UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
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(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4400 Falls of Neuse Road
Raleigh, North Carolina 27609
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(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 878-3100
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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 August 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
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated statements of financial condition at June 30, 1999
(Unaudited) and December 31, 1998
Consolidated statements of income (loss) for the three months ended
June 30, 1999 and June 30, 1998 (Unaudited)
Consolidated statements of loss for the six months ended
June 30, 1999 and June 30, 1998 (Unaudited)
Consolidated statements of cash flows for the six months ended
June 30, 1999 and June 30, 1998 (Unaudited)
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and December 31, 1998
June 30, December 31,
ASSETS 1999 1998
--------- ---------
(In thousands) (Unaudited)
<S> <C> <C>
Cash and due from banks ................................ $ 8,040 $ 10,365
Federal funds sold ..................................... 12,789 16,400
Investment securities
Available for sale, at fair value ................. 44,975 34,066
Held-to-maturity, at amortized cost ............... 2,000 3,560
--------- ---------
Total investment securities ................... 46,975 37,626
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Loans-net of unearned income ........................... 128,697 110,779
Allowance for loan losses .............................. (1,813) (1,457)
--------- ---------
Net loans ..................................... 126,884 109,322
--------- ---------
Premises and equipment, net ............................ 2,933 2,592
Accrued interest receivable ............................ 1,195 853
Deposit premium and goodwill, net ...................... 1,725 1,833
Other assets ........................................... 876 1,002
--------- ---------
Total assets ............................... $ 201,417 $ 179,993
========= =========
LIABILITIES
Deposits
Demand, non-interest bearing ...................... $ 8,796 $ 7,539
Savings and interest bearing demand deposits ...... 36,946 35,689
Time deposits ..................................... 102,118 94,115
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Total deposits ................................ 147,860 137,343
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Accrued interest payable ............................... 618 501
Repurchase agreements .................................. 3,659 2,501
Borrowings ............................................. 16,052 5,066
Other liabilities ...................................... 2,371 1,075
--------- ---------
Total liabilities .......................... 170,560 146,486
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized; 3,658,689 shares issued and outstanding 34,788 34,788
Accumulated deficit .................................... (2,855) (1,255)
Unearned ESOP shares ................................... (52) (66)
Deferred stock awards .................................. -- (195)
Accumulated other comprehensive income (loss) .......... (1,024) 235
--------- ---------
Total stockholders' equity ................. 30,857 33,507
--------- ---------
Total liabilities and stockholders' equity . $ 201,417 $ 179,993
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended June 30, 1999 and 1998
1999 1998
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(In thousands) (Unaudited)
<S> <C> <C>
Interest income:
Loans and loan fees ................................... $ 2,524 $ 1,674
Investment securities ................................. 736 537
Federal funds and other interest income ............... 153 296
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Total interest income ............................. 3,413 2,507
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Interest expense:
Deposits .............................................. 1,624 1,309
Borrowings and repurchase agreements .................. 232 4
------- -------
Total interest expense ............................ 1,856 1,313
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Net interest income ............................... 1,557 1,194
Provision for loan losses ............................. 195 171
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Net interest income after provision for loan losses 1,362 1,023
Noninterest income:
Service charges and other fees ........................ 108 68
Other noninterest income .............................. 192 71
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Total noninterest income .......................... 300 139
Noninterest expenses:
Salaries and employee benefits ........................ 977 723
Occupancy ............................................. 126 87
Data processing ....................................... 82 62
Directors fees ........................................ 46 105
Advertising ........................................... 67 54
Furniture and equipment ............................... 70 63
Amortization of intangibles ........................... 54 54
Other expenses ........................................ 143 295
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Total noninterest expenses ........................ 1,565 1,443
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Net income (loss) before tax expense ........... 97 (281)
Income tax expense (benefit) .......................... (4) 3
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Net income (loss) .............................. $ 101 $ (284)
======= =======
Earnings per share - basic and diluted ..................... $ 0.02 $ (0.08)
======= =======
Dividends per share ........................................ $ -- $ --
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Six Months Ended June 30, 1999 and 1998
1999 1998
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(In thousands) (Unaudited)
<S> <C> <C>
Interest income:
Loans and loan fees ................................... $ 4,913 $ 3,062
Investment securities ................................. 1,473 1,061
Federal funds and other interest income ............... 252 597
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Total interest income ............................. 6,638 4,720
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Interest expense:
Deposits .............................................. 3,171 2,431
Borrowings and repurchase agreements .................. 350 9
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Total interest expense ............................ 3,521 2,440
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Net interest income ............................... 3,117 2,280
Provision for loan losses ............................. 399 345
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Net interest income after provision for loan losses 2,718 1,935
Noninterest income:
Service charges and other fees ........................ 205 134
Other noninterest income .............................. 367 86
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Total noninterest income .......................... 572 220
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Noninterest expenses:
Salaries and employee benefits ........................ 1,846 1,320
Occupancy ............................................. 238 168
Data processing ....................................... 163 112
Directors fees ........................................ 125 140
Advertising ........................................... 130 107
Furniture and equipment ............................... 133 119
Amortization of intangibles ........................... 108 108
Merger related expenses ............................... 1,647 --
Other expenses ........................................ 357 471
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Total noninterest expenses ........................ 4,747 2,545
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Net loss before tax expense .................... (1,457) (390)
Income tax expense (benefit) .......................... (40) 4
------- -------
Net loss ....................................... $(1,417) $ (394)
======= =======
Earnings per share - basic and diluted ..................... $ (0.39) $ (0.11)
======= =======
Dividends per share ........................................ $ 0.05 $ 0.05
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
1999 1998
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net loss ................................................ $ (1,417) $ (394)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of deposit premium and goodwill ........ 108 108
Depreciation ........................................ 184 116
Amortization of premium on securities, net .......... 24 4
MRP and ESOP compensation ........................... 209 78
Provision for loan losses ........................... 399 345
Changes in assets and liabilities:
Accrued interest receivable ...................... (342) (2)
Other assets ..................................... 126 (276)
Accrued interest payable and other liabilities ... 1,413 (387)
-------- --------
Net cash provided by (used in) operating
activities ................................. 704 (408)
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments .......... (17,961) (25,432)
Additions to premises and equipment ..................... (525) (1,680)
Purchase of Federal Home Loan Bank stock ................ (343) (63)
Purchase of securities available for sale ............... (16,281) (7,233)
Proceeds from maturities of securities available for sale 4,432 5,517
Proceeds from maturities of securities held to maturity . 1,560 1,000
-------- --------
Net cash used in investing activities ........ (29,118) (27,891)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits ................................ 10,517 18,010
Net decrease in repurchase agreements ................... 1,158 --
Net increase (decrease) in borrowings ................... 10,986 (29)
Cash dividends .......................................... (183) (181)
-------- --------
Net cash provided by financing activities .... 22,478 17,800
-------- --------
Net change in cash and cash equivalents ...... (5,936) (10,499)
Cash and cash equivalents:
Beginning ........................................... 26,765 30,046
-------- --------
Ending .............................................. $ 20,829 $ 19,547
-------- --------
</TABLE>
<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 six month period ended
June 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. As used in this report,
the term "Company" refers to Capital Bank Corporation and its subsidiaries,
Capital Bank and Home Savings Bank of Siler City SSB, Inc., after the holding
company reorganization.
As a result of the reorganization and acquisition, which was treated 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.
<PAGE>
3. Comprehensive Loss
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." Comprehensive 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 six month periods ended June 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
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(In thousands) (Unaudited)
Three month period ended June 30, 1999 and 1998:
<S> <C> <C>
Net income (loss) before comprehensive items ............. $ 101 $ (284)
Unrealized gains/(losses) on securities available for sale (922) 61
------- -------
Comprehensive net loss ................................... $ (821) $ (223)
======= =======
Six month period ended June 30, 1999 and 1998:
Net loss before comprehensive items ...................... $(1,417) $ (394)
Unrealized gains/(losses) on securities available for sale (1,259) 67
------- -------
Comprehensive net loss ................................... $(2,676) $ (327)
======= =======
</TABLE>
4. 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 six month periods ended June 30, 1999 and 1998.
<PAGE>
4. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands except number of shares) (Unaudited)
<S> <C> <C>
Three month period ended June 30, 1999 and 1998:
Income available to stockholders - basic and diluted .. $ 101 $ (284)
=========== ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic . 3,674,964 3,638,651
Incremental shares from assumed exercise of stock
options - antidilutive during loss periods ....... 10,155 n/a
----------- -----------
Weighted average number of shares outstanding - diluted 3,685,119 3,638,651
=========== ===========
Six month period ended June 30, 1999 and 1998:
Income available to stockholders - basic and diluted .. $ (1,417) $ (394)
========= ===========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic . 3,674,386 3,636,216
Incremental shares from assured exercise of stock
options - antidilutive during loss periods .......... n/a n/a
Weighted average number of shares outstanding - diluted 3,674,386 3,636,216
========= ===========
</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 six month periods ended June 30, 1999 for Capital
Bank Corporation and its wholly owned subsidiaries, Capital Bank and Home
Savings Bank of Siler City, SSB, Inc. As a result of the reorganization and
acquisition, 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 under Exhibit
99.01, "Risk Factors," in the Company's Annual Report on Form 10-K filed with
the FDIC.
<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 definite 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.
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.
The Company has no operations other than those of its subsidiaries. The
subsidiaries are full-service community banks. The Company's profitability
depends principally upon the net interest income, provision for loan losses,
noninterest income and noninterest expenses of the banks.
Financial Condition
Total consolidated assets of the Company for the quarter ended June 30, 1999
were $201.4 million compared to $180.0 million at December 31, 1998, an increase
of $21.4 million, or 12%. On June 30, 1999, loans were $128.7 million, up $17.9
million, or 16%, compared to December 31, 1998. Investment securities were $47.0
million and Federal funds sold were $12.8 million at period end. During the six
month period, Federal funds sold declined by $3.6 million as this asset category
was redeployed into higher yielding loans and securities. The allowance for loan
losses on June 30, 1999 was $1.8 million and represented approximately 1.41% of
total loans. Management believes that the amount of the allowance is adequate at
this time.
Deposits on June 30, 1999 were $147.9 million, an increase of $10.5 million or
8% from December 31, 1998. Earning assets represented 94% of total assets on
June 30, 1999. Total consolidated stockholders' equity was $ 30.9 million at
June 30, 1999.
Results of Operations
For the three month period ended June 30, 1999, the Company reported net income
of $101,000 or $.02 per share compared to a loss of $284,000 or $.08 per share
in the second quarter of 1998. For the six month period ended June 30, 1999, the
Company reported a net loss of $1.4 million or $.39 per share compared to a loss
of $394,000 or $.11 per share for the same period in 1998. Included in the loss
for the six month period ended June 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 $230,000 or $0.06 per
share for the six month period ended June 30, 1999.
<PAGE>
Net interest income in the second quarter was $1.6 million, up 30% compared to
$1.2 million in the second quarter of 1998. For the six month period ended June
30, 1999, net interest income was $3.1 million, up 37% compared to $2.3 million
for the same period in 1998. The Company's net interest margin (net interest
income as a percentage of average earning assets) was 3.37% and 3.47% for the
three and six month periods ended June 30, 1999, respectively.
The provision for loan losses was $195,000 and $399,000 for the three and six
month periods ended June 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 June 30, 1999, the allowance for loan losses was 1.41% of
total loans. Loans 30 days or more past due totaled $766,000 and represented
.60% of total loans on June 30, 1999.
Non-interest income for the three and six month periods ended June 30, 1999,
were $300,000 and $572,000, respectively, compared to $139,000 and $220,000 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 expense for the three and six month periods ended June 30, 1999,
were $1.6 million and $4.7 million, respectively, compared to $1.4 million and
$2.5 million for the same periods in 1998. Salaries and employee benefits,
representing the largest expense category, increased from $723,000 and $1.3
million for the three and six month periods in 1998 to $977,000 and $1.8 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 June 30, 1999 the Company had 68 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 six month period ended June 30, 1999. Occupancy costs, the third
highest component of non-interest expenses, increased from $87,000 and $168,000
for the three and six month periods in 1998 to $126,000 and $238,000 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 and
operating revenue are anticipated to decrease over time.
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
$20.8 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 81% of total assets at June 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.
<PAGE>
Stockholder's equity was $30.9 million or $8.43 per share at June 30, 1999.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth for the next 12 months and to maintain a
well-capitalized position. At June 30, 1999, Capital Bank had a leverage ratio
of 16.7%, a Tier 1 capital ratio of 20.2%, and a total risk-based capital ratio
of 21.4% and Home Savings Bank had a leverage ratio of 13.3%, a Tier 1 capital
ratio of 34.2%, and a total risk-based capital ratio of 35.5%. 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.
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.
<PAGE>
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 June 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 detailed contingency plans in case problems do occur.
The Company has developed 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 $72,000 to date.
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.
<PAGE>
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 June 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 of 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
- ------ ---------------------------------------------------
On June 17, 1999, the annual meeting of stockholders of the Company was held to
consider and vote upon three issues; the election of several Class II directors,
the election of one Class I director, and the ratification of the appointment of
PricewaterhouseCoopers, LLP as the Company's independent auditors for the fiscal
year ended December 31, 1999. All items were approved by the stockholders. Of
the 3,658,689 shares eligible to vote, 3,304,804 were voted as shown on the
following tables:
Vote concerning the election of Class II directors:
For Withheld Total
--------- ------- ---------
Edwin E. Bridges ............ 3,295,336 9,468 3,304,804
L.I. Cohen, Jr .............. 3,268,504 36,300 3,304,804
Robert L. Jones ............. 3,268,204 36,600 3,304,804
Vernon Malone ............... 3,265,864 38,940 3,304,804
J. Rex Thomas ............... 3,267,864 36,940 3,304,804
Bruce V. Wainwright ......... 3,267,064 37,740 3,304,804
Samuel J. Wornom, III ....... 3,268,504 36,300 3,304,804
<PAGE>
Vote concerning the election of one Class I director:
For Withheld Total
--------- --------- ---------
John F. Grimes 3,258,050 46,754 3,304,804
Vote concerning the ratification of the appointment of PricewaterhouseCoopers,
LLP as the independent auditors for the fiscal year ended December 31, 1999:
For Against Abstain Total
-------- ------ -------- --------
3,215,599 60,580 28,625 3,304,804
In each case, the affirmative vote of at least a majority of all shares entitled
to vote was required to approve the action and was obtained.
Item 5 Other Information
- ------ -----------------
None
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, a Current Report on Form 8-K,
dated March 31, 1999, was filed with the Commission by the Company.
This report included information about the Company's acquisition of
Home Savings and Capital Bank's reorganization into a bank holding
company. The report also included or incorporated the following
financial statements: (i) Home Savings as of September 30, 1998 and
1997 and for the years ended September 30, 1998, 1997, and 1996, (ii)
certain interim financial statements of Home Savings as of and for the
quarter ended December 31, 1998 (filed by amendment); and (iii) pro
forma financial statements for the Company and Home Savings as of and
for the year ended December 31, 1998 (filed by amendment).
During the quarter ended June 30, 1999, an amendment to the above
mentioned Form 8-K was filed to include the required interim and pro
forma financial statements as also described above.
<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: August 5, 1999 By: /s/ Allen T. Nelson, Jr.,
-------------------------
Allen T. Nelson, Jr.,
Senior Vice President and CFO
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