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 September 30, 1999
[ ] 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.)
4400 Falls of Neuse Road
Raleigh, North Carolina 27609
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 878-3100
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
----- -----
As of November 5, 1999, there were issued and outstanding 3,658,689 shares of
the Registrant's common stock, no par value.
<PAGE>
Capital Bank Corporation
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Consolidated statements of financial condition at September 30, 1999 (Unaudited)
and December 31, 1998 1
Consolidated statements of income (loss) for the three months ended
September 30, 1999 and September 30, 1998 (Unaudited) 2
Consolidated statements of loss for the nine months ended
September 30, 1999 and September 30, 1998 (Unaudited) 3
Consolidated statements of cash flows for the nine months ended
September 30, 1999 and September 30, 1998 (Unaudited) 4
Notes to consolidated financial statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
<S> <C> <C>
Cash and due from banks $ 14,156 $ 10,365
Federal funds sold 7,920 16,400
Investment securities
Available for sale, at fair value 46,108 34,066
Held-to-maturity, at amortized cost - 3,560
------------------- ------------------
Total investment securities 46,108 37,626
------------------- ------------------
Loans-net of unearned income 138,386 110,779
Allowance for loan losses (2,054) (1,457)
------------------- ------------------
Net loans 136,332 109,322
------------------- ------------------
Premises and equipment, net 3,157 2,592
Accrued interest receivable 1,142 853
Deposit premium and goodwill, net 1,671 1,833
Other assets 835 1,002
------------------- ------------------
Total assets $ 211,321 $ 179,993
=================== ==================
LIABILITIES
Deposits
Demand, non-interest bearing $ 9,621 $ 7,539
Savings and interest bearing demand deposits 37,276 35,689
Time deposits 104,581 94,115
------------------- ------------------
Total deposits 151,478 137,343
------------------- ------------------
Accrued interest payable 621 501
Repurchase agreements 5,608 2,501
Borrowings 20,000 5,066
Other liabilities 2,319 1,075
------------------- ------------------
Total liabilities 180,026 146,486
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized; 3,658,689 shares issued and outstanding 34,806 34,788
Accumulated deficit (2,670) (1,255)
Unearned ESOP shares - (66)
Deferred stock awards - (195)
Accumulated other comprehensive income (loss) (841) 235
------------------- ------------------
Total stockholders' equity 31,295 33,507
------------------- ------------------
Total liabilities and stockholders' equity $ 211,321 $ 179,993
================== =================
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
<S> <C> <C>
Interest income:
Loans and loan fees $ 2,847 $ 1,940
Investment securities 710 520
Federal funds and other interest income 205 252
--------- ---------
Total interest income 3,762 2,712
--------- ---------
Interest expense:
Deposits 1,700 1,430
Borrowings and repurchase agreements 294 4
--------- ---------
Total interest expense 1,994 1,434
--------- ---------
Net interest income 1,768 1,278
Provision for loan losses 225 203
--------- ---------
Net interest income after provision for loan losses 1,543 1,075
Noninterest income:
Service charges and other fees 114 80
Other noninterest income 220 230
--------- ---------
Total noninterest income 334 310
--------- ---------
Noninterest expenses:
Salaries and employee benefits 999 814
Occupancy 133 96
Data processing 92 86
Directors fees 64 80
Advertising 58 58
Furniture and equipment 77 74
Amortization of intangibles 54 54
Other expenses 215 288
--------- ---------
Total noninterest expenses 1,692 1,550
--------- ---------
Net income (loss) before tax expense 185 (165)
Income tax expense (benefit) - 2
--------- ---------
Net income (loss) $ 185 $ (167)
========= =========
Earnings per share - basic and diluted $ 0.05 $ (0.05)
========= =========
Dividends per share $ - $ 0.05
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
<S> <C> <C>
Loans and loan fees $ 7,760 $ 5,002
Investment securities 2,183 1,581
Federal funds and other interest income 457 849
-------- --------
Total interest income 10,400 7,432
-------- --------
Interest expense:
Deposits 4,871 3,861
Borrowings and repurchase agreements 644 13
-------- --------
Total interest expense 5,515 3,874
-------- --------
Net interest income 4,885 3,558
Provision for loan losses 624 548
-------- --------
Net interest income after provision for loan losses 4,261 3,010
Noninterest income:
Service charges and other fees 319 214
Other noninterest income 587 316
-------- --------
Total noninterest income 906 530
-------- --------
Noninterest expenses:
Salaries and employee benefits 2,845 2,134
Occupancy 371 264
Data processing 255 198
Directors fees 189 220
Advertising 188 165
Furniture and equipment 210 193
Amortization of intangibles 162 162
Merger related expenses 1,647 --
Other expenses 572 759
-------- --------
Total noninterest expenses 6,439 4,095
-------- --------
Net loss before tax expense (1,272) (555)
Income tax expense (benefit) (40) 6
-------- --------
Net loss $ (1,232) $ (561)
======== ========
Earnings per share - basic and diluted $ (0.34) $ (0.16)
======== ========
Dividends per share $ 0.05 $ 0.10
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1999 1998
(In thousands) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (1,232) $ (561)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of deposit premium and goodwill 162 162
Depreciation 288 190
Amortization of premium on securities, net 36 8
MRP and ESOP compensation 279 125
Provision for loan losses 624 548
Gain on sale of loans -- (2)
Changes in assets and liabilities:
Accrued interest receivable (289) (74)
Other assets 167 (755)
Accrued interest payable and other liabilities 1,364 (376)
-------- --------
Net cash provided by (used in) operating
activities 1,399 (735)
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (27,634) (35,866)
Additions to premises and equipment (853) (1,860)
Purchase of Federal Home Loan Bank stock (395) (63)
Purchase of securities available for sale (18,244) (13,245)
Proceeds from sales of securities available for sale -- 2,995
Proceeds from maturities of securities available for sale 5,485 7,392
Proceeds from maturities of securities held to maturity 3,560 6,000
-------- --------
Net cash used in investing activities (38,081) (34,647)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 14,135 33,782
Net increase in repurchase agreements 3,107 --
Net increase (decrease) in borrowings 14,934 (51)
Cash dividends (183) (361)
-------- --------
Net cash provided by financing activities 31,993 33,370
-------- --------
Net change in cash and cash equivalents (4,689) (2,012)
Cash and cash equivalents:
Beginning 26,765 30,046
-------- --------
Ending $ 22,076 $ 28,034
======== ========
</TABLE>
-4-
<PAGE>
Notes to the Consolidated Financial Statements
1. Significant Accounting Policies and Interim Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
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. The results of operations for the nine month period ended
September 30, 1999 are not necessarily indicative of the results of operations
that may be expected for the year ended December 31, 1999.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the 1998 Capital Bank Corporation annual report.
2. Changes in Operating Structure
Capital Bank (the "Bank") was incorporated under the laws of North Carolina on
May 30, 1997 and commenced operations on June 20, 1997. The Bank is a locally
owned community bank engaged in general commercial banking, providing a full
range of banking services. The majority of the Bank's customers are individuals
and small to medium-size businesses. The Bank's primary source of revenue is
interest earned from loans to customers and from invested cash and securities.
Prior to March 31, 1999, the Bank operated through its corporate office in
Raleigh, North Carolina, two branches in Cary, North Carolina and two branches
in Sanford, North Carolina. At a special meeting of shareholders held on March
26, 1999, the shareholders of Capital Bank approved the reorganization of
Capital Bank into a bank holding company named "Capital Bank Corporation" (the
"Company"). In the holding company reorganization, the shareholders of Capital
Bank each received a right to one share of Company stock for each share of
Capital Bank stock that they owned. Thus, the shareholders of Capital Bank
before the holding company reorganization are now the shareholders of the
Company. In addition, on March 31, 1999 the Company completed its acquisition of
Home Savings Bank of Siler City SSB, Inc. in a stock-for-stock exchange in which
the Company issued 1,181,038 shares of its Common Stock. On July 16, 1999, Home
Savings Bank merged with Capital Bank to form one subsidiary under Capital Bank
Corporation. In conjunction with the merger, the common stock of Home Savings
Bank was retired. As used in this report, the term "Company" refers to Capital
Bank Corporation and its subsidiary, Capital Bank, after the holding company
reorganization.
As a result of the reorganization, acquisition, and subsequent merger, which was
accounted for as a pooling-of-interests transaction, all amounts in these
statements are restated to reflect a consolidated basis as if the current
organization had been in place during both operating periods.
-5-
<PAGE>
3. Comprehensive Loss
Comprehensive income (loss) includes net income (loss) and all other changes to
the Company's equity, with the exception of transactions with shareholders
("Other Comprehensive Income"). The Company's only components of other
comprehensive income relate to unrealized gains and losses on securities
available for sale. The Company's total comprehensive net loss and information
concerning the Company's other comprehensive income items for the three and nine
month periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------
(In thousands) (Unaudited)
<S> <C> <C>
Three month period ended September 30, 1999 and 1998:
Net income (loss) before comprehensive items $ 185 $ (167)
Unrealized gains on securities available for sale 183 251
------- -------
Comprehensive net income $ 368 $ 84
======= =======
Nine month period ended September 30, 1999 and 1998:
Net loss before comprehensive items $(1,232) $ (561)
Unrealized gains/(losses) on securities available for sale (1,076) 318
------- -------
Comprehensive net loss $(2,308) $ (243)
======= =======
</TABLE>
1. Earnings Per Share
The Bank is required to report a dual presentation of 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. For loss periods, diluted EPS is the same as
basic EPS due to the fact that including common stock equivalents computed as a
result of the 215,248 stock options outstanding in the calculation of diluted
EPS would be antidilutive. For periods where the Bank has positive earnings,
diluted EPS are presented due to the effect of those same options. The following
tables provide a computation and reconciliation of basic and diluted EPS for the
three and nine month periods ended September 30, 1999 and 1998.
-6-
<PAGE>
4. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
1999 1998
----------------------------
(In thousands except number of shares) (Unaudited)
<S> <C> <C>
Three month period ended September 30, 1999 and 1998:
Income available to stockholders - basic and diluted $ 185 $ (167)
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 3,675,036 3,632,365
Incremental shares from assumed exercise of stock
options - antidilutive during loss periods 7,147 n/a
----------- -----------
Weighted average number of shares outstanding - diluted 3,682,183 3,632,365
=========== ===========
Nine month period ended September 30, 1999 and 1998:
Income available to stockholders - basic and diluted $ (1,232) $ (561)
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 3,674,605 3,634,932
Incremental shares from assumed exercise of stock
options - antidilutive during loss periods n/a n/a
----------- -----------
Weighted average number of shares outstanding - diluted 3,674,605 3,634,932
=========== ===========
</TABLE>
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 nine month periods ended September 30, 1999 for
Capital Bank Corporation and its wholly owned subsidiary, Capital Bank. All
amounts in these statements are reflected on a consolidated basis as if the
current organization had been in place during both operating periods. This
discussion and analysis is intended to provide pertinent information concerning
financial position, results of operations, liquidity, and capital resources. It
should be read in conjunction with the unaudited financial statements and
related footnotes contained in Part I, Item 1 of this report.
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, as well as the factors set forth in the Company's
periodic reports and other filings with the SEC.
-7-
<PAGE>
Overview
Capital Bank was incorporated under the laws of North Carolina on May 30, 1997
and commenced banking operations on June 20, 1997 in its main office in Raleigh,
North Carolina, and two branch locations in Sanford, North Carolina. In March
1998, the Bank opened a branch in Cary, North Carolina, closely followed by
another branch in the Cary area, which opened in September of that same year.
On August 6, 1998, the Bank announced its plan to organize a bank holding
company to be known as Capital Bank Corporation. In September, 1998, the Bank
entered into a definitive agreement to acquire Home Savings Bank of Siler City,
SSB, Inc. ("Home Savings"). Home Savings had total assets in excess of $59
million and operated from its main office in Siler City, North Carolina.
On October 19, 1998, Capital Bank Corporation filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission to register under the
Securities Act of 1933 up to 3,694,651 shares of its common stock to be issued
in connection with Capital Bank's holding company reorganization and the Home
Savings acquisition.
Regulatory and shareholder approval was completed for both of the above
transactions in 1999 and the transactions were completed on March 31, 1999. On
that same day, Capital Bank and Home Savings Bank of Siler City, SSB, Inc.
became wholly owned subsidiaries of the Company.
On July 16, 1999, Home Savings Bank merged with Capital Bank to form one
subsidiary under Capital Bank Corporation. In conjunction with the merger, the
common stock of Home Savings Bank was retired.
The Company has no operations other than those of its subsidiary, Capital Bank.
The Bank is a full-service community bank. The Company's profitability depends
principally upon the net interest income, provision for loan losses, noninterest
income and noninterest expenses of the bank.
Financial Condition
Total consolidated assets of the Company for the quarter ended September 30,
1999 were $211.3 million compared to $180.0 million at December 31, 1998, an
increase of $31.3 million, or 17%. On September 30, 1999, loans were $138.4
million, up $27.6 million, or 25%, compared to December 31, 1998. Investment
securities were $46.1 million and Federal funds sold were $7.9 million at period
end. During the nine month period, Federal funds sold declined by $8.5 million
as this asset category was redeployed into higher yielding loans and securities.
Earning assets represented 95% of total assets on September 30, 1999. The
allowance for loan losses on September 30, 1999 was $2.1 million and represented
approximately 1.48% of total loans. Management believes that the amount of the
allowance is adequate at this time.
Deposits on September 30, 1999 were $151.5 million, an increase of $14.1 million
or 10% from December 31, 1998. Borrowings increased from $5.0 million at
December 31, 1998 to $20.0 million at September 30, 1999 to provide funding for
certain fixed rate commercial mortgages and to increase liquidity for potential
Year 2000 cash needs. Total consolidated stockholders' equity was $ 31.3 million
at September 30, 1999, a decrease of $2.2 million from December 31, 1998,
primarily due to net losses and declines in the market value of available for
sale securities.
-8-
<PAGE>
Results of Operations
For the three month period ended September 30, 1999, the Company reported net
income of $185,000 or $.05 per share compared to a loss of $167,000 or $.05 per
share in the third quarter of 1998. For the nine month period ended September
30, 1999, the Company reported a net loss of $1.2 million or $.34 per share
compared to a loss of $561,000 or $.16 per share for the same period in 1998.
Included in the loss for the nine month period ended September 30, 1999 were
certain nonrecurring charges related to the establishment of the bank holding
company and the acquisition of Home Savings of $1.6 million. Excluding those
costs, the Company had consolidated net income from operations of approximately
$414,000 or $0.11 per share for the nine month period ended September 30, 1999.
Net interest income in the third quarter was $1.8 million, up 38% compared to
$1.3 million in the third quarter of 1998. For the nine month period ended
September 30, 1999, net interest income was $4.9 million, up 37% compared to
$3.6 million for the same period in 1998. The Company's net interest margin (net
interest income as a percentage of average earning assets) was 3.63% and 3.53%
for the three and nine month periods ended September 30, 1999, respectively.
The provision for loan losses was $225,000 and $624,000 for the three and nine
month periods ended September 30, 1999, respectively. This provision was used to
build the allowance for loan losses to a prudent level to support the Company's
actual loan growth. At September 30, 1999, the allowance for loan losses was
1.48% of total loans. Loans 30 days or more past due totaled $876,000 and
represented .63% of total loans on September 30, 1999.
Non-interest income for the three and nine month periods ended September 30,
1999, were $334,000 and $906,000, respectively, compared to $310,000 and
$530,000 for the same periods in 1998. The increases in non-interest income is
primarily attributable to mortgage origination fees and loan servicing fees
associated with accounts receivable financing. These two business activities
were new revenue sources in latter part of 1998.
Non-interest expenses for the three and nine month periods ended September 30,
1999, were $1.7 million and $6.4 million, respectively, compared to $1.6 million
and $4.1 million for the same periods in 1998. Salaries and employee benefits,
representing the largest expense category, increased from $814,000 and $2.1
million for the three and nine month periods in 1998 to $999,000 and $2.8
million for the same periods in 1999. These increases reflect an increase in the
number of personnel employed by the Company as the Company must maintain
adequate staffing levels in order to meet customer needs and to keep pace with
its expected growth. As of September 30, 1999 the Company had 74 full-time
equivalent employees. Nonrecurring charges related to the Home Savings
acquisition and the setup of the Capital Bank Corporation bank holding company
represented the second largest expense category. Those expenses amounted to
approximately $1.6 million for the nine month period ended September 30, 1999.
Occupancy costs, the third highest component of non-interest expenses, increased
from $96,000 and $264,000 for the three and nine month periods in 1998 to
$133,000 and $371,000 for the same periods in 1999. These increases are
primarily associated with the leasing of additional office space as a result of
growth in the lending area and the related growth in the number of personnel
needed in that department. Although management expects noninterest expense to
increase on an absolute basis as the Company continues its growth, these
expenses as a percentage of asset size, currently and operating revenue are
anticipated to decrease over time.
-9-
<PAGE>
Liquidity and Capital Resources
The Company's liquidity management involves planning to meet the Company's
anticipated funding needs at a reasonable cost. Liquidity management is guided
by policies formulated by the Company's senior management and the
Asset/Liability Management Committee of the Board of Directors. The Company had
$22.1 million in its most liquid assets, cash and cash equivalents at quarter
end. The Company's principal sources of funds are deposits, Federal Home Loan
Bank borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of
liquidity, together with equity capital funded 79% of total assets at September
30, 1999. In addition, the Company has the ability to take advantage of various
other funding programs available from the Federal Home Loan Bank of Atlanta.
Stockholder's equity was $31.3 million or $8.55 per share at September 30, 1999.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth for at least the next 12 months and to maintain
a well-capitalized position. At September 30, 1999, Capital Bank had a leverage
ratio of 14.8%, a Tier 1 capital ratio of 21.6%, and a total risk-based capital
ratio of 22.9%. These ratios far exceed the federal regulatory minimum
requirements for a "well-capitalized" bank. Management's challenge is to use
this capital to implement a prudent growth strategy of branch and bank
acquisitions while growing the existing branch structure through quality service
and responsiveness to its customers' needs, although there is no assurance that
the Company will meet these objectives.
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact, since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer-term interest-bearing assets
and liabilities, but the Company attempts to limit its long-term assets and
liabilities.
Year 2000
As the Year 2000 approaches, an important business issue has emerged regarding
whether or not existing computer systems and other operating systems can process
this date value properly. The problem is the result of computer programs and
related logic which use a two digit value to define a particular calendar year
(i.e. 99 for 1999). When this logic is used, computer systems can not recognize
the two digit code "00" associated with the Year 2000 as coming after 99. The
issue is significant because many computer systems deployed throughout the
business world, not just in banks, use software which contain the two digit date
logic.
-10-
<PAGE>
Capital Bank Corporation uses two outside data processing companies (service
bureaus) to provide computer processing systems for their primary banking
products including loans, deposits, ATM's, check processing and general ledger.
The computer software used by these service bureaus is used by many banks
throughout the country. Both service bureaus have tested their software and
believe that they are Y2K compliant.
In addition to the service bureaus, the Company utilizes personal computers
configured into seven local area networks (LANS) which are, in turn, connected
to each other through a wide area network (WAN). All key equipment has been
purchased new since 1997 and has subsequently been tested for Year 2000
readiness by an independent consultant. The test results indicate that all
equipment will function properly into the Year 2000.
In addition to the service bureau applications, the Company uses software
distributed through the LAN/WAN network for functions such as word processing,
E-mail, spreadsheet, teller transactions, document preparation and new account
setup. All these software products are purchased or licensed from third party
vendors. It should be noted that Capital Bank Corporation does not write or
develop any of its own computer applications and all key third party vendors
have provided the Company with written certification or information that their
software is Year 2000 ready.
In addition to receiving these assurances from third party vendors the Company
has instituted a Year 2000 compliance program whereby it is reviewing the year
2000 issue on a comprehensive, Company-wide basis. This program is administered
by a project team consisting of executive and senior management as well as a
representative from the Board of Directors.
As of September 30, 1999, the Company had completed its assessment of existing
computer systems and applications and had identified mission critical
applications. The Bank has tested these systems or has reviewed third party test
results. It is the opinion of management that all mission critical systems will
properly handle the century data change. However, the Year 2000 is a global
issue which extends beyond the control of Capital Bank Corporation and may
effect the providers of services such as power and telecommunications. These
services are critical to the ongoing operations of the Company and in the
unlikely event of an interruption in these services, it is management's opinion
that such a failure will be quickly resolved.
The Company has developed and successfully tested detailed contingency plans in
case problems do occur. The Company has also developed and successfully tested a
general business resumption contingency plan which provides for the
implementation of manual processes on a temporary basis should any computer
application malfunction on or after January 1, 2000. The Company has also
developed a liquidity plan which is designed to meet customer needs for
increased funds and currency.
The Company has budgeted $93,000 for the Year 2000 program and has spent
approximately $80,000 to date.
-11-
<PAGE>
As a lending institution the Company is exposed to potential risk if borrowers
suffer year 2000 related difficulties and are unable to repay their loans. In
July 1998, the Company sent informational material and a year 2000 questionnaire
to all large borrowers which focuses on their year 2000 readiness. During the
third quarter 1998, the Company's loan officers and account managers met with
these customers to personally review the answers to these questionnaires and to
discuss the impact of the Year 2000 on their operations. The Company has
evaluated the information obtained from these meetings in order to determine
what impact the Year 2000 will have on their financial performance and their
ability to make loan payments. Thus far none of the Company's borrowers have
reported the expectation of material adverse impacts as a result of the year
2000 issue.
Based on the information now available, the Company anticipates that the systems
it uses will properly process dates in the year 2000 and beyond and that the
costs incurred in achieving full year 2000 compliance will not be material to
the Company's results of operation, liquidity or capital resources.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
The Company has not experienced any material change in its portfolio risk from
December 31, 1998 to September 30, 1999.
Part II - Other Information
Item 1 Legal Proceedings
- ------ -----------------
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. In addition, the Company is not
aware of any threatened litigation, unasserted claims or assessments that could
have a material adverse effect on the Company's business, operating results or
condition.
Item 2 Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
None
Item 3 Defaults Upon Senior Securities
- ------ -------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None
Item 5 Other Information
- ------ -----------------
None
-12-
<PAGE>
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
--------
27.01 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on form 8-K were filed during the period covered by this
report.
-13-
<PAGE>
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: November 5, 1999 By: /s/ Allen T. Nelson, Jr.,
--------------------------
Allen T. Nelson, Jr.,
-14-
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