UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
---------------
Amendment No.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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
Raleigh, North Carolina 27612
(Address of principal executive office)
Registrant's telephone number, including area code: (919) 645-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share Nasdaq National Market
(Title of Class) (Name of Exchange on Which Registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark 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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|.
The aggregate market value of the registrant's Common Stock, no par value per
share, as of June 30, 2004, held by those persons deemed by the registrant to be
non-affiliates was approximately $87,363,642 (5,343,342 shares held by
non-affiliates at $16.35 per share). For purposes of the forgoing calculation
only, all directors, executive officers, and 5% shareholders of the registrant
have been deemed affiliates.
As of March 7, 2005, there were 6,593,787 shares of the registrant's Common
Stock, no par value per share, outstanding.
-1-
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Where
- --------------------- -----
1. Portions of the registrant's Proxy Statement for the Annual Part III
Meeting of Shareholders to be held on May 26, 2005
Explanatory Note
On March 15, 2005, Capital Bank Corporation (the "Company') filed with the
Securities and Exchange Commission (the "SEC") its Annual report on Form 10-K
for the fiscal year ended December 31, 2004 (the "Annual Report"). This
Amendment No. 1 to the Annual Report on Form 10-K has been filed to correct a
typographical error in the Report of Independent Registered Public Accounting
Firm contained in Item 8 of Part II. No other items of the Annual Report are
being amended and this Amendment does not reflect any events occurring after the
filing of the original Annual Report.
PART I
Item 8. Financial Statements and Supplementary Data.
-2-
Capital Bank Corporation
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except share data)
2004 2003
-----------------------
Assets
Cash and due from banks:
Interest-earning $ 971 $ 569
Noninterest earning 22,036 21,839
Federal funds sold and short term investments 4 3,202
Investment securities - available for sale, at fair value (Note 4) 140,946 160,216
Investment securities - held to maturity, at amortized cost (Note 4) 13,336 --
Federal Home Loan Bank stock (Note 5) 6,298 5,697
Loans-net of unearned income and deferred fees (Note 6) 654,867 625,945
Less allowance for loan losses (10,721) (11,613)
--------- ---------
Net loans 644,146 614,332
--------- ---------
Premises and equipment, net (Note 7) 15,608 14,190
Bank owned life insurance 13,500 9,429
Deposit premium and goodwill, net (Note 3) 13,065 14,530
Deferred income tax (Note 12) 5,985 6,492
Accrued interest receivable and other assets 6,399 7,238
--------- ---------
Total assets $ 882,294 $ 857,734
========= =========
Liabilities and Shareholders' Equity
Deposits (Note 8):
Demand, non-interest bearing $ 65,673 $ 58,350
Savings and interest bearing checking 93,116 84,701
Money market deposit accounts 100,319 115,751
Time deposits less than $100,000 260,574 267,673
Time deposits $100,000 and greater 135,294 103,144
--------- ---------
Total deposits 654,976 629,619
--------- ---------
Repurchase agreements and fed funds purchased (Note 9) 16,755 11,014
Federal Home Loan Bank advances (Note 9) 102,320 114,591
Subordinated debentures (Note 11) 20,620 20,620
Accrued interest payable and other liabilities 9,885 8,967
--------- ---------
Total liabilities 804,556 784,811
--------- ---------
Commitments and contingencies (Notes 13, 14, 16 and 17)
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized, 6,612,787
and 6,541,495 issued and outstanding as of 2004 and 2003, respectively 68,341 67,381
Accumulated other comprehensive income 305 377
Retained earnings 9,092 5,165
--------- ---------
Total shareholders' equity 77,738 72,923
--------- ---------
Total liabilities and shareholders' equity $ 882,294 $ 857,734
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
Capital Bank Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2004, 2003, and 2002
(In thousands except per share data)
2004 2003 2002
-------- -------- --------
Interest income:
Loans and fees on loans $ 35,704 $ 34,352 $ 29,601
Investment securities 6,531 5,898 6,273
Federal funds and other interest income 156 190 370
-------- -------- --------
Total interest income 42,391 40,440 36,244
-------- -------- --------
Interest expense:
Deposits 11,782 12,070 12,567
Borrowings and repurchase agreements 4,475 4,248 3,328
-------- -------- --------
Total interest expense 16,257 16,318 15,895
-------- -------- --------
Net interest income 26,134 24,122 20,349
Provision for loan losses 1,038 8,247 4,190
-------- -------- --------
Net interest income after provision for loan losses 25,096 15,875 16,159
-------- -------- --------
Other operating income:
Service charges and fees 2,948 2,858 2,350
Net gain on sale of securities 18 442 981
Mortgage origination fees 1,288 4,864 3,294
Gain on sale of branches 1,164 -- --
Loss on sale of mortgage loan portfolio (320) -- --
Other fees and income 1,807 2,158 1,362
-------- -------- --------
Total other operating income 6,905 10,322 7,987
-------- -------- --------
Other operating expenses:
Personnel 12,125 13,895 9,821
Occupancy 2,366 2,226 1,557
Data processing 1,130 1,164 917
Furniture and equipment 1,683 1,469 1,141
Amortization of intangibles 247 310 180
Advertising 869 721 578
Professional fees 989 1,017 304
Telecommunications 542 337 191
Other 3,873 4,026 2,776
-------- -------- --------
Total other operating expenses 23,824 25,165 17,465
-------- -------- --------
Net income before income tax expense 8,177 1,032 6,681
Income tax expense 2,866 38 2,374
-------- -------- --------
Net income $ 5,311 $ 994 $ 4,307
======== ======== ========
Net income per share - basic $ .79 $ .15 $ .79
======== ======== ========
Net income per share - diluted $ .77 $ .15 $ .76
======== ======== ========
Dividends per share $ .21 $ .20 $ .20
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2004, 2003, and 2002
(In thousands, except share and per share data)
Accumulated
Other
Number Common Comprehensive Retained
of Shares Stock Income (Loss) Earnings Total
------------ ------------ -------------- ------------ --------
Balance at January 1, 2002 3,597,339 $ 34,109 $ 568 $ 2,306 $ 36,983
Repurchase of outstanding common stock (365,334) (4,945) -- -- (4,945)
Issuance of common stock for compensation 5,622 57 -- -- 57
Issuance of common stock for options excercised 147,645 990 -- -- 990
Issuance of common stock for acquisition of
subsidiaries 3,210,512 38,486 -- -- 38,486
Net income -- -- -- 4,307 4,307
Unrealized gain on securities, net of deferred tax
expense of $456 -- -- 725 -- 725
--------
Comprehensive income 5,032
Cash dividends ($0.20 per share) -- -- -- (1,132) (1,132)
---------- ---------- -------- -------- --------
Balance at December 31, 2002 6,595,784 68,697 1,293 5,481 75,471
Repurchase of outstanding common stock (182,500) (2,701) -- -- (2,701)
Issuance of common stock for compensation 2,357 24 -- -- 24
Issuance of common stock for options excercised 125,854 1,171 -- -- 1,171
Noncash compensation -- 190 -- -- 190
Net income -- -- -- 994 994
Unrealized loss on securities, net of deferred tax
benefit of $577 -- -- (916) -- (916)
--------
Comprehensive income 78
Cash dividends ($0.20 per share) -- -- -- (1,310) (1,310)
---------- ---------- -------- -------- --------
Balance at December 31, 2003 6,541,495 67,381 377 5,165 72,923
Issuance of common stock for compensation 2,028 22 -- -- 22
Issuance of common stock for options excercised 69,264 938 -- -- 938
Net income -- -- -- 5,311 5,311
Unrealized loss on securities, net of deferred tax
benefit of $45 -- -- (72) -- (72)
--------
Comprehensive income 5,239
Cash dividends ($0.21 per share) -- -- -- (1,384) (1,384)
---------- ---------- -------- -------- --------
Balance at December 31, 2004 6,612,787 $ 68,341 $ 305 $ 9,092 $ 77,738
========== ========== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
Capital Bank Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
----------------------------------------
Net income $ 5,311 $ 994 $ 4,307
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangibles 247 310 180
Writedown of intangible assets -- 10 --
Depreciation 1,480 1,459 1,228
Gain(loss) on disposal of equipment 70 (160) --
Amortization of premiums/discounts on securities, net 637 1,971 922
Gain on sale of investments (18) (442) (981)
Funding of held for sale loans (69,893) (259,041) (191,608)
Proceeds from sale of held for sale loans 71,334 264,447 181,366
Provision for loan losses 1,038 8,247 4,190
Deferred tax (benefit) expense 523 (564) 130
Issuance of stock for compensation 22 24 57
Other noncash compensation -- 190 --
Gain on sale of branches (1,164) -- --
Loss on sale of mortgage portfolio 320 -- --
Changes in assets and liabilities:
Accrued interest receivable and other assets 1,130 222 710
Accrued interest payable and other liabilities (110) (885) 410
-------- --------- ---------
Net cash provided by operating activities 10,927 16,782 911
-------- --------- ---------
Cash flows from investing activities:
Net increase in loans (64,755) (37,620) (23,946)
Additions to premises and equipment (3,871) (2,712) (1,145)
Proceeds from sale of equipment 645 622 1
Net (purchase) sale of Federal Home Loan Bank stock (600) (681) 91
Purchase of securities available for sale (17,014) (43,462) (33,851)
Purchase of securities held to maturity (15,477) -- --
Purchase of mortgage-backed securities available for sale (24,317) (73,051) (71,883)
Purchase of bank owned life insurance (3,500) (6,000) --
Proceeds from calls/maturities of securities available for sale 33,945 87,704 35,124
Proceeds from sales of securities available for sale 25,920 15,859 41,434
Proceeds from calls/maturities of securities held to maturity 2,140 -- --
Capitalized purchase costs of acquisitions -- (38) (47)
Proceeds from sale of mortgage portfolio 18,667 -- --
Net cash paid in branch sale (23,054) -- --
Net cash acquired from acquisitions -- -- 20,695
-------- --------- ---------
Net cash used by investing activities (71,271) (59,379) (33,527)
-------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
Capital Bank Corporation
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
--------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 64,911 $(15,268) $ 51,718
Net increase (decrease) in repurchase agreements 5,741 (2,067) 1,914
Proceeds from Federal Home Loan Bank borrowings 42,500 71,000 86,123
Principal repayments of Federal Home Loan Bank borrowings (54,771) (54,267) (66,969)
Proceeds from subordinated debentures, net of issuance costs -- 20,120 --
Repurchase of outstanding common stock -- (2,701) (4,945)
Exercise of stock options 679 1,171 990
Cash dividends paid (1,315) (1,314) (799)
-------- -------- --------
Net cash provided by financing activities 57,745 16,674 68,032
-------- -------- --------
Net change in cash and cash equivalents (2,599) (25,923) 35,416
Cash and cash equivalents at beginning of year 25,610 51,533 16,117
-------- -------- --------
Cash and cash equivalents at end of year $ 23,011 $ 25,610 $ 51,533
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Capital Bank Corporation (the "Company") is a financial holding company
incorporated under the laws of North Carolina on August 10, 1998. The
Company's primary function is to serve as the holding company for its
wholly-owned subsidiaries, Capital Bank and Capital Bank Investment
Services, Inc. In addition, the Company has interest in two trusts,
Capital Bank Statutory Trust I and II (hereinafter collectively referred
to as the "Trusts"). The Trusts are not consolidated with the financial
statements of the Company per the provisions of FIN 46R. Capital Bank (the
"Bank") was incorporated under the laws of North Carolina on May 30, 1997
and commenced operations on June 20, 1997. The Bank is not a member of the
Federal Reserve System and has no subsidiaries. The Bank is a community
bank engaged in general commercial banking, providing a full range of
banking services. The majority of the Bank's customers are individuals and
small to medium-size businesses. The Bank's primary source of revenue is
interest earned from loans to customers and from invested cash and
securities and non-interest income derived from various fees.
The Bank operates throughout North Carolina with branch facilities located
in Raleigh (4), Sanford (3), Burlington (2), Asheville (3), Greensboro,
Cary (2), Oxford, Hickory, Siler City, Graham, and Wake Forest. The
Company's corporate headquarters are located on Glenwood Avenue in
Raleigh, North Carolina.
The Trusts were formed for the sole purpose of issuing trust preferred
securities. The proceeds from such issuances were loaned to the Company in
exchange for the Debentures (as defined below), which are the sole assets
of the Trust. A portion of the proceeds from the issuance of the
Debentures were used by the Company to repurchase shares of Company common
stock. The Company's obligation under the Debentures constitutes a full
and unconditional guarantee by the Company of the Trust's obligations
under the trust preferred securities. The Trusts have no operations other
than those that are incidental to the issuance of the trust preferred
securities. See Note 11 - Subordinated Debentures.
The Company has no operations other than those of its subsidiaries.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
more significant estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan
losses, valuation of goodwill and intangible assets, valuation of
investments, and tax assets, liabilities and expense. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits (with original
maturities of 90 days or less) at other institutions, federal funds sold
and other short term investments. Generally, federal funds are purchased
and sold for one-day periods. At times, the Bank places deposits with high
credit quality financial institutions in amounts which may be in excess of
federally insured limits. Banks are required to maintain reserve and
clearing balances with the Federal Reserve Bank (the "FRB"). Accordingly,
the Bank has amounts restricted for this purpose of $11,696 included in
"cash and due from banks" on the Consolidated Balance Sheet at December
31, 2004.
Securities
-8-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investments in certain securities are classified into three categories and
accounted for as follows:
1. Securities Held to Maturity - Debt securities that the institution
has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; or
2. Trading Securities - Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; or
3. Securities Available for Sale - Debt and equity securities not
classified as either held to maturity securities or trading
securities are classified as available for sale securities and
reported at fair value, with unrealized gains and losses reported as
other comprehensive income, a separate component of shareholders'
equity.
The initial classification of securities is determined at the date of
purchase. Gains and losses on sales of securities, computed based on
specific identification of the adjusted cost of each security, are
included in other income at the time of the sales.
Premiums and discounts on debt securities are recognized in interest
income using the level interest yield method over the period to maturity,
or when the debt securities are called.
Loans Held for Sale
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements, calculated on the aggregate loan basis. At December
31, 2004 and 2003, there were approximately $3.4 million and $4.8 million,
respectively, in loans held for sale which are classified as loans on the
balance sheet.
Through the normal course of originating loans held for sale, the
customer's interest rate is fixed upon lock-in by the customer. The Bank
enters into a best efforts commitment to sell the loan to an investor
after the rate lock-in by the customer. Rate lock commitments for loans
held for sale are valued based on the value to be realized upon sale to an
investor less any value attributable to the servicing rights which are
also sold to the investor.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and net deferred loan origination fees and
costs. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. Deferred loan fees
and costs are amortized to interest income over the contractual life of
the loan using the level interest yield method.
A loan is considered impaired, based on current information and events, if
it is probable that the Bank will be unable to collect the scheduled
payments of principal and interest when due according to the contractual
terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral.
There were no loans classified as impaired at December 31, 2004. Loans
deemed to be impaired at December 31, 2003 amounted to $3.0 million and
the related allowance for loan losses was $825,000. Average impaired loans
during 2004 and 2003 were $2.1 million and $3.2 million, respectively.
Interest income recognized on loans classified as impaired was $175,000
for the year ended December 31, 2004.
The Bank uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation
of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows,
operating income or loss, etc. It is possible that these factors and
management's evaluation of the adequacy of the allowance for loan losses
will change.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb
-9-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
probable losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, and current economic conditions and trends that
may affect the borrowers' ability to pay.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful or as partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained
period of repayment performance (generally a minimum of six months) of
interest and principal by the borrower in accordance with the contractual
terms.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled amortizations
where the payment is generally applied to the oldest payment due. When the
future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a nonaccrual
loan had been partially charged-off, recognition of interest on a cash
basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Foreclosed Assets
Any assets acquired as a result of foreclosure are valued at the lower of
the recorded investment in the loan or fair value less estimated costs to
sell. The recorded investment is the sum of the outstanding principal loan
balance and foreclosure costs associated with the loan. Any excess of the
recorded investment over the fair value of the property received is
charged to the allowance for loan losses. Valuations will be periodically
performed by management and any subsequent write-downs due to the carrying
value of a property exceeding its estimated fair value less estimated
costs to sell are charged against other expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed by the
straight-line method based on estimated service lives of assets. Useful
lives range from 3 to 10 years for furniture and equipment. The cost of
leasehold improvements is being amortized using the straight-line method
over the terms of the related leases. Repairs and maintenance are charged
to expense as incurred.
Upon disposition, the asset and related accumulated depreciation or
amortization are relieved and any gains or losses are reflected in
operations.
Income Taxes
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes
will become payable or receivable. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements that will result in taxable or
deductible amounts in future years. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is recorded for deferred tax
assets if the Company determines that it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company applies a financial-components approach that focuses on
control when accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. Under that
-10-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This approach provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
Derivatives
The Company uses derivatives to manage interest rate risk. The instruments
consist of interest rate swaps and swaptions. A derivative is a financial
instrument that derives its cash flows, and therefore its value, by
reference to an underlying instrument, index, or referenced interest rate.
The Bank uses derivatives, accounted for as fair value hedges, to hedge
its fixed rate interest-bearing liabilities.
Under SFAS 133, derivatives are recorded in the balance sheet at fair
value. For fair value hedges, the change in the fair value of the
derivative and the corresponding change in fair value of the hedged risk
in the underlying item being hedged are accounted for in earnings. Any
difference in these two changes in fair value results in hedge
ineffectiveness that results in a net impact to earnings.
Derivative contracts are written in amounts referred to as notional
amounts. Notional amounts only provide the basis for calculating payments
between counterparties and do not represent amounts to be exchanged
between parties and are not a measure of financial risk.
Stock Option Plans
The Company has a stock-based incentive compensation plan covering certain
officers and directors. The Company grants stock options under the
incentive plan for a fixed number of shares with an exercise price equal
to the fair value of the shares on the date of grant. The Company has
elected to account for these stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, recognizes no compensation expense
for these stock option grants.
The Company discloses pro forma net income and earnings per share in these
notes as if compensation was measured under the fair value based method
promulgated under Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation. Under the fair value based
method, compensation cost is measured at the grant date of the option
based on the value of the award and is recognized over the service period,
which is usually the vesting period. Had compensation expense for the
stock option plans been determined consistent with SFAS No. 123, the
Company's net income and net income per share for the years ended December
31, 2004, 2003 and 2002 would have been reduced to the pro forma amounts
indicated below. These pro forma amounts may not be representative of the
effect on reported net income in future years.
(In thousands, except per share data) 2004 2003 2002
---------------------------------------
Net income As reported $5,311 $ 994 $4,307
Pro forma 5,095 922 3,474
Net income per share - Basic As reported $ 0.79 $ 0.15 $ 0.79
Pro forma 0.76 0.14 0.64
Net income per share - Diluted As reported $ 0.77 $ 0.15 $ 0.76
Pro forma 0.74 0.14 0.62
The Company is required to disclose the pro forma effects on net income as
if it had recorded compensation based on the fair value of options
granted. The fair values of the options granted in 2004, 2003 and 2002 are
estimated on the date of the grants using the Black-Scholes option-pricing
model. Option pricing models require the use of highly subjective
assumptions, including expected stock volatility, which when changed can
materially affect fair value estimates. The fair values were estimated
using the following weighted-average assumptions:
-11-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------
Dividend yield 1.04% 1.20% 1.46%
Expected volatility 27.7% 28.0% 29.7%
Riskfree interest rate 3.92% 3.72% 3.93%
Expected life 7 years 7 years 7 years
The weighted average fair value of options granted during 2004, 2003 and
2002 was $5.99, $5.15, and $4.47, respectively.
Net Income Per Share
The Company follows SFAS No. 128, Earnings Per Share. In accordance with
SFAS No. 128, the Company has presented both basic and diluted EPS on the
face of the Consolidated Statements of Operations. Basic EPS excludes
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. The weighted average number of shares outstanding for
2004, 2003, and 2002 were as follows:
2004 2003 2002
------------------------------------------
(In thousands, except number of shares)
Income available to stockholders - basic and diluted $ 5,311 $ 994 $ 4,307
========== ========== ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,712,502 6,655,926 5,467,735
Incremental shares from assumed exercise of stock
options 173,198 137,946 195,214
---------- ---------- ----------
Weighted average number of shares outstanding - diluted 6,885,700 6,793,872 5,662,949
========== ========== ==========
Comprehensive Income
The Company follows SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards for reporting and displaying comprehensive
income (loss) and its components (revenues, expenses, gains, and losses)
in general-purpose financial statements.
The Company's only components of other comprehensive income relate to
unrealized gains and losses on available for sale securities. Information
concerning the Company's other comprehensive income (loss) for the years
ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
------------------------------------------
(In thousands)
Unrealized (losses) gains on securities available for sale $ (99) $ (1,051) $ 2,162
Reclassification of gains recognized in net income (18) (442) (981)
Income tax benefit (expense) 45 577 (456)
---------- ---------- ----------
Other comprehensive income (loss) $ (72) $ (916) $ 725
========== ========== ==========
Segment Information
The Company follows the provisions of SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 requires that
public business enterprises report certain information about operating
segments in their annual financial statements and in condensed financial
statements of interim periods issued to shareholders. It also requires
that the public business enterprises report related disclosures
-12-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and descriptive information about products and services provided by
significant segments, geographic areas, and major customers, differences
between the measurements used in reporting segment information and those
used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources, and
in assessing performance. The Company has determined that it has one
significant operating segment, the providing of general commercial
financial services to customers located in the single geographic area of
North Carolina. The various products are those generally offered by
community banks, and the allocation of resources is based on the overall
performance of the institution, versus the individual branches or
products.
Reclassifications
Certain items included in the 2003 and 2002 financial statements have been
reclassified to conform to the 2004 presentation. These reclassifications
have no effect on net income or shareholders' equity previously reported.
New Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
standard is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
financial statements based on their fair values and is effective for the
first interim or annual reporting period beginning after June 15, 2005.
The Company expects to adopt SFAS No. 123R on July 1, 2005, using the
standard's modified prospective application method. Adoption of SFAS No.
123R will not affect the Company's cash flows or financial position, but
it will reduce reported income and earnings per share because the Company
will be required to recognize compensation expense for share purchase
rights granted under its employee stock option and employee stock purchase
plans, whereas the Company has not been required to record such expense
under current accounting rules. Under SFAS No. 123R, the Company will
recognize compensation expense for the fair value of its share purchase
rights over the vesting period. The Company has not performed all of the
final calculations for expensing stock options but the estimated impact is
presented under the heading "Stock Option Plans" in Note 1 - Significant
Accounting Policies. In addition, the Company has other plans and
liabilities impacted by SFAS No. 123R. These are obligations which may be
settled in the Company's shares. The most material obligations are
deferred compensation plans for directors and advisory board members. The
Company is evaluating alternatives for these plans to minimize the impact
to the Company's net income, including payment of shares due under the
plans prior to the effective date of SFAS No. 123R. If SFAS No. 123R were
effective as of December 31, 2004, the impact on pretax income would have
been approximately $1.0 million based on a share price of $18.75 per
share.
2. Significant Activities
On January 18, 2002, the Company acquired First Community Financial
Corporation ("First Community"), the holding company for Community Savings
Bank, Inc. ("Community Savings Bank"). As a result of the acquisition, the
Company issued an additional 1.9 million shares of common stock. The
transaction was accounted for under the purchase method and was intended
to qualify as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code.
On December 1, 2002, the Company acquired High Street Corporation ("High
Street"), the holding company for High Street Banking Company ("High
Street Bank"). As a result of the acquisition, the Company issued an
additional 1.3 million shares of common stock. The transaction was
accounted for under the purchase method and is intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code.
The following table reflects the unaudited pro forma combined results of
operations for the year ended December 31, 2002 assuming these
acquisitions had occurred at the beginning of fiscal 2002:
-13-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2002
-------
(In thousands, except per share amounts)
Net interest income $24,436
Net income 3,530
Net earnings per diluted share 0.51
In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what actual combined results of operations might
have been if the acquisitions had been effective at the beginning of
fiscal 2002.
A summary of estimated fair values of assets acquired and liabilities
assumed was as follows:
(In thousands) First High
Community Street Total
--------- --------- ---------
Loans receivable $ 134,149 $ 126,175 $ 260,324
Premises and equipment 5,424 3,050 8,474
Deposit premium 782 976 1,758
Goodwill 3,835 5,319 9,154
Other assets 52,661 28,333 80,994
Deposits (156,241) (132,485) (288,726)
Borrowings (16,414) (12,290) (28,704)
Other liabilities (3,342) (1,446) (4,788)
--------- --------- ---------
Investment in subsidiary, net of dividends to shareholders
and capitalized acquisition costs $ 20,854 $ 17,632 $ 38,486
========= ========= =========
During 2003, the Company made several changes to its branch structure
including the consolidation of two branches in Oxford into one main Oxford
facility in a new location and the opening of an additional branch in
Raleigh. In addition, during the third quarter of 2003, the Company made
the decision to discontinue the operations of CBIS. CBIS will remain an
inactive subsidiary of the Company. Also during 2003, the Company entered
into two separate offerings of trust preferred securities, one in June by
Trust I and the other in December by Trust II. See Notes to Consolidated
Financial Statements - Note 11 - Subordinated Debentures for additional
information on these Trusts.
During 2004, the Company made additional changes to its branch structure
including the sale of three branches in Warrenton, Seaboard and Woodland
to other financial institutions in the third quarter. Included in the sale
were approximately $39.6 million of deposits and $12.8 million of loans,
as well as other assets. With the closing of the branch sale, the Company
was required to make payments of $23.0 million dollars to cover the excess
of liabilities over assets assumed by the acquiring companies. A one time
gain was recorded for $1.2 million in connection with this sale. In
addition, the Company opened three new branches during the year, one each
in Wake Forest, Asheville and Greensboro, North Carolina. Also during
2004, the Company sold a mortgage portfolio which was being serviced by an
independent organization and which had been acquired as a part of a
previous bank acquisition. The sale included approximately $19.2 million
in loans and $152,000 in foreclosed assets. The Company recorded a
$320,000 one time loss on this sale.
3. Goodwill and Other Intangible Assets
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition, and as such, the historical cost
basis of individual assets and liabilities are adjusted to reflect their
fair value. Identified intangibles are amortized on a straight-line basis
over the period benefited. In 2002, the Company adopted SFAS No. 142
Goodwill and Other Intangible Assets and accordingly, goodwill is no
longer amortized, but is reviewed for potential impairment at least
annually at the reporting unit level. An impairment loss is recorded to
the extent that the carrying amount of goodwill exceeds its implied fair
value.
-14-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other intangible assets are evaluated for impairment if events and
circumstances indicate a possible impairment. Such evaluation of other
intangible assets is based on undiscounted cash flow projections. No
impairment charges were recorded in 2004 based on the evaluation and a
$10,000 charge was recorded in 2003 related to the shutdown of CBIS.
As of December 31, 2004 and 2003, intangible assets, primarily deposit
premiums paid for acquisitions, and goodwill were as follows:
Accumulated
(In thousands) Gross Amortization Net
--------------------------------------
At December 31, 2004
From January 2002 acquisition of First Community:
Deposit premium $ 782 $ (404) $ 378
Goodwill 3,834 -- 3,834
-------- -------- --------
4,616 (404) 4,212
-------- -------- --------
From December 2002 acquisition of High Street:
Deposit premium 976 (337) 639
Goodwill 5,381 -- 5,381
-------- -------- --------
6,357 (337) 6,020
-------- -------- --------
From April 2000 branch acquisitions:
Goodwill 1,996 (347) 1,649
From June 1997 branch acquisitions:
Goodwill 2,164 (980) 1,184
-------- -------- --------
$ 15,133 $ (2,068) $ 13,065
======== ======== ========
Accumulated
Gross Amortization Net
--------------------------------------
At December 31, 2003
From January 2002 acquisition of First Community:
Deposit premium $ 782 $ (304) $ 478
Goodwill 3,834 -- 3,834
-------- -------- --------
4,616 (304) 4,312
-------- -------- --------
From December 2002 acquisition of High Street:
Deposit premium 976 (190) 786
Goodwill 5,381 -- 5,381
-------- -------- --------
6,357 (190) 6,167
-------- -------- --------
From April 2000 branch acquisitions:
Goodwill 3,471 (604) 2,867
From June 1997 branch acquisitions:
Goodwill 2,164 (980) 1,184
-------- -------- --------
$ 16,608 $ (2,078) $ 14,530
======== ======== ========
Deposit premiums are amortized over a period of up to 10 years using an
accelerated method. During 2004 and 2003, deposit premiums were reduced by
amortization expenses of $247,000 and $310,000, respectively. In addition,
during 2004, goodwill was reduced by $1.2 million in connection with
deposits sold in branch sales. Estimated amortization expenses for the
next five fiscal years are as follows:
-15-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended
(In thousands) December 31,
------------
2005 $212,000
2006 185,000
2007 161,000
2008 137,000
2009 113,000
4. Securities
Securities at December 31, 2004 and 2003 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
---------- ----------- ----------- -----------
2004
----
Available for sale:
U.S. Agency obligations $ 35,511 $ 86 $ 425 $ 35,172
Municipal bonds 24,087 828 85 24,830
Mortgage-backed securities 80,851 427 334 80,944
-------- -------- -------- --------
140,449 1,341 844 140,946
-------- -------- -------- --------
Held to maturity:
U.S. Agency obligations $ 5,000 $ 2 $ 12 4,990
Municipal bonds 300 -- -- 300
Mortgage-backed securities 8,036 15 68 7,983
-------- -------- -------- --------
13,336 17 80 13,273
-------- -------- -------- --------
$153,785 $ 1,358 $ 924 $154,219
======== ======== ======== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
---------- ----------- ----------- -----------
2003
----
Available for sale:
U.S. Agency obligations $ 35,747 $ 87 $ 507 $ 35,327
Municipal bonds 24,678 769 64 25,383
Mortgage-backed securities 99,189 859 542 99,506
-------- -------- -------- --------
$159,614 $ 1,715 $ 1,113 $160,216
======== ======== ======== ========
The amortized cost and estimated market values of securities at December
31, 2004 by contractual maturities are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
-16-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Dollars in thousands) Available for Sale Held to Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------------- -----------------------
US Agency securities:
Due after one year through five years $ 24,702 $ 24,465 $ 5,000 $ 4,990
Due after five years through ten years 3,918 3,943 -- --
Due after ten years 6,891 6,764 -- --
----------------------- -----------------------
Total US Agency securities 35,511 35,172 5,000 4,990
----------------------- -----------------------
Municipal bonds
Due after five years through ten years 8,063 8,313 300 300
Due after ten years 16,024 16,517 -- --
----------------------- -----------------------
Total Municipal bonds 24,087 24,830 300 300
----------------------- -----------------------
Mortgage-backed securities
Due after one year through five years 3,764 3,777 -- --
Due after five years through ten years 4,355 4,402 -- --
Due after ten years 72,732 72,765 8,036 7,983
----------------------- -----------------------
Total Mortgage-backed securities 80,851 80,944 8,036 7,983
----------------------- -----------------------
$140,449 $140,946 $ 13,336 $ 13,273
======================= =======================
The following table shows the gross unrealized losses and fair value of
the Company's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and
length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2004:
(Dollars in thousands) Less Than 12 Months 12 Months or Greater Total
----------------------------------------------------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Losses Fair Value Losses Fair Value Losses
----------------------------------------------------------------------------------------------------------------------
Available for sale
Direct obligations of U.S.
government agencies $18,568 $ 181 $ 6,756 $ 244 $25,324 $ 425
Municipal bonds 1,569 43 1,268 42 2,837 85
Federal agency mortgage-
backed securities 20,537 131 10,030 203 30,567 334
----------------------------------------------------------------------
40,674 355 18,054 489 58,728 844
----------------------------------------------------------------------
Held to maturity
Direct obligations of U.S.
government agencies 3,982 12 -- -- 3,982 12
Mortgage-backed
securities 2,842 68 -- -- 2,842 68
----------------------------------------------------------------------
6,824 80 -- -- 6,824 80
----------------------------------------------------------------------
$47,498 $ 435 $18,054 $ 489 $65,552 $ 924
======================================================================
Government Agency Obligations. The unrealized losses on the Company's
investments in direct obligations of U.S. government agencies were the
result of interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price
materially less than the amortized cost of the investment. Because the
Company has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, the Company does not
consider these investments to be other-than-temporarily impaired at
December 31, 2004.
Federal Agency Mortgage-Backed Securities. The unrealized losses on the
Company's investment in agency mortgage-backed securities issued by FNMA,
FHLMC, and GNMA were caused by interest rate increases.
-17-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company purchased most of these investments at either a discount or a
premium relative to their face amount, and the contractual cash flows of
each is guaranteed by the issuer organization. Accordingly, it is expected
that the securities would not be settled at a price materially less than
the amortized cost of the Company's investment. Because the decline in
market value is attributable to changes in interest rates and not credit
quality and because the Company has the ability to hold these investments
until a recovery of fair value, which may be maturity, the Company does
not consider these investments to be other-than-temporarily impaired at
December 31, 2004.
During the years ended December 31, 2004, 2003 and 2002, the Company had
gross realized gains of $18,000, $442,000 and $981,000, respectively, on
sales of available for sale securities with book values of $25.9 million,
$15.4 million and $40.5 million.
Securities with an amortized cost of $66.8 million were pledged as of
December 31, 2004 to secure public deposits, repurchase agreements, and
FHLB advances.
5. Federal Home Loan Bank Stock
During 2004, in order to raise additional capital, the Federal Home Loan
Bank ("FHLB") restructured the stock ownership requirements in order to be
a member of the FHLB System. As a member, the Bank is required to maintain
an investment in capital stock of the FHLB in an amount equal to 0.20% of
its total assets as of December 31st of the prior year (up to a maximum of
$25.0 million) plus 4.5% of its outstanding FHLB advances. No ready market
exists for the FHLB stock, and it has no quoted market value, therefore,
cost approximates market at December 31, 2004 and 2003.
6. Loans and Allowance for Loan Losses
The composition of the loan portfolio by loan classification at December
31, 2004 and 2003 is as follows:
(In thousands) 2004 2003
------------------------
Commercial $ 531,834 $ 474,104
Consumer 34,865 42,929
Home equity lines 61,925 58,430
Residential mortgages 26,020 50,437
--------- ---------
654,644 625,900
Less deferred loan fees (costs), net (223) (45)
--------- ---------
$ 654,867 $ 625,945
========= =========
A summary of activity in the allowance for loan losses for the years ended
December 31, 2004, 2003, and 2002 is as follows:
-18-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 2004 2003 2002
-----------------------------------
Balance at beginning of year $ 11,613 $ 9,390 $ 4,286
Allowance for loan losses transferred from acquired companies -- -- 4,593
Provision for loan losses 1,038 8,247 4,190
Loans charged-off, net of recoveries (1,619) (6,024) (3,679)
Reclassified (311)
-------- -------- -------
Balance at end of year $ 10,721 $ 11,613 $ 9,390
======== ======== =======
During the year, the Company reclassified $311,000 of the allowance which
related to loss exposure on unfunded loan commitments and letters of
credit into a separate other liability account.
At December 31, 2004, nonperforming assets consisted of nonaccrual loans
in the amount of $8.2 million and foreclosed real estate of $418,000. At
December 31, 2003, nonperforming assets consisted of nonaccrual loans in
the amount of $8.0 million and foreclosed real estate of $978,000.
Unrecognized income on nonaccrual loans at December 31, 2004 and 2003 was
$275,000 and $262,000, respectively. At December 31, 2004 and 2003, there
were no loans past due greater than 90 days still accruing interest.
In the normal course of business, certain directors and executive officers
of the Company, including their immediate families and companies in which
they have an interest, may be loan customers. Total loans to such groups
at December 31, 2004 and activity during the year ended December 31, 2004,
is summarized as follows:
(In thousands) 2004 2003 2002
------------------------------------
Beginning balance $ 23,392 $ 15,288 $ 8,286
New loans 16,737 14,562 13,015
Principal repayments (8,844) (4,048) (6,013)
Reclassifications -- (2,410) --
-------- -------- --------
Ending balance $ 31,285 $ 23,392 $ 15,288
======== ======== ========
In addition, such groups had available lines of credit in the amount of
$7.7 million at December 31, 2004. The Company paid an aggregate of
approximately $1.0 million, $922,000, and $705,000 to companies owned by
members of the board of directors for leased space, equipment,
construction and consulting services during 2004, 2003 and 2002,
respectively.
7. Premises and Equipment
Premises and equipment at December 31, 2004 and 2003 are as follows:
-19-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2004 2003
----------------------
(In thousands)
Land $ 4,813 $ 4,679
Buildings and leasehold improvements 8,863 8,492
Furniture and equipment 9,488 8,344
Automobiles 324 256
Construction in progress 959 2
-------- --------
24,447 21,773
Less accumulated depreciation and amortization (8,839) (7,583)
-------- --------
$ 15,608 $ 14,190
======== ========
8. Deposits
At December 31, 2004, the scheduled maturities of certificates of deposit
are as follows:
Weighted
Average
(In thousands) Balance Rate
-------- --------
2005 $259,763 2.16%
2006 60,284 3.15%
2007 64,757 3.17%
2008 2,749 2.98%
2009 and thereafter 8,315 3.93%
-------- --------
$395,868 2.52%
======== ========
9. Borrowings
Short term borrowed funds. Following is an analysis of short-term borrowed
funds at December 31, 2004 and 2003:
End of Period Daily Average Balance Maximum
---------------------- ---------------------- Outstanding
Weighted Interest At Any
(Dollars in thousands) Balance Avg Rate Balance Rate Month End
---------------------- ---------------------- ------------
2004
Fed funds purchased $ 1,573 2.70% $ 564 1.77% $ 2,137
Repurchase agreements 15,182 1.68% 12,301 0.89% 17,875
-------- -----------------------
$ 16,755 $ 12,865 0.92%
======== =======================
2003
Fed funds purchased $ -- n/a $ 177 1.41% $ --
Repurchase agreements 11,014 0.53% 14,280 0.61% 16,358
-------- -----------------------
$ 11,014 $ 14,457 0.62%
======== =======================
Interest on federal funds purchased totaled $10,000 in 2004 and $3,000 in
2003. Repurchase agreements are collateralized by U.S. government agency
and mortgage-backed securities with carrying values of $17.8 million and
fair values of $17.7 million at December 31, 2004. Interest expense on
securities sold under agreements to repurchase totaled $109,000 in 2004
and $86,000 in 2003.
Federal Home Loan Bank Advances. Advances from the FHLB had a weighted
average rate of 4.08% and 4.21% at December 31, 2004 and 2003,
respectively, and were collateralized by certain 1 - 4 family mortgages,
multifamily first mortgage loans, home equity loans and qualifying
commercial loans totaling
-20-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$103.5 million and $93.7 million at year-end 2004 and 2003, respectively.
In addition, the Company pledged certain investment securities with an
amortized cost of $25.2 million and $32.3 million at December 31, 2004 and
2003. See Note 4 - Securities.
At December 31, 2004, the scheduled maturities of FHLB advances were as
follows:
Weighted
Average
(Dollars in thousands) Balance Rate
----------- -----------
2005 $ 10,000 3.93%
2006 -- --
2007 5,000 2.11%
2008 -- --
2009 and thereafter 87,320 4.21%
----------- -----------
$ 102,320 4.08%
=========== ===========
At December 31, 2004, the Company had an additional $74.6 million of
credit available with the FHLB.
10. Derivative Financial Instruments
The Company maintains positions in derivative financial instruments to
manage interest rate risk, to facilitate asset/liability management
strategies, and to manage other risk exposures.
In July 2003, the Company entered into interest rate swap agreements to
convert portions of its fixed rate FHLB advances to floating interest
rates. Because of the effectiveness of the swap agreements against the
related debt instruments, the adjustments needed to record the swaps at
fair value were offset by the adjustments needed to record the related
debt instruments at fair value and the net difference between those
amounts were not material.
These interest rate hedges, accounted for as fair value hedges, have an
aggregated notional amount of $25.0 million and reset quarterly at
variable rates based on 90 day LIBOR. The counterparty for these hedges is
a firm with an investment grade rating by a nationally recognized
investment rating service. The swaps are collateralized by certain
investment securities and are summarized as follows:
Effective
Maturity Amount Variable Rate
------------------------------------------------------
2009 $ 10,000,000 LIBOR + 1.87
2011 15,000,000 LIBOR + 2.02
11. Subordinated Debentures
In June 2003 and December 2003, the Company formed the Trusts. Each issued
10,000 of its floating rate capital securities (the "trust preferred
securities"), with a liquidation amount of $1,000 per capital security, in
pooled offerings of trust preferred securities. The Trusts sold their
common securities to the Company for an aggregate of $620,000, resulting
in total proceeds from each offering equal to $10,310,000 or $20,620,000
in aggregate. The Trusts then used these proceeds to purchase $20,620,000
in principal amount of the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures (the "Debentures"). Following payment by
the Company of a placement fee and other expenses of the offering, the
Company's net proceeds from the offering aggregated $20.0 million.
The trust preferred securities have a 30 year maturity and are redeemable
after 5 years with certain exceptions. Prior to the redemption date, the
trust preferred securities may be redeemed at the option of the Company
after the occurrence of certain events, including without limitation
events that would have a negative tax effect on the Company or the Trusts,
would cause the trust preferred securities to no longer
-21-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
qualify as Tier 1 capital, or would result in the Trusts being treated as
an investment company. The Trusts' ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment
on the Debentures. The Company's obligation under the Debentures
constitutes a full and unconditional guarantee by the Company of the
Trusts' obligations under the trust preferred securities.
The securities associated with both trusts are floating rate, based on 90
day LIBOR, and adjust quarterly. Those associated with Trust I, originally
issued in June 2003, adjust at LIBOR + 3.10% while the securities
associated with Trust II, issued in December 2003, adjust at LIBOR +
2.85%.
The Debentures, which are subordinate and junior in right of payment to
all present and future senior indebtedness and certain other financial
obligations of the Company, are the sole assets of the Trusts and the
Company's payment under the Debentures is the sole source of revenue for
the Trusts.
Per the provisions of FIN 46R, the assets and liabilities of the Trusts
are not consolidated into the consolidated financial statements of the
Company. Interest on the Debentures is included in the Company's Condensed
Consolidated Statements of Income as interest expense. The Debentures are
presented as a separate category of long-term debt on the Consolidated
Statements of Financial Condition entitled "Subordinated Debentures." For
regulatory purposes, the $20.0 million of trust preferred securities
qualifies as Tier 1 capital, subject to certain limitations, or Tier 2
capital in accordance with regulatory reporting requirements.
12. Income Taxes
Income taxes charged to operations for the years ended December 31, 2004,
2003, and 2002 consist of the following components:
(In thousands) 2004 2003 2002
-----------------------------
Current income tax expense $2,343 $ 602 $2,244
Deferred income tax expense (benefit) 523 (564) 130
------ ------ ------
Total income tax expense $2,866 $ 38 $2,374
====== ====== ======
Income taxes for the years ended December 31, 2004, 2003 and 2002 were
allocated as follows:
(In thousands) 2004 2003 2002
------------------------------
Income from continuing operations $ 2,866 $ 38 $2,374
Stockholders' equity, for unrealized gains (losses) on
securities available for sale (45) (577) 456
Stockholders' equity, for compensation expense for tax
purposes in excess of financial reporting purposes (259) -- --
------------------------------
$ 2,562 $ (539) $2,830
==============================
A reconciliation of the difference between income tax expense and the
amount computed by applying the statutory federal income tax rate of 34%
is as follows:
-22-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Amount % of Pretax Income
---------------------------------- ----------------------------------
(Dollars in thousands) 2004 2003 2002 2004 2003 2002
------------------------------------------------------------------------------ ----------------------------------
Tax expense at statutory rate on income
before taxes $ 2,780 $ 351 $ 2,272 34.00% 34.00% 34.00%
State taxes, net of federal benefit 372 112 200 4.55% 10.85% 2.99%
Increase (reduction) in taxes resulting
from:
Tax exempt interest on investment
securities (366) (339) (181) -4.48% -32.85% -2.71%
Non-taxable life insurance income (50) (62) (46) -0.61% -6.01% -0.69%
Other, net 130 (24) 129 1.59% -2.31% 1.94%
---------------------------------- ---------------------------------
$ 2,866 $ 38 $ 2,374 35.05% 3.68% 35.53%
================================== =================================
Significant components of deferred tax assets and liabilities at December
31, 2004 and 2003 are as follows:
(In thousands) 2004 2003
--------------------
Deferred tax assets:
Allowance for loan losses $ 4,224 $ 4,477
Deferred compensation 1,496 1,645
Net operating loss carryforwards 1,022 1,306
Directors fees 845 697
Contributions carryforwards 13 171
------- -------
Total deferred tax assets 7,600 8,296
------- -------
Deferred tax liabilities:
Unrealized security gains (192) (250)
Depreciation (608) (535)
Purchase accounting adjustments (206) (338)
FHLB stock (304) (304)
Other (305) (377)
------- -------
Total deferred tax liabilites (1,615) (1,804)
------- -------
Net deferred tax assets $ 5,985 $ 6,492
======= =======
At December 31, 2004 and 2003, the Company had net deferred tax assets of
$6.0 million and $6.5 million, respectively. A valuation allowance is
provided when it is more likely than not that some portion of the deferred
tax asset will not be realized. In management's opinion, it is more likely
than not that the results of future operations will generate sufficient
taxable income to recognize the deferred tax assets.
Included in deferred tax assets are the tax benefits derived from net
operating loss carryforwards totaling $3.0 million relating to a prior
acquisition which expire in various amounts through 2022. Management
expects to use be able to utilize all of these carryforward amounts before
they expire.
13. Leases
The Company has noncancelable operating leases for its corporate office
and branch locations that expire at various times through 2027. Future
minimum lease payments under the leases for years subsequent to December
31, 2004 are as follows:
-23-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands)
2005 $ 1,164
2006 1,028
2007 1,008
2008 1,000
2009 1,000
Thereafter 6,712
-------
$11,912
=======
During 2004, 2003, and 2002, payments under operating leases were $1.2
million, $1.1 million, and $806,000, respectively.
14. Regulatory Matters and Restrictions
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the
consolidated financial statements. Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios, as set forth in the table below. As of June 30, 2004,
the most recent notification from regulators, the Bank was categorized as
"well capitalized" by regulatory authorities. There are no conditions or
events since that date that management believes could have an adverse
effect on the Bank's category. Management believes that as of December 31,
2004, the Company meets all capital requirements to which it is subject.
The Bank, as a North Carolina banking corporation, may pay dividends only
out of undivided profits as determined pursuant to North Carolina General
Statues Section 53-87. At December 31, 2004, the undivided profits of the
Bank totaled $5.5 million. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a
limitation is in the public interest and is necessary to ensure financial
soundness of the bank.
To be categorized as well capitalized, the Company and the Bank must
maintain minimum amounts and ratios. The Company's actual capital amounts
and ratios as of December 31, 2004 and 2003 and the minimum requirements
are presented in the following table.
Minimum Requirements To Be:
Actual Adequately Capitalized Well Capitalized
--------------------- ---------------------- ---------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- -------- --------- -------- -------- --------
2004
----
Total Capital (to Risk Weighted Assets) $ 92,971 12.33% $ 60,310 8.00% $ 75,387 10.00%
Tier I Capital (to Risk Weighted Assets) 83,528 11.08% 30,155 4.00% 45,232 6.00%
Tier I Capital (to Average Assets) 83,528 9.61% 34,783 4.00% 43,479 5.00%
2003
----
Total Capital (to Risk Weighted Assets) $ 84,692 12.13% $ 55,853 8.00% $ 69,817 10.00%
Tier I Capital (to Risk Weighted Assets) 74,572 10.68% 27,927 4.00% 41,890 6.00%
Tier I Capital (to Average Assets) 74,572 8.71% 34,262 4.00% 42,827 5.00%
15. Employee Benefit Plans
401(k) Plan
-24-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company maintains a 401(k) plan (the "Plan") for the benefit of its
employees, which includes provisions for employee contributions, subject
to limitation under the Internal Revenue Code, with the Company to match
contributions up to 6% of the employee's salary. The Plan provides that
employees' contributions are 100% vested at all times and the Company's
contributions vest 20% after the second year of service, an additional 20%
after the third and fourth years of service and the remaining 40% after
the fifth year of service. Further, the Company may make additional
contributions on a discretionary basis. Aggregate contributions for 2004,
2003, and 2002 were $366,000, $387,000, and $342,000, respectively.
16. Stock Options
The Company has stock option plans providing for the issuance of up to
650,000 options to purchase shares of the Company's stock to officers and
directors. At December 31, 2004, options for 162,510 shares of common
stock remained available for future issuance. In addition, there were
approximately 567,000 options which were assumed under various plans from
previously acquired financial institutions, of which approximately 288,000
remain outstanding.
Grants of options are made by the Board or the Compensation Committee. All
grants must be at no less than fair market value on the date of grant,
must be exercised no later than 10 years from the date of grant, and may
be subject to some vesting provisions.
A summary of the activity during the years ending December 31, 2004, 2003
and 2002 of the Company's stock option plans, including the weighted
average exercise price ("WAEP") is presented below:
2004 2003 2002
----------------------------------------------------------------------------
Shares WAEP Shares WAEP Shares WAEP
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 704,540 $ 10.40 786,366 $ 9.70 416,694 $ 10.43
Granted 84,250 17.85 81,000 15.82 16,000 12.54
Assumed in connection with acquisitions -- -- -- -- 502,977 8.13
Exercised (69,264) 9.80 (125,854) 9.31 (147,645) 6.71
Terminated (26,002) 13.58 (36,972) 11.16 (1,660) 10.25
-------- -------- -------- -------- -------- --------
Outstanding at end of year 693,524 $ 11.25 704,540 $ 10.40 786,366 $ 9.70
======== ======== ======== ======== ======== ========
Options exercisable at year-end 580,010 $ 10.31 590,560 $ 9.66 720,394 $ 9.61
======== ======== ======== ======== ======== ========
The following table summarizes information about the Company's stock
options at December 31, 2004:
Weighted
Average
Remaining
Number Contractual Number
Exercise Price Outstanding Life in Years Exercisable
----------------------- ------------ ------------------ ------------
$6.62 - $9.00 266,570 4.72 263,820
$9.01 - $12.00 166,201 5.73 165,237
$12.01 - $15.00 95,192 3.67 87,992
$15.01 - $18.00 98,811 8.29 27,711
$18.01 - $18.37 66,750 9.99 35,250
------------ ------------------ ------------
693,524 5.83 580,010
============ ================== ============
-25-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
To meet the financial needs of its customers, the Company is party to
financial instruments with off-balance sheet risk in the normal course of
business. At December 31, 2004, these financial instruments were comprised
entirely of unused lines of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making these
commitments as they do for on-balance sheet instruments. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management's credit evaluation of the borrower.
Collateral held varies but may include trade accounts receivable,
property, plant, and equipment and income-producing commercial properties.
Since many unused lines of credit expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Unused lines of credit were $123.2 million and $115.3 million,
respectively, at the end of 2004 and 2003. Outstanding letters of credit
were $1.4 million and $1.6 million, respectively, at December 31, 2004 and
2003.
The Bank's lending is concentrated primarily in Wake, Chatham, Alamance,
Buncombe, Catawba, Granville, and Lee counties in North Carolina.
18. Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires the disclosure of estimated fair values for financial
instruments. Quoted market prices, if available, are utilized as an
estimate of the fair value of financial instruments. Because no quoted
market prices exist for a significant part of the Company's financial
instruments, the fair value of such instruments has been derived based on
management's assumptions with respect to future economic conditions, the
amount and timing of future cash flows and estimated discount rates.
Different assumptions could significantly affect these estimates.
Accordingly, the net amounts ultimately collected could be materially
different from the estimates presented below. In addition, these estimates
are only indicative of the values of individual financial instruments and
should not be considered an indication of the fair value of the Company
taken as a whole.
The fair values of cash and due from banks, Federal funds sold, interest
bearing deposits in banks and accrued interest receivable/payable are
equal to the carrying value due to the nature of the financial
instruments. The estimated fair values of investment securities are
provided in Note 4 - Securities.
The fair value of the net loan portfolio has been estimated using the
present value of expected cash flows, discounted at an interest rate
giving consideration to estimated prepayment risk and credit loss factors.
The fair value of the Bank's loan portfolio at December 31, 2004 and 2003
was as follows:
(In thousands) 2004 2003
---------------------
Loans:
Carrying amount $644,146 $614,332
Estimated fair value 643,663 617,705
The deposit liabilities and repurchase agreements with no stated
maturities are predominately at variable rates and, accordingly, the fair
values have been estimated to equal the carrying amounts (the amount
payable on demand), totaling $275.9 million and $269.8 million at December
31, 2004 and 2003, respectively.
The fair values of certificates of deposits and advances from the FHLB are
estimated by discounting the future cash flows using the current rates
offered for similar deposits and advances with the same remaining
-26-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
maturities. The carrying value and estimated fair values of certificates
of deposit, FHLB advances and subordinated debt at December 31, 2004 and
2003 were as follows:
(In thousands) 2004 2003
------------------------
Certificates of deposits:
Carrying amount $395,868 $370,817
Estimated fair value 395,348 373,286
Advances from the FHLB:
Carrying amount $102,320 $114,591
Estimated fair value 102,762 115,203
Subordinated Debt
Carrying amount $ 20,620 $ 20,620
Estimated fair value 21,170 20,718
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $124.6 million and $116.9
million at December 31, 2004 and 2003, respectively, which are primarily
comprised of unfunded loan commitments.
The Company's remaining assets and liabilities are not considered
financial instruments.
-27-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
19. Parent Company Financial Information
Condensed financial information of the financial holding company of the
Bank at December 31, 2004 and 2003 and for the years ended December 31,
2004, 2003, and 2002 is presented below:
(In thousands)
Condensed Balance Sheets 2004 2003
-----------------
Assets:
Cash $ 5,885 $ 3,514
Equity investment in subsidiary 92,020 90,245
Other assets 1,126 495
------- -------
Total assets $99,031 $94,254
======= =======
Liabilities:
Subordinated debentures $20,620 $20,630
Deferred tax liabilities 192 237
Dividends payable 397 327
Other liabilities 84 137
------- -------
Total liabilities 21,293 21,331
------- -------
Shareholders' equity:
Common stock 65,385 64,425
Accumulated other comprehensive income 305 377
Retained earnings 12,048 8,121
------- -------
Total shareholders' equity 77,738 72,923
------- -------
Total liabilities and shareholders' equity $99,031 $94,254
======= =======
(In thousands)
Condensed Statements of Operations 2004 2003 2002
------------------------------------
Dividends from wholly-owned subsidiaries $ 4,000 $ 750 $ 2,750
Undistributed earnings of subsidiaries 1,892 401 1,570
Other income 66 15 --
Interest expense (929) (249) --
Other expenses (17) (4) (13)
-------- -------- --------
Net income before tax benefits 5,012 913 4,307
Income tax benefit 299 81 --
-------- -------- --------
Net income $ 5,311 $ 994 $ 4,307
======== ======== ========
-28-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands)
Condensed Statements of Cash Flows 2004 2003 2002
------------------------------------
Operating activities:
Net income $ 5,311 $ 994 $ 4,307
Equity in undistributed earnings of subsidiary (1,892) (401) (1,570)
Net change in other assets and liabilities (693) (200) --
-------- -------- --------
Cash flow provided by operating activities 2,726 393 2,737
-------- -------- --------
Investing activities:
Additional investment in subsidiaries -- (14,594) --
-------- -------- --------
Cash flow used in investing activities -- (14,594) --
-------- -------- --------
Financing activities:
Proceeds from issuance of common stock 960 1,171 990
Payments to repurchase common stock -- (2,677) (4,945)
Proceeds from issuance of subordinated debentures, net
of issuance costs -- 20,120 --
Dividends paid (1,315) (1,314) (799)
Net cash from acquisitions -- -- 2,429
-------- -------- --------
Cash flow provided by (used in) financing activities (355) 17,300 (2,325)
-------- -------- --------
Net increase in cash and cash equivalents 2,371 3,099 412
Cash and cash equivalents, beginning of year 3,514 415 3
-------- -------- --------
Cash and cash equivalents, end of year $ 5,885 $ 3,514 $ 415
======== ======== ========
-29-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
20. Supplemental Disclosure of Cash Flow Information
2004 2003 2002
--------------------------------------
(In thousands)
Cash payments for interest $ 16,131 $ 16,552 $ 15,237
========= ========= =========
Cash payments for income taxes $ 1,398 $ 1,008 $ 1,775
========= ========= =========
Dividends payable $ 397 $ 328 $ 332
========= ========= =========
Transfers from loans to real estate acquired
through foreclosure $ 1,221 $ 854 $ 1,708
========= ========= =========
Purchase of First Community:
Loans, net of reserves $ -- $ -- $(134,149)
Investments -- -- (39,001)
Other assets acquired -- -- (10,435)
Goodwill and deposit premium -- -- (4,617)
Deposits -- -- 156,241
Borrowings -- -- 16,414
Other liabilities assumed -- -- 3,342
Issuance of stock -- -- 20,854
--------- --------- ---------
Net cash and cash equivalents acquired $ -- $ -- $ 8,649
========= ========= =========
Purchase of High Street:
Loans, net of reserves $ -- $ -- $(126,175)
Investments -- -- (12,275)
Other assets acquired -- -- (7,062)
Goodwill and deposit premium -- -- (6,295)
Deposits -- -- 132,485
Borrowings -- -- 12,290
Other liabilities assumed -- -- 1,446
Issuance of stock -- -- 17,632
--------- --------- ---------
Net cash and cash equivalents acquired $ -- $ -- $ 12,046
========= ========= =========
Sale of Northern Region branches
Loans, net of reserves $ 12,830 $ -- $ --
Property and equipment 258 -- --
Other assets and liabilities, net 1,030 -- --
Goodwill written off 1,218 -- --
Deposits (39,554) -- --
Net gain on sale 1,164 -- --
--------- --------- ---------
Net cash and cash equivalents sold $ (23,054) $ -- $ --
========= ========= =========
Sale of mortgage portfolio
Loans, net of reserves $ 18,722 $ -- $ --
Real estate owned 152 -- --
Other assets and liabilities, net 113 -- --
Net loss on sale (320) -- --
--------- --------- ---------
Net cash and cash equivalents acquired $ 18,667 $ -- $ --
========= ========= =========
-30-
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
21. Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly balances and results for the years ended
December 31, 2004 and 2003 are as follows:
2004
---------------------------------------------------
Three Months Ended
---------------------------------------------------
(In thousands, except per share data) Dec. 31 Sept. 30 June 30 March 31
---------------------------------------------------
Assets $ 882,294 $ 875,713 $ 885,754 $ 891,703
Loans 654,867 657,359 657,537 642,407
Investment securities 160,580 154,694 150,340 159,349
Deposits 654,976 647,037 671,796 678,817
Shareholders' equity 77,738 76,370 72,615 75,440
Net interest income $ 6,945 $ 6,689 $ 6,231 $ 6,269
Provision for loan losses 357 268 297 116
Other operating income 1,480 2,280 1,544 1,601
Other operating expenses 5,938 6,179 6,070 5,637
Income taxes 740 872 517 737
--------- --------- --------- ---------
Net income $ 1,390 $ 1,650 $ 891 $ 1,380
========= ========= ========= =========
Net income per share - Basic $ .21 $ .25 $ .13 $ .21
========= ========= ========= =========
Net income per share - Diluted $ .20 $ .24 $ .13 $ .20
========= ========= ========= =========
2003
---------------------------------------------------
Three Months Ended
---------------------------------------------------
(In thousands, except per share data) Dec. 31 Sept. 30 June 30 March 31
---------------------------------------------------
Assets $ 857,734 $ 871,780 $ 908,677 $ 856,076
Loans 625,945 637,745 645,525 622,015
Investment securities 165,913 166,940 161,938 155,835
Deposits 629,619 656,030 684,180 652,690
Shareholders' equity 72,923 70,776 75,144 76,512
Net interest income $ 6,274 $ 5,941 $ 5,972 $ 5,935
Provision for loan losses (12) 4,963 2,696 600
Other operating income 1,898 3,080 2,739 2,605
Other operating expenses 5,847 7,593 5,777 5,948
Income taxes 766 (1,392) (47) 711
--------- --------- --------- ---------
Net income (loss) $ 1,571 $ (2,143) $ 285 $ 1,281
========= ========= ========= =========
Net income (loss) per share - Basic $ .24 $ (.32) $ .04 $ .19
========= ========= ========= =========
Net income (loss) per share - Diluted $ .24 $ (.32) $ .04 $ .19
========= ========= ========= =========
-31-
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Bank Corporation
In our opinion, the consolidated balance sheets and the related statements of
operations, of changes in shareholders' equity, and of cash flows present
fairly, in all material respects, the financial position of Capital Bank
Corporation at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers, LLP
Raleigh, North Carolina
March 10, 2005
-32-
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements. The financial statements and information listed
below are included in this Amendment No. 1 to Form 10-K in Part I, Item 8:
Financial Statements and Information
------------------------------------
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(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 have been included in the Notes to the Consolidated Financial
Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed
in the Exhibit Index immediately following the signature pages to this report.
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Raleigh, North Carolina, on the 19th day of April, 2005.
CAPITAL BANK CORPORATION
By: /s/ Richard W. Edwards
-------------------------------------
Richard W. Edwards
Chief Financial Officer
-34-
EXHIBIT INDEX
Exhibit No. Description
3.01(1) Articles of Incorporation of the Company 3.02(2) Bylaws of the
Company, as amended to date 4.01(1) Specimen Common Stock
Certificate of the Company
4.02 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long-term debt of the registrant
have been omitted but will be furnished to the Commission upon
request.
10.01(1,3) Equity Incentive Plan
10.02(1,3) Deferred Compensation Plan for Outside Directors
10.03(3,4) Employment Agreement dated April 21, 2004 between B. Grant Yarber
and Capital Bank Corporation
10.04(3,4) Employment Agreement dated April 16, 2004 between Richard W.
Edwards and Capital Bank Corporation
10.05(3,5) Change of Control Agreement dated May 3, 2004 between Karen H.
Priester and Capital Bank.
10.06(6) Lease Agreement, dated November 16, 1999, between Crabtree Park,
LLC and the Company.
10.07(2) Agreement, dated November 2001 between Fiserv Solutions, Inc. and
the Company.
21 * Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
31.01 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. [This
exhibit is being furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by that act, be deemed to be incorporated by reference
into any document or filed herewith for purposes of liability
under the Securities Exchange Act of 1934, as amended, or the
Securities Act of 1933, as amended, as the case may be.]
32.02 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. [This
exhibit is being furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by that act, be deemed to be incorporated by reference
into any document or filed herewith for purposes of liability
under the Securities Exchange Act of 1934, as amended, or the
Securities Act of 1933, as amended, as the case may be.]
1. 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.
2. Incorporated by reference to the Company's Annual Report on Form 10-K
filed with the SEC on March 29, 2002.
3. Denotes a management contract or compensatory plan, contract or
arrangement.
4. Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed with the SEC on May 7, 2004.
5. Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed with the SEC on August 3, 2004.
6. Incorporated by reference to the Company's Annual Report on Form 10-K
filed with the SEC on March 27, 2000.
* Previously Filed
-35-