512 13,591
-------- --------
Interest expense:
Deposits 6,058 7,050
Borrowings and repurchase agreements 1,546 842
-------- --------
Total interest expense 7,604 7,892
-------- --------
Net interest income 9,908 5,699
Provision for loan losses 1,230 600
-------- --------
Net interest income after provision for loan losses 8,678 5,099
Noninterest income:
Service charges and other fees 1,107 703
Net gain on sale of securities available for sale 243 77
Other noninterest income 1,783 1,150
-------- --------
Total noninterest income 3,133 1,930
-------- --------
Noninterest expenses:
Salaries and employee benefits 4,442 3,094
Occupancy 746 563
Data processing 462 312
Directors fees 136 105
Advertising 322 203
Furniture and equipment 565 372
Amortization of intangibles 323 291
Other expenses 1,500 931
-------- --------
Total noninterest expenses 8,496 5,871
-------- --------
Net income before income tax expense 3,315 1,158
Income tax expense (benefit) 1,232 (141)
-------- --------
Net income $ 2,083 $ 1,299
======== ========
Earnings per share - basic $ 0.39 $ 0.35
======== ========
Earnings per share - diluted $ 0.38 $ 0.35
======== ========
See Notes to Condensed Consolidated Financial Statements
3
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Three and Six Months Ended June 30, 2002 and 2001
2002 2001
- ------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Three month period ended June 30, 2002 and 2001:
Net income before comprehensive items $ 1,141 $ 362
Reclassification of gains recognized in net income (159) (27)
Unrealized gains on securities available for sale,
net of deferred tax effect 1,516 23
------- -------
Comprehensive income $ 2,498 $ 358
======= =======
Six month period ended June 30, 2002 and 2001:
Net income before comprehensive items $ 2,083 $ 1,299
Reclassification of gains recognized in net income (243) (77)
Unrealized gains on securities available for sale,
net of deferred tax effect 779 143
------- -------
Comprehensive income $ 2,619 $ 1,365
======= =======
See Notes to Condensed Consolidated Financial Statements
4
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
2002 2001
- --------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 2,083 $ 1,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deposit premium 323 291
Depreciation 673 417
Gain on sale of equipment -- (3)
Gains on sale of securities available for sale (243) (77)
Amortization/accretion of premiums/discounts on
on securities, net 244 (149)
Deferred income tax benefits (43) (815)
Provision for loan losses 1,230 600
Changes in assets and liabilities:
Accrued interest receivable 170 344
Other assets (648) (146)
Accrued interest payable and other liabilities (252) (822)
-------- --------
Net cash provided by operating activities 3,537 939
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (25,476) (25,882)
Additions to premises and equipment (809) (605)
Proceeds from sale of equipment -- 38
Net (purchase) sale of Federal Home Loan Bank stock 858 (500)
Purchase of securities available for sale (23,018) (50,347)
Proceeds from maturities of securities available for sale 8,926 26,232
Proceeds from sale of securities available for sale 12,771 9,014
Capitalized purchase costs (29) (57)
Net cash acquired from purchase of subsidairy 8,649 --
-------- --------
Net cash used in investing activities (18,128) (42,107)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 42,337 16,994
Net increase in repurchase agreements 1,714 1,385
Net increase (decrease) in borrowings (5,013) 15,000
Cash dividends paid (267) --
Issuance of common stock for options 665 --
Purchase of treasury stock (3,421) (180)
-------- --------
Net cash provided by financing activities $ 36,015 $ 33,199
-------- --------
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
5
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended June 30, 2002 and 2001
2002 2001
- -----------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Net change in cash and cash equivalents $ 21,424 $ (7,969)
Cash and cash equivalents:
Beginning 16,117 28,426
--------- ---------
Ending $ 37,541 $ 20,457
========= =========
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 802 $ --
========= =========
Cash paid for:
Income taxes $ 1,583 $ 555
========= =========
Interest $ 7,413 $ 7,863
========= =========
Dividends payable $ 267 $ --
========= =========
Purchase of First Community Financial Corp:
Loans, net of reserves $(134,149) $ --
Investments (39,001) --
Other assets acquired (12,131) --
Goodwill and deposit premium (2,921) --
Deposits 156,241 --
Borrowings 16,414 --
Other liabilities assumed 3,342 --
Issuance of stock 20,854 --
--------- ---------
Net cash and cash equivalents acquired $ 8,649 $ --
========= =========
See Notes to Condensed Consolidated Financial Statements
6
Notes to the Condensed Consolidated Financial Statements
1. Significant Accounting Policies and Interim Reporting
The accompanying unaudited condensed consolidated financial statements include
the accounts of Capital Bank Corporation (the "Company") and its wholly-owned
subsidiaries, Capital Bank (the "Bank") and Capital Bank Investment Services
("CBIS"). The interim financial statements have been prepared in accordance with
generally accepted accounting principles. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and therefore should be read in
conjunction with the audited financial statements and accompanying footnotes in
the Company's 2001 Annual Report on Form 10-K. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included and all
significant intercompany transactions have been eliminated in consolidation. The
results of operations for the six month period ended June 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 2002.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the 2001 Capital Bank Corporation annual report.
2. Acquisition of First Community Financial Corporation
On January 18th, 2001, the Company acquired First Community Financial
Corporation ("First Community") in Burlington, NC., the holding company for
Community Savings Bank, Inc. ("Community Savings Bank"). Community Savings Bank
was originally chartered in 1934, and its market area consists of the
communities in Alamance County, North Carolina. Community Savings Bank primarily
engaged in soliciting deposit accounts from businesses and the general public
and making commercial loans, construction loans, residential real estate loans,
home equity line of credit loans, consumer loans and various investments. Each
First Community share of common stock was exchanged for 1.30275 shares of
Capital Bank Corporation common stock plus $16.20 cash. As a result of the
acquisition, the Company issued an additional 1.9 million shares of stock. The
transaction was accounted for under the purchase method and is intended to
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code.
A summary of estimated fair values of assets acquired and liabilities assumed
were as follows:
(In thousands)
Loans receivable $ 134,149
Investments 39,001
Premises and equipment 5,424
Goodwill 2,139
Deposit premium 782
Other assets 12,957
Deposits (156,241)
Borrowings (16,414)
Other liabilities (3,342)
-----------
Investment in subsidiary, net of dividends to shareholders
and capitalized acquisition costs $ 18,455
===========
7
3. Comprehensive Income
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other comprehensive
income relate to unrealized gains and losses on securities available for sale,
net of the applicable income tax effect. The Company's comprehensive net income
and information concerning the Company's other comprehensive income items for
the three and six month periods ended June 30, 2002 and 2001 are as shown in the
Condensed Consolidated Statements of Comprehensive Income.
4. Earnings Per Share
The Company is required to report both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS assumes the conversion, exercise or
issuance of all potential common stock instruments, such as stock options,
unless the effect is to reduce a loss or increase earnings per share. For
Capital Bank Corporation, EPS is adjusted for outstanding stock options using
the Treasury Stock method in order to compute diluted EPS. The following tables
provide a computation and reconciliation of basic and diluted EPS for the three
and six month periods ended June 30, 2002 and 2001.
2002 2001
--------------------------
(Unaudited)
(In thousands except number of shares)
Three month periods ended June 30, 2002 and 2001:
Income available to stockholders - basic and diluted $ 1,141 $ 362
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 5,457,320 3,723,785
Incremental shares from assumed exercise of stock
options 228,214 31,101
---------- ----------
Weighted average number of shares outstanding - diluted 5,685,534 3,754,886
========== ==========
2002 2001
---------------------------
(Unaudited)
(In thousands except number of shares)
Six month periods ended June 30, 2002 and 2001:
Income available to stockholders - basic and diluted $ 2,083 $ 1,299
========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 5,330,157 3,728,288
Incremental shares from assumed exercise of stock
options 198,225 26,181
----------
Weighted average number of shares outstanding - diluted 5,528,382 3,754,469
==========
Total options of 689,000 were used in the diluted calculation. All options
currently issued under
8
existing plans were included in the diluted calculation because the average fair
market value of a common share of stock was greater than all of the option
exercise prices.
5. Income Taxes
Prior to the three month period ended March 31, 2001, the Corporation recorded
minimal net income tax expenses. This was due primarily to the generation of
consolidated net operating losses during the start up phase and the
establishment of a valuation allowance against deferred tax assets until such
time as the Company demonstrated the ability to utilize those deferred tax
assets in the future. Management determined during the three month period ended
March 31, 2001 that the Company would more likely than not be able to utilize
those assets in the future. Accordingly, during the period ended March 31, 2001,
the remaining valuation allowances were reversed and all reserved deferred tax
assets were recorded on the consolidated financial statements of the Company,
resulting in a one time net tax benefit of $356,000.
Item 2
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
- -------------------------------------------------
The following discussion presents an overview of the unaudited financial
statements for the three and six month periods ended June 30, 2002 and 2001 for
Capital Bank Corporation and its wholly owned subsidiaries, Capital Bank and
Capital Bank Investment Services, Inc. This discussion and analysis is intended
to provide pertinent information concerning financial position, results of
operations, liquidity, and capital resources. It should be read in conjunction
with the unaudited financial statements and related footnotes contained in Part
I, Item 1 of this report.
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, as well as the factors set forth in the Company's
periodic reports and other filings with the SEC.
Overview
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws of North Carolina on August 10, 1998. The Company's
election to become a financial holding company was effective April 23, 2001. The
Company's primary function is to serve as the holding company for its
wholly-owned subsidiaries, Capital Bank and Capital Bank Investment Services,
Inc. Capital 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
9
subsidiaries. At a special meeting of shareholders held on March 26, 1999, the
shareholders of Capital Bank approved the reorganization of Capital Bank into
Capital Bank Corporation. In the holding company reorganization, the
shareholders of Capital Bank each received a right to one share of Company stock
for each share of Capital Bank stock that they owned.
Prior to April 14, 2000, the Bank operated primarily throughout the central part
of North Carolina with branch facilities located in Raleigh (1), Cary (2),
Sanford (3), and Siler City (1). In April, 2000, the Bank acquired 5 branches
from another area financial institution which was accounted for as a purchase
transaction. The transaction included branches in the eastern part of North
Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). In
June, 2000, the Bank opened a new branch and moved its corporate headquarters to
an office on Glenwood Avenue in Raleigh, North Carolina. In January 2001, the
Bank opened an additional branch in Raleigh bringing the total to 3 branches in
Raleigh.
On March 1, 2001, Capital Bank Corporation announced that it had formed Capital
Bank Investment Services, Inc. ("CBIS"), an investment services subsidiary and
agreed to acquire an independent branch brokerage office located in Raleigh,
North Carolina.
CBIS makes available a full range of non-deposit investment services to
individuals and corporations, including the customers of the Bank. These
investment services include full-service securities brokerage, asset management,
financial planning and retirement services, such as 401(k) plans, all provided
exclusively through a strategic alliance with Raymond James Financial Services,
Inc. ("Raymond James"). These services will be available in the offices of
Capital Bank through registered investment representatives.
On October 5, 2001, the Company entered into a definitive agreement to acquire
First Community Financial Corporation ("First Community") in Burlington, NC, the
holding company for Community Savings Bank, Inc. ("Community Savings Bank").
Community Savings Bank operates in the communities in and around Burlington and
Graham (Alamance County), and was primarily engaged in soliciting deposit
accounts from businesses and the general public and making commercial loans,
construction loans, residential real estate loans, home equity line of credit
loans, consumer loans and various investments. The acquisition was approved at a
special shareholder meeting on January 17, 2002 and the transaction took place
effective the close of business on January 18, 2002. Each First Community share
of common stock was exchanged for 1.30275 shares of Capital Bank Corporation
common stock plus $16.20 cash. The transaction was accounted for under the
purchase method and is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code.
On May 1, 2002, the Company entered into a definitive agreement to acquire High
Street Corporation ("High Street") in Asheville, NC. High Street was
incorporated on October 30, 2001 to serve as the holding company for High Street
Banking Company ("High Street Bank"). High Street has had no significant assets
other than the outstanding capital stock of High Street Bank. High Street Bank
was originally incorporated on April 25, 1997, and its market area consists of
the communities of Asheville and Hickory, North Carolina. High Street Bank is
primarily engaged in soliciting deposit accounts from businesses and the general
public and making commercial loans, construction loans, residential real estate
loans, home equity line of credit loans, consumer loans and various investments.
Management anticipates that the acquisition will be completed in the fourth
quarter of 2002.
10
As of June 30, 2002, High Street Corporation had consolidated assets of $165.2
million, consolidated loans of $128.3 million, consolidated deposits of $138.8
million and consolidated shareholders' equity of $15.1 million.
The Company has no operations other than those of its subsidiaries, Capital Bank
and Capital Bank Investment Services, Inc. The Bank is a full-service community
bank and the Investment Company is a full service brokerage firm. The Company's
profitability depends principally upon the net interest income, provision for
loan losses, non-interest income and non-interest expenses of the Bank and the
net commissions generated by CBIS.
Financial Condition
Total consolidated assets of the Company at June 30, 2002 were $642.0 million
compared to $406.7 million at December 31, 2001, an increase of $235.2 million,
or 58%. On June 30, 2002, loans, including loans held for sale of $1.5 million,
were $467.1 million, up $160.2 million, or 52%, compared to December 31, 2001.
Investment securities were $114.0 million and federal funds sold were $8.3
million at June 30, 2002. During the six month period ended June 30, 2002, cash
and cash equivalents, including federal funds sold, increased by $21.4 million.
All increases were primarily the result of the acquisition of First Community
and it's subsidiary bank, Community Savings Bank, as of January 18, 2002 as
described above and through internal growth of existing branches. Loans and
investments acquired aggregated $173.1 million.
Earning assets represented 94% of total assets on June 30, 2002. The allowance
for loan losses on June 30, 2002 was $6.9 million and represented approximately
1.47% of total loans. Management believes that the amount of the allowance is
adequate at this time.
Deposits on June 30, 2002 were $503.0 million, an increase of $198.6 million or
65% from December 31, 2001, primarily the result of deposits acquired from First
Community of $156.2 million. As a result, the acquired deposits caused the
company's deposit mix to change with higher rate CD's now representing a larger
portion of total deposits. The increase in CD's partially offset a trend towards
lower rate funds that the Company had moved towards over the previous year.
Certificates of deposit made up 59% of total deposits as of June 30, 2002
compared to 57% at December 31, 2001. During the six month period ended June 30,
2002, certificates of deposit increased by $122.8 million, or 70% from $174.4
million to $297.2 million. At the same time, non-interest bearing demand deposit
accounts increased $10.1 million, or 35%, from $28.5 million to $38.5 million
and savings and interest bearing demand deposit accounts increased $65.8
million, or 65%, from $101.6 million to $167.3 million. During 2001, the
dependency on certificates of deposit declined as the result of a conscious
effort on management's part to attract lower cost core deposits such as money
market and interest bearing checking accounts along with an effort to reduce the
overall rates paid on certificates of deposit while still remaining price
competitive. Management intends to continue with this strategy during 2002.
Borrowings increased from $50.0 million at December 31, 2001 to $61.4 million at
June 30, 2002, as the Company acquired the outstanding borrowings of First
Community, amounting to $16.4 million at acquisition, along with the other
assets and liabilities of that company. Both Capital Bank Corporation and First
Community took advantage of the low rates offered by the Federal Home Loan Bank
during the latter part of 2001 and leveraged those additional borrowings into
higher yielding investments.
11
Total consolidated shareholders' equity was $57.2 million at June 30, 2002, an
increase of $20.2 million from December 31, 2001, due primarily to the issuance
of additional common stock as a part of the acquisition of First Community.
Results of Operations
For the three month period ended June 30, 2002, the Company reported net income
of $1.1 million or $.20 per share - diluted compared to $362,000 or $.10 per
share - diluted for the same period in 2001. Net income for 2002 included a
significantly higher pretax income primarily attributable to higher loan and
deposit balances on which net interest and noninterest income are generated.
These increased balances were principally the result of the acquisition
described above. For the six month period ended June 30, 2002, the Company
reported net income of $2.1 million or $.38 per share - diluted compared to $1.3
million or $.35 per share - diluted for the same period in 2001. Net interest
income in the first six months of 2002 was $9.9 million, up 74% compared to $5.7
million in the same period of 2001 due primarily to increased balances in loans
and deposits. Pretax income for the period ended June 30, 2002 was $1.7 million,
an increase of $1.1 million or 194% over the $577,000 recorded during the same
period in 2001. The increase in pretax income was offset by a significant
difference in the amount of income taxes recorded for the different periods.
During the period ended March 31, 2001, the Company recorded a one time reversal
of valuation allowances on deferred income tax assets done as a result of
continued trends of profitability. See Note 4 for additional information. This
reversal, net of current tax expense for the period, resulted in a net tax
benefit of $356,000. For the six month period ended June 30, 2002, income tax
expense was $1.2 million compared to a tax benefit of $141,000 recorded for the
same period in 2001. During 2001, the market experienced a rapid decline in
short term interest rates which had a negative impact on interest margins as the
yield on the Company's earning assets adjusted downward at a faster rate than
the interest rates paid on deposits. As rates have stabilized during the first
half of 2002, the average rate paid on deposits has adjusted downward while the
yield on assets have remained relatively stable resulting in an increase in the
overall net interest spread. The Company's net interest margin (net interest
income as a percentage of average earning assets) for the three and six month
periods ended June 30, 2002 were 3.43% and 3.44%, compared to 3.24% and 3.37% in
the same periods in 2001.
The provisions for loan losses were $705,000 and $1.2 million, respectively, for
the three and six month periods ended June 30, 2002. These provisions were used
to maintain the allowance for loan losses at a prudent level considering the
Company's loan growth and credit quality. At June 30, 2002, the allowance for
loan losses was 1.47% of total loans. Loans 90 days or more past due or in
nonaccrual status totaled $4.1 million and represented .88% of total loans on
June 30, 2002.
Non-interest income for the three and six month periods ended June 30, 2002,
were $1.5 million and $3.1 million, respectively, compared to $1.1 million and
$1.9 million for the same periods in 2001. The increase in non-interest income
is primarily attributable to several factors. The Company increased fees
associated with deposit accounts in the second quarter of 2001 that had a
positive impact on the 2002 balances. In addition, the mortgage origination
department experienced a large increase in fees on sold loans as the result of
the lower interest rate environment and increased refinance business. Mortgage
loan origination fees increased from $925,000 in the first six months of 2001 to
$1.2 million for the same period in 2002. In addition,
12
the Company started a new overdraft checking privilege program called Bounce
Free checking program during the second quarter of 2001 which caused a
substantial increase in fee income during the 2002 period. Fees for
non-sufficient funds, which include the new Bounce Free checking program income,
have increased from $424,000 in 2001 to $693,000 in 2002. Finally, the deposit
base on which fees are earned increased substantially during the first quarter
of 2002 as a result of the acquisition.
Non-interest expense for the three and six month periods ended June 30, 2002 was
$4.3 million and $8.5 million compared to $3.1 million and $5.9 million for the
same periods in 2001. Salaries and employee benefits, representing the largest
expense category, increased from $1.6 million and $3.1 million for the three and
six month periods in 2001 to $2.2 million and $4.4 million for the same periods
in 2002. This increase reflects an increase in the number of personnel employed
by the Company due to the acquisition and as a result of management intention to
maintain adequate staffing levels to meet customer needs and keep pace with its
expected growth. As of June 30, 2002, the Company had 175 full-time equivalent
employees compared to 129 for the same period in 2001. Occupancy costs, the
second highest component of non-interest expenses, increased from $289,000 and
$563,000 for the three and six month periods in 2001 to $378,000 and $746,000
for the same period in 2002. This increase is primarily associated with the
acquisition of the 4 additional branches received as part of the First Community
transaction. Although management expects non-interest expense to increase on an
absolute basis as the Company continues its growth, these expenses as a
percentage of asset size and operating revenue are anticipated to decrease over
time.
Income tax expense was $555,000 and $1.2 million during the three and six month
periods ended June 30, 2002 compared to an expense of $215,000 and a benefit of
$141,000 during the same periods in 2001. At June 30, 2002, the Company had net
deferred tax assets of $4.4 million resulting from timing differences associated
primarily with the deductibility of certain expenses reflected on the financial
statements. Prior to 2001, the Company was unable to use deferred tax benefits
and recorded deferred tax assets only to the extent those amounts offset current
taxes. During March 2001, previously recorded valuation allowances were reversed
and deferred tax assets were recorded on the consolidated financial statements
of the Company, resulting in a one-time net tax benefit of $356,000.
13
Asset Quality
Determining the allowance for loan losses is based on a number of factors. At
the inception of each commercial loan, management assesses the relative risk of
the loan and assigns a corresponding risk grade. To insure that credit quality
is maintained after a loan is booked, the Bank has a loan review department and
a loan review process which includes an internal senior level Loan Review
Community which meets each month. Account officers obtain updated financial
information on all large commercial loan relationships and review each
relationship with the Committee on an annual basis. In addition, an outside firm
performs a review that covers the largest commercial relationships as well as a
sample of loans from the consumer, mortgage and smaller commercial loan
portfolios each year. The firm reviews underwriting, documentation and risk
grading analysis. The goal of these reviews is to determine if the Company's
risk assessments are accurate and that its loan review process is appropriate.
The Bank calculates the amount of allowance needed to cover the probable losses
in the portfolio by applying a reserve percentage to each risk grade. Consumer
loans and mortgages are not risk graded but a percentage is reserved for these
loans based on historical losses. In addition to this quantitative analysis, a
qualitative assessment of the general economic trends, portfolio concentration
and the trend of delinquencies are taken into consideration. The allowance is
adjusted accordingly.
Based on this allowance calculation, management charged operations in the amount
of $1.2 million for the six months ended June 30, 2002 to provide for probable
losses related to uncollectible loans. In addition, an allowance of $2.6 million
was acquired by the Bank from Community Savings Bank. At the end of June 30,
2002, the loan loss reserve was 1.47% of gross loans, compared to 1.51% as of
June 30, 2001. The following table presents an analysis of changes in the
allowance for loan losses for the three and six month periods ended June 30,
2002 and 2001:
14
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(In thousands)
Allowance for loan losses, beginning of period $ 6,750 $ 3,754 $ 4,287 $ 3,463
Net charge-offs:
Loans charged off:
Commercial 584 4 1,244 13
Consumer 183 14 231 19
------------ ------------ ------------ ------------
Total charge-offs 767 18 1,475 32
------------ ------------ ------------ ------------
Recoveries of loans previously charged off:
Commercial 154 - 155 -
Consumer 31 2 36 7
------------ ------------ ------------ ------------
Total recoveries 185 2 191 7
------------ ------------ ------------ ------------
Total net charge-offs 582 16 1,284 25
------------ ------------ ------------ ------------
Loss provisions charged to operations 705 300 1,230 600
Allowances transferred during acquisition - - 2,640 -
------------ ------------ ------------ ------------
Allowance for loan losses, end of period $ 6,873 $ 4,038 $ 6,873 $ 4,038
============ ============ ============ ============
Net chargeoffs to average loans during the period 0.13% 0.01% 0.28% 0.01%
Allowance as a percent of gross loans 1.47% 1.51% 1.47% 1.51%
Due to a weakened economy the Company experienced higher loan charge offs in the
three and six month periods ended June 30, 2002 when compared to the same
periods in the prior year. In the second quarter of 2002, the Bank charged-off
$767,000, an increase of $749,000 over the same period last year. This increase
is primarily related to commercial loans in default.
The Bank has also experienced a significant increase in non-performing loans. At
the end of the second quarter of 2002, non-performing loans as a percentage of
total assets increased to .74% from .40% in the second quarter of 2001. This
increase is primarily due to the current economic downturn. The following table
presents an analysis of nonperforming assets as of June 30, 2002 and 2001:
15
Period
Ended June 30,
2002 2001
------ ------
(In thousands)
Nonperforming assets:
Nonaccrual loans:
Commercial real estate $1,716 $1,317
Commercial 395 --
Consumer 322 --
Equity lines 49 65
Mortgage 1,606 127
------ ------
Total nonacrual loans 4,088 1,509
Loans past due 90 days or more and still
accruing interest:
Consumer -- 2
------ ------
Total nonperforming loans 4,088 1,511
Foreclosed property held 669 --
------ ------
Total nonperforming assets $4,757 $1,511
====== ======
Nonperforming loans to total loans 0.88% 0.56%
Nonperforming assets to total assets 0.74% 0.40%
Allowance coverage of nonperforming loans 168% 267%
Liquidity and Capital Resources
The Company's liquidity management involves planning to meet the Company's
anticipated funding needs at a reasonable cost. Liquidity management is guided
by policies formulated by the Company's senior management and the
Asset/Liability Management Committee of the Board of Directors. The Company had
$37.5 million in its most liquid assets, cash and cash equivalents, at quarter
end. The Company's principal sources of funds are deposits, Federal Home Loan
Bank borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of
liquidity, together with equity capital, funded 76% of total assets at June 30,
2002. In addition, the Company has the ability to take advantage of various
other funding programs available from the Federal Home Loan Bank of Atlanta.
Shareholders' equity was $57.2 million or $10.70 per share at June 30, 2002.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth for at least the next 12 months and to maintain
a well-capitalized position. At June 30, 2002, Capital Bank Corporation had a
Tier 1 capital ratio of 9.65%, a total risk-based capital ratio of 10.90% and a
leverage ratio of 7.77%. These ratios exceed the federal regulatory minimum
requirements for a "well-capitalized" bank.
16
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact, since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer-term interest-bearing assets
and liabilities, but the Company attempts to limit its long-term assets and
liabilities.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
The Company has not experienced any material change in its portfolio risk from
December 31, 2001 to June 30, 2002.
Part II - Other Information
Item 1 Legal Proceedings
- ------ -----------------
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. In addition, the Company is not
aware of any threatened litigation, unasserted claims or assessments that could
have a material adverse effect on the Company's business, operating results or
condition.
Item 2 Changes in Securities and Use of Proceeds
- --------- -----------------------------------------
During the three month period ended June 30, 2002, 13,254 shares of Capital Bank
Corporation common stock were issued to certain individuals who exercised stock
options.
Item 3 Defaults Upon Senior Securities
- ------ -------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On May 23, 2002, the annual meeting of stockholders of the Company was held to
consider and vote upon three issues; the election of Class I, II, and III
directors, the approval of the combination of our existing option plans into one
Equity Incentive Plan, and the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal
year ended December 31, 2002. All items were approved by the stockholders. Of
the 5,487,419 shares eligible to vote, 4,416,572 were voted as shown on the
following tables:
17
For Withheld Total
------------------------------------------------
Class II Directors:
William R. Gilliam 4,408,903 7,669 4,416,572
Robert L. Jones 4,405,538 11,034 4,416,572
Samuel J. Wornom, III 4,407,470 9,102 4,416,572
Class III Director:
Charles A. LeGrand 4,409,070 7,502 4,416,572
Class I Director:
James D. Moser, Jr. 4,409,420 7,152 4,416,572
Approval of the combination of our existing option plans into one Equity
Incentive Plan and the reservation of 250,000 additional shares for issuance
under the plan.
For Against Abstain Total
------------------------------------------------------------------
4,011,808 366,765 37,999 4,416,572
Vote concerning the ratification of the appointment of PricewaterhouseCoopers
LLP as the independent auditors for the fiscal year ended December 31, 2002:
For Against Abstain Total
--------------------------------------------------------------------
4,408,209 3,997 4,366 4,416,572
In each case, the vote required to approve the action was obtained.
Item 5 Other Information
- ------ -----------------
None
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
--------
Exhibit 99.1 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
During May 2002, a Current Report on Form 8-K, dated May 1, 2002, was
filed with the Commission by the Company. This report included
information about a definitive agreement entered into by the Company to
merge with High Street Corporation ("High Street"), the holding company
for High Street Bank, pursuant to which High Street will
18
merge with and into the Company, with the Company being the surviving
corporation. The report also included or incorporated the following:
(i) a joint press release distributed May 1, 2002 and (ii) a copy of
the Merger Agreement between the Company and High Street dated May 1,
2002.
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL BANK CORPORATION
Date: August 14, 2002 By: /s/ Allen T. Nelson, Jr.
-----------------------------------
Allen T. Nelson, Jr.,
Executive Vice President and CFO
20