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 March 31, 2006
or
[ ] 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 000-30062
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 rganization) 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of May 4, 2006 there were 11,623,629 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 March 31, 2006
(Unaudited) and December 31, 2005 1
Condensed consolidated statements of income for the three months
ended March 31, 2006 and 2005 (Unaudited) 2
Condensed consolidated statements of changes in shareholders' equity for
the three months ended March 31, 2006 and 2005 (Unaudited) 3
Condensed consolidated statements of cash flows for the three months
ended March 31, 2006 and 2005 (Unaudited) 4 - 5
Notes to condensed consolidated financial statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12 - 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29
Signatures 31
Item 1 Financial Statements
--------------------
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2006 and December 31, 2005
March 31, December 31,
2006 2005
- ----------------------------------------------------------------------------------------
(Dollars in thousands, except share data) (Unaudited)
ASSETS
Cash and due from banks:
Interest earning $ 6,938 $ 4,603
Noninterest earning 33,435 30,544
Cash held in escrow -- 33,185
Federal funds sold and short term investments 19,444 8,757
Investment securities - available for sale, at fair value 168,894 149,266
Investment securities - held to maturity, at amortized cost 12,138 12,334
Loans - net of unearned income and deferred fees 944,325 668,982
Allowance for loan losses (14,209) (9,592)
----------- -----------
Net loans 930,116 659,390
----------- -----------
Premises and equipment, net 21,594 14,868
Bank owned life insurance 20,088 19,857
Deposit premium and goodwill, net 67,149 12,853
Accrued interest receivable and other assets 28,771 15,249
----------- -----------
Total assets $ 1,308,567 $ 960,906
=========== ===========
LIABILITIES
Deposits:
Demand, noninterest bearing $ 107,425 $ 77,847
Savings and interest bearing demand deposits 315,933 237,005
Time deposits 548,874 383,628
----------- -----------
Total deposits 972,232 698,480
----------- -----------
Repurchase agreements and federal funds purchased 26,305 14,514
Short-term debt -- 30,000
Federal Home Loan Bank advances 107,798 93,173
Subordinated debentures 30,930 30,930
Accrued interest payable and other liabilities 13,207 10,317
----------- -----------
Total liabilities 1,150,472 877,414
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares authorized;
11,623,629 and 6,852,156 issued and outstanding as of
March 31, 2006 and December 31, 2005, respectively 143,669 70,985
Retained earnings 16,245 14,179
Accumulated other comprehensive loss (1,819) (1,672)
----------- -----------
Total shareholders' equity 158,095 83,492
----------- -----------
Total liabilities and shareholders' equity $ 1,308,567 $ 960,906
=========== ===========
See Notes to Condensed Consolidated Financial Statements
1
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2006 and 2005
(Unaudited) 2006 2005
- --------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Interest income:
Loans and loan fees $ 17,018 $ 9,742
Investment securities 2,110 1,697
Federal funds and other interest income 542 17
----------- -----------
Total interest income 19,670 11,456
----------- -----------
Interest expense:
Deposits 6,110 3,182
Borrowings and repurchase agreements 2,170 1,368
----------- -----------
Total interest expense 8,280 4,550
----------- -----------
Net interest income 11,390 6,906
Provision (credit) for loan losses 412 (250)
----------- -----------
Net interest income after provision (credit) for loan losses 10,978 7,156
----------- -----------
Noninterest income:
Service charges and other fees 965 657
Mortgage fees and revenues 364 272
Net gain on sale of securities -- 6
Bank owned life insurance 231 123
Other noninterest income 455 282
----------- -----------
Total noninterest income 2,015 1,340
----------- -----------
Noninterest expenses:
Salaries and employee benefits 4,542 3,149
Occupancy 778 614
Furniture and equipment 492 367
Data processing 489 311
Director fees 376 171
Advertising 255 216
Amortization of deposit premium 343 54
Professional fees 212 322
Telecommunications 176 140
Other expenses 1,151 806
----------- -----------
Total noninterest expenses 8,814 6,150
----------- -----------
Income before income tax expense 4,179 2,346
Income tax expense 1,416 791
----------- -----------
Net income $ 2,763 $ 1,555
=========== ===========
Earnings per share - basic $ 0.24 $ 0.23
=========== ===========
Earnings per share - diluted $ 0.24 $ 0.22
=========== ===========
Weighted average shares
Basic 11,616,894 6,754,576
=========== ===========
Fully diluted 11,704,315 6,941,776
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
(Dollars in thousands, except share data)
Shares of Other
Common Common Comprehensive Retained
Stock Stock Income Earnings Total
----------- ----------- ----------- ----------- -----------
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 options exercised 2,255 19 19
Net income 1,555 1,555
Other comprehensive loss (1,061) (1,061)
-----------
Comprehensive income 494
-----------
Dividends ($0.05 per share) (394) (394)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2005 6,565,042 $ 67,468 $ (756) $ 10,253 $ 76,965
=========== =========== =========== =========== ===========
Balance at January 1, 2006 6,852,156 $ 70,985 $ (1,672) $ 14,179 $ 83,492
Repurchase of outstanding common stock (116,000) (1,847) (1,847)
Issuance of common stock for
acquisition of 1st State Bancorp, Inc. 4,882,630 74,499 74,499
Issuance of common stock
for options exercised 4,843 32 32
Net income 2,763 2,763
Other comprehensive loss (147) (147)
-----------
Comprehensive income 2,616
-----------
Dividends ($0.06 per share) (697) (697)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2006 11,623,629 $ 143,669 $ (1,819) $ 16,245 $ 158,095
=========== =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
3
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2006 and 2005
(Unaudited) 2006 2005
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows From Operating Activities:
Net income $ 2,763 $ 1,555
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of deposit premium 343 54
Depreciation 481 362
Net gains on sale of securities available for sale -- (6)
Change in held for sale loans, net (2,458) (1,550)
Amortization of premiums on securities, net 38 76
Deferred income tax expense 1,548 135
Provision (credit) for loan losses 412 (250)
Changes in assets and liabilities:
Accrued interest receivable and other assets 4,688 (1,243)
Accrued interest payable and other liabilities (141) 2,457
Other operating activities, net -- --
--------- ---------
Net cash provided by operating activities 7,674 1,590
--------- ---------
Cash Flows From Investing Activities:
Loan repayments (originations), net (38,375) 8,280
Additions to premises and equipment (1,175) (445)
Net (purchase) sales of Federal Home Loan Bank stock 767 (47)
Purchase of securities available for sale (15,489) (7,491)
Purchase of securities held to maturity -- (973)
Proceeds from maturities of securities available for sale 2,427 4,637
Proceeds from sales of securities available for sale 102,396 2,430
Proceeds from maturities of securities held to maturity 199 261
Net cash paid in merger transaction (37,470) --
Proceeds from sales of property and equipment 12 --
--------- ---------
Net cash provided by investing activities 13,292 6,652
--------- ---------
Cash Flows From Financing Activities:
Net increase in deposits 1,716 7,202
Net increase (decrease) in repurchase agreements 11,791 (2,409)
Net decrease in borrowings (19,519) (1,456)
Repayment of short-term debt (30,000) --
Distribution of cash held in escrow 33,185 --
Dividends paid (411) (397)
Issuance of common stock for options and other plans 32 19
Repurchase of common stock (1,847) (892)
Other financing activities, net -- --
--------- ---------
Net cash (used in) provided by financing activities (5,053) 2,067
--------- ---------
Net change in cash and cash equivalents 15,913 10,309
Cash and cash equivalents at beginning of period 43,904 23,011
--------- ---------
Cash and cash equivalents at end of period $ 59,817 $ 33,320
========= =========
(continued on next page)
See Notes to Condensed Consolidated Financial Statements
4
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended March 31, 2006 and 2005
(Unaudited) 2006 2005
- ------------------------------------------------------------------------
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information
Transfer of loans and premises and equipment
to other real estate owned $ 2,142 $ 116
======== ========
Dividends payable $ 697 $ 394
======== ========
Cash paid for:
Income taxes $ -- $ 223
======== ========
Interest $ 7,992 $ 4,414
======== ========
Acquisition of 1st State Bancorp
Fair value of assets acquired $429,981 $ --
Issuance of common stock $ 74,499 $ --
Cash paid $ 46,570 $ --
Liabilities assumed $308,912 $ --
See Notes to Condensed Consolidated Financial Statements
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 interests in
three trusts, Capital Bank Statutory Trust I, II, and III (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 accounting principles generally accepted
in the United States of America. They do not include all of the information and
footnotes required by such accounting principles for complete financial
statements and therefore should be read in conjunction with the audited
consolidated financial statements and accompanying footnotes in the Company's
Annual Report on Form 10-K for the year ended December 31, 2005, as amended.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
as well as the amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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. All such adjustments are of a normal and recurring
nature. Certain amounts reported in prior periods have been reclassified to
conform to the current presentation. Such reclassifications have no effect on
net income or shareholders' equity as previously reported. The results of
operations for the three month period ended March 31, 2006 are not necessarily
indicative of the results of operations that may be expected for the year ended
December 31, 2006.
The balance sheet at December 31, 2005 has been derived from the audited
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2005, as amended.
The accounting policies followed are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 2005, as amended.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error
Corrections ("SFAS 154"), which replaces APB No. 20, Accounting Changes ("APB
20"), and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 applies to all voluntary changes in accounting principles
and requires retrospective application of changes in accounting principle to
prior period financial statements, unless it is impracticable to determine
either the period-specific effects or the cumulative effects of the change. SFAS
154 carries forward without change the guidance contained in APB 20 for
reporting the correction of an error and a change in accounting estimate. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company
6
adopted SFAS 154 effective January 1, 2006. The adoption of SFAS 154 had no
impact on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting For Servicing of
Financial Assets, an Amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
("SFAS 156") which requires that all separately recognized servicing assets and
liabilities be initially measured at fair value, if practicable, and requires
entities to elect either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of
Statement 140 for subsequent measurement. SFAS 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company plans to adopt SFAS 156 on January 1, 2007. The adoption of SFAS 156
is not expected to have any material impact on the Company's financial condition
or results of operations.
2. Acquisition of 1st State Bancorp
On January 3, 2006, the Company completed its acquisition of all the outstanding
capital stock of 1st State Bancorp, Inc. ("1st State Bancorp"), the holding
company for 1st State Bank. ("1st State Bank"). The total purchase price was
approximately $121.1 million, including transaction costs of $6.3 million. The
Company issued approximately 4.9 million shares of common stock and paid $40.1
million in cash in exchange for 100% of 1st State Bancorp's outstanding common
stock and stock options. The transaction was accounted for under the purchase
method of accounting and is intended to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code.
An unaudited summary of the preliminary estimated fair values of assets acquired
and liabilities assumed is as follows:
(Dollars in thousands)
Loans receivable, net of allowance for loan losses $ 230,600
Investment securities 110,107
Premises and equipment 7,925
Deposit premium 5,331
Goodwill 49,308
Other assets 26,710
Deposits (272,037)
Borrowings (34,144)
Other liabilities (2,731)
---------
Investment in subsidiary, net of dividends to shareholders
and capitalized acquisition costs $ 121,069
=========
3. Comprehensive Income
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's comprehensive income for the three month
periods ended March 31, 2006 and 2005 are as shown in the Company's Consolidated
Statements of Changes in Shareholders' Equity for the three months ended March
31, 2006 and 2005 (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
As of March 31,
2006 2005
------------------
(Dollars in thousands) (Unaudited)
Unrealized losses on securities available for sale $ (239) $(1,721)
Reclassification of gains recognized in net income -- (6)
Income tax benefit 92 666
------- -------
Other comprehensive loss $ (147) $(1,061)
======= =======
4. Earnings Per Share
The Company is required to report both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS assumes the conversion, exercise or
issuance of all potential common stock instruments, such as stock options,
unless the effect is to reduce a loss or increase earnings per share. For 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 month
periods ended March 31, 2006 and 2005:
As of March 31,
2006 2005
----------- -----------
(Dollars in thousands) (Unaudited)
Income available to shareholders - basic and diluted $ 2,763 $ 1,555
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 11,616,894 6,754,576
Incremental shares from assumed exercise of stock
options 87,421 187,200
----------- -----------
Weighted average number of shares outstanding - diluted 11,704,315 6,941,776
=========== ===========
Options to purchase approximately 374,000 shares of common stock were used in
the diluted calculation. An aggregate of 117,000 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.
5. Stock Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R, Share-Based Payments ("SFAS 123R"), using the
modified-prospective transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123")
and (b) compensation cost for all share-based payments granted subsequent to
December 31, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R.
Beginning January 1, 2006, the Company will recognize the cost of all new
employee share-based awards on a straight-line basis over their respective
vesting periods, net of estimated
8
forfeitures. The Company previously accounted for stock options using the
intrinsic value method in accordance with the provisions of APB Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees, and SFAS 123. Under the
SFAS 123, the Company was required to disclose the pro forma effects on net
income as if it had recorded compensation based on the fair value of options
granted.
On December 29, 2005, the Compensation/Human Resources Committee of the Board of
Directors of the Company approved the acceleration of vesting of all then
outstanding unvested stock options awarded under the Company's Equity Incentive
Plan. As a result, options to purchase 67,200 shares of the Company's common
stock, which would otherwise have vested from time to time over the next five
years, became immediately exercisable on December 30, 2005. As a result of the
acceleration of vesting, approximately $331,000 of future compensation expense
that would have been recognized in operating results under SFAS 123R over the
next five years was eliminated. Accordingly, the adoption of SFAS 123R did not
have a material impact on the Company's operating results or financial
condition.
The Company has stock option plans providing for the issuance of up to 650,000
options to purchase shares of the Company's common stock to officers and
directors. At March 31, 2006, options for 186,709 shares of common stock
remained available for future issuance. In addition, there were approximately
567,000 options which were assumed under various plans from previously acquired
financial institutions, of which approximately 218,000 remain outstanding.
Grants of options are made by the Board of Directors or its Compensation/Human
Resources 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. There were no new stock option
grants in the quarter ended March 31, 2006 and all options outstanding as of
March 31, 2006 were fully vested.
The Company also administers the Capital Bank Corporation Deferred Compensation
Plan for Non-Employee Directors ("Deferred Compensation Plan"). Under the
Deferred Compensation Plan, eligible directors may elect to defer all or part of
their directors' fees for a calendar year, in exchange for common stock of the
Company, based on the year-end share price. The amount deferred, if elected, is
equal to 125 percent of their total director's fees. Each participant is fully
vested in his account balance. The Deferred Compensation Plan generally provides
for payment of share units either in shares of common stock of the Company or
cash (at the Company's option) after the participant ceases to serve as a
director for any reason. The Deferred Compensation Plan is classified as a
liability-based plan under SFAS 123R.
The following is a summary of stock option information and the weighted average
exercise price ("WAEP") for the quarter ended March 31, 2006:
Shares WAEP
-------- --------
Outstanding at January 1, 2006 495,822 $ 11.25
Granted -- --
Exercised (4,843) 6.92
Terminated -- --
-------- --------
Outstanding at March 31, 2006 490,979 $ 11.70
======== ========
Options exercisable at March 31, 2006 490,979 $ 11.70
======== ========
9
The following table summarizes information about the Company's stock options at
March 31, 2006:
Number Contractual Number
Exercise Price Outstanding Life in Years Exercisable
- --------------------- ------------------- ------------------- -----------------
$6.62 - $9.00 167,925 4.00 167,925
$9.01 - $12.00 105,201 5.31 105,201
$12.01 - $15.00 74,692 2.32 74,692
$15.01 - $18.00 82,911 7.29 82,911
$18.01 - $18.37 60,250 8.99 60,250
------------------- ------------------- -----------------
490,979 5.18 490,979
=================== =================== =================
The fair values of the options granted prior to January 1, 2006 had been
estimated on the date of the grants using the Black-Scholes option-pricing
model. Option pricing models require the use of highly subjective assumptions,
including expected stock volatility, which when changed can materially affect
fair value estimates. The expected life of the options used in this calculation
was the period the options are expected to be outstanding. Expected stock price
volatility was based on the historical volatility of the Company's common stock
for a period approximating the expected life, the expected dividend yield was
based on the Company's historical annual dividend payout, and the risk-free rate
was based on the implied yield available on US Treasury issues. The following
weighted-average assumptions were used in the determining fair value for options
granted in the quarter ended March 31, 2006 and 2005:
2006 2005
--------------------------
Dividend yield -- 1.21%
Expected volatility -- 27.7%
Risk-free interest rate -- 4.02%
Expected life -- 7 years
6. 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 March 31, 2006:
10
(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 $ 23,003 $ 126 $ 34,558 $ 1,075 $ 57,561 $ 1,201
Municipal bonds 4,686 18 3,925 126 8,611 144
Mortgage-backed securities 24,380 481 39,552 1,573 63,932 2,054
---------------------------------------------------------------------------------
52,069 625 78,035 2,774 130,104 3,399
---------------------------------------------------------------------------------
Held to maturity
Direct obligations of U.S.
government agencies 594 3 3,888 108 $ 4,482 $ 111
Municipal bonds -- -- 290 10 290 10
Mortgage-backed securities 2,239 58 4,780 168 7,019 226
---------------------------------------------------------------------------------
2,833 61 8,958 286 11,791 347
---------------------------------------------------------------------------------
Total at March 31, 2006 $ 54,902 $ 686 $ 86,993 $ 3,060 $ 141,895 $ 3,746
=================================================================================
The unrealized losses on the Company's investments in direct obligations of U.S.
government agencies and mortgage-backed securities were primarily the result of
interest rate changes. Mortgage-backed securities include securities issued by
government agencies and corporate entities. The Company has the ability and
intent to hold these investments until a recovery of fair value, which may be
maturity. Accordingly, the Company does not consider these investments to be
other-than-temporarily impaired at March 31, 2006.
7. Loans
The composition of the loan portfolio by loan classification at March 31, 2006
and December 31, 2005 is as follows:
March 31, December 31,
(Dollars in thousands) 2006 2005
------------ ------------
Commercial $ 756,494 $ 555,198
Consumer 32,878 26,222
Home equity lines 98,905 65,566
Residential mortgages 55,953 21,863
------------ ------------
944,230 668,849
Plus deferred loan costs, net 95 133
------------ ------------
$ 944,325 $ 668,982
============ ============
Loans held for sale as of March 31, 2006 and December 31, 2005 were $6.6 million
and $4.2 million, respectively, and were included in the residential mortgage
category.
11
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 month period ended March 31, 2006 and 2005 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 Part II, Item 1A of this report, and the Company's periodic reports
and other filings with the Securities and Exchange Commission (the "SEC").
Overview
The Bank is a full-service state chartered community bank conducting business
throughout North Carolina. The Bank's business consists principally of
attracting deposits from the general public and investing these funds in loans
secured by commercial real estate, secured and unsecured commercial and consumer
loans, single-family residential mortgage loans, and home equity lines. As a
community bank, the Bank's profitability depends primarily upon its levels of
net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
When interest-earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by its provision for loan losses, other operating
income, and other operating expenses. Other income primarily consists of
miscellaneous service charges and ATM fees, fees generated from originating
mortgage loans that are sold and the increase in cash surrender value of
bank-owned life insurance. Operating expenses primarily consist of compensation
and benefits, occupancy related expenses, advertising, data processing,
professional fees, telecommunication and other expenses.
The Bank's operations are influenced significantly by local economic conditions
and by policies of financial institution regulatory authorities. The Bank's cost
of funds is influenced by interest rates on competing investments and by rates
offered on similar investments by competing financial institutions in our market
area, as well as general market interest rates. Lending activities are affected
by the demand for financing, which in turn is affected by the prevailing
interest rates.
12
Executive Summary
As discussed in more detail below, the following is a brief summary of certain
of our significant results for the quarter ended March 31, 2006:
o The Company reported net income for the quarter ended March 31, 2006 of
$2.8 million compared to $1.6 million for the quarter ended March 31,
2005. Fully diluted earnings per share were $0.24 and $0.22 for the
quarter ended March 31, 2006 and 2005, respectively. The increase in net
income was primarily due to the effects of the 1st State Bancorp merger
transaction and a 53 basis point increase in the net interest margin for
the quarter ended March 31, 2006 compared to the quarter ended March 31,
2005.
o The provision for loan losses for the quarter ended March 31, 2006 was
$412,000 compared to a credit in the quarter ended March 31, 2005 of
$250,000. The increase in the provision for loan losses is primarily due
to an increase in the specific allocation for one loan relationship and
the estimated inherent losses associated with the net growth in the loan
portfolio during the quarter ended March 31, 2006. Net charge-offs for the
quarter ended March 31, 2006 were $3.4 million, or 1.45% of average loans,
compared to $99,000, or 0.06% of average loans for the quarter ended March
31, 2005. Charge-offs for the quarter ended March 31, 2006 includes $3.2
million related to one loan relationship that had been fully reserved by
1st State Bank as of December 31, 2005 and had no impact on the Bank's
loan loss provision for the quarter ended March 31, 2006
o Net interest income for the quarter ended March 31, 2006 rose to record
levels as the net interest margin widened to 4.06%, a 33 basis point
increase over the fourth quarter of 2005 and an increase of 53 basis
points over the net interest margin for the quarter ended March 31, 2005.
Net interest income rose to $11.4 million for the quarter ended March 31,
2006, a 65% increase over the $6.9 million reported in the quarter ended
March 31, 2005, primarily due to the infusion of 1st State Bancorp's
interest-earning assets, organic loan portfolio growth in the quarter and
the continued increase in short term rates by the Federal Reserve.
o Non-interest income for the quarter ended March 31, 2006 increased
$675,000 to $2.0 million compared to the quarter ended March 31, 2005.
This increase is primarily due to higher service charges and other fees as
a result of a higher volume of transaction accounts, which were acquired
in the 1st State Bancorp merger transaction.
o Non-interest expenses were $8.8 million for the quarter ended March 31,
2006 compared to $6.2 million for the quarter ended March 31, 2005. The
increase is primarily due to higher salaries and employee benefits, which
increased by $1.4 million in the quarter ended March 31, 2006 compared to
the quarter ended March 31, 2005. The increase in salaries and employee
benefits was primarily due to an increase in the number of personnel
employed by the Company as a result of the 1st State Bancorp merger
transaction as well as higher costs associated with the Company's growth.
Financial Condition
Total consolidated assets of the Company at March 31, 2006 were $1,308.6 million
compared to $960.9 million at December 31, 2005, an increase of $347.7 million,
or approximately 36%. The
13
increase in total consolidated assets for the quarter ended March 31, 2006 is
primarily due to a $271 million increase in Capital Bank's loan portfolio, net
of the allowance for loan losses, from December 31, 2005, which includes $230
million of net loans acquired in the 1st State Bancorp merger transaction. Total
deposits as of March 31, 2006 were $972 million, which represents growth of $274
million from December 31, 2005 and includes $271 million of total deposits
acquired in the 1st State Bancorp merger transaction.
Total earning assets were $1,151.7 million at March 31, 2006 compared to $843.9
million at December 31, 2005. Earning assets represented 88.0% and 87.8% of
total assets as of March 31, 2006 and December 31, 2005, respectively. At March
31, 2006, investment securities were $181.0 million, which includes $7.8 million
of investment securities acquired in the 1st State Bancorp merger transaction,
compared to $161.6 million at December 31, 2005. The Company sold approximately
$102.3 million of investment securities acquired in the 1st State Bancorp merger
transaction during January 2006, with proceeds principally being used to repay
the $30 million of short-term debt that was outstanding as of December 31, 2005
(used to fund the majority of the cash portion of the 1st State Bancorp merger
consideration), fund new loan growth and purchase new investment securities.
Interest-earning cash, federal funds sold and short term investments were $26.4
million at March 31, 2006, an increase of $13.0 million from December 31, 2005.
The Company has increased its holdings of short-term investment assets to
maintain liquidity for loan fundings and future commitments. As of December 31,
2005, the Company had $33.1 million of cash held in escrow, which represented
funds the Company was required to deposit with its transfer agent for payment to
1st State Bancorp shareholders as cash consideration in connection with the 1st
State Bancorp merger transaction. Earning assets exclude bank owned life
insurance, which increased from $19.9 million at December 31, 2005 to $20.1
million at March 31, 2006 due to the increase in cash surrender values.
The allowance for loan losses as of March 31, 2006 was $14.2 million and
represented approximately 1.50% of total loans at March 31, 2006. The allowance
for loan losses increased $4.6 million from the December 31, 2005 balance of
$9.6 million. The increase is primarily due to the addition of 1st State Bank's
allowance for loan losses, which was $7.6 million as of the January 3, 2006
acquisition date, offset by net charge-offs of $3.4 million, including $3.2
million related to one 1st State Bank loan relationship that had been fully
reserved for prior to the closing date of the transaction. Management believes
that the amount of the allowance is adequate to absorb the estimated probable
losses inherent in the current loan portfolio. See "Asset Quality" for further
discussion of the allowance for loan losses.
Total deposits as of March 31, 2006 were $972.2 million, an increase of $273.8
million, or 39.2%, from December 31, 2005. The increase was primarily the result
of $271 million of deposits acquired in the 1st State Bancorp merger
transaction. At March 31, 2006, the Company experienced an increase of $137.8
million, or 39.8%, in certificates of deposit ("CDs") compared to December 31,
2005, which includes $139.8 million of CDs acquired in the 1st State Bancorp
merger transaction. Absent the CDs acquired in the 1st State Bancorp merger
transaction, CDs would have decreased slightly between December 31, 2005 and
March 31, 2006 as a result of CD maturities exceeding new CD sales and renewals.
Total time deposits represented 56.5% of total deposits at March 31, 2006
compared to 54.9% at December 31, 2005.
Noninterest bearing demand deposit accounts ("DDA") were $107.4 million at March
31, 2006, an increase of $29.6 million, or 38%, from December 31, 2005, which
includes $19.8 million of noninterest bearing deposits acquired in the 1st State
Bancorp merger transaction. The average
14
balance of noninterest DDA accounts was $100.0 million during the quarter ended
March 31, 2006 compared to $62.0 million during the quarter ended March 31,
2005.
Total consolidated shareholders' equity was $158.1 million as of March 31, 2006,
an increase of $74.6 million from December 31, 2005. The Company issued 4.9
million shares of common stock valued at $74.5 million in connection with the
1st State Bancorp merger transaction. Retained earnings increased by $2.1
million reflecting $2.8 million of net income for the quarter ended March 31,
2006 less $697,000 of dividends paid during the quarter. See Item 1. Financial
Statements - Consolidated Statements of Changes in Shareholders' Equity for
additional information.
Results of Operations
Quarter ended March 31, 2006 compared to quarter ended March 31, 2005
- ---------------------------------------------------------------------
For the quarter ended March 31, 2006, the Company reported net income of $2.8
million, or $0.24 per diluted share, compared to net income of $1.6 million, or
$0.22 per diluted share, for the quarter ended March 31, 2005. Net income
increased by $1.2 million primarily due to higher loan and deposit balances on
which net interest income and noninterest income are generated. The increased
balances were primarily the result of the 1st State Bancorp merger transaction.
The Company's net interest margin also widened in the quarter ended March 31,
2006 compared to the quarter ended March 31, 2005 as a result of the increasing
interest rate environment.
Net interest income increased $4.5 million, or approximately 64.9%, from $6.9
million for the quarter ended March 31, 2005, to $11.4 million for the three
month period ended March 31, 2006. Average earning assets increased $345.3
million to $1,158.3 million for the quarter ended March 31, 2006 from $813.0
million for the quarter ended March 31, 2005. Average interest bearing
liabilities increased $299.4 million to $1,027.9 million for the quarter ended
March 31, 2006 from $728.5 for the quarter ended March 31, 2005. The net
interest margin on a fully taxable equivalent basis increased 53 basis points to
4.06% for the quarter ended March 31, 2006 from 3.53% for the quarter ended
March 31, 2005. The earned yield on average interest earnings assets was 6.95%
and 5.80% for the quarter ended March 31, 2006 and 2005, respectively, while the
interest rate on average interest bearing liabilities for those periods was
3.26% and 2.53%, respectively. 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"). The Company's
balance sheet remains asset-sensitive and, as a result, its interest earning
assets re-price faster than its interest bearing liabilities. The Company 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 the Company's prime
rate and likely continue to 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.
15
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
Quarter Ended March 31, 2006 and 2005
(Taxable Equivalent Basis - Dollars in Thousands) (1)
2006 2005
------------------------------------------------------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
------------------------------------------------------------------------------------
Assets
Loans receivable: (2)
Commercial $ 738,162 $ 13,677 7.51% $ 533,246 $ 7,927 6.03%
Consumer 31,570 640 8.23% 31,823 567 7.23%
Home equity 100,319 1,822 7.37% 61,913 874 5.73%
Residential mortgages (3) 53,899 878 6.61% 25,447 374 5.96%
------------------------------------------------------------------------------------
Total loans 923,950 17,018 7.47% 652,429 9,742 6.06%
Investment securities (4) 194,535 2,303 4.80% 157,963 1,861 4.78%
Federal funds sold and other
interest on short term investments 39,839 542 5.52% 2,571 17 2.68%
------------------------------------------------------------------------------------
Total interest earning assets 1,158,324 $ 19,863 6.95% 812,963 $ 11,620 5.80%
========================= =========================
Cash and due from banks 31,374 22,466
Other assets 138,602 55,346
Allowance for loan losses (17,155) (10,863)
----------- -----------
Total assets $ 1,311,145 $ 879,912
=========== ===========
Liabilities and Equity
Savings deposits $ 43,815 $ 60 0.56% $ 15,751 $ 10 0.26%
Interest-bearing demand deposits 265,685 1,549 2.36% 174,133 638 1.49%
Time deposits 548,217 4,501 3.33% 395,926 2,534 2.60%
------------------------------------------------------------------------------------
Total interest bearing deposits 857,717 6,110 2.89% 585,810 3,182 2.20%
Borrowed funds 114,362 1,326 4.70% 106,541 1,019 3.88%
Subordinated debt 32,574 597 7.43% 20,620 276 5.43%
Repurchase agreements 24,852 247 4.03% 15,480 73 1.91%
------------------------- -------------------------
Total interest-bearing liabilities 1,029,505 $ 8,280 3.26% 728,451 $ 4,550 2.53%
========================= =========================
Non-interest bearing deposits 99,976 61,977
Other liabilities 21,823 11,008
----------- -----------
Total liabilities 1,151,304 801,436
Shareholders' equity 159,841 78,476
----------- -----------
Total liabilities and shareholders' equity $ 1,311,145 $ 879,912
=========== ===========
Net interest spread (5) 3.69% 3.26%
Tax equivalent adjustment $ 193 $ 164
Net interest income and net
interest margin (6) $ 11,583 4.06% $ 7,070 3.53%
(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.
16
Interest income on loans increased from $9.7 million for the quarter ended March
31, 2005 to $17.0 million for the quarter ended March 31, 2006. The increase is
primarily due to higher average loan balances, which increased by $271.5 million
primarily due to loan balances acquired in the 1st State Bancorp merger
transaction, and increased loan yields. Yields on commercial, consumer, and home
equity increased 148 basis points, 100 basis points and 164 basis points,
respectively, in the quarter ended March 31, 2006 compared to the quarter ended
March 31, 2005. Higher yields in 2006 reflect the increase in the prime rate
charged by the Bank between those two periods. Variable rate loans made up
approximately 69.6% of the total loan portfolio at March 31, 2006 compared to
69.3% at March 31, 2005.
Interest income on investment securities increased from $1.7 million for the
quarter ended March 31, 2005 to $2.1 million for the quarter ended March 31,
2006. The increase is primarily due to an increase in average balances
outstanding between the periods, which increased by $36.6 million. The yield on
investment securities on a tax-equivalent basis increased from 4.78% in the
quarter ended March 31, 2005 to 4.80% in the quarter ended March 31, 2006. The
slight increase is due to higher yields on new investment securities purchases
offset by the overall lower yield on the acquired 1st State Bank's investment
security portfolio. The Company sold $102.3 million of 1st State Bank's
investment security portfolio after the completion of the merger. Proceeds were
principally used to repay the $30 million of short-term debt that was
outstanding at December 31, 2005 (used to fund the majority of the cash portion
of the1st State Bancorp merger consideration), fund loan commitments and
purchase new investment securities.
Interest expense on deposits increased from $3.2 million for the quarter ended
March 31, 2005 to $6.1 million for the quarter ended March 31, 2006. The
increase is primarily due an increase in the average balance of interest bearing
deposits outstanding, which increased $271.9 million primarily due to deposit
balances acquired in the 1st State Bancorp merger transaction, and higher
deposit rates. The average rate paid on time deposits increased from 2.60% for
the quarter ended March 31, 2005 to 3.33% for the quarter ended March 31, 2006,
a 73 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 2006.
Interest expense on borrowings increased from $1.4 million for the quarter ended
March 31, 2005 to $2.2 million for the quarter ended March 31, 2006. The
increase is primarily due to higher outstanding borrowing and subordinated debt
balances and an increase in interest rates. The rate on borrowings and
subordinated debentures for the quarter ended March 31, 2006 increased to 4.70%
and 7.43%, respectively, from 3.88% and 5.43%, respectively, for the quarter
ended March 31, 2005. In July of 2003, the Bank entered into interest rate swap
agreements on $25.0 million of its outstanding Federal Home Loan Bank advances
to swap fixed rate borrowings to a variable rate. In the first quarter of 2005,
the net effect of the swaps was a reduction of interest expense, however, as a
result of the significant increase in short-term interest rates, the net effect
of the swaps was an increase in interest expense for the first quarter of 2006.
As short-term interest rates have increased following the FOMC rate increases,
the overall effective rate on both borrowings and subordinated debt has
increased.
17
For the quarter ended March 31, 2006, the provision for loan losses was $412,000
compared to a credit of $250,000 for the quarter ended March 31, 2005, an
increase of $662,000. The increase in the provision for loan losses was
primarily due to an increase in the specific allocation for one loan
relationship and the estimated inherent losses associated with the net growth in
the loan portfolio during the quarter ended March 31, 2006 and other factors as
discussed more fully below under "Asset Quality". Net charge-offs for the
quarter ended March 31, 2006 were $3.4 million, or 1.45% of average loans,
compared to $99,000, or 0.06% of average loans for the quarter ended March 31,
2005. Charge-offs for the quarter ended March 31, 2006 includes $3.2 million
related to one loan relationship that had been fully reserved by 1st State Bank
as of December 31, 2005 and had no impact on the Bank's loan loss provision for
the quarter ended March 31, 2006.
Noninterest income for the quarter ended March 31, 2006 was $2.0 million
compared to $1.3 million for the quarter ended March 31, 2005, an increase of
$0.7 million. This increase was primarily due to higher service charges and
other fees, which increased by $308,000, as a result of a higher volume of
transaction accounts, which were acquired in the 1st State Bancorp merger
transaction. Income on bank owned life insurance increased $108,000 primarily
due to additional insurance purchased in the second quarter of 2005.
Noninterest expenses for the quarter ended March 31, 2006 were $8.8 million
compared to $6.2 million for the quarter ended March 31, 2005. Salaries and
employee benefits, representing the largest noninterest expense category,
increased to $4.5 million for the quarter ended March 31, 2006, from $3.1
million for the quarter ended March 31, 2005. The increase was primarily due to
an increase in the number of personnel employed by the Company as a result of
the 1st State Bancorp merger transaction and the Company's overall
period-over-period growth. As of March 31, 2006, the Company had 328 full-time
equivalent employees compared to 241 for the same date in 2005 and 256 at
December 31, 2005.
Occupancy costs, the second largest component of noninterest expenses, increased
$164,000 to $778,000 for the quarter ended March 31, 2006 from $614,000 for the
same period in 2005. The increase is primarily due to expenses associated with
branches acquired in the 1st State Bancorp merger transaction. Furniture and
equipment expenses for the quarter ended March 31, 2006 increased $125,000 from
the same period in 2005 primarily due to higher equipment repair and maintenance
costs associated with the increase in branch locations. Data processing expenses
for the quarter ended March 31, 2006 increased $178,000 from the same period in
2005 primarily due to higher fees from third-party providers prior to the
start-up of the Company's operations center. The Company completed the
consolidation of its state-wide operations during the first quarter of 2006 and
now processes data and banking items in-house. The Company anticipates data
processing costs will decrease in future periods as a result of consolidating
the transaction processing at its operations center in Burlington, North
Carolina. Director fees for the quarter ended March 31, 2006 increased $205,000
from the same period in 2005 primarily due to higher expense accruals associated
with the directors supplemental retirement plan and the directors deferred
compensation plan as a result of the adoption of SFAS 123R. Deposit premium
amortization for the quarter ended March 31, 2006 increased $289,000 from the
same period in 2005 primarily as a result of the deposit premium intangible
associated with the 1st State Bancorp merger transaction, which was valued at
$5.3 million as of the closing date and is being amortized over eight years
Other expenses for the quarter ended March 31, 2006 increased $345,000 from the
same period in 2005 primarily due to higher postage, printing and travel
expenses associated with the 1st State Bancorp merger transaction.
18
The Company's effective tax rate for the first quarter of 2006 was 33.9%
compared to 33.7% for the comparable period of 2005. Income tax expense for the
quarter ended March 31, 2006 and 2005 was $1.4 million and $0.8 million
respectively. The Company forecasts its taxable and non-taxable income and
calculates the effective tax rate for the entire year, which is then applied to
the three month period.
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 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 Audit Committee. 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 estimates the amount of allowance needed to cover probable losses in
the portfolio by applying a loss allowance factor to each risk grade. Consumer
loans and mortgages are not risk graded, but a loss allocation factor is
utilized for these loans based on historical losses. The loss allocation factors
have been developed based on the Bank's 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 loan loss allowance is adjusted to an amount
that management believes is adequate to absorb probable losses inherent in the
loan portfolio as of the balance sheet date presented.
Beginning in the second quarter of 2005, the Company began estimating a specific
allowance for loan losses associated with certain commercial loans greater than
$750,000. Management determines the level of specific allowance based on the
facts and circumstances of each loan, including among other factors, payment
history, collateral values, guarantor liquidity, and net worth. Of the $14.2
million allowance for loan losses as of March 31, 2006, $3.1 million has been
allocated to specific loans.
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 provision of $412,000 for
the quarter ended March 31, 2006, compared to a credit of $250,000 for the
quarter ended March 31, 2005. The Company added 1st State Bank's allowance for
loan losses, which was $7.6 million as of December 31, 2005, to the Company's
allowance for loan losses. The Company continued to experience an overall
improvement in the risk ratings of the loan portfolio during the quarter ended
March 31, 2006, however past due loans as a percentage of the loan portfolio
increased from 1.07% at December 31, 2005 to 1.26% at March 31, 2006. Past dues
greater than 90 days as a percentage of total loans decreased from 0.66% at
December 31, 2005 to 0.46% at March 31, 2006. The following
19
table presents an analysis of changes in the allowance for loan losses for the
three month periods ended March 31, 2006 and 2005, respectively:
Three Months
Ended March 31,
2006 2005
-------- --------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 9,592 $ 10,721
1st State Bank loan loss allowance acquired 7,637 --
Net charge-offs:
Loans charged off:
Commercial 3,316 96
Consumer 106 159
Home equity lines -- --
Mortgage 31 51
-------- --------
Total charge-offs 3,453 306
-------- --------
Recoveries of loans previously charged off:
Commercial 8 201
Consumer 4 6
Home equity lines 4 --
Mortgage 5 --
-------- --------
Total recoveries 21 207
-------- --------
Total net charge-offs 3,432 99
-------- --------
Loss provisions (credits) charged to operations 412 (250)
-------- --------
Allowance for loan losses, end of period $ 14,209 $ 10,372
======== ========
Net charge-offs to average loans during the
period (annualized) 1.49% 0.06%
Allowance as a percent of gross loans 1.50% 1.60%
Net charge-offs for the quarter ended March 31, 2006 includes $3.2 million
related to one 1st State Bank loan relationship that was fully reserved by 1st
State Bank as of December 31, 2005. Excluding this transaction, charge-offs
declined, which reflects the resources management has allocated to improving the
overall credit quality of the loan portfolio.
The following table presents an analysis of nonperforming assets as of March 31,
2006 and 2005 and December 31, 2005:
20
March 31, December 31,
2006 2005 2005
------- ------- -------
(Dollars in thousands)
Nonaccrual loans:
Commercial and commercial real estate $ 5,149 $ 5,797 $ 5,040
Mortgage 1,588 1,880 1,628
Construction 807 2,374 737
Equity lines 398 323 497
Comsumer 100 195 176
------- ------- -------
Total nonaccrual loans 8,042 10,569 8,078
Foreclosed property held 888 431 771
------- ------- -------
Total nonperforming assets $ 8,930 $11,000 $ 8,849
======= ======= =======
Nonperforming assets to total loans 0.95% 1.63% 1.32%
Nonperforming assets to total assets 0.68% 1.24% 0.92%
Allowance coverage of nonperforming loans 177% 98% 119%
At March 31, 2006, nonperforming assets were $8.9 million, an increase of $0.1
million from December 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 any material
losses associated with the nonperforming loans existing at March 31, 2006.
A loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. There were no impaired
loans at March 31, 2006 and December 31, 2005.
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.
Foreclosed property increased to $888,000 at March 31, 2006 from $771,000 at
December 31, 2005. 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 fair value. Foreclosed property excludes $1.8 million related to four
branch locations that are held for sale and are reported as other real estate
owned pursuant to bank regulations and are also recorded at the lower of cost or
fair value.
21
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 $59.8 million in its most liquid assets, cash and cash equivalents,
as of March 31, 2006. 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, which totaled $ 948.6
million and $652.1 million at March 31, 2006 and December 31, 2005,
respectively, funded 72.2% of total assets at March 31, 2006 compared to 67.7%
at December 31, 2005. 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.
On February 27, 2006, the Company announced the Company's Board of Directors had
authorized the Company to acquire in the open market or in any private
transaction, from time-to-time and in accordance with applicable laws, rules and
regulations, up to 1.0 million shares of the Company's common stock. Management
plans to utilize share repurchases to manage capital levels of the Company. The
Company plans to effect the repurchase program through open-market purchases.
During the first quarter of 2006, the Company repurchased 116,000 shares at a
weighted average price of $15.92 per share.
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 March 31, 2006 and the minimum requirements are presented in the following
table:
Minimum
Requirements To Be
Actual Well Capitalized
----------------------------- ----------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
------------- -------------- ------------- -------------
Capital Bank Corporation
------------------------
Total Capital (to Risk Weighted Assets) $ 131,036 11.42% $ 114,713 10.00%
Tier I Capital (to Risk Weighted Assets) 115,602 10.08% 68,829 6.00%
Tier I Capital (to Average Assets) 115,602 9.34% 61,898 5.00%
Capital Bank
------------
Total Capital (to Risk Weighted Assets) $ 127,832 11.15% $ 114,638 10.00%
Tier I Capital (to Risk Weighted Assets) 113,500 9.90% 68,783 6.00%
Tier I Capital (to Average Assets) 113,500 9.68% 58,645 5.00%
22
Consolidated capital ratios decreased from December 31, 2005 due to the increase
in risk-weighted and total assets associated with the Company's acquisition of
1st State Bancorp exceeding the tangible capital acquired. 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, 2005 were 13.71%,
11.73% and 10.64%, respectively.
Shareholders' equity was $158.1 million, or $13.60 per share, at March 31, 2006.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth and to maintain a well capitalized position.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
As described in more detail in our Annual Report on Form 10-K for the year ended
December 31, 2005, as amended, asset/liability management involves the
evaluation, monitoring and management of interest rate risk, liquidity and
funding. While the Board of Directors has overall responsibility for the
Company's asset/liability management policies, the Asset and Liability Committee
monitors loan, investment, and liability portfolios to ensure comprehensive
management of interest rate risk and adherence to the policies.
The Company utilizes an outside asset liability management advisory firm to help
management evaluate interest rate risk and develop asset/liability management
strategies. One tool used is a computer simulation model which projects the
Company's performance under different interest rate scenarios. Analyses are
prepared quarterly which evaluate the Company's performance under different
interest rate scenarios (flat, rising and declining). The following tables
illustrate the output from the Company's simulation model based on the balance
sheets as of March 31, 2006 and December 31, 2005. The tables reflect
rate-sensitive positions at March 31, 2006 and December 31, 2005, and are not
necessarily indicative of positions on other dates. The projected results as of
March 31, 2006 include the impact of the 1st State Bancorp merger transaction,
which was completed on January 3, 2006.
The following table illustrates the Company's interest rate sensitivity as of
March 31, 2006 and December 31, 2005. The carrying amounts of interest rate
sensitive assets and liabilities are presented in periods in which they next
reprice to market rates or mature and are aggregated to show the interest rate
sensitivity gap. To reflect anticipated prepayments, certain asset and liability
amounts were based on estimated cash flows rather than contractual cash flows.
The Company continues to be "asset sensitive" at March 31, 2006 as its assets
reprice faster than its liabilities.
Within One One to Two Two to Five After Five
Interest Rate Sensitivity Year Years Years Years Total
- ------------------------- ---- ----- ----- ----- -----
(Dollars in thousands)
As of March 31, 2006
Total assets $ 845,796 $ 92,466 $ 161,215 $ 209,090 $1,308,567
Total liabilities and equity $ 654,266 $ 217,885 $ 198,395 $ 238,021 $1,308,567
--------- --------- --------- --------- ----------
Interest-rate sensitivity gap $ 191,530 ($ 125,419) ($ 37,180) ($ 28,931) $ --
Cumulative interest-rate sensitivity gap $ 191,530 $ 66,111 $ 28,931 $ --
23
Within One One to Two Two to Five After Five
Year Years Years Years Total
---- ----- ----- ----- -----
As of December 31, 2005
Total assets $ 569,081 $ 60,830 $182,755 $ 148,240 $960,906
Total liabilities and equity $ 387,158 $ 250,575 $115,821 $ 207,352 $960,906
--------- --------- -------- --------- --------
Interest-rate sensitivity gap $ 181,923 ($ 189,745) $ 66,934 ($ 59,112) $ --
Cumulative interest-rate sensitivity gap $ 181,923 ($ 7,822) $ 59,112 $ --
As of March 31, 2006 and December 31, 2005, under the flat rate scenario, the
Company was projected to earn $50.4 million and $34.9 million, respectively. The
table below measures the impact on net interest income of both a gradual and
immediate 200 basis point change in interest rates over the twelve months
following the interest rate change. Actual results could differ from these
estimates.
Change in 12 month Projected Net Interest Income Versus
Projected Net Interest Income Under No Rate Change
--------------------------------------------------
March 31, 2006 December 31, 2005
-------------- -----------------
(Dollars in millions) Dollar Change Percentage Change Dollar Change Percentage Change
------------- ----------------- ------------- -----------------
Basis Point Change
+200 gradual $ 4.8 9.5% $ 2.9 8.3%
+200 immediate $ 8.4 16.6% $ 5.2 14.9%
No rate change -- -- -- --
- -200 gradual ($2.5) (5.0%) ($1.7) (4.9%)
- -200 immediate ($5.2) (10.3%) ($3.3) (9.5%)
The table does not reflect the impact of hedging strategies discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005, as
amended.
Item 4 Controls and Procedures
-----------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its 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 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 its Exchange Act filings.
24
Changes in Internal Control over Financial Reporting
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 control over
financial reporting as a result of remediation of matters identified through its
review of internal control 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 1A 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
25
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
nonbank 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 the Company's common stock on the NASDAQ National Market
has been comparable to other similarly-sized banks. Nevertheless, this trading
is relatively low when compared with more seasoned companies listed on the
NASDAQ National Market or other consolidated reporting systems or stock
exchanges. Thus, the market in the Company's common stock may be limited in
scope relative to other companies.
We Depend Heavily on Our Key Management Personnel
The Company's success depends in part on its 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.
26
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 Securities and Exchange Commission may adversely
affect our ability to operate profitably.
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 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, which could decrease our reported
earnings.
27
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/Human Resources 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.
We May Not Be Able to Successfully Integrate 1st State Bancorp or to Realize the
Anticipated Benefits of our Recently Completed Merger
Our recently completed merger with 1st State Bancorp involves the combination of
two bank holding companies that previously have operated independently. A
successful combination of the operations of the two entities will depend
substantially on our ability to consolidate operations, systems and procedures
and to eliminate redundancies and costs. We may not be able to combine the
operations of 1st State Bancorp with our operations without encountering
difficulties, such as:
o The loss of key employees and customers;
o The disruption of operations and business;
o Inability to maintain and increase competitive presence;
o Deposit attrition, customer loss and revenue loss;
o Possible inconsistencies in standards, control procedures and policies;
o Unexpected problems with costs, operations, personnel, technology and
credit; and/or
o Problems with the assimilation of new operations, sites or personnel,
which could divert resources from regular banking operations.
Further, although meaningful cost savings are anticipated as a result of the
merger, such expected cost savings may not be realized. Finally, any cost
savings that are realized may be offset by losses in revenues or other charges
to earnings.
28
Item 2 Unregistered Sale of Equity Securities and Use of Proceeds
----------------------------------------------------------
The following table lists all repurchases (both open market and private
transactions) during the quarter ended March 31, 2006 of any the Company's
securities registered under Section 12 of the Exchange Act, by or on behalf of
the Company, or any affiliated purchaser of the Company:
Issuer Purchase of Equity Securities
------------------------------------
Total Number
of Shares Maximum Number
Purchased as of Shares That
Part of Publicly May Yet Be
Total Number Average Price Announced Purchased Under
of Shares Paid per Plans or Plans or
Month of Purchased Share Programs (1) Programs
- --------------------------- -------------------------------------------------------------------
January 2006 -- $ -- -- 1,000,000
February 2006 -- -- -- 1,000,000
March 2006 116,000 15.92 116,000 884,000
----------------------------------------------
116,000 $ 15.92 116,000
============== ==============
(1) On February 27, 2006, the Company announced that on February 23, 2006 the
Company's Board of Directors had authorized a program to repurchase (in the
open market or in any private transaction), up to 1.0 million shares of the
Company's outstanding common stock. The repurchase program is for a period
of up to two years and supercedes the share repurchase program authorized
by the Company's Board of Directors on December 22, 2004, which authorized
the repurchase of up to 100,000 shares. The Company did not acquire any
shares under this former repurchase program. As of March 31, 2006, there
was an aggregate of 884,000 shares remaining authorized for future
repurchases.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits
--------
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.
29
Exhibit 10.1 Employment Agreement, dated January 3, 2006, between Capital
Bank and A. Christine Baker (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the SEC on January 9, 2006).
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 A. Christine Baker 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.]
Exhibi 32.2 Certification of A. Christine Baker 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.]
30
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, in Raleigh, North Carolina, on the 10th
day of May 2006.
CAPITAL BANK CORPORATION
By: /s/ A. Christine Baker
-----------------------
A. Christine Baker
Chief Financial Officer
31
Exhibit Index
- --------------------------------------------------------------------------------
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 Employment Agreement, dated January 3, 2006, between Capital
Bank and A. Christine Baker (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the SEC on January 9, 2006).
- --------------------------------------------------------------------------------
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 A. Christine Baker 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.]
- --------------------------------------------------------------------------------
Exhibi 32.2 Certification of A. Christine Baker pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 [This exhibit is being furnished
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 and
shall not, except to the extent required by that act, be
deemed to be incorporated by reference into any document or
filed herewith for purposes of liability under the Securities
Exchange Act of 1934, as amended, or the Securities Act of
1933, as amended, as the case may be.]
- --------------------------------------------------------------------------------
32