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, 2005
[ ] 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. X Yes No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). X Yes No
--- ---
As of August 4, 2005 there were 6,722,309 shares outstanding of the registrant's
common stock, no par value.
Capital Bank Corporation
Form 10-Q
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated statements of financial condition at June 30, 2005
(Unaudited) and December 31, 2004 1
Condensed consolidated statements of income for the three months
ended June 30, 2005 and 2004 (Unaudited) 2
Condensed consolidated statements of income for the six months
ended June 30, 2005 and 2004 (Unaudited) 3
Condensed consolidated statements of changes in shareholders' equity for
the six months ended June 30, 2005 and 2004 (Unaudited) 4
Condensed consolidated statements of cash flows for the six months
ended June 30, 2005 and 2004 (Unaudited) 5 - 6
Notes to condensed consolidated financial statements 7 - 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13 - 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32 - 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33 - 34
Item 5. Other Information 34
Item 6. Exhibits 34 - 35
Signatures 36
Item 1 Financial Statements
--------------------
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and December 31, 2004
June 30, December 31,
2005 2004
- ------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 7,982 $ 971
Noninterest earning 24,209 22,036
Federal funds sold and short term investments 22,038 4
Investment securities - available for sale, at fair value 141,295 140,946
Investment securities - held to maturity, at amortized cost 14,182 13,336
Federal Home Loan Bank stock 6,345 6,298
Loans - net of unearned income and deferred fees 648,765 654,867
Allowance for loan losses (10,075) (10,721)
------------ ------------
Net loans 638,690 644,146
------------ ------------
Premises and equipment, net 16,179 15,608
Bank owned life insurance 19,280 13,500
Deposit premium and goodwill, net 12,958 13,065
Deferred tax assets 6,131 5,985
Accrued interest receivable and other assets 8,103 6,399
------------ ------------
Total assets $ 917,392 $ 882,294
============ ============
LIABILITIES
Deposits:
Demand, noninterest bearing $ 81,778 $ 65,673
Savings and interest bearing demand deposits 217,627 193,435
Time deposits 390,592 395,868
------------ ------------
Total deposits 689,997 654,976
------------ ------------
Repurchase agreements and federal funds purchased 15,326 16,755
Federal Home Loan Bank advances 101,203 102,320
Subordinated debentures 20,620 20,620
Accrued interest payable and other liabilities 10,747 9,885
------------ ------------
Total liabilities 837,893 804,556
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares authorized;
6,625,870 and 6,612,787 issued and outstanding as of
June 30, 2005 and December 31, 2004, respectively 68,184 68,341
Retained earnings 11,458 9,092
Accumulated other comprehensive income (loss) (143) 305
------------ ------------
Total shareholders' equity 79,499 77,738
------------ ------------
Total liabilities and shareholders' equity $ 917,392 $ 882,294
============ ============
See Notes to Condensed Consolidated Financial Statements
-1-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2005 and 2004
2005 2004
- ------------------------------------------------------------------------------------
(Dollars in thousands, except per share) (Unaudited)
Interest income:
Loans and loan fees $ 10,405 $ 8,572
Investment securities 1,727 1,552
Federal funds and other interest income 116 39
-------- --------
Total interest income 12,248 10,163
-------- --------
Interest expense:
Deposits 3,676 2,913
Borrowings and repurchase agreements 1,412 1,019
-------- --------
Total interest expense 5,088 3,932
-------- --------
Net interest income 7,160 6,231
Provision (credit) for loan losses (156) 297
-------- --------
Net interest income after provision for loan losses 7,316 5,934
-------- --------
Noninterest income:
Service charges and other fees 714 768
Mortgage banking revenues 386 365
Net gain on sale of securities 1 --
Other noninterest income 478 411
-------- --------
Total noninterest income 1,579 1,544
-------- --------
Noninterest expenses:
Salaries and employee benefits 3,479 3,061
Occupancy 626 582
Furniture and equipment 370 474
Data processing 318 301
Advertising 163 222
Amortization of deposit premium 53 61
Other expenses 1,480 1,369
-------- --------
Total noninterest expenses 6,489 6,070
-------- --------
Income before income tax expense 2,406 1,408
Income tax expense 803 517
-------- --------
Net income $ 1,603 $ 891
======== ========
Earnings per share - basic $ 0.24 $ 0.13
======== ========
Earnings per share - diluted $ 0.23 $ 0.13
======== ========
Weighted average shares
Basic 6,731 6,709
======== ========
Fully diluted 6,871 6,883
======== ========
See Notes to Condensed Consolidated Financial Statements
-2-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2005 and 2004
2005 2004
- ------------------------------------------------------------------------------------
(Dollars in thousands, except per share) (Unaudited)
Interest income:
Loans and loan fees $ 20,147 $ 17,043
Investment securities 3,424 3,270
Federal funds and other interest income 133 81
-------- --------
Total interest income 23,704 20,394
-------- --------
Interest expense:
Deposits 6,858 5,775
Borrowings and repurchase agreements 2,780 2,119
-------- --------
Total interest expense 9,638 7,894
-------- --------
Net interest income 14,066 12,500
Provision (credit) for loan losses (406) 413
-------- --------
Net interest income after provision for loan losses 14,472 12,087
-------- --------
Noninterest income:
Service charges and other fees 1,371 1,495
Mortgage banking revenues 658 702
Net gain on sale of securities 7 13
Other noninterest income 883 935
-------- --------
Total noninterest income 2,919 3,145
-------- --------
Noninterest expenses:
Salaries and employee benefits 6,628 5,903
Occupancy 1,240 1,154
Furniture and equipment 737 839
Data processing 629 623
Advertising 379 424
Amortization of deposit premium 107 126
Other expenses 2,919 2,638
-------- --------
Total noninterest expenses 12,639 11,707
-------- --------
Income before income tax expense 4,752 3,525
Income tax expense 1,594 1,254
-------- --------
Net income $ 3,158 $ 2,271
======== ========
Earnings per share - basic $ 0.47 $ 0.34
======== ========
Earnings per share - diluted $ 0.46 $ 0.33
======== ========
Weighted average shares
Basic 6,743 6,699
======== ========
Fully diluted 6,906 6,885
======== ========
See Notes to Condensed Consolidated Financial Statements
-3-
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 2005 and 2004
(Dollars in thousands, except per share)
Shares of Other
Common Common Comprehensive Retained
Stock Stock Income Earnings Total
----------- ---------- -------------- ---------- ----------
(Unaudited)
Balance at January 1, 2004 6,541,495 $ 67,381 $ 377 $ 5,165 $ 72,923
Issuance of common stock
for options exercised 44,721 444 -- -- 444
Net income -- -- -- 2,271 2,271
Other comprehensive income -- -- (2,365) -- (2,365)
----------
Comprehensive income (94)
----------
Dividends ($0.10 per share) -- -- -- (658) (658)
---------- ---------- -------------- ---------- ----------
Balance at June 30, 2004 6,586,216 $ 67,825 $ (1,988) $ 6,778 $ 72,615
========== ========== ============== ========== ==========
Balance at January 1, 2005 6,612,787 $ 68,341 $ 305 $ 9,092 $ 77,738
Repurchase of outstanding common stock (50,000) $ (892) $ -- $ -- (892)
Issuance of common stock
for services 40,241 380 -- -- 380
Issuance of common stock
for options exercised 22,842 355 -- -- 355
Net income -- -- -- 3,158 3,158
Other comprehensive income -- -- (448) -- (448)
----------
Comprehensive income 2,710
----------
Dividends ($0.12 per share) -- -- -- (792) (792)
---------- ---------- -------------- ---------- ----------
Balance at June 30, 2005 6,625,870 $ 68,184 $ (143) $ 11,458 $ 79,499
========== ========== ============== ========== ==========
See Notes to Condensed Consolidated Financial Statements
-4-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004
2005 2004
- --------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Cash Flows From Operating Activities
Net income $ 3,158 $ 2,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deposit premium 107 126
Depreciation 731 744
Net gains on sale of securities available for sale (7) (13)
Gain on disposal of equipment 3 --
Change in held for sale loans, net -- (787)
Amortization of premiums on securities, net 147 407
Deferred income tax expense 136 309
Issuance of stock for compensation 255 --
Net proceeds from sale of loans held for sale (3,914) --
Provision (credit) for loan losses (406) 413
Changes in assets and liabilities:
Accrued interest receivable and other assets (6,480) 129
Accrued interest payable and other liabilities 960 472
Other operating activities, net -- 69
-------- --------
Net cash used for operating activities (5,310) 4,140
-------- --------
Cash Flows From Investing Activities
Loan (originations) repayments, net 8,775 (31,813)
Additions to premises and equipment (1,324) (2,236)
Net (purchases) sales of Federal Home Loan Bank stock (47) 603
Purchase of securities available for sale (15,761) (27,424)
Purchase of securities held to maturity (1,560) --
Proceeds from maturities of securities available for sale 10,146 22,137
Proceeds from sales of securities available for sale 4,399 16,013
Proceeds from maturities of securities held to maturity 711 --
Proceeds from sales of property and equipment 19 645
Other investing activities, net -- --
-------- --------
Net cash provided by (used in)
investing activities 5,358 (22,075)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 35,021 42,177
Net increase (decrease) in repurchase agreements (1,429) (2,186)
Net increase (decrease) in borrowings -- (12,135)
Principal repayments of FHLB borrowings (1,117) --
Dividends paid (792) (658)
Issuance of common stock for options and other plans 379 444
Repurchase of common stock (892) --
-------- --------
Net cash provided by financing activities 31,170 27,642
-------- --------
Net change in cash and cash equivalents 31,218 9,707
Cash and cash equivalents:
Beginning of period 23,011 25,610
-------- --------
Ending at June 30 $ 54,229 $ 35,317
======== ========
(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, 2005 and 2004
2005 2004
- --------------------------------------------------------------------------------
(In thousands) (Unaudited)
Supplemental Disclosure of Cash Flow Information
Transfer from loans to real estate acquired
through foreclosure $ 1,004 $ 399
======== ========
Dividends payable $ 397 $ 328
======== ========
Cash paid for:
Income taxes $ 1,713 $ 384
======== ========
Interest $ 9,386 $ 7,777
======== ========
See Notes to Condensed Consolidated Financial Statements
-6-
Notes to 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
subsidiary, Capital Bank (the "Bank"). 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 have not been consolidated with the
financial statements of the Company. The interim financial statements have been
prepared in accordance with generally accepted accounting principles. 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 Annual Report on Form 10-K for the year ended
December 31, 2004, as amended. 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 three month and six month period ended June 30, 2005 are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the Company's
audited consolidated financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, as amended.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004, as amended.
2. 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 comprehensive income for the six month
periods ended June 30, 2005 and 2004 are as shown in the Company's Consolidated
Statements of Changes in Shareholder's Equity for the six months ended June 30,
2005 and 2004 (unaudited). 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 and are as follows:
-7-
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
Three and Six Months Ended June 30, 2005 and 2004
2005 2004
- ---------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Three month period ended June 30, 2005 and 2004:
Net income $ 1,603 $ 891
Reclassification of gains recognized in net income (1) --
Unrealized gains (losses) on securities available for sale 998 (5,677)
Income tax benefit (expense) (384) 2,189
----------- -----------
Comprehensive income (loss) $ 2,216 $ (2,597)
=========== ===========
Six month period ended June 30, 2005 and 2004:
Net income $ 3,158 $ 2,271
Reclassification of gains recognized in net income (7) (13)
Unrealized gains (losses) on securities available for sale (723) (3,825)
Income tax benefit (expense) 282 1,473
----------- -----------
Comprehensive income (loss) $ 2,710 $ (94)
=========== ===========
3. 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 the
Company, 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, 2005 and 2004, respectively:
-8-
2005 2004
--------------------------
(Dollars in thousands) (Unaudited)
Three month periods ended June 30, 2005 and 2004:
Income available to shareholders - basic and diluted $ 1,603 $ 891
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,730,979 6,708,742
Incremental shares from assumed exercise of stock
options 139,842 174,415
----------- -----------
Weighted average number of shares outstanding - diluted 6,870,821 6,883,157
=========== ===========
Six month periods ended June 30, 2005 and 2004:
Income available to shareholders - basic and diluted $ 3,158 $ 2,271
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 6,742,712 6,698,844
Incremental shares from assumed exercise of stock
options 163,521 186,018
----------- -----------
Weighted average number of shares outstanding - diluted 6,906,233 6,884,862
=========== ===========
Options to purchase approximately 571,633 shares of common stock were used in
the diluted calculation. An aggregate of 75,750 options were not included in the
diluted calculation because the option price exceeded the average fair market
value of the associated shares of common stock.
4. Stock Based Compensation
The Company has a stock option plan under which options to purchase Company
common stock may be granted periodically to certain employees. Grants of options
are made by the Board of Directors or its 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
certain vesting provisions.
The Company accounts for stock options under the provisions of APB Opinion No.
25 ("APB 25"), Accounting for Stock Issued to Employees. However, under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 ("FAS
123"), Accounting for Stock-Based Compensation, the Company is required to
disclose the pro forma effects on net income as if it had recorded compensation
based on the fair value of options granted. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with certain assumptions. Option pricing models require the use of highly
subjective assumptions, including expected stock price volatility, which if
changed can materially affect fair value estimates.
Under SFAS No. 148 ("FAS 148"), Accounting for Stock-Based
Compensation--Transition and Disclosure, companies are required to disclose for
each period for which an income statement is
-9-
presented an accounting policy footnote that includes: (i) the method of
accounting for stock options; (ii) total stock compensation cost that is
recognized in the income statement and would have been recognized had FAS 123
been adopted for recognition purposes as of its effective date; and (iii) pro
forma net income and earnings per share (where applicable) that would have been
reported had FAS 123 been adopted for recognition purposes as of its effective
date. These disclosures are required to be made in annual financial statements
and in quarterly information provided to shareholders without regard to whether
the entity has adopted FAS 123 for recognition purposes.
The Company granted 6,000 options to purchase its shares of common stock at a
weighted average price of $17.49 during the first six months of 2005. For the
three and six month periods ended June 30, 2005, the following table summarizes
the net income and stock-based compensation expense, as reported, compared to
pro forma amounts had the fair value method been applied:
-10-
2005 2004
--------------------------
(Unaudited)
(Dollars in thousands, except per share)
Three month periods ended June 30, 2005 and 2004:
Net income, as reported $ 1,603 $ 891
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (38) (39)
--------------------------
Pro forma net income $ 1,565 $ 852
==========================
Earnings per share:
Basic - as reported $ 0.24 $ 0.13
Basic - pro forma $ 0.24 $ 0.13
Diluted - as reported $ 0.23 $ 0.13
Diluted - pro forma $ 0.23 $ 0.13
Six month periods ended June 30, 2005 and 2004:
Net income, as reported $ 3,158 $ 2,271
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (86) (81)
--------------------------
Pro forma net income $ 3,072 $ 2,190
==========================
Earnings per share:
Basic - as reported $ 0.47 $ 0.34
Basic - pro forma $ 0.46 $ 0.33
Diluted - as reported $ 0.46 $ 0.33
Diluted - pro forma $ 0.45 $ 0.32
The implementation of SFAS No.123R, Share Based Payment, has been delayed and
will not take effect until January 1, 2006. Additional details on the expected
impact on the Company as a result of implementation of SFAS No.123R is included
in footnote 1 to the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K, as amended.
5. Investment Securities
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 June 30, 2005:
-11-
(Unaudited)
(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 $ 12,624 $ 76 $ 18,503 $ 503 $ 31,127 $ 579
Municipal bonds 1,854 13 2,120 67 3,974 80
Federal agency mortgage-
backed securities 39,733 267 14,937 293 54,670 560
---------------------------------------------------------------------------
54,211 356 35,560 863 89,771 1,219
---------------------------------------------------------------------------
Held to maturity
Direct obligations of U.S.
government agencies 5,541 44 -- -- 5,541 44
Municipal bonds 294 6 -- -- 294 6
Federal agency mortgage-
backed securities 8,236 61 -- -- 8,236 61
---------------------------------------------------------------------------
14,071 111 -- -- 14,071 111
---------------------------------------------------------------------------
$ 68,282 $ 467 $ 35,560 $ 863 $ 103,842 $ 1,330
===========================================================================
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 June 30, 2005.
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. 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
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 June 30, 2005.
-12-
6. Loans
The composition of the loan portfolio by loan classification at June 30, 2005
and December 31, 2004 is as follows:
June 30, December 31,
(Dollars in thousands) 2005 2004
-------- ------------
Commercial $524,635 $ 531,834
Consumer 33,503 34,865
Home equity lines 61,349 61,925
Residential mortgages 29,036 26,020
-------- ------------
648,523 654,644
Plus deferred loan costs, net 242 223
-------- ------------
$648,765 $ 654,867
======== ============
Loans held for sale as of June 30, 2005 and December 31, 2004 were $7.3 million
and $3.4 million, respectively, and were included in the residential mortgage
category.
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 period ended June 30, 2005 and 2004 for
Capital Bank Corporation (the "Company") and it's wholly owned subsidiary,
Capital Bank (the "Bank"). This discussion and analysis is intended to provide
pertinent information concerning financial position, results of operations,
liquidity, and capital resources for the periods covered and 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, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), 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 this discussion and analysis, and the Company's periodic reports
and other filings with the Securities and Exchange Commission (the "SEC").
-13-
Risk Factors
You should consider the following material risk factors carefully before
deciding to invest in Capital Bank Corporation securities. Additional risks and
uncertainties not presently known to us, that we may currently deem to be
immaterial or that are similar to those faced by other companies in our industry
or business in general, such as competitive conditions, may also impact our
business operations. If any of the events described below occur, the Company's
business, financial condition, or results of operations could be materially
adversely affected. In that event, the trading price of the Company's common
stock may decline, in which case the value of your investment may decline as
well.
Our Results Are Impacted by the Economic Conditions of Our Principal Operating
Regions
Our operations are concentrated throughout Central and Western North Carolina.
As a result of this geographic concentration, our results may correlate to the
economic conditions in these areas. Deterioration in economic conditions in any
of these market areas, particularly in the industries on which these geographic
areas depend, may adversely affect the quality of our loan portfolio and the
demand for our products and services, and accordingly, our results of
operations.
We Are Exposed to Risks in Connection with the Loans We Make
A significant source of risk for us arises from the possibility that losses will
be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. We have underwriting and
credit monitoring procedures and credit policies, including the establishment
and review of the allowance for loan losses, that we believe are appropriate to
minimize this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying our loan portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could adversely affect our
results of operations.
We Compete With Larger Companies for Business
The banking and financial services business in our market areas continues to be
a competitive field and is becoming more competitive as a result of:
o Changes in regulations;
o Changes in technology and product delivery systems; and
o The accelerating pace of consolidation among financial services
providers.
We may not be able to compete effectively in our markets, and our results of
operations could be adversely affected by the nature or pace of change in
competition. We compete for loans, deposits and customers with various bank and
non-bank financial services providers, many of which have substantially greater
resources including higher total assets and capitalization, greater access to
capital markets and a broader offering of financial services.
Our Trading Volume Has Been Low Compared With Larger Banks
The trading volume in our common stock on the NASDAQ National Market has been
comparable to other similarly-sized banks. Nevertheless, this trading is
relatively low when
-14-
compared with more seasoned companies listed on the NASDAQ National Market or
other consolidated reporting systems or stock exchanges. Thus, the market in our
common stock may be limited in scope relative to other companies.
We Depend Heavily on Our Key Management Personnel
Our success depends in part on our ability to retain key executives and to
attract and retain additional qualified management personnel who have experience
both in sophisticated banking matters and in operating a small to mid-size bank.
Competition for such personnel is strong in the banking industry and we may not
be successful in attracting or retaining the personnel we require. We expect to
effectively compete in this area by offering financial packages that include
incentive-based compensation and the opportunity to join in the rewarding work
of building a growing bank.
Technological Advances Impact Our Business
The banking industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, on our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations. Many of our competitors have substantially greater resources
than we do to invest in technological improvements. We may not be able to
effectively implement new technology-driven products and services or
successfully market such products and services to our customers.
Government Regulations May Prevent or Impair Our Ability to Pay Dividends,
Engage in Acquisitions or Operate in Other Ways
Current and future legislation
and the policies established by federal and state regulatory authorities will
affect our operations. We are subject to supervision and periodic examination by
the Federal Deposit Insurance Corporation and the North Carolina State Banking
Commission. Banking regulations, designed primarily for the protection of
depositors, may limit our growth and the return to you, our investors, by
restricting certain of our activities, such as:
o The payment of dividends to our shareholders;
o Possible mergers with or acquisitions of or by other institutions;
o Our desired investments;
o Loans and interest rates on loans;
o Interest rates paid on our deposits;
o The possible expansion of our branch offices; and/or
o Our ability to provide securities or trust services.
We also are subject to capitalization guidelines set forth in federal
legislation, and could be subject to enforcement actions to the extent that we
are found by regulatory examiners to be undercapitalized. We cannot predict what
changes, if any, will be made to existing federal and state legislation and
regulations or the effect that such changes may have on our future business and
earnings prospects. The cost of compliance with regulatory requirements
including those imposed by the SEC may adversely affect our ability to operate
profitably.
-15-
There Are Potential Risks Associated With Future Acquisitions and Expansions
We intend to continue to explore expanding our branch system through selective
acquisitions of existing banks or bank branches in the Research Triangle area
and other North Carolina markets. We cannot say with any certainty that we will
be able to consummate, or if consummated, successfully integrate, future
acquisitions, or that we will not incur disruptions or unexpected expenses in
integrating such acquisitions. In the ordinary course of business, we evaluate
potential acquisitions that would bolster our ability to cater to the small
business, individual and residential lending markets in North Carolina. In
attempting to make such acquisitions, we anticipate competing with other
financial institutions, many of which have greater financial and operational
resources. In addition, since the consideration for an acquired bank or branch
may involve cash, notes or the issuance of shares of common stock, existing
shareholders could experience dilution in the value of their shares of the our
common stock in connection with such acquisitions. Any given acquisition, if and
when consummated, may adversely affect our results of operations or overall
financial condition.
In addition, we may expand our branch network through de novo branches in
existing or new markets. These de novo branches will have expenses in excess of
revenues for varying periods after opening that could decrease our reported
earnings.
Compliance with Changing Regulation of Corporate Governance and Public
Disclosure May Result in Additional Risks and Expenses
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC
regulations, are creating uncertainty for companies such as ours. These laws,
regulations and standards are subject to varying interpretations in many cases,
and as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We are
committed to maintaining high standards of corporate governance and public
disclosure. As a result, our efforts to comply with evolving laws, regulations
and standards have resulted in, and are likely to continue to result in,
increased expenses and a diversion of management time and attention. In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding management's required assessment of
our internal control over financial reporting and our external auditors' audit
of that assessment has required the commitment of significant financial and
managerial resources. We expect these efforts to require the continued
commitment of significant resources. Further, the members of our Board of
Directors, members of the Audit or Compensation committees, our Chief Executive
Officer, our Chief Financial Officer and certain other of our executive officers
could face an increased risk of personal liability in connection with the
performance of their duties. As a result, our ability to attract and retain
executive officers and qualified Board and committee members could be more
difficult. In addition, it may become more difficult and more expensive to
obtain director and officer liability insurance.
-16-
Our Proposed Transaction with 1st State Bancorp, Inc. is Subject to
Uncertainties.
Our proposed transaction with 1st State Bancorp, Inc. is subject to customary
closing conditions, including regulatory and shareholder approval. If any of the
conditions to closing are not satisfied or waived, the proposed transaction
would not be completed. In addition, the merger agreement relating to the
proposed transaction can be terminated prior to completion of the transaction
under certain circumstances, including where 1st State Bancorp receives an
acquisition proposal from a third party that its board believes is more
favorable to its shareholders than the proposed transaction (after following
specific procedures described in our merger agreement with 1st State Bancorp).
If the merger agreement is terminated, the proposed transaction would not be
completed, and, in certain circumstances, 1st State Bancorp could be required to
pay us a termination fee of $2 million. If the merger is not completed, the
value of our common stock could decline. We are currently targeting to close the
proposed transaction, assuming the satisfaction or waiver of all conditions, in
the first quarter of 2006. The closing of the proposed transaction could be
delayed beyond the first quarter of 2006 due to many factors, including factors
beyond the control of either party.
Overview
Capital Bank Corporation is a financial holding company incorporated under the
laws of the state of North Carolina on August 10, 1998. The Company's primary
function is to serve as the holding company for its wholly-owned subsidiary,
Capital Bank (the "Bank"). 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 have not been consolidated with the financial
statements of the Company. The Bank was incorporated under the laws of the State
of North Carolina on May 30, 1997 and commenced operations as a state-chartered
banking corporation on June 20, 1997. The Bank is not a member of the Federal
Reserve System and has no subsidiaries.
Capital Bank is a community bank engaged in the general commercial banking
business in Wake, Chatham, Granville, Alamance, Lee, Buncombe, Guilford and
Catawba Counties of North Carolina. Wake County has a diversified economic base,
comprised primarily of services, retail trade, government and manufacturing and
includes the City of Raleigh, the state capital. Lee, Granville, and Chatham
counties are significant centers for various industries, including agriculture,
manufacturing, lumber and tobacco. Alamance and Guilford counties have a
diversified economic base, comprised primarily of manufacturing, agriculture,
retail and wholesale trade, government, services and utilities. Catawba County,
which includes Hickory, is a regional center for manufacturing and wholesale
trade. The economic base of Buncombe County is comprised primarily of services,
medical, tourism and manufacturing industries and includes the city of
Asheville.
The Bank offers a full range of banking services, including the following:
checking accounts; savings accounts; NOW accounts; money market accounts;
certificates of deposit; loans for real estate, construction, businesses,
agriculture, personal uses, home improvement and automobiles; home equity lines
of credit; consumer loans; individual retirement accounts; safe deposit boxes;
bank money orders; internet banking; electronic funds transfer services
including wire transfers; traveler's checks; various investments; and free
notary services to all Bank customers. In addition, the Bank provides automated
teller machine access to its customers for cash withdrawals through nationwide
ATM networks. At present, the Bank does not provide the services of a trust
department.
-17-
The Bank offers non-insured investment products and services by Capital Bank
Financial Services through a partnership with Capital Investment Group, a
leading Raleigh, North Carolina based broker-dealer. The Bank employs
commission-based financial advisors to offer full-service brokerage to
individual and corporate customers.
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 subordinated debentures (the "Debentures"), which are the sole
assets of the Trusts. 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.
The Company has no operations other than those of its subsidiaries.
Executive Summary
As discussed in more detail below, the following is a brief summary of certain
of our significant quarterly results:
o The Company reported net income for the second quarter 2005 of
$1,603,000 compared to $891,000 in the second quarter of 2004.
Earnings per fully diluted share increased to $.23 from $.13 for the
second quarter 2004
o For the six months ended June 30, 2005 and 2004, respectively, the
Company reported net income of $3,158,000 and $2,271,000. Fully
diluted earnings per share were $.46 and $.33 for the six months
ended June 30, 2005 and 2004, respectively.
o For the three months ended June 30, 2005, the credit provision for
loan losses was $(156,000) compared to a provision of $297,000 for
the three months ended June 30, 2004. Net charge-offs for the three
months ended June 30, 2005 were $138,000, or 0.09% of average loans,
compared to $101,000, or 0.06% of average loans, for the three
months ended June 30, 2004. For the six months ended June 30, 2005
and 2004 the provision expense was $(406,000) and $413,000,
respectively. The significant decline in the provision expense
during the periods is largely due to improved credit quality and
also a modest decline in loan balances. See "Asset Quality" section
for further discussion.
o Net interest income increased $929,000 from $6.2 million for the
three month period ended June 30, 2004, to $7.1 million for the same
period in 2005. The Company's net interest margin increased by 2
basis points compared to first quarter of 2005 to 3.55%. For the six
months ended June 30, 2005 and 2004 net interest income was
$14,066,000 and $12,500,000, respectively. The increase is
attributable to increases in short-term interest rates as the
Federal Reserve Open Market Committee's benchmark federal funds rate
has been increased 9 times since June 30, 2004 reaching 3.25% at
June 30, 2005.
o Noninterest income for the three month period ended June 30, 2005,
approximated noninterest income for the same period of 2004. For the
six months ended June 30, 2005 and 2004 noninterest income declined
slightly to $2.9 million from $3.1 million,
-18-
respectively. The largest single component of the decline was due to
gains on the sale of repossessed property recorded in the first
quarter 2004.
o Noninterest expense was $6.5 million for the three month period
ended June 30, 2005 compared to $6.1 million for the same period of
2004. Increases in salaries and employee benefits, the largest
noninterest expense category, were the primary cause of the overall
noninterest expense increase as those costs moved to $3.5 million
for the three month period ended June 30, 2005 from $3.1 million for
the same period in 2004. Approximately 50% of the increase was
attributable to severance payments for an executive officer that
left the Company in April 2005. The remaining increase was primarily
due to an increase in the number of personnel employed by the
Company and management's intention to maintain adequate staffing to
meet customer's needs and keep pace with expected growth.
Merger with 1st State Bancorp, Inc.
On June 29, 2005, the Company announced that it had entered into a definitive
agreement with 1st State Bancorp, Inc., ("1st State"), headquartered in
Burlington, North Carolina whereby 1st State will be merged with and into the
Company. 1st State shareholders will receive approximately $37.15 (in cash
and/or stock) per share of 1st State common stock. The Company filed a Current
Report on Form 8-K on June 29, 2005 which among other things more fully
describes the proposed transaction and attaches the definitive agreement.
Financial Condition
Total consolidated assets of the Company at June 30, 2005 were $917.4 million
compared to $882.3 million at December 31, 2004, an increase of $35.1 million,
or almost 4%. Overall growth in the balance sheet was due to growth of core
deposits, especially demand deposits and money market deposits.
Loan balances during the quarter remained relatively constant and down slightly
from year-end 2004 levels. At June 30, 2005, investment securities were $161.8
million, up $1.2 million from December 31, 2004. The increase reflects a slight
investment of proceeds from the growth in deposits. Federal funds sold and short
term investments were $22.0 million, up $22.0 million from December 31, 2004. At
year end, the Company was in a federal funds purchased position, however
increases in deposits and a decrease in the loan portfolio have resulted in an
increase in short term liquidity at June 30, 2005.
Earning assets represented 91.6% of total assets as of June 30, 2005. The
allowance for loan losses as of June 30, 2005 was $10.1 million and represented
approximately 1.55% of total loans and 1.57% of loans excluding those held for
sale at the end of the period. The allowance for loan losses decreased $646,000,
from the December 31, 2004 balance of $10.7 million. Management believes that
the amount of the allowance is adequate to absorb probable losses inherent in
the current loan portfolio. See "Asset Quality" for further discussion of the
allowance for loan losses.
Deposits as of June 30, 2005 were $690.0 million, an increase of $35.0 million,
or 5%, from December 31, 2004. The overall net growth was primarily the result
of strong internal growth fueled by a successful core deposit campaign. One of
the Company's highest priorities for 2005 is the growth of non-time deposits,
including demand deposit accounts ("DDA") and money
-19-
market accounts. During the first six months of 2005, the Company experienced a
net decrease of $5.3 million, or 1.3%, in certificates of deposit ("CDs")
compared to December 31, 2004. Approximately $2.2 million of this decrease is
attributable to brokered CDs. In addition, the Company has not aggressively
priced certain maturing CDs where the customer has no other banking relationship
with the Company. Time deposits represented 56.6% of total deposits at June 30,
2005 compared to 60.4% at December 31, 2004.
Noninterest bearing DDAs increased to $81.8 million at June 30, 2005, an
increase of $16.1 million, or 25%, from $65.7 million at December 31, 2004. In
addition, the average balance of DDA accounts increased $6.3 million during the
second quarter 2005 compared to the first quarter 2005. The Company has also
focused on gathering money market accounts and, accordingly, the Bank began an
advertising and promotional campaign designed to attract more of those types of
deposits. As a result of the campaign, savings, interest bearing DDAs, and money
market accounts increased to $217.6 million at June 30, 2005, an increase of
$24.2 million, or 13%, from $193.4 million at December 31, 2004. The average
balance of these accounts also increased significantly during the second quarter
with the average balance being $194.5 million for the second quarter 2005
compared to $174.1 million for the first quarter 2005.
Total consolidated shareholders' equity was $79.5 million as of June 30, 2005,
an increase of $1.8 million from December 31, 2004. Retained earnings increased
by $2.4 million reflecting the net income during the six month period ended June
30, 2005 less dividends paid during that same time, offset by a $448,000 decline
in accumulated other comprehensive income due to declines in the market value of
the investment portfolio. Common stock decreased by $157,000 as a result of
repurchases of the Company's stock pursuant to an approved repurchase plan
during the first quarter of 2005 offset by the issuance of shares under various
plans. See Item 1. Financial Statements - Consolidated Statements of Changes in
Shareholders' Equity for additional information.
Results of Operations
Three month period ended June 30, 2005
- --------------------------------------
For the three month period ended June 30, 2005, the Company reported net income
of $1.6 million, or $.23 per diluted share, compared to net income of $900,000
or $.13 per diluted share, for the three month period ended June 30, 2004. The
improved net income was due to improved net interest margins and a lower
provision for loan losses for the comparable periods.
Net interest income increased $929,000, or approximately 15%, from $6.3 million
for the three month period ended June 30, 2004, to $7.2 million for the same
quarter in 2005. Average earning assets increased $7.5 million period over
period while average interest bearing liabilities increased $4.3 million. The
net interest margin on a fully taxable equivalent basis increased 41 basis
points quarter-over-quarter to 3.55% for the three month period ended June 30,
2005 from 3.14% for the same time period for 2004. The increase in the net
interest margin is primarily attributed to increases in the benchmark federal
funds rates as determined by the Federal Reserve Open Market Committee ("FOMC"),
resulting in nine corresponding increases in the prime interest rate starting on
June 30, 2004. The Company's balance sheet remains asset-sensitive and, as a
result, its interest earning assets reprice quicker than its interest bearing
liabilities. Since June 30, 2004 the Bank has increased its prime rate by 225
basis points to 6.25% in
-20-
response to FOMC rate increases. We cannot be certain of the direction of the
benchmark federal funds rates as set by the FOMC. Further increases by the FOMC
will affect the level of our prime rate and likely increase the effective cost
of interest-bearing liabilities.
The following table shows the Company's effective yield on earning assets and
cost of funds. Yields and costs are computed by dividing income or expense for
the year by the respective daily average asset or liability balance.
-21-
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Three Months Ended June 30, 2005 and 2004
(Taxable Equivalent Basis - Dollars in Thousands) (1)
2005 2004
-------------------------------------------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
-------------------------------------------------------------------------
Assets
Loans receivable: (2)
Commercial $ 529,066 $ 8,469 6.42% $ 504,802 $ 6,496 5.18%
Consumer 31,309 594 7.61% 39,491 667 6.79%
Home equity 61,755 954 6.20% 60,195 724 4.84%
Residential mortgages (3) 26,139 388 5.95% 47,586 685 5.79%
-------------------------------------------------------------------------
Total loans 648,269 10,405 6.44% 652,074 8,572 5.29%
Investment securities (4) 160,955 1,890 4.71% 154,244 1,720 4.48%
Federal funds sold and other
interest on short term investments 17,137 116 2.72% 12,531 39 1.25%
-------------------------------------------------------------------------
Total interest earning assets 826,361 $ 12,411 6.02% 818,849 $ 10,331 5.07%
====================== ======================
Cash and due from banks 23,278 18,812
Other assets 57,844 51,813
Allowance for loan losses (10,305) (11,391)
--------- ---------
Total assets $ 897,178 $ 878,083
========= =========
Liabilities and Equity
Savings deposits $ 17,239 $ 31 0.72% $ 17,785 $ 11 0.25%
Interest-bearing demand deposits 194,511 848 1.75% 187,029 522 1.12%
Time deposits 391,244 2,797 2.87% 401,755 2,380 2.38%
-------------------------------------------------------------------------
Total interest bearing deposits 602,994 3,676 2.45% 606,569 2,913 1.93%
Borrowed funds 100,819 1,027 4.09% 97,698 796 3.28%
Trust preferred debt 20,620 305 5.93% 20,620 214 4.17%
Repurchase agreements 14,332 80 2.24% 9,563 9 0.38%
-------------------------------------------------------------------------
Total interest-bearing liabilities 738,765 $ 5,088 2.76% 734,450 $ 3,932 2.15%
====================== ======================
Non-interest bearing deposits 68,313 60,293
Other liabilities 11,394 9,039
--------- ---------
Total liabilities 818,472 803,782
Shareholders' equity 78,706 74,301
--------- ---------
Total liabilities and shareholders' equity $ 897,178 $ 878,083
========= =========
Net interest spread (5) 3.26% 2.92%
Tax equivalent adjustment $ 163 $ 168
Net interest income and net
interest margin (6) $ 7,323 3.55% $ 6,399 3.14%
(1) The taxable equivalent basis is computed using a blended federal and state
tax rate of approximately 38%.
(2) Loans receivable include nonaccrual loans for which accrual of interest
has not been recorded.
(3) Includes loans held for sale.
(4) The average balance for investment securities exclude the effect of their
mark-to-market adjustment, if any.
(5) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents the net interest income divided by average
interest-earning assets.
-22-
Yields on commercial, home equity and consumer loans increased 124 basis points,
136 basis points and 82 basis points, respectively, in the second quarter of
2005 compared to the same period in 2004. Higher yields in 2005 reflect the
increase in the prime rate charged by the Bank between those two periods.
Variable rate loans made up approximately 70% of the total loan portfolio at
June 30, 2005 compared to 70% at June 30, 2004.
The yield on investment securities on a tax-equivalent basis increased from
4.48% in the second quarter of 2004 to 4.71% in the second quarter of 2005. The
investment yield in 2004 was negatively affected by higher premium amortizations
on mortgage backed securities ("MBS") as the average expected lives of the MBS
portfolio were shortened due to significant prepayments of the underlying
mortgage loans. MBS premium amortizations were approximately $229,000 in the
second quarter of 2004 compared to approximately $86,000 for the same period in
the current year. Longer term rates have increased much less significantly than
short-term rates. The majority of the investment portfolio is in medium to long
term maturity investments and, as a result, the Company's yield on investments
will not increase rapidly if long term rates begin to increase.
The rate paid on time deposits increased from 2.39% to 2.87% for the three
months ended June 30, 2004 compared to the same period in 2005, a 48 basis point
rise, as new certificates were opened at higher rates due to the rising interest
rate environment. Rates on shorter maturity CDs have increased significantly
with the FOMC interest rate increases and management anticipates the Bank's CD
funding costs will increase on a quarterly basis going forward for the remainder
of 2005.
The rate on borrowings for the three month period ended June 30, 2005 increased
year over year to 4.09% from 3.28%. In July of 2003, the Bank entered into
interest rate swap agreements on $25.0 million of the outstanding Federal Home
Loan Bank advances to swap fixed rate borrowings to a variable rate. The net
effect of the swaps has been to reduce interest and, accordingly, the net
effective rate paid on those advances. As short-term interest rates have
increased following the FOMC rate increases, the overall effective yield on
borrowings has increased. The increases in short-term rates are also responsible
for the increase in the cost of the Company's subordinated debentures.
For the three month period ended June 30, 2005, the credit provision for loan
losses was $(156,000) compared to a provision of $297,000 for the same period in
2004, a decrease of approximately $453,000. The decline in 2005 was primarily
due to a strong loan growth in the second quarter of 2004 compared to minimal
loan growth in 2005, improvements in the risk rating classifications of certain
loans contained in the portfolio and other factors as discussed more fully below
under the "Asset Quality" section.
Noninterest income for the three month periods ended June 30, 2004 and 2005 were
flat. Deposit service charges declined as mature branches were sold in September
2004 despite new branches being opened which don't generate as much fee income
as mature branches. Other income increased largely from retail brokerage
commissions and higher levels of bank owned life insurance. Mortgage revenues
increased to their highest level since 2003 during the quarter with increases in
mortgage production.
Noninterest expense for the three month period ended June 30, 2005 was $6.5
million compared to $6.1 million for the corresponding period in 2004. Salaries
and employee benefits,
-23-
representing the largest noninterest expense category, increased to $3.5 million
for the three month period ended June 30, 2005, from $3.1 million for the same
period in 2004. Approximately 50% of the increase was attributable to severance
payments for an executive officer that left the Company in April 2005. The
remaining increase was primarily due to an increase in the number of personnel
employed by the Company and management's intention to maintain adequate staffing
to meet customer's needs and keep pace with expected growth. As of June 30,
2005, the Company had 244 full-time equivalent employees ("FTEs") compared to
216 for the same date in 2004 and 227 at December 31, 2004. Substantially all of
the increase from June 30, 2004 through year-end was related to commissioned
mortgage originators and brokerage representatives while the increase from
year-end through June 30, 2005 was for additional staffing in other areas of the
bank including loan officers and other sales positions.
Increases in other expenses related to a new director retirement program and
increased director fees in 2005 were offset by lower equipment costs. The lower
equipment costs were attributable to higher expenses in 2004 associated with the
purchase of non-capitalized equipment for the opening of new branches in
Greensboro and Asheville.
As previously disclosed, in contemplation of the proposed merger of 1st State
with and into the Company, which is subject to regulatory and shareholder
approval as well as other customary closing conditions and which is discussed in
more detail in the Company's Current Report on Form 8-K as filed with the SEC on
June 29, 2005, the Company plans to consolidate its state-wide operations into
1st State's headquarters building in Burlington, North Carolina. The Company
anticipates that such consolidation will include data processing services and
item processing, which to date have been provided by FiServe. In conjunction
with processing in-house, the Company will be required to purchase additional
software and equipment. The Company will continue to utilize FiServe for item
processing and data processing on a month-to-month basis after its contract
expires at the end of 2005, until the conversion is completed. The Company
estimates the total cost of the conversion to be approximately $1.8 million to
$2.5 million.
The Company's effective tax rate for the second quarter of 2005 was 33.4%
compared to 36.7% for the comparable period of 2004. The Company forecasts it
taxable and non-taxable income and calculates the effective tax rate for the
entire year, which is then applied to the three month period. The changes in the
effective tax rate are due to changes in forecasted levels of taxable and tax
exempt income and the decline for these comparable periods primarily reflects
the addition of nontaxable income as the result of a purchase of bank owned life
insurance in the latter part of 2004 and again in May 2005.
The Company recorded an income tax expense of $803,000 during the three month
period ended June 30, 2005 compared to an expense of $517,000 during the same
period in 2004. At June 30, 2005, the Company had net deferred tax assets of
$6.1 million resulting from timing differences associated primarily with the
deductibility of certain expenses reflected on the financial statements such as
the allowance for loan losses and the mark-to-market of unrealized security
losses.
Results of Operations
Six month period ended June 30, 2005
- ------------------------------------
For the six month period ended June 30, 2005, the Company reported net income of
$3.2 million,
-24-
or $.46 per diluted share, compared to net income of $2.3 million, or $.33 per
diluted share, for the six month period ended June 30, 2004. The improved net
income was due to improved net interest margins and a lower provision for loan
losses for the comparable periods.
Net interest income increased $1,566,000, or approximately 13%, from $12.5
million for the six month period ended June 30, 2004, to $14.1 million for the
same period in 2005. Average earning assets increased $7.0 million period over
period while average interest bearing liabilities increased only $0.5 million.
The net interest margin on a fully taxable equivalent basis increased 37 basis
points quarter-over-quarter to 3.54% for the six month period ended June 30,
2005 from 3.17% for the same time period for 2004. The increase in the net
interest margin is primarily attributed to increases in the benchmark federal
funds rates as determined by the FOMC and the asset sensitive position of the
Company's balance sheet.
The following table shows the Company's effective yield on earning assets and
cost of funds. Yields and costs are computed by dividing income or expense for
the year by the respective daily average asset or liability balance.
-25-
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Six Months Ended June 30, 2005 and 2004
(Taxable Equivalent Basis - Dollars in Thousands) (1)
2005 2004
-------------------------------------------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
-------------------------------------------------------------------------
Assets
Loans receivable: (2)
Commercial $ 531,156 $ 16,396 6.22% $ 493,823 $ 12,840 5.21%
Consumer 31,566 1,161 7.42% 39,320 1,330 6.78%
Home equity 61,834 1,828 5.96% 59,747 1,446 4.85%
Residential mortgages (3) 25,793 762 5.96% 47,779 1,427 5.99%
-------------------------------------------------------------------------
Total loans 650,349 20,147 6.25% 640,669 17,043 5.33%
Investment securities (4) 159,459 3,751 4.74% 158,267 3,606 4.57%
Federal funds sold and other
interest on short term investments 9,854 133 2.72% 13,689 81 1.19%
-------------------------------------------------------------------------
Total interest earning assets 819,662 $ 24,031 5.91% 812,625 $ 20,730 5.12%
====================== ======================
Cash and due from banks 22,872 21,417
Other assets 56,595 51,789
Allowance for loan losses (10,584) (11,553)
--------- ---------
Total assets $ 888,545 $ 874,278
========= =========
Liabilities and Equity
Savings deposits $ 16,495 $ 41 0.50% $ 17,536 $ 22 0.25%
Interest-bearing demand deposits 184,322 1,486 1.63% 185,629 1,015 1.10%
Time deposits 393,585 5,331 2.73% 394,676 4,738 2.41%
-------------------------------------------------------------------------
Total interest bearing deposits 594,402 6,858 2.33% 597,841 5,775 1.94%
Borrowed funds 103,680 2,046 3.98% 103,752 1,661 3.21%
Trust preferred debt 20,620 581 5.68% 20,620 430 4.18%
Repurchase agreements 14,906 153 2.07% 10,850 28 0.52%
-------------------------------------------------------------------------
Total interest-bearing liabilities 733,608 $ 9,638 2.65% 733,063 $ 7,894 2.16%
====================== ======================
Non-interest bearing deposits 65,145 58,106
Other liabilities 11,201 8,719
--------- ---------
Total liabilities 809,954 799,888
Shareholders' equity 78,591 74,390
--------- ---------
Total liabilities and shareholders' equity $ 888,545 $ 874,278
========= =========
Net interest spread (5) 3.26% 2.96%
Tax equivalent adjustment $ 327 $ 336
Net interest income and net
interest margin (6) $ 14,393 3.54% $ 12,836 3.17%
(1) The taxable equivalent basis is computed using a blended federal and state
tax rate of approximately 38%.
(2) Loans receivable include nonaccrual loans for which accrual of interest
has not been recorded.
(3) Includes loans held for sale.
(4) The average balance for investment securities exclude the effect of their
mark-to-market adjustment, if any.
(5) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents the net interest income divided by average
interest-earning assets.
-26-
For the six month period ended June 30, 2005, the credit provision for loan
losses was $(406,000) compared to a provision of $413,000 for the same period in
2004, a decrease of approximately $819,000. The decline in 2005 was primarily
due to a reduction in charge offs during the six month period ended June 30,
2005, which dropped to $237,000 from $609,000 recorded in same period in 2004,
improvements in the risk rating classifications of certain loans contained in
the portfolio and overall reduction of the loan portfolio as discussed above.
See "Asset Quality" below for further discussion of the allowance for loan
losses.
Noninterest income for the six month period ended June 30, 2005, was $2.9
million compared to $3.1 million for the same period in 2004, a decrease of
$226,000, or 7%. The largest single component of this decrease was a decline of
$124,000, or 23%, in deposit service charges and fees largely attributable to
the sale of three mature branches in the northern part of North Carolina in
September 2004. Mortgage production, another large component of noninterest
income, was impacted by industry wide lower origination volumes caused by higher
mortgage interest rates. Mortgage revenues fell 6% during the first six months
of 2005 compared to the same period of 2004. As noted above, mortgage revenues
did rebound slightly during the second quarter of 2005.
Noninterest expense for the six month period ended June 30, 2005 was $12.6
million compared to $11.7 million for the corresponding period in 2004. Salaries
and employee benefits, representing the largest noninterest expense category,
increased to $6.6 million for the six month period ended June 30, 2005, from
$5.9 million for the same period in 2004. This increase reflects an increase in
the number of personnel employed by the Company consistent with management's
intention to maintain adequate staffing levels to meet customer needs and keep
pace with expected growth.
Occupancy costs and equipment expenses for the six months ended June 30, 2005
and 2004 were impacted by changes in the Company's branch network and the timing
of expenses associated with those changes. Occupancy expense has increased from
2004 levels largely due to new locations opened that have a higher cost
structure than those branch locations disposed of in late 2004. Furniture and
equipment expense has declined from 2004 levels because of the amount of
equipment expense associated with the initial startup of these new locations.
The Company added a new location in Pittsboro during the second quarter of 2005
while branches were opened during May through August 2004 in Greensboro, Wake
Forest, and Asheville, North Carolina.
Increases in noninterest expense also reflect an increase in professional fees.
Professional fees increased 31%, or $127,000, to $532,000 for the six month
period ended June 30, 2005 from $405,000 for the same period in 2004. During the
second quarter 2005 professional fees declined slightly from first quarter 2005
levels as fees associated with Sarbanes-Oxley compliance declined.
The Company's effective tax rate for the year to date 2005 was 33.5% compared to
35.5% for the comparable period of 2004. The changes in the effective tax rate
are due to changes in forecasted levels of taxable and tax exempt income and the
decline for these comparable periods primarily reflects the addition of
nontaxable income as the result of a purchase of bank owned life insurance in
the latter part of 2004 and during the second quarter of 2005.
The Company recorded an income tax expense of $1.6 million and $1.3 million for
the six months ended June 30, 2005 and 2004, respectively. The increase is due
to increases in pre-tax income despite the decline in the effective tax rate
discussed above.
-27-
Asset Quality
Determining the allowance for loan losses is based on a number of factors, many
of which are subject to judgments made by management. At the origination of each
commercial loan, management assesses the relative risk of the loan and assigns a
corresponding risk grade. To ascertain that the credit quality is maintained
after the loan is booked, the Bank has a procedure whereby a loan review officer
performs an annual review of all loans that exceed a predetermined threshold
amount, all unsecured loans over a predetermined loan amount, a sampling of
loans within a lender's authority, and a sampling of the entire loan pool. Loans
are reviewed for credit quality, sufficiency of credit and collateral
documentation, proper loan approval, covenant, policy and procedure adherence,
and continuing accuracy of the loan grade. This officer reports directly to the
Chief Credit Officer and will report on a sampling of loans each month to the
Loan Committee of the Bank's Board of Directors. On an as needed basis, the Bank
will hire an outside third party firm to review the Bank's loan portfolio to
ensure quality standards and reasonableness of risk assessment.
The Company calculates the amount of allowance needed to cover 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. The reserve percentages have been developed
based on historical losses and industry trends. 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 to an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectible.
During the second quarter of 2005, the Company adjusted its methodology for
estimating the allowance for loan losses associated with certain commercial
loans greater than $750,000. In prior periods, the Company generally used
standard percentage allocations based on the risk rating of the commercial loan
if the loan was risk rated below a "pass" credit. Commencing in the second
quarter, the Company began estimating a specific allowance for loan losses for
these loans. We determine the level of specific allowance based on the facts and
circumstances of each loan which include among other factors, payment history,
collateral values, guarantor liquidity, and net worth. The effect of the change
in methodology on the second quarter was to reduce the overall amount of loan
loss reserves associated with non-pass loans greater than $750,000 by
approximately $200,000 to $225,000.
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. Based
on this allowance calculation, management recorded a credit provision of
$156,000 for the three month period ended June 30, 2005 compared to an expense
of $297,000 for the same period in the prior year. In addition, to the change in
methodology with large non-pass loans, the Company saw an overall improvement in
delinquencies and the risk ratings of the portfolio during the quarter which
also contributed to the reduction in provision expense. Loan loss reserves were
1.55% and 1.64% of gross loans, respectively, as of June 30, 2005 and December
31, 2004. Loan loss reserves as a percent of loans excluding loans held for sale
were 1.57% and 1.65% as of June 30, 2005 and December 31, 2004, respectively.
The following table presents an analysis of changes in the allowance for loan
losses for the three month period ended June 30, 2005 and 2004, respectively:
-28-
Three Months Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
-------- -------------------- --------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 10,372 $ 11,221 $ 10,721 $ 11,613
Net charge-offs:
Loans charged off:
Commercial -- 14 96 461
Consumer 121 134 280 319
Mortgage 59 70 110 70
-------- -------------------- --------
Total charge-offs 180 218 486 850
-------- -------------------- --------
Recoveries of loans previously charged off:
Commercial 23 33 224 87
Consumer 19 58 25 62
Mortgage -- 26 -- 92
-------- -------------------- --------
Total recoveries 42 117 249 241
-------- -------------------- --------
Total net charge-offs 138 101 237 609
-------- -------------------- --------
Loss provisions (credits) charged to operations (159) 297 (409) 413
-------- -------------------- --------
Allowance for loan losses, end of period $ 10,075 $ 11,417 $ 10,075 $ 11,417
======== ==================== ========
Net charge-offs to average loans during the
period (annualized) 0.09% 0.06% 0.07% 0.19%
Allowance as a percent of gross loans 1.55% 1.74%
Allowance as a percent of gross loans excluding
loans held for sale 1.57% 1.75%
Net charge-offs have declined, as management has allocated significant resources
to improving the overall credit quality of the loan portfolio. Management
believes these efforts will result in lower net charge-offs during 2005 than in
2004 and 2003, however, material changes in economic and other factors could
effect net charge-offs for 2005.
The following table presents an analysis of nonperforming assets as of June 30,
2005 and 2004 and December 31, 2004:
-29-
June 30, December 31,
2005 2004 2004
-------- -------- ------------
(Dollars in thousands)
Nonaccrual loans:
Commercial and commercial real estate $ 6,094 $ 3,740 $ 3,964
Mortgage 2,014 1,837 1,898
Construction 1,674 580 1,622
Consumer 645 561 312
Equity lines -- -- 415
-------- -------- --------
Total nonaccrual loans 10,427 6,718 8,211
Foreclosed property held 1,508 412 418
-------- -------- --------
Total nonperforming assets $ 11,935 $ 7,130 $ 8,629
======== ======== ========
Nonperforming loans to total loans 1.61% 1.02% 1.32%
Nonperforming assets to total assets 1.30% 0.80% 0.98%
Allowance coverage of nonperforming loans 97% 170% 131%
On June 30, 2005, nonperforming assets were $10.4 million, an increase of $2.2
million from year-end and a decrease of $100,000 from March 31, 2005. The
majority of the Company's nonperforming loans are secured by real estate and to
a lesser extent the Company relies on the support of guarantors. The Company
monitors the value of the underlying collateral and the liquidity of the
guarantors on a periodic basis. Based on this review and analysis, the Company
does not currently anticipate significant losses associated with the June 30,
2005 nonperforming loans or from the increase during the second quarter in
nonperforming loans.
The increase in nonperforming loans during the year was largely attributable to
four customers. These loans are primarily secured by real estate and, in some
instances the Company is receiving some payments on the loans.
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. Impaired loans were
$1,758,000 at June 30, 2005 compared to none at December 31, 2004. Average
impaired loans during the second quarter of 2005 were $1,758,000.
The Bank uses several factors in determining if a loan is impaired. Internal
asset classification procedures include a review of significant loans and
lending relationships by both management and third party credit review firms and
includes the accumulation of related data such as loan payment status,
borrowers' financial data and borrowers' operating factors such as cash flows,
operating income or loss. The Company's determination of the allowance for loan
losses is subject to management's judgment and analysis of many internal and
external factors. While management is comfortable with the adequacy of the
current allowance, changes in factors and management's future evaluation of the
adequacy of the allowance for loan losses will change.
-30-
Foreclosed property increased to $1,508,000 at June 30, 2005 from $418,000 at
December 31, 2004. The increase is largely attributable to the foreclosure of
certain nonaccrual loans during the quarter. The Company is actively marketing
all of its foreclosed property. All foreclosed assets are recorded at the lower
of cost or market.
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 Company's Board of Directors. The
Company had $54.2 million in its most liquid assets, cash and cash equivalents,
as of June 30, 2005. The Company's principal sources of funds are loan
repayments, deposits, Federal Home Loan Bank borrowings and capital and, to a
lesser extent, investment repayments. 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 75.7% of total
assets at June 30, 2005 compared to 67.7% at December 31, 2004. In addition, the
Company has the ability to take advantage of various other funding programs
available from the Federal Home Loan Bank of Atlanta, as well as access to
funding through various brokered deposit programs, federal funds lines and
security repurchase agreements.
The management of equity is a critical aspect of capital management in any
business. The determination of the appropriate amount of equity is affected by a
wide number of factors. The primary factor for a regulated financial institution
is the amount of capital needed to meet regulatory requirements, although other
factors, such as the "risk equity" the business requires and balance sheet
leverage, also affect the determination.
During the second quarter of 2004, the Board of Directors approved a stock
repurchase plan authorizing the repurchase of up to 50,000 shares of the
Company's stock. In December 2004, the Board of Directors approved the
repurchase of an additional 100,000 shares in December 2004. The principal
purpose of the stock repurchase program is to manage equity capital relative to
the growth of the Company, to offset the dilutive effect of employee
equity-based compensation and to enhance long term shareholder value. The
Company plans to effect the repurchase program through open-market purchases.
During the first quarter of 2005, the Company repurchased 50,000 shares at a
weighted average price of $17.84 per share. There were no repurchases during the
second quarter 2005.
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 June 30, 2005 and the minimum requirements are presented in the following
table:
-31-
Minimum
Requirements To Be
Actual Well Capitalized
----------------------------- -----------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
------------- ------------- ------------- -------------
Capital Bank Corporation
------------------------
Total Capital (to Risk Weighted Assets) $ 96,067 12.62% $ 76,100 10.00%
Tier I Capital (to Risk Weighted Assets) 86,542 11.37% 45,660 6.00%
Tier I Capital (to Average Assets) 86,542 9.89% 43,773 5.00%
Capital Bank
------------
Total Capital (to Risk Weighted Assets) $ 90,329 11.90% $ 75,931 10.00%
Tier I Capital (to Risk Weighted Assets) 80,825 10.64% 45,558 6.00%
Tier I Capital (to Average Assets) 80,825 9.16% 44,125 5.00%
Consolidated capital ratios improved from December 31, 2004 due to the increase
in capital associated with the Company's retention of earnings for the six
months ended June 30, 2005 in excess of dividends and balance sheet growth.
Total capital to risk weighted assets, Tier I capital to risk weighted assets
and Tier I capital to average assets on a consolidated basis as of December 31,
2004 were 12.33%, 11.08% and 9.61%, respectively.
Shareholders' equity was $79.5 million, or $10.04 per share, at June 30, 2005.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth and to maintain a well capitalized position.
The merger agreement with 1st State calls for the payment of a portion (up to
35%) of the total merger consideration in cash. While the Company has not yet
finalized its plans with respect to the financing of that portion of the total
merger consideration, it does not expect the payment of cash in the merger to
have a material adverse effect on the Companies liquidity position.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company has not experienced any material change in the risk of its portfolio
of interest earning assets and interest bearing liabilities from December 31,
2004 to June 30, 2005.
Item 4 Controls and Procedures
-----------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods required by
the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures, which, by
their nature, can provide only reasonable assurance regarding management's
control objectives.
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the CEO and CFO, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
-32-
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be included in our Exchange Act
filings.
Changes in Internal Control
There were no changes in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the period covered by this report that have materially affected or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Management has implemented changes in internal controls as
a result of remediation of matters identified through its review of internal
controls over financial reporting as required under Section 404 of the Sarbanes
Oxley Act, however it does not believe any of the changes implemented were
material in nature.
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 Unregistered Sale of Equity Securities and Use of Proceeds
----------------------------------------------------------
None
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 26, 2005, the Company held its annual shareholder meeting to consider and
vote upon three issues: (i) election of nominees to serve as Class II directors
with terms continuing until the Annual Meeting of Shareholders in 2008, (ii)
approval of the amended and restated Capital Bank Corporation Deferred
Compensation Plan for Outside Directors, (iii) ratification of the appointment
of Grant Thornton LLP as the Company's independent registered public accounting
firm for the fiscal year ending December 31, 2005. Each item considered was
approved by the Company's shareholders. Of the 6,566,486 shares eligible to
vote, 5,548,212, (of which 2,236,790 broker non-votes were registered on the
deferred compensation proposal) were voted as shown on the following tables:
-33-
For Against/Withheld Abstain
----------------------------------------------
Class II Directors:
John F. Grimes, III 5,495,471 52,740 --
Robert L. Jones 5,495,262 52,949 --
J. Rex Thomas 5,495,755 52,456 --
Samuel J. Wornom, III 5,495,262 52,949 --
Deferred Compensation Plan 2,573,604 714,501 23,315
Ratification of Auditors 5,525,860 18,057 4,295
The term of office of William C. Burkhardt, Leopold I. Cohen, O. A. Keller, III,
Carl H. Ricker, Jr., and George R. Perkins, III continued after the annual
shareholder meeting until 2006. In addition, the term of office of Charles F.
Atkins, Oscar A. Keller, Jr., James D. Moser, Jr., Don W. Perry, and B. Grant
Yarber continued after the annual shareholder meeting until 2007.
Item 5 Other Information
-----------------
None
Item 6 Exhibits
--------
Exhibit 2.1 Merger Agreement, dated June 29, 2005, by and between Capital
Bank Corporation and 1st State Bancorp, Inc. (incorporated
herein by reference to Exhibit 2.1 to the Capital Bank
Corporation Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on June 29, 2005)
Exhibit 2.2 List of Schedules Omitted from Merger Agreement referenced in
Exhibit 2.1 above. (incorporated herein by reference to
Exhibit 2.2 to the Capital Bank Corporation Current Report on
Form 8-K, as filed with the Securities and Exchange Commission
on June 29, 2005)
Exhibit 4.1 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.
Exhibit 10.1 Agreement between Capital Bank and Karen H. Priester dated
April 25, 2005 (incorporated herein by reference to Exhibit
10.1 to the Capital Bank Corporation Current Report on Form
8-K, as filed with the Securities Exchange Commission on April
28, 2005)
Exhibit 10.2 Capital Bank Defined Benefit Supplemental Executive Retirement
Plan effective May 24, 2005 (incorporated herein by reference
to Exhibit 10.1 to the Capital Bank Corporation Current Report
on Form 8-K, as filed with the Securities Exchange Commission
on May 27, 2005)
Exhibit 10.3 Capital Bank Supplemental Retirement Plan for Directors
effective May 24, 2005 (incorporated herein by reference to
Exhibit 10.1 to the Capital Bank Corporation Current Report on
Form 8-K, as filed with the Securities Exchange Commission on
May 27, 2005)
-34-
Exhibit 31.1 Certification of B. Grant Yarber pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of William R. Lampley pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of B. Grant Yarber 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.]
Exhibit 32.2 Certification of William R. Lampley 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.]
-35-
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 8, 2005 By: /s/ B. Grant Yarber
---------------------
B. Grant Yarber
Chief Executive Officer
-36-
Exhibit Index
- -----------------------------------------------------------------------------------------------------------------
Exhibit 2.1 Merger Agreement, dated June 29, 2005, by and between Capital Bank Corporation and 1st State
Bancorp, Inc. (incorporated herein by reference to Exhibit 2.1 to the Capital Bank
Corporation Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on June 29, 2005)
- -----------------------------------------------------------------------------------------------------------------
Exhibit 2.2 List of Schedules Omitted from Merger Agreement referenced in Exhibit 2.1 above.
(incorporated herein by reference to Exhibit 2.2 to the Capital Bank Corporation Current
Report on Form 8-K, as filed with the Securities and Exchange Commission on June 29, 2005)
- -----------------------------------------------------------------------------------------------------------------
Exhibit 4.1 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.
- -----------------------------------------------------------------------------------------------------------------
Exhibit 10.1 Agreement between Capital Bank and Karen H. Priester dated April 25, 2005 (incorporated
herein by reference to Exhibit 10.1 to the Capital Bank Corporation Current Report on Form
8-K, as filed with the Securities Exchange Commission on April 28, 2005)
- -----------------------------------------------------------------------------------------------------------------
Exhibit 10.2 Capital Bank Defined Benefit Supplemental Executive Retirement Plan effective May 24, 2005
(incorporated herein by reference to Exhibit 10.1 to the Capital Bank Corporation Current
Report on Form 8-K, as filed with the Securities Exchange Commission on May 27, 2005)
- -----------------------------------------------------------------------------------------------------------------
Exhibit 10.3 Capital Bank Supplemental Retirement Plan for Directors effective May 24, 2005 (incorporated
herein by reference to Exhibit 10.1 to the Capital Bank Corporation Current Report on Form
8-K, as filed with the Securities Exchange Commission on May 27, 2005)
- -----------------------------------------------------------------------------------------------------------------
Exhibit 31.1 Certification of B. Grant Yarber pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- -----------------------------------------------------------------------------------------------------------------
Exhibit 31.2 Certification of William R. Lampley pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- -----------------------------------------------------------------------------------------------------------------
Exhibit 32.1 Certification of B. Grant Yarber 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.]
- -----------------------------------------------------------------------------------------------------------------
Exhibit 32.2 Certification of William R. Lampley 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.]
- -----------------------------------------------------------------------------------------------------------------
-37-