As filed with the Securities and Exchange Commission on April 23, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAPITAL BANK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 56-2101930
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
4400 Falls Of Neuse Road
Raleigh, North Carolina
(Address of Principal Executive 27609
Offices) (Zip Code)
CAPITAL BANK CORPORATION INCENTIVE STOCK OPTION PLAN
CAPITAL BANK CORPORATION NONQUALIFIED STOCK OPTION PLAN
CAPITAL BANK CORPORATION DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS
HOME SAVINGS BANK OF SILER CITY, INC. SSB 1995 NONQUALIFIED STOCK OPTION PLAN
HOME SAVINGS BANK OF SILER CITY, INC. SSB 1995 INCENTIVE STOCK OPTION PLAN
(Full title of the plans)
James A. Beck, President and Chief Executive Officer
Capital Bank Corporation
4400 Falls Of Neuse Road
Raleigh, North Carolina 27609
(Name and address of agent for service)
(919)878-3100
(Telephone number, including area code, of agent for service)
Copy to:
D. Scott Coward, Esq.
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
P. O. Box 2611
Raleigh, North Carolina 27602-2611
(919) 821-1220
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================== ============== ================= ================== ===============
Title of securities to be registered Amount to be Proposed Proposed maximum Amount of
registered maximum aggregate Registration
offering price offering price fee
per share(1)
===================================== ============== ================= ================== ===============
<S> <C> <C> <C> <C>
Common Stock, no par value per share 563,099 $10.25 $5,771,764.70 $1,604.55
shares
===================================== ============== ================= ================== ===============
</TABLE>
(1) Pursuant to Rule 457(c) and (h), based upon the average of the high and low
prices for the Company's Common Stock reported on the Nasdaq Stock Market on
April 16, 1999.
<PAGE>
PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
EXPLANATORY NOTE
As permitted by the rules of the Securities and Exchange Commission (the
"Commission"), this registration statement omits the information specified in
Part I (Items 1 and 2) of Form S-8. The documents containing the information
specified in Part I will be delivered to the participants in the Plan as
required by Rule 428(b) under the Securities Act. Such documents are not being
filed with the Commission as part of this registration statement or as
prospectuses or prospectus supplements pursuant to Rule 424.
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the
Commission and are incorporated herein by reference:
(1) The Final Joint Proxy Statement-Prospectus filed by the Company
as part of a Registration Statement on Form S-4 (Reg. No.333-
65853) on February 16, 1999.
(2) Annual Report on Form 10-K of Capital Bank filed with the Federal
Deposit Insurance Corporation on March 25, 1999 and included as
Exhibit as 99.01 of this Registration Statement.
(3) Current Report on Form 8-K filed by the Company on April 15,
1999.
All reports and other documents filed by the Company subsequent to the
date hereof pursuant to Sections 13(a), 13(c), 14, and 15(d) of the Securities
Exchange Act of 1934, prior to the filing of a post-effective amendment which
indicates that all securities offered under the plan have been sold or which
deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference in this registration statement and to be a part hereof
from the date of filing of such documents.
Any statement contained in a document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, shall be deemed
modified or superseded for purposes of this Registration Statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Registration Statement except as so modified, and any
statement so superseded shall not be deemed to constitute part of this
Registration Statement.
ITEM 4. DESCRIPTION OF SECURITIES
Not Applicable.
2
<PAGE>
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL
Not Applicable.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (a) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (b) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification
described above under the statutory scheme, Section 55-8-57 of the North
Carolina General Statutes permits a corporation to indemnify or agree to
indemnify any of its directors, officers, employees or agents against liability
and expenses (including attorney's fees) in any proceeding (including
proceedings brought by or on behalf of the corporation) arising out of their
status as such or their activities in such capacities, except for any
liabilities or expenses incurred on account of activities that were, at the time
taken, known or believed by the person to be clearly in conflict with the best
interests of the corporation. The Bylaws of Capital Bank Corporation provide for
indemnification to the fullest extent permitted under North Carolina law for
persons who serve as directors or officers of Capital Bank Corporation, or at
the request of Capital Bank Corporation serve as an officer, director, agent,
partner, trustee, administrator or employee for any other foreign or domestic
entity, except to the extent such activities were at the time taken known or
believed by the potential indemnities to be clearly in conflict with the best
interests of Capital Bank Corporation.
3
<PAGE>
Accordingly, Capital Bank Corporation may indemnify its directors, officers or
employees in accordance with either the statutory or non-statutory standards.
Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes
require a corporation, unless its articles of incorporation provide otherwise,
to indemnify a director or officer who has been wholly successful, on the merits
or otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina General Statutes provides
that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the NCBCA to indemnify such party.
Capital Bank Corporation may purchase a standard directors' and officers'
liability policy which will, subject to certain limitations, indemnify Capital
Bank Corporation and its officers and directors for damages they become legally
obligated to pay as a result of any negligent act, error, or omission committed
by directors or officers while acting in their capacity as such.
As permitted by North Carolina law, Article 5 of Capital Bank
Corporation's Articles limits the personal liability of directors for monetary
damages for breaches of duty as a director arising out of any legal action
whether by or in the right of Capital Bank Corporation or otherwise, provided
that such limitation will not apply to (i) acts or omissions that the director
at the time of such breach knew or believed were clearly in conflict with the
best interests of Capital Bank Corporation, (ii) any liability under Section
55-8-33 of the General Statutes of North Carolina, or (iii) any transaction from
which the director derived an improper personal benefit (which does not include
a director's reasonable compensation or other reasonable incidental benefit for
or on account of his service as a director, officer, employee, independent
contractor, attorney, or consultant of Capital Bank Corporation).
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
Not Applicable.
ITEM 8. EXHIBITS
The following exhibits are filed or incorporated by reference as a part
of this registration statement:
Exhibit Description
No.
4(1) Specimen Common Stock Certificate
5 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P.
23.1 Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. (contained in the opinion submitted as Exhibit 5 hereto)
23.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (included as part of the signature page)
99.01 Annual Report on Form 10-K of Capital Bank filed with the Federal
Deposit Insurance Corporation on March 25, 1999.
- ---------------------------
(1) Exhibit to the Company's Registration Statement on Form S-4 (Reg. No.
333-65853) filed with the Securities and Exchange Commission on October
19, 1998 and incorporated by reference herein.
4
<PAGE>
ITEM 9. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8,
or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Raleigh, State of North Carolina, on April 15, 1999.
CAPITAL BANK CORPORATION
By: /s/ James A. Beck
----------------------------------------
James A. Beck
President and Chief Executive Officer
6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James A. Beck and Allen T. Nelson, Jr. and each
of them, each with full power to act without the other, his or her true and
lawful attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments to this Registration Statement
on Form S-8 and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully for all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on April 15,
1999 in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ James A Beck President, Chief Executive Officer and Director
- ---------------------------
James A. Beck
/s/ Allen T. Nelson, Jr. Senior Vice President and Chief Financial Officer
- ---------------------------
Allen T. Nelson, Jr.
/s/ Charles F. Atkins Director
- ---------------------------
Charles F. Atkins
/s/ Lamar Beach Director
- ---------------------------
Lamar Beach
/s/ William C. Burkhardt Director
- ---------------------------
William C. Burkhardt
/s/ L. I. Cohen, Jr. Director
- ---------------------------
L. I. Cohen, Jr.
- ---------------------------
David G. Gospodarek Director
/s/ Carolyn W. Grant Director
- ---------------------------
Carolyn W. Grant
- ---------------------------
Darleen M. Johns Director
/s/ Robert L. Jones Director
- ---------------------------
Robert L. Jones
/s/ Oscar A. Keller, III Chairman of the Board of Directors
- ---------------------------
Oscar A. Keller, III
/s/ Oscar A. Keller, Jr. Director
- ---------------------------
Oscar A. Keller, Jr.
/s/ Vernon Malone Director
- ---------------------------
Vernon Malone
7
<PAGE>
/s/ George R. Perkins, III Director
- ---------------------------
George R. Perkins, III
/s/ Donald W. Perry Director
- ---------------------------
Donald W. Perry
/s/ J. Rex Thomas Director
- ---------------------------
J. Rex Thomas
/s/ Bruce V. Wainright Director
- ---------------------------
Bruce V. Wainright
/s/ Samuel J. Wornom, III Director
- ---------------------------
Samuel J. Wornom, III
8
<PAGE>
EXHIBIT INDEX
Exhibit Description
No.
4(1) Specimen Common Stock Certificate
5 Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P.
23.1 Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. (contained in the opinion submitted as Exhibit 5 hereto)
23.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (included as part of the signature page)
99.01 Annual Report on Form 10-K of Capital Bank filed with the
Federal Deposit Insurance Corporation on March 25, 1999.
- ---------------------------
(1) Exhibit to the Company's Registration Statement on Form S-4(Reg.
No.333-65853) filed with the Securities and Exchange Commission on
October 19, 1998 and incorporated by reference herein.
9
EXHIBIT 5
Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
Lawyers
P. O. Box 2611
Raleigh, North Carolina 27601
Phone: 919-821-1220
Fax: 919-821-6800
April 19, 1999
Capital Bank Corporation
4400 Falls of Neuse Road
Raleigh, NC 27609
Ladies and Gentlemen:
As counsel for Capital Bank Corporation (the "Company"), we furnish the
following opinion in connection with the proposed issuance by the Company of up
to 563,099 shares of its common stock, $0.01 par value (the "Common Stock"),
pursuant to the Capital Bank Corporation Incentive Stock Option Plan, Capital
Bank Corporation Nonqualified Stock Option Plan, Capital Bank Corporation
Deferred Compensation Plan for Outside Directors, Home Savings Bank of Siler
City, Inc. SSB 1995 Nonqualified Stock Option Plan and Home Savings Bank of
Siler City, Inc. SSB 1995 Incentive Stock Option Plan (collectively, the
"Plans"). These securities are the subject of a Registration Statement to be
filed by the Company with the Securities and Exchange Commission on Form S-8
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"1933 Act"), to which this opinion is to be attached as an exhibit.
We have examined the Articles of Incorporation and Bylaws of the
Company, the minutes of meetings of its Board of Directors, and such other
corporate records of the Company and other documents and have made such
examinations of law as we have deemed relevant for purposes of this opinion. We
also have received a certificate of an officer of the Company, dated of even
date herewith, relating to the issuance of the Common Stock pursuant to the
Plans. Based on such examination and such certificate it is our opinion that the
563,099 shares of Common Stock of the Company which are being registered
pursuant to the Registration Statement, may be legally issued in accordance with
the Company's Articles of Incorporation and Bylaws, and when so issued and duly
delivered against payment therefor pursuant to the Plans as described in the
Registration Statement, such shares will be legally issued, fully paid, and
nonassessable.
The opinion expressed herein does not extend to compliance with state
and federal securities laws relating to the sale of these securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement that you are about to file with the Securities and
Exchange Commission. Such consent shall not be deemed to be an admission that
this firm is within the category of persons whose consent is required under
Section 7 of the 1933 Act or the regulations promulgated pursuant to the 1933
Act.
Sincerely yours,
/s/ SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
10
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this registration
statement on Form S-8 of Capital Bank Corporation of our report, dated January
29, 1999, on our audits of the financial statements of Capital Bank as of
December 31, 1998 and 1997 and for the year ended December 31, 1998 and the
period ended December 31, 1997, which report is included in the 1998 Form 10-K
of Capital Bank, and our report dated October 16, 1998, on our audits of the
consolidated financial statements of Home Savings Bank of Siler City, Inc., SSB
and Subsidiary as of September 30, 1998 and 1997, and for each of the three
years in the period ended September 30, 1998, which report is
included in the Form S-4 of Capital Bank Corporation.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 21, 1999
EXHIBIT 99.01
FORM 10-K
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
FDIC certificate number 34452
CAPITAL BANK
(Exact name of registrant as specified in its charter)
North Carolina 56-2032984
(State of incorporation) (I.R.S. Employer Identification Number)
4400 Falls of Neuse Road 27609
Raleigh, North Carolina (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (919) 878-3100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $5.00 par
value per share, as of March 15, 1999, held by those persons deemed by the
registrant to be non-affiliates was approximately $22,975,000.
As of March 15, 1999, there were 2,477,651 shares of the registrant's
Common Stock, $5.00 par value per share, outstanding.
<TABLE>
<CAPTION>
DOCUMENTS INCORPORATED BY REFERENCE
<S> <C> <C> <C> <C> <C> <C>
Document Where Incorporated
- -------- ------------------
1. Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1998 Part II
2. Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 17, 1999 Part III
Total sequentially-numbered pages - 53.
Exhibit Index located on sequentially-numbered page 19.
</TABLE>
<PAGE>
CAPITAL BANK
Annual Report on Form 10-K
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I................................................................................................3
Item 1. Business...................................................................................3
Item 2. Properties................................................................................12
Item 3. Legal Proceedings.........................................................................13
Item 4. Submission of Matters To A Vote Of Security Holders.......................................13
PART II..............................................................................................13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................13
Item 6. Selected Financial Data...................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................13
Item 8. Financial Statements and Supplementary Data...............................................14
PART III.............................................................................................14
Item 10. Directors and Executive Officers of the Registrant.......................................14
Item 11. Executive Compensation...................................................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................14
Item 13. Certain Relationships and Related Transactions...........................................14
PART IV..............................................................................................15
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K.........................15
Forward-Looking Statements...........................................................................16
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Capital Bank (the "Bank") was incorporated under the laws of the State
of North Carolina on May 30, 1997, and commenced operations as a state-chartered
banking corporation on June 20, 1997. The Bank is not a member of the Federal
Reserve System and has no subsidiaries. As of December 31, 1998, the Bank had
assets of approximately $120.8 million, gross loans outstanding of approximately
$81.4 million and deposits of approximately $88.6 million. The Bank's corporate
and main office is located at 4400 Falls of Neuse Road, Raleigh, North Carolina
27609, and its telephone number is (919) 878-3100. In addition to the main
office, the Bank has two branch offices in Cary and two in Sanford, North
Carolina.
The Bank is a locally-owned community bank engaged in the general
commercial banking business in Wake and Lee Counties, North Carolina. Wake
County has a diversified economic base, comprised primarily of services, retail
trade, government and manufacturing and includes the City of Raleigh, the state
capital. Lee County is a significant center for various industries, including
agriculture, manufacturing, lumber and tobacco.
The Bank offers a full range of banking services, including checking
accounts, savings accounts, NOW accounts, money market accounts and certificates
of deposit; loans for real estate, businesses, agriculture, personal uses, home
improvement and automobiles; equity lines of credit; credit cards; individual
retirement accounts; safe deposit boxes; bank money orders; electronic funds
transfer services including wire transfers; traveler's checks; and free notary
services to all Bank customers. In addition, the Bank provides automated teller
machine access to its customers for cash withdrawals through nationwide ATM
networks. At present, the Bank does not provide the services of a trust
department.
RECENT DEVELOPMENTS
In August of 1998, the Bank announced the formation of Capital Bank
Corporation, which will become the holding company for the Bank. In addition, a
definitive agreement for Capital Bank Corporation to acquire Home Savings Bank
of Siler City, Inc., SSB ("Home Savings") was announced in September of 1998.
Home Savings is a North Carolina state savings bank headquartered in Siler City,
North Carolina. Both transactions have received regulatory approval and are
subject to shareholder approval. The Bank's shareholders' meeting is scheduled
for March 26, 1999 and Home Savings' shareholders' meeting is scheduled for
March 29, 1999. Management expects each transaction to close in the first
quarter of 1999.
LENDING ACTIVITIES AND DEPOSITS
LOAN TYPES AND LENDING POLICIES. The Bank makes a variety of loans,
including loans secured by real estate, loans for commercial purposes and loans
to individuals for personal and household purposes. There were no large
concentrations of credit to any particular industry. The economic trends of the
area served by the Bank are influenced by the significant industries within the
region. Consistent with the Bank's emphasis on being a community-oriented
financial institution, virtually all the Bank's business
3
<PAGE>
activity is with customers located in the Cary, Raleigh and Sanford areas. The
ultimate collectibility of the Bank's loan portfolio is susceptible to changes
in the market conditions of this geographic region.
The Bank uses a centralized risk management process to insure uniform
credit underwriting that adheres to bank policy. Lending policies are reviewed
on a regular basis to confirm that the Bank is prudent in setting its
underwriting criteria. Credit risk is managed through a number of methods
including loan grading of commercial loans, committee approval of larger loans,
and class and purpose coding of loans. Management believes that early detection
of credit problems through regular contact with the Banks' clients coupled with
consistent reviews of the borrowers' financial condition are important factors
in overall credit risk management.
The following table sets forth, as of December 31, 1998, the approximate
composition of the Bank's loan portfolio:
<TABLE>
<CAPTION>
LOAN TYPE AMOUNT PERCENTAGE
--------- ------ ----------
(IN THOUSANDS)
<S> <C> <C>
Commercial........................................ $62,196 76.3%
Consumer.......................................... 7,379 9.1
Real Estate....................................... 2,061 2.5
Equity Lines...................................... 9,817 12.1
----- ----
Total................................. $81,453 100.0%
======= =======
</TABLE>
DEPOSITS. The majority of the Bank's customers are individuals and small
to medium-size businesses located in Wake and Lee Counties, North Carolina and
contiguous areas. The Bank's deposits and loans are well diversified, with no
material concentration in a single industry or group of related industries. The
management of the Bank does not believe that the deposits or the business of the
Bank in general are seasonal in nature. The deposits may, however, vary with
local and national economic conditions but not enough, management believes, to
have a material effect on planning and policy making. The Bank attempts to
control deposit flow through the pricing of deposits and promotional activities.
Management believes that the Bank's rates are competitive with those offered by
other institutions in Cary, Sanford and Raleigh.
The following table sets forth the mix of depository accounts at the
Bank as a percentage of total deposits as of December 31, 1998:
Non-interest bearing demand ............................ 8.4%
Interest checking ...................................... 5.5
Market rate investment ................................. 18.6
Savings ............................................... 2.6
Time deposits
Under $100,000........................................ 51.8
Equal to or over $100,000............................. 13.1
--------
100.0%
========
4
<PAGE>
COMPETITION
Commercial banking in North Carolina is extremely competitive in large
part due to statewide branching. The Bank competes in its market area with some
of the largest banking organizations in the state and the country and other
financial institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit. Many of
the Bank's competitors have broader geographic markets and higher lending limits
than the Bank and are also able to provide more services and make greater use of
media advertising.
The enactment of legislation authorizing interstate banking has caused
great increases in the size and financial resources of some of the Bank's
competitors. In addition, as a result of interstate banking, out-of-state
commercial banks may acquire North Carolina banks and heighten the competition
among banks in North Carolina.
Despite the competition in its market area, the Bank believes that it
has certain competitive advantages that will distinguish it from its
competition. The Bank believes that its primary competitive advantages are its
strong local identity and affiliation with the community and its emphasis on
providing specialized services to small and medium-sized business enterprises,
as well as professional and upper-income individuals. The Bank offers customers
modern, high-tech banking without forsaking community values such as prompt,
personal service and friendliness. The Bank offers many personalized services
and intends to attract customers by being responsive and sensitive to their
individualized needs. The Bank also relies on goodwill and referrals from
shareholders and satisfied customers, as well as traditional media to attract
new customers. To enhance a positive image in the community, the Bank supports
and participates in local events and its officers and directors serve on boards
of local civic and charitable organizations.
EMPLOYEES
At March 15, 1999, the Bank employed 51 persons, of which 48 were
full-time and 3 were part-time. None of its employees is represented by any
collective bargaining unit. The Bank considers relations with its employees to
be good.
SUPERVISION AND REGULATION
The Bank is extensively regulated under both federal and state law.
Generally, these laws and regulations are intended to protect depositors and
borrowers, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulation may have a material effect on the business of
the Bank.
STATE LAW. The Bank is subject to extensive supervision and regulation
by the North Carolina Commissioner of Banks (the "Commissioner"). The
Commissioner oversees state laws that set specific requirements for bank capital
and regulate deposits in, and loans and investments by, banks, including the
amounts, types, and in some cases, rates. The Commissioner supervises and
performs periodic examinations of North Carolina-chartered banks to assure
compliance with state banking statutes and regulations, and the Bank is required
to make regular reports to the Commissioner describing in detail the
5
<PAGE>
resources, assets, liabilities and financial condition of the Bank. Among other
things, the Commissioner regulates the mergers and consolidations of
state-chartered banks, the payment of dividends, loans to officers and
directors, record keeping, types and amounts of loans and investments, and the
establishment of branches.
DEPOSIT INSURANCE. As a member institution of the Federal Deposit
Insurance Corporation ("FDIC"), the Bank's deposits are insured up to a maximum
of $100,000 per depositor through the Bank Insurance Fund ("BIF"), administered
by the FDIC, and each member institution is required to pay semi-annual deposit
insurance premium assessments to the FDIC. The BIF assessment rates have a range
of 0 cents to 27 cents for every $100 in assessable deposits. Banks with no
premium are subject to an annual statutory minimum assessment.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, qualifying noncumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1998, the Bank's ratio of Tier 1 capital to risk-weighted assets
stood at 24.5% and its ratio of total capital to risk-weighted assets stood at
25.8%. In addition to risk-based capital, banks and bank holding companies are
required to maintain a minimum amount of Tier 1 capital to total assets,
referred to as the leverage capital ratio, of at least 4%. As of December 31,
1998, the Bank's leverage capital ratio was 19.8.
The federal banking agencies have adopted regulations specifying that
they will include, in their evaluations of a bank's capital adequacy, an
assessment of the Bank's interest rate risk ("IRR") exposure. The standards for
measuring the adequacy and effectiveness of a banking organization's IRR
management include a measurement of board of director and senior management
oversight, and a determination of whether a banking organization's procedures
for comprehensive risk management are appropriate for the circumstances of the
specific banking organization.
6
<PAGE>
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under "Federal Deposit Insurance Corporation Improvement Act
of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the shareholders.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for certain financial institutions, including audits by
independent accountants, (ii) the establishment of uniform accounting standards
by federal banking agencies, (iii) the establishment of a "prompt corrective
action" system of regulatory supervision and intervention, based on
capitalization levels, with greater scrutiny and restrictions placed on
depository institutions with lower levels of capital, (iv) additional grounds
for the appointment of a conservator or receiver, and (v) restrictions or
prohibitions on accepting brokered deposits, except for institutions which
significantly exceed minimum capital requirements. FDICIA also provides for
increased funding of the FDIC insurance funds and the implementation of
risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
MISCELLANEOUS. The dividends that may be paid by the Bank to
shareholders are subject to legal limitations. In accordance with North Carolina
banking law, dividends may not be paid unless the Bank's capital surplus is at
least 50% of its paid-in capital. In addition, the Bank may not, in any case,
pay any dividends during its first three years of operation. The Board of
Directors does not anticipate that the Bank will declare any dividends for the
foreseeable future.
7
<PAGE>
Shareholders of banks may be compelled by bank regulatory authorities to
invest additional capital in the event their bank's capital shall have become
impaired by losses or otherwise. Failure to pay such an assessment could result
in a forced sale of a shareholder's bank stock.
The earnings of the Bank will be affected significantly by the policies
of the Federal Reserve Board, a federal agency which is responsible for
regulating the United States money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques used to implement these objectives
are open market transactions in United States government securities, changes in
the rate paid by banks on bank borrowings, and changes in reserve requirements
against bank deposits. These techniques are used in varying combinations to
influence overall growth and distribution of bank loans, investments, and
deposits, and their use may also affect interest rates charged on loans or paid
for deposits.
The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business and
earnings of the Bank.
The Bank cannot predict what legislation might be enacted or what
regulations might be adopted, or if enacted or adopted, the effect thereof on
the Bank's operations.
REGULATION OF CAPITAL BANK CORPORATION
It is expected that on March 26, 1999, the shareholders of Capital Bank
will approve the reorganization of the Bank into a bank holding company named
Capital Bank Corporation and that such reorganization will become effective on
or about that date. The following discussion is a summary of the regulatory
matters that will apply to Capital Bank Corporation in anticipation of the
reorganization.
FEDERAL REGULATION. Following consummation of the holding company
reorganization, Capital Bank Corporation will be subject to examination,
regulation and periodic reporting under the Bank Holding Company Act (the "BHC
Act"), as administered by the Board of Governors of the Federal Reserve. The
Federal Reserve has adopted capital adequacy guidelines for bank holding
companies on a consolidated basis.
Capital Bank Corporation will be required to obtain the prior approval
of the Federal Reserve to acquire all, or substantially all, of the assets of
any bank or bank holding company. Prior Federal Reserve approval will be
required for Capital Bank Corporation to acquire direct or indirect ownership or
control of any voting securities of any bank or bank holding company if, after
giving effect to such acquisition, it would, directly or indirectly, own or
control more than five percent of any class of voting shares of such bank or
bank holding company.
Capital Bank Corporation will be required to give the Federal Reserve
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of Capital Bank
Corporation's consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal would constitute an
unsafe and unsound practice, or would violate any law, regulation, Federal
Reserve
8
<PAGE>
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve. Such notice and approval is not required for a bank holding
company that would be treated as "well capitalized" under applicable regulations
of the Federal Reserve, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the Federal Reserve, and that is
not the subject of any unresolved supervisory issues.
The status of Capital Bank Corporation as a registered bank holding
company under the BHC Act will not exempt it from certain federal and state laws
and regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from
engaging in, or acquiring five percent or more of any class of voting securities
of any company engaged in, non-banking activities. One of the principal
exceptions to this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. Some of the principal activities that the Federal
Reserve has determined by regulation to be so closely related to banking as to
be a proper incident thereto are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed primarily
to promote community welfare; and
o acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would be applicable to the extent
that Capital Bank Corporation maintains as a separate subsidiary a depository
institution, such as Home Savings, in addition to Capital Bank.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and Federal Reserve regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of
Capital Bank, Capital Bank Corporation, any subsidiary of Capital Bank
Corporation and related interests of such persons. Moreover, subsidiaries of
bank holding
9
<PAGE>
companies are prohibited from engaging in certain tie-in arrangements (with the
holding company or any of its subsidiaries) in connection with any extension,
lease or sale of property or furnishing of services.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
The executive officers of the Bank are as follows:
<S> <C> <C> <C> <C> <C> <C>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
James A. Beck 46 President and Chief Executive
Officer
Allen T. Nelson, Jr. 49 Senior Vice President, Chief
Financial Officer and
Secretary
Franklin G. Shell 40 Senior Vice President and
Senior Lending Officer
Ernest F. McAllister 41 Cary Market CEO
Charles T. Bowers 55 Lee County Market CEO
William L. Dawkins 43 Raleigh Market CEO
</TABLE>
JAMES A. BECK is currently President and Chief Executive Officer of the
Bank, a position he has held since the Bank commenced operations. Mr. Beck
served as Chairman, President and Chief Executive Officer of SouthTrust Bank of
North Carolina, N.A. from January 1991 until June 1996 when it was merged into
the SouthTrust Charlotte-based bank. Mr. Beck thereafter served as President and
a director of the combined bank until January 1997, when he resigned to join the
Bank.
ALLEN T. NELSON, JR. has been employed by the Bank since February 2,
1998, as its Chief Financial Officer and Secretary. From December 1993 through
January 1998, Mr. Nelson served as the Senior Vice President and Chief Financial
Officer for Jefferson Bankshares, Inc. and its principal subsidiary, Jefferson
National Bank, both based in Charlottesville, Virginia.
ERNEST F. MCALLISTER has been employed by the Bank since July 23, 1997,
and served as its Senior Vice President, Lee County Market Executive until
January 21, 1998. Since January 21, 1998, Mr.. McAllister has been the Bank's
Market Executive for the Cary, North Carolina market. From 1988 until his
employment with the Bank, Mr. McAllister was a vice president and commercial
lender with First Citizens Bank, a bank based in Raleigh, North Carolina.
FRANKLIN G. SHELL has been employed with the Bank since April 14, 1997,
as its Senior Vice President and Senior Lending Officer. Prior thereto, from
1989, Mr. Shell was employed by the North
10
<PAGE>
Carolina-based bank, Branch Banking and Trust Company, serving as a commercial
loan officer in its Raleigh, North Carolina office.
11
<PAGE>
CHARLES T. BOWERS joined the Bank in February 1998. From February 1992
to July 1997, Mr. Bowers was a Senior Vice President, Lee County (North
Carolina) branch supervisor for Triangle Bancorp., Raleigh, North Carolina. From
June 1997 until he joined the Bank, Mr. Bowers was a trainee in the securities
licensing program of Wheat, First Butcher & Singer.
WILLIAM L. DAWKINS joined the Bank in March 1999. From January 1997 to
March 1999, Mr. Dawkins was Triangle Market CEO for SouthTrust Bank. Mr. Dawkins
had previously served as Senior Vice President and Senior Lending Officer for
SouthTrust Bank since 1995. Prior thereto, from 1984 to 1995, Mr. Dawkins was
employed by Southern National Bank.
NOTICE REGARDING ANNUAL MEETING
The date of the Bank's, or its holding company successor Capital Bank
Corporation's, 1999 annual meeting of shareholders has been advanced by more
than 30 days from the date of the 1998 annual meeting of shareholders.
Therefore, any proposals that shareholders intend to present for a vote at the
1999 annual meeting, and which such shareholders desire to have included in the
Bank's proxy materials relating to that meeting, must be received by the Bank on
or before April 14, 1999.
ITEM 2. PROPERTIES.
The Bank currently leases an aggregate of 5,694 square feet of office
space located at 4400 Falls of Neuse Road, Raleigh, North Carolina for the
Bank's headquarters and main office pursuant to three lease agreements. These
lease agreements expire on September 29, 2000, December 31, 2000, and December
31, 2000, respectively.
In June 1997, the Bank opened a branch at 129 South Steele Street,
Sanford, North Carolina which it moved to 130 North Steele Street, Sanford,
North Carolina in November 1997. The Bank entered into a lease in October 1997
with Global House, Inc. for approximately 5,300 square feet for this branch
office. This lease is for a ten-year term with monthly rent of $2,600 and has
two five-year renewal options.
In June 1997, the Bank opened a branch at 2800 Williams Street, Sanford,
North Carolina. The Bank entered into a lease with Buchanan Properties Joint
Venture for approximately 1,800 square feet for this branch office. This lease
was renewed in October, 1998 and extended for a five-year term with monthly rent
of $850.
On March 20, 1998, the Bank opened a branch office located at 915 North
Harrison Avenue, Cary, North Carolina. Formerly the site of a United Carolina
Bank branch office (prior to that bank's acquisition by BB&T), the branch
consists of approximately 1.14 acres of real property and a free-standing
building of approximately 2,700 square feet which are owned by the Bank.
On September 8,1998, the Bank opened a branch office located at 1201
Kildaire Farm Road, Cary, North Carolina. The building was purchased from
another financial institution but the real property is leased under an
arrangement with Triangle V III, Limited Partnership. The lease, which calls for
monthly rent of $1,336, was assumed from the previous tenants and expires in
December, 2004 with four five-year renewal options.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Bank is a party or
of which any of its property is subject. In addition, the Bank is not aware of
any threatened litigation, unasserted claims or assessments that could have a
material adverse effect on the Bank's business, operating results or financial
condition. There are also no material proceedings involving the Bank, or, to the
Bank's knowledge, proceedings arising under Section 8 of the FDIC Act, to which
any director, officer, or any person holding beneficially in excess of five
percent of the Common Stock, or any associate of any such director, officer or
security holder is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the year ended December 31, 1998, there
were no matters submitted to a vote of the Bank's shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information relating to the market for the Bank's Common Stock is
incorporated by reference from the outside back cover of the 1998 Annual Report
to Shareholders of Capital Bank Corporation, which is expected to be the bank
holding company successor to the Bank (the "1998 Annual Report"), filed as
Exhibit 13 to this report.
RECENT SALES OF UNREGISTERED SECURITIES. The Bank did not sell any
securities in the fiscal year ended December 31, 1998 which were not registered
under the Securities Act of 1933, as amended, except that during such fiscal
year the Bank granted options to employees and directors to acquire an aggregate
of 75,750 shares of its Common Stock at a weighted average exercise price of
$13.90 per share pursuant to the Bank's Stock Option Plans.
ITEM 6. SELECTED FINANCIAL DATA.
This information is incorporated by reference from page 11 through 27 of
the 1998 Annual Report, filed as Exhibit 13 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information is incorporated by reference from pages 3 through 10 of
the 1998 Annual Report, filed as Exhibit 13 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This information is incorporated by reference from page 10 of the 1998
Annual Report, filed as Exhibit 13 to this report.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is incorporated by reference from pages 11 through 27
of the 1998 Annual Report, filed as Exhibit 13 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Previously reported by the Bank under the caption "Changes In and
Disagreements With Accountants on Accounting and Financial Disclosure" in its
Registration Statement on Form 10 as filed with the FDIC under the Securities
Exchange Act of 1934, as amended, on October 2, 1997 and amended on November 12,
1997.
PART III
This Part incorporates certain information from the definitive proxy
statement (the "1999 Proxy Statement") for the 1999 Annual Meeting of
Shareholders of Capital Bank Corporation, which is expected to be the bank
holding company successor to the Bank effective on or about March 26, 1999, as
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Bank's fiscal year covered by this Report on Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Bank's executive officers is included under
the caption "Executive Officers" on pages 10 through 11 of this report.
Information concerning the Bank's directors and filing of certain reports of
beneficial ownership is incorporated by reference to the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference to the 1999 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is incorporated by reference to the 1999 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference to the 1999 Proxy
Statement.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS.The following financial statements included
in the 1998 Annual Report, filed as Exhibit 13 to this report, are incorporated
by reference in Item 8 of this report:
<TABLE>
<CAPTION>
Annual Report to
Financial Statements and Information Form 10-K Page Shareholders Page
------------------------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance Sheets dated as of December 31, 1998 and 1997 31 11
Statement of Operations for the year ended December 31, 32 12
1998 and the period from June 20, 1997 to December 31, 1997
Statement of Shareholders' Equity for the year ended 33 13
December 31, 1998 and the period from June 20, 1997 to
December 31, 1997
Statement of Cash Flows for the year ended December 31, 34 14
1998 and the period from June 20, 1997 to December 31, 1997
Report of Independent Accountants 47 27
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULES. All applicable financial statement
schedules required under Regulation S-X and pursuant to Industry Guide 3 under
the Securities Act of 1933 have been included in the Notes to the Financial
Statements.
(A)(3) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
listed in the Exhibit Index immediately following the signature pages to this
report.
(B) REPORTS ON FORM 8-K. The Bank filed no reports on Form 8-K in the
fourth quarter of the year ended December 31, 1998.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K 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 Bank's judgment concerning the future and are
subject to risks and uncertainties that could cause the Bank's actual operating
results and financial position to differ materially from the forward looking
statements. 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 Bank cautions that any such forward looking statements are further
qualified by important factors that could cause the Bank's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the Bank's management of its growth, the risks
associated with possible or completed acquisitions, competition within the
industry, dependence on key personnel, government regulation and the other risk
factors described in Exhibit 99 attached to this report.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 22nd day of March, 1999.
CAPITAL BANK
By: /s/ James A. Beck
-------------------------------------------
James A. Beck
President and Chief Executive Officer
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James A. Beck and Allen T. Nelson, Jr., and each
of them, with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Federal Deposit Insurance Corporation, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on March 18, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ James A. Beck. President, Chief Executive Officer and Director
------------------------------
James A. Beck
/s/ Allen T. Nelson, Jr. Senior Vice President and Chief Financial Officer
------------------------------
Allen T. Nelson, Jr.
/s/ Charles F. Atkins Director
------------------------------
Charles F. Atkins
/s/ Lamar Beach Director
------------------------------
Lamar Beach
/s/ William C. Burkhardt Director
------------------------------
William C. Burkhardt
/s/ L. I. Cohen, Jr. Director
------------------------------
L.I. Cohen, Jr.
------------------------------ Director
David G. Gospodarek
/s/ Carolyn w. Grant Director
------------------------------
Carolyn W. Grant
/s/ Darleen M. Johns Director
------------------------------
Darleen M. Johns
/s/ Robert L. Jones Director
------------------------------
Robert L. Jones
/s/ Oscar A. Keller, III Chairman of the Board of Directors
------------------------------
Oscar A. Keller, III
/s/ Oscar A. Keller, Jr. Director
------------------------------
Oscar A. Keller, Jr.
/s/ Vernon Malone Director
------------------------------
Vernon Malone
/s/ George R. Perkins, III Director
------------------------------
George R. Perkins, III
/s/ Donald W. Perry Director
------------------------------
Donald W. Perry
/s/ J. Rex Thomas Director
------------------------------
J. Rex Thomas
/s/ Bruce V. Wainright Director
------------------------------
Bruce V. Wainright
/s/ Samuel J. Wornom, III Director
------------------------------
Samuel J. Wornom, III
</TABLE>
6
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------
(In thousands, except share data)
1998 1997
---------------------------
<S> <C> <C>
Assets
Cash and due from banks:
Interest-earning $ 4,986 $ 2
Noninterest earning 4,055 2,639
Federal funds sold 4,500 16,787
Securities (Note 3):
Available for sale 10,007 6,020
Held to maturity (estimated market value of $2,014 and
$8,004 at December 31, 1998 and 1997, respectively) 2,000 8,002
Mortgage-backed securities available for sale (Note 3) 9,739 5,357
Federal Home Loan Bank stock (Note 4) 250 153
Loans, net of unearned income of $19 in 1998 (Note 5) 81,434 27,066
Less allowance for loan losses (1,138) (427)
---------- ----------
Net loans 80,296 26,639
---------- ----------
Accrued interest receivable 702 453
Premises and equipment, net (Note 6) 2,309 665
Deposit premium and goodwill, net 1,833 2,049
Other assets 154 138
---------- ----------
Total assets $ 120,831 $ 68,904
========== ==========
Liabilities and Shareholders' Equity
Deposits (Note 7):
Demand deposits $ 7,483 $ 6,118
Savings and interest bearing checking 7,214 4,290
Money market deposit accounts 16,495 7,666
Time deposits less than $100,000 45,791 21,423
Time deposits $100,000 and greater 11,620 3,889
---------- ----------
Total deposits 88,603 43,386
---------- ----------
Repurchase agreements 2,501 -
Federal Home Loan Bank advances (Note 8) 5,000 -
Accrued interest payable 239 211
Other liabilities 549 351
---------- ----------
Total liabilities 96,892 43,948
---------- ----------
Commitments and contingencies (Notes 10, 11, 12 and 13)
Shareholders' equity:
Common stock, $5 par value; 20,000,000 shares authorized,
2,477,651 shares issued and outstanding at December 31, 1998 and 12,388 12,388
1997
Surplus 13,285 13,285
Accumulated other comprehensive income 112 5
Accumulated deficit (1,846) (722)
---------- ----------
Total shareholders' equity 23,939 24,956
---------- ----------
$ 120,831 $ 68,904
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM JUNE 20, 1997 TO DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
(In thousands except per share data)
1998 1997
-------------------------
<S> <C> <C>
Interest income:
Loans and fees on loans $ 4,729 $ 815
Federal funds sold 489 594
Securities 1,254 407
--------- --------
Total interest income 6,472 1,816
--------- --------
Interest expense:
Deposits 3,038 663
Borrowings 16 6
Repurchase agreements 9 -
--------- --------
Total interest expense 3,063 669
--------- --------
Net interest income 3,409 1,147
Provision for loan losses 752 270
--------- --------
Net interest income after provision for loan 2,657 877
losses
--------- --------
Other operating income:
Service charges and fees 275 101
Net gain on sale of securities 60 -
Other fees and income 305 46
--------- --------
Total other operating income 640 147
--------- --------
Other operating expenses:
Personnel 2,058 817
Advertising 183 117
Occupancy 341 99
Furniture and equipment 232 62
Data processing 152 44
Professional fees 215 131
Director fees 138 86
Amortization of intangibles 216 114
Merger expenses 204 -
Other 682 276
--------- --------
Total other operating expenses 4,421 1,746
--------- --------
Net loss (1,124) (722)
Other comprehensive income 107 5
--------- --------
Comprehensive net loss $ (1,017) $ (717)
========== =========
Net loss per share - basic and diluted $ (.45) $ (.29)
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
CAPITAL BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM JUNE 20, 1997 TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
Accumulated
Other Stock
Common Comprehensive Subscription Accumulated
Stock Surplus Income Receivable Deficit Total
-------- -------- ------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 19, 1997 $ 12,234 $ 13,175 $ -- $ (983) $ -- $ 24,426
Issuance of stock 154 185 -- -- -- 339
Proceeds from stock
subscriptions -- -- -- 983 -- 983
Commissions paid on
issuance of stock -- (75) -- -- -- (75)
Change in unrealized gain
on available for sale
securities, net of taxes -- -- 5 -- -- 5
Net loss -- -- -- -- (722) (722)
-------- -------- ------------- ------------ ----------- --------
Balance at
December 31, 1997 12,388 13,285 5 -- (722) 24,956
Change in unrealized gain
on available for sale
securities, net of taxes -- -- 107 -- -- 107
Net loss -- -- -- -- (1,124) (1,124)
-------- -------- ------------- ------------ ----------- --------
Balance at December 31, 1998 $ 12,388 $ 13,285 $ 112 $ -- $ (1,846) $ 23,939
======== ======== ============ ============ =========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
CAPITAL BANK
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM JUNE 20, 1997
TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
-------------------------
Net loss $ (1,124) $ (722)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of deposit premium and goodwill 216 114
Depreciation 248 63
Amortization of premium on securities, net 23 4
Gain on sale of investments (60) --
Provision for loan losses 752 270
Changes in assets and liabilities:
Accrued interest receivable (249) (390)
Accrued interest payable 28 (23)
Other assets (16) (128)
Other liabilities 217 (1,269)
------------ -----------
Net cash provided by (used in) operating activities 35 (2,081)
------------ -----------
Cash flows from investing activities:
Net increase in loans (54,428) (16,164)
Additions to premises and equipment (1,892) (479)
Purchase of Federal Home Loan Bank stock (97) (153)
Purchase of securities available for sale (6,936) (11,528)
Purchase of securities held-to-maturity -- (8,004)
Purchase of mortgage-backed securities available for sale (6,563) --
Proceeds from maturities of securities available for sale 2,221 155
Proceeds from maturities of securities held to maturity 6,000 --
Proceeds from sales of securities available for sale 3,055 --
Net cash received from branch acquisitions -- 10,289
------------ -----------
Net cash used by investing activities (58,640) (25,884)
------------ -----------
Cash flows from financing activities:
Net increase in deposits 45,217 20,092
Net increase in repurchase agreements 2,501 --
Net increase (decrease) in borrowings 5,000 (525)
Proceeds received from sale of stock, net of costs -- 264
Proceeds received from stock subscriptions -- 983
------------ -----------
Net cash provided by financing activities 52,718 20,814
------------ -----------
Net change in cash and cash equivalents (5,887) (7,151)
Cash and cash equivalents at beginning of period 19,428 26,579
------------ -----------
Cash and cash equivalents at end of period $ 13,541 $ 19,428
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 3,034 $ 458
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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 operates through its corporate office in Raleigh, North Carolina ,
two branches in Cary, North Carolina and two branches in Sanford, North
Carolina. 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 securities and invested cash.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits (with
original maturities of 90 days or less) at other institutions and
federal funds sold. Generally, federal funds are purchased and sold for
one-day periods. At times, the Bank places deposits with high credit
quality financial institutions in amounts, which at times, may be in
excess of federally insured limits.
SECURITIES
Investments in certain securities are classified into three categories
and accounted for as follows:
1. Securities Held to Maturity - Debt securities that the institution
has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost;
2. Trading Securities - Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings;
15
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. Securities Available for Sale - Debt and equity securities not
classified as either held to maturity securities or trading
securities are classified as available for sale securities and
reported at fair value, with unrealized gains and losses reported as
other comprehensive income, a separate component of shareholders'
equity.
The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of securities, computed based on
specific identification of the adjusted cost of each security, are
included in other income at the time of the sales.
Premiums and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and net deferred loan origination fees and
costs. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. Deferred
loan fees and costs are amortized to interest income over the
contractual life of the loan using the level yield method.
A loan is considered impaired, based on current information and events,
if it is probable that the Bank will be unable to collect the scheduled
payments of principal and interest when due according to the contractual
terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral.
At December 31, 1998, the recorded investment in loans which have been
identified by the Bank as impaired loans in accordance with SFAS 114
totaled $479,000. The average balance during 1998 for impaired loans was
approximately $490,000. Total income related to impaired loans from the
point in time when those loans were deemed to be impaired as reflected
in the 1998 Statement of Operations was approximately $4,000. At
December 31, 1997, there were no loans material to the financial
statements considered to be impaired.
The Bank uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation
of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows,
operating income or loss, etc. It is possible that these factors and
management's evaluation of the adequacy of the allowance for loan losses
will change.
16
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may
affect the borrowers' ability to pay.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest
for a period of more than 90 days, unless such loans are well-secured
and in the process of collection. If a loan or a portion of a loan is
classified as doubtful or as partially charged off, the loan is
generally classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled amortizations
where the payment is generally applied to the oldest payment due. When
the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged-off, recognition of interest
on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate. Receipts in
excess of that amount are recorded as recoveries to the allowance for
loan losses until prior charge-offs have been fully recovered.
FORECLOSED ASSETS
Any assets acquired as a result of foreclosure are valued at the lower
of the recorded investment in the loan or fair value less estimated
costs to sell.
17
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The recorded investment is the sum of the outstanding principal loan
balance and foreclosure costs associated with the loan. Any excess of
the recorded investment over the fair value of the property received is
charged to the allowance for loan losses. Valuations will be
periodically performed by management and any subsequent write-downs due
to the carrying value of a property exceeding its estimated fair value
less estimated costs to sell are charged against other expenses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed by the
straight-line method based on estimated service lives of assets. Useful
lives range from 4 to 10 years for furniture and equipment. The cost of
leasehold improvements is being amortized using the straight-line method
over the terms of the related leases. Repairs and maintenance are
charged to expense as incurred.
Upon disposition, the asset and related accumulated depreciation or
amortization are relieved and any gains or losses are reflected in
operations.
INTANGIBLE ASSETS
Deposit premium and goodwill arising from the branch acquisition
completed on June 20, 1997 of $2,000,000 and $164,000, respectively,
before combined accumulated amortization of $330,000 and $114,000 at
December 31, 1998 and 1997, respectively, are being amortized on a
straight-line basis over ten years. These lives were estimated by
management at the time the assets were acquired using information
available at that time and are subject to re-evaluation as new
information becomes available. Amortization expense recognized during
the year ended December 31, 1998 was $216,000 and $114,000 during the
period ended December 31, 1997.
The Bank evaluates intangible assets for potential impairment by
analyzing the operating results, trends and prospects of the Bank. The
Bank also takes into consideration recent acquisition patterns within
the banking industry and any other events or circumstances which might
indicate potential impairment.
INCOME TAXES
Deferred tax asset and liability balances are determined by application
to temporary differences of the tax rate expected to be in effect when
taxes will become payable or receivable. Temporary differences are
differences between the tax basis of assets and liabilities and their
reported amounts in
18
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the financial statements that will result in taxable or deductible
amounts in future years. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded for deferred tax assets if the
Bank cannot determine that the benefits will more likely than not be
realized.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
The Bank adopted Statement No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" on
January 1, 1998. This Statement establishes new criteria for determining
whether a transfer of financial assets should be accounted for as a sale
or as a pledge of collateral in a secured borrowing. This Statement also
establishes new accounting requirements for pledged collateral. The
adoption of this pronouncement had no material effect on the Bank's
financial statements.
NET LOSS PER SHARE
Net loss per share is computed on the weighted average number of shares
outstanding during the period. The weighted average number of shares
outstanding was 2,485,385 for the year ended December 31, 1998 and
2,475,546 for the period ended December 31, 1997.
As of December 31, 1997, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In
accordance with SFAS 128, the Bank has presented both basic and diluted
EPS on the face of the Statement of Operations. Basic EPS excludes
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. For loss periods, diluted EPS is the same as basic EPS
due to the fact that including common stock equivalents in the
calculation of diluted EPS would be antidilutive.
19
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
COMPREHENSIVE LOSS
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses,
gains, and losses) in general-purpose financial statements.
As required by SFAS 130, prior year information has been modified to
conform with the new presentation. The Bank's only components of other
comprehensive income relate to unrealized gains on available for sale
securities. Information concerning the Bank's other comprehensive income
for the year ended December 31, 1998 and for the period from June 20,
1997 to December 31, 1997 is as follows:
1998 1997
--------------
(In thousands)
Unrealized gains on securities available for sale $ 167 $ 5
Reclassification of gains recognized in net loss (60) --
----- -----
Other comprehensive income $ 107 $ 5
===== =====
SEGMENT INFORMATION
During the year ended December 31, 1998, the Bank adopted the provisions
of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The Statement requires that public business enterprises
report certain information about operating segments in their annual
financial statements and in condensed financial statements of interim
periods issued to shareholders. It also requires that the public
business enterprises report related disclosures and descriptive
information about products and services provided by significant
segments, geographic areas, and major customers, differences between the
measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources,
and in assessing performance. The Bank has determined that it has one
significant operating segment, the providing of general commercial
financial services to customers located in the single geographic area of
Central North Carolina. The various products are those generally offered
by community banks, and the allocation of resources is based on the
20
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
overall performance of the institution, versus the individual branches
or products.
There are no differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and the measurement of segment amounts has not
changed for 1998 from prior years.
EMPLOYERS DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company has adopted the provisions of SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits", effective
for fiscal years beginning after December 15, 1997. This Statement
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans. The adoption of SFAS No. 132 did not have a material effect
on the Bank's consolidated financial statements.
RECLASSIFICATIONS
Certain items included in the 1997 financial statements have been
reclassified to conform to the 1998 presentation. These
reclassifications have no effect on the net loss or shareholders' equity
previously reported.
21
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NEW PRONOUNCEMENTS
The Bank will adopt the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective with the fiscal
quarter beginning January 1, 2000. This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that derivatives be recognized as either assets
or liabilities in the statement of financial position and be measured at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and whether or not the
derivative is designated as a hedging instrument. SFAS No. 133 is not
expected to have a material effect on the Bank's financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", was issued in October 1998. This Statement amends existing
classification and accounting treatment of mortgage-backed securities,
retained after mortgage loans held for sale are securitized, for
entities engaged in mortgage banking activities. These securities
previously were classified and accounted for as trading and now may be
classified as held-to-maturity or available-for-sale, also. This
Statement is effective for the first fiscal quarter beginning after
December 15, 1998. SFAS No. 134 is not expected to have material effect
on the Bank's financial statements.
2. ORGANIZATION AND SIGNIFICANT ACTIVITIES
The Bank was organized on December 12, 1996 and commenced a public
subscription offering on February 17, 1997. The offering resulted in
gross proceeds of $27.3 million from the sale of 2,477,651 shares.
On June 20, 1997, the Bank acquired the two branches located in Sanford,
North Carolina from a large community bank. A summary of the acquisition
is as follows:
22
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands)
Deposits assumed $ 23,294
Deposit premium paid (2,000)
Loans acquired (10,908)
Goodwill recorded 163
Net other assets acquired (260)
--------
Net cash received $ 10,289
========
In accordance with the rules and regulations of the North Carolina
Commissioner of Banks, all expenditures of the Bank prior to commencing
operations are charged against surplus. The operating expenses,
principally personnel and occupancy, amounted to $437,000, and expenses
related to the offering aggregated $1,069,000.
On September 29, 1998, Capital Bank signed an Agreement and Plan of
Reorganization and Share Exchange with Home Savings Bank of Siler City,
Inc., SSB (Home Savings). The Plan calls for the issuance of
approximately 1,180,000 shares of Capital Bank stock in exchange for all
the outstanding shares of Home Savings. The exchange will be accounted
for as a pooling of interests and is expected to be completed by March
31, 1999. Information related to Home Savings as of September 30, 1998
and for the year then ended is as follows (unaudited):
(In thousands)
Total assets $59,709
Total revenue $ 4,024
Net income $ 245
23
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. SECURITIES
Securities at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- --------- --------- -----------
1998
----
Available for sale:
<S> <C> <C> <C> <C>
U.S. Agency obligations $ 9,938 $ 82 $ 13 $ 10,007
Mortgage-backed securities 9,696 53 10 9,739
--------- -------- -------- ----------
$ 19,634 $ 135 $ 23 $ 19,746
========= ======== ======== ==========
Held to maturity:
U.S. Agency obligations $ 2,000 $ - $ - $ 2,000
========= ======== ======== ==========
1997
----
Available for sale:
U.S. Treasury securities $ 2,994 $ 20 $ - $ 3,014
U.S. Agency securities 3,000 6 - 3,006
Mortgage-backed securities: 5,378 - 21 5,357
--------- -------- -------- ----------
$ 11,372 $ 26 $ 21 $ 11,377
========= ======== ======== ==========
Held to Maturity:
U.S. Agency securities $ 8,002 $ 2 $ - $ 8,004
========= ======== ======== ==========
</TABLE>
The amortized cost and estimated market values of securities at December
31, 1998 by contractual maturities are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
24
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Amortized Market
(In thousands) Cost Value
--------- ---------
Available for sale:
<S> <C> <C>
Due in one year or less $ 990 $ 990
Due after one year through five years 8,191 8,255
Due after five years through ten years 6,329 6,371
Due after ten years 4,124 4,130
------- -------
$19,634 $19,746
======= =======
Held to maturity:
Due after one year through five years $ 2,000 $ 2,014
======= =======
</TABLE>
During the year ended December 31, 1998, the Bank had gross realized
gains of $60,000 on sales of available for sale securities with book
values of $2,995,000. There were no sales of securities during the
period ended December 31, 1997.
Securities with an amortized cost of $7,975,000 were pledged as of
December 31, 1998 to secure public deposits and Federal Home Loan Bank
advances.
4. FEDERAL HOME LOAN BANK STOCK
The Company, as member of the Federal Home Loan Bank System, is required
to maintain an investment in capital stock of the FHLB in an amount
equal to the greater of 1% of its outstanding home loans or 5% of its
outstanding FHLB advances. No ready market exists for the FHLB stock,
and it has no quoted market value. The balance of Federal Home Loan Bank
Stock held at December 31, 1998 and 1997 was $250,000 and $153,300,
respectively.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio by loan classification at December
31, 1998 and 1997 is as follows:
25
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
-----------------------------
Commercial $ 62,196 $ 14,715
Consumer 7,379 4,005
Home Equity Lines 9,817 6,050
Residential mortgages 2,061 2,296
-------------- -------------
81,453 27,066
Less deferred loan fees, net 19 -
-------------- -------------
$ 81,434 $ 27,066
============== =============
A summary of activity in the allowance for loan losses for the year
ended December 31, 1998 and the period ended December 31, 1997 is as
follows:
(In thousands) 1998 1997
------------------------
Balance at beginning of period $ 427 $ -
Adjustment for loans acquired - 163
Provision for loan losses 752 270
Loans charged-off, net of $8 in recoveries for 1998 (41) (6)
----------- -----------
Balance at end of period $ 1,138 $ 427
=========== ===========
At December 31, 1998, nonperforming assets consisted of nonaccrual loans
in the amount of $75,000. At December 31, 1998, there were no loans past
due greater than 90 days and still accruing interest. At December 31,
1997 there were no nonperforming assets.
In the normal course of business certain directors and executive
officers of the Bank, including their immediate families and companies
in which they have an interest, may be loan customers. Total loans to
such groups at December 31, 1998 and activity during the year ended
December 31, 1998, is summarized as follows:
26
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands)
Beginning balance $ 3,209
New loans 3,517
Principal repayments (1,532)
------------
Ending balance $ 5,194
============
In addition, such groups had available lines of credit in the amount of
$1,361,000 at December 31, 1998. The Bank paid an aggregate of
approximately $176,000 to companies owned by members of the board of
directors for equipment and construction and consulting services during
1998.
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are as follows:
1998 1997
--------------------------
(In thousands)
Land $ 350 $ -
Buildings and leasehold improvements 1,227 108
Furniture and equipment 952 425
Automobiles 86 41
Construction in progress 4 154
------------- ------------
2,619 728
Less accumulated depreciation and amortization (310) (63)
------------- ------------
$ 2,309 $ 665
============= ============
7. DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
(In thousands)
1999 $ 54,228
2000 3,062
2001 91
2002 30
--------
$ 57,411
========
27
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan had a weighed average rate of 4.14%
at December 31, 1998 and were collateralized by certain securities (Note
3). Advances outstanding at December 31, 1998 mature in December 2008.
At December 31, 1998, the Bank had an additional $2,400,000 of credit
available with the FHLB.
9. INCOME TAXES
No federal or state income tax expense resulted from the year ended
December 31, 1998 or the period ended December 31, 1997 due to the
generation of net operating losses and the establishment of a valuation
allowance against deferred tax assets.
28
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The difference between income tax and the amount computed by applying
the statutory federal income tax rate of 34% was primarily a result of
the establishment of the valuation allowance on the net deferred tax
assets for the periods ended December 31, 1998 and 1997, and certain
non-deductible merger expenses in 1998.
Significant components of deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
(In thousands) 1998 1997
--------------
Deferred tax assets (liabilities):
Preopening expenditures $ 138 $ 178
Reserve for bad debts 341 105
Amortization 42 14
Directors fees 86 34
Accrued bonuses 61 --
Deferred loan costs 41 --
Other 8 --
Net operating loss 148 161
----- -----
Total deferred tax assets 865 492
Valuation allowance (846) (479)
Depreciation (19) (13)
----- -----
Net deferred tax assets $ -- $ --
===== =====
Total net operating losses of $296,000 and $84,000 expire in 2012 and
2018, respectively, for federal tax purposes and in 2002 and 2003 for
state tax purposes.
10. LEASES
The Bank has noncancelable operating leases for its corporate office,
branch locations, and an automobile that expire at various times through
2007. Future minimum lease payments under the leases for years
subsequent to December 31, 1998 are $164,000 for 1999, $112,000 for
2000, $57,000 each year for 2001, 2002 and 2003, and $138,000
thereafter. During 1998 and 1997, payments under operating leases were
$162,000 and $64,000, respectively.
11. REGULATORY MATTERS AND RESTRICTIONS
The Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
29
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios, as set forth in the table below. As of March 31, 1998, the Bank
was categorized as "well capitalized" by regulatory authorities. There
are no conditions or events since March that management believes could
have changed the Bank's category.
The Bank, as a North Carolina banking corporation, may pay dividends
only out of undivided profits as determined pursuant to North Carolina
General Statues Section 53-87. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a
limitation is in the public interest and is necessary to ensure
financial soundness of the bank.
To be categorized as well capitalized, the Bank must maintain minimum
amounts and ratios. The Bank's actual capital amounts and ratios as of
December 31, 1998 and December 31, 1997 and the minimum requirements are
presented in the following table.
<TABLE>
<CAPTION>
Minimum Requirements for:
Actual Adequacy Purposes To Be Well Capitalized
------ ----------------- ----------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
1998
----
Total Capital (to Risk Weighted Assets) $23,157 25.83% $ 7,172 8.00% $ 8,967 10.00%
Tier I Capital (to Risk Weighted Assets) 22,019 24.56% 3,586 4.00% 5,379 6.00%
Tier I Capital (to Average Assets) 22,019 19.85% 4,437 4.00% 5,547 5.00%
</TABLE>
<TABLE>
<CAPTION>
Minimum Requirements for:
Actual Adequacy Purposes To Be Well Capitalized
------ ----------------- ----------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
1997
----
Total Capital (to Risk Weighted Assets) $23,328 68.80% $ 2,713 8.00% $ 3,391 10.00%
Tier I Capital (to Risk Weighted Assets) 22,901 67.54% 1,356 4.00% 2,034 6.00%
Tier I Capital (to Average Assets) 22,901 42.12% 2,175 4.00% 2,719 5.00%
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Bank instituted a 401(k) plan for the benefit of its employees,
which includes provisions for employee contributions, subject to
limitation under
30
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the Internal Revenue Code, with the Company to match contributions up to
6% of the employee's salary. The Plan provides that employees'
contributions are 100% vested at all times and the Bank's contributions
vest 25% during the third year of service, an additional 25% during the
fourth year of service and the remaining 50% during the fifth year of
service. Further, the Bank may make additional contributions on a
discretionary basis. Aggregate contributions for 1998 and 1997 were
$70,000 and $19,000, respectively.
13. STOCK OPTIONS
The Bank's Board of Directors has approved an incentive stock option
plan and a nonqualified stock option plan for the benefit of its
employees and its employees and directors, respectively. The Board has
reserved 122,500 and 122,500 shares, respectively, under the
aforementioned plans.
Grants of options are made by the Board or the Compensation Committee.
All grants must be at no less than fair market value on the date of
grant, must be exercised no later than 10 years from the date of grant,
and may be subject to some vesting provisions.
A summary of the changes during the year ending December 31, 1998 and
the period ending December 31, 1997 of the Bank's Plan, including the
weighted average exercise price ("WAEP") is presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
--------------------- ---------------------
Shares WAEP Shares WAEP
------ ---- ------ ----
Outstanding at beginning of year 42,000 $ 11.00 -- --
Granted 75,750 $ 13.90 42,000 $ 11.00
------ --------- ------ ---------
Outstanding at end of year 117,750 $ 12.87 42,000 $ 11.00
======= ========= ====== =========
Options exercisable at year-end 64,950 $ 13.13 13,000 $ 11.00
====== ========= ====== =========
</TABLE>
The following table summarizes information about the Plan's stock
options at December 31, 1998:
31
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Remaining
Number Contractual Number
Exercise Price Outstanding Life Exercisable
------------------ ---------------- --------------- ---------------
$11.00 43,000 8.5 years 18,800
$13.75 18,000 9.1 years -
$14.00 56,750 9.6 years 46,150
---------------- ---------------
117,750 64,950
================ ===============
The Bank intends to account for its Plans under the provisions of APB
Opinion No. 25. However, the Bank is required to disclose the pro forma
effects on net income had it recorded compensation based on the fair
value of options granted. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants:
1998 1997
------- -------
Dividend yield -- --
Expected volatility 33.5% 15%
Riskfree interest rate 5.40% 5.75%
Expected Life 7 years 6 years
The weighted average fair value of options granted during 1998 and 1997
was $6.52 and $3.51, respectively.
Had compensation cost for the Bank's stock-based compensation plans, as
described above, been determined consistent with SFAS No. 123, the
Bank's net loss and loss per share would have been increased by to the
pro forma amounts indicated below:
32
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands, except per share data) 1998 1997
------------- -------------
Net (loss) As reported $ (1,124) $ (722)
Pro forma (1,486) (751)
Net (loss) per share - Basic and diluted As reported $ (0.45) $ (0.29)
Pro forma (0.60) (0.30)
</TABLE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. At December 31, 1998, these financial instruments were
comprised entirely of unused lines of credit. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making these
commitments as they do for on-balance sheet instruments. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation of the borrower.
Collateral held varies but may include trade accounts receivable,
property, plant, and equipment and income-producing commercial
properties. Since many unused lines of credit expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements.
Unused lines of credit and outstanding letters of credit were
$21,490,000 and $155,000, respectively, at December 31, 1998.
The Bank's lending in concentrated primarily in Wake and Lee counties in
North Carolina.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires the
disclosure of estimated fair values for financial instruments. Quoted
market prices, if available, are utilized as an estimate of the fair
value of financial instruments. Because no quoted market prices exist
for a significant part of the Bank's financial instruments, the fair
value of such instruments has been derived based on management's
assumptions with
33
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
respect to future economic conditions, the amount and timing of future
cash flows and estimated discount rates. Different assumptions could
significantly affect these estimates. Accordingly, the net amounts
ultimately collected could be materially different from the estimates
presented below. In addition, these estimates are only indicative of the
values of individual financial instruments and should not be considered
an indication of the fair value of the Bank taken as a whole.
The fair values of cash and due from banks, Federal funds sold, interest
bearing deposits in banks and accrued interest receivable/payable are
equal to the carrying value due to the nature of the financial
instruments. The estimated fair values of investment securities and
mortgage-backed securities are provided in Note 3 to the Financial
Statements.
The fair value of the net loan portfolio has been estimated using the
present value of expected cash flows, discounted at an interest rate
giving consideration to estimated prepayment risk and credit loss
factors. The fair value of the Bank's loan portfolio at December 31,
1998 and 1997 were as follows:
(In thousands) 1998 1997
-----------------
Loans:
Carrying amount $80,296 $26,639
Estimated fair value $80,321 $26,692
The fair values of deposit liabilities and repurchase agreements with no
stated maturities has been estimated to equal the carrying amount (the
amount payable on demand), totaling $33,693,000 and $18,074,000 at
December 31, 1998 and 1997, respectively. Therefore, the fair value
estimates for these products do not reflect the benefits that the Bank
receives from the low-cost, long-term funding they provide. These
benefits are considered significant.
The fair values of certificates of deposits and advances from the FHLB
is estimated by discounting the future cash flows using the current
rates offered for similar deposits and advances with the same remaining
maturities. The carrying value and estimated fair values of certificates
of deposit and FHLB advances at December 31, 1998 and 1997 were as
follows:
34
<PAGE>
CAPITAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
-----------------
Certificates of deposits:
Carrying amount $57,411 $25,312
Estimated fair value 57,679 25,382
Advances from the FHLB:
Carrying amount $ 5,000 $ --
Estimated fair value 5,000 --
There is no material difference between the carrying amount and
estimated fair value of off-balance sheet items totaling $21,645,000 and
$5,873,000 at December 31, 1998 and 1997, respectively, which are
primarily comprised of unfunded loan commitments.
The Bank's remaining assets and liabilities are not considered financial
instruments.
35
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Period Ended
(In thousands except share and per share data) December 31,
------------------------------
<S> <C> <C> <C>
1998 1997 (1)
Selected Balance Sheet Data
Cash and Due From Banks $ 9,041 $ 2,641
Federal Funds Sold 4,500 16,787
Securities 21,996 19,532
Gross Loans 81,453 27,066
Allowance for Loan Losses 1,138 427
Total Assets 120,831 68,904
Deposits 88,603 43,386
Borrowings 5,000 --
Repurchase Agreements 2,501 --
Shareholders' Equity 23,939 24,956
Summary of Operations
Interest Income $ 6,472 $ 1,816
Interest Expense 3,063 669
Net Interest Income 3,409 1,147
Provision for Loan Losses 752 270
Net Interest Income After Provision For Loan Losses 2,657 877
Non-interest Income 640 147
Non-interest Expense 4,421 1,746
Net Income (Loss) (1,124) (722)
Per Share Data
Net Income (Loss) $ (.45) $ (.29)
Book Value 9.66 10.08
Number of Common Shares 2,477,651 2,477,651
Selected Ratios
Return On Average Assets (Annualized) (1.25)% (2.45)%
Return on Average Shareholders' Equity (Annualized) (4.60)% (5.40)%
Average Shareholders' Equity to Average Total Assets 27.22% 45.42%
Net Interest Margin (Annualized) 4.07% 4.24%
</TABLE>
(1) The Bank opened for business on June 20, 1997. Accordingly, 1997
income and expenses only reflect 6 months and 10 days of operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW Capital Bank (the "Bank") is a full-service state chartered community
bank conducting business primarily in the Research Triangle and surrounding
areas of North Carolina. The Bank was incorporated on May 30, 1997 and opened
for business on June 20th of that same year at its main office in Raleigh.
During 1997, two branches were opened in Sanford, North Carolina. During 1998,
the Bank opened branches in two Cary, North Carolina locations. As a community
bank, the Bank's profitability depends primarily upon its levels of net interest
income, provision for loan losses, non-interest income, and non-interest
expenses.
The following discussion and analysis is intended to aid the reader in
understanding and evaluating the results of operations and financial condition
of Capital Bank. This discussion is designed to provide more comprehensive
information about the major components of the Bank's results of operations and
financial condition, liquidity, and capital resources than could be obtained
from reading the financial statements alone. This discussion should be read in
conjunction with the Bank's financial statements, the related notes and the
selected financial data presented elsewhere in this report.
Because the operations of the Bank began on June 20, 1997, the results of
operations in 1997 only reflect the period beginning on June 20, 1997 and,
therefore, are not representative of a full year of operations. This should be
taken into consideration when reviewing comparisons between 1998 and 1997
results.
RESULTS OF OPERATIONS Capital Bank reported a net loss of $1,124,000 or $.45 per
share in 1998 as compared to $722,000 or $.29 per share in 1997. The 1998 net
loss before nonrecurring merger related costs associated with a pending merger
with another area financial institution was $920,000, or $.37 per share. It is
generally expected that a new bank in its start-up phase will operate at a loss
and that the amount of loss should moderate over time as the bank continues to
grow. The amount of the 1998 and 1997 operating losses were in line with
management expectations.
NET INTEREST INCOME. Net interest income is the difference between total
interest income and total interest expense and is the Bank's principal source of
earnings. The amount of net interest income is determined by the volume of
interest-earning assets, the level of rates earned on those assets, and the
volume and cost of supporting funds. Net interest income increased from
$1,147,000 in 1997 to $3,409,000 in 1998, an increase of 197%. This increase was
primarily the result of 1998 being a full year of operations for the bank as
compared to the shorter 1997 period and due to a significant increase in the
volume of interest-bearing assets and liabilities between the two years. The
difference between rates earned on interest-earning assets and the cost of
supporting funds is measured by the net interest margin. Average earning assets
were $83.7 million and $50.9 million for 1998 and 1997, respectively, and the
net interest margin was 4.07% and 4.24% for those same periods. The decrease in
the net interest margin is primarily due to the fact that a large percentage of
the loans originated during 1997 were funded by proceeds from the Bank's initial
stock offering in June 1997 as opposed to funds received from establishing
interest-bearing deposit accounts. As the loan and deposit portfolios continue
to grow and more loans are funded by deposits, the effect of capital on the net
interest margin should diminish.
Interest income increased 256% in 1998 to $6.5 million from $1.8 million in
1997. This increase is primarily due to the two factors mentioned above. The
average yields on interest-earning assets increased from 6.71% in 1997 to 7.74%
in 1998. The increase is attributable to a portfolio shift from
2
<PAGE>
lower rate federal funds, which had an average balance of $21.8 million in 1997
as compared to $9.6 million in 1998 to higher yielding loans, which had an
average balance of 17.6 million in 1997 as compared to $53.7 million in 1998.
Interest expense increased 358% in 1998 to $3.1 million from $669,000 in 1997.
This increase is primarily due to 1998 being a full twelve month period as
compared to 1997 and to a significant increase in interest-bearing deposits. The
average rates on interest-bearing liabilities increased from 4.91% in 1997 to
5.22% in 1998. The increase is primarily attributable to a shift in deposit mix
between lower rate savings and demand accounts and higher rate certificates of
deposit as the portfolio of certificate accounts has seen larger growth.
The following two tables set forth certain information regarding the Bank's
yield on interest-earning assets and cost of interest bearing liabilities and
the component changes in net interest income. The first table reflects Capital'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 monthly
average asset or liability balance. Changes in net interest income from 1997 to
1998 can be explained in terms of fluctuations in volume, rate and, since 1997
did not reflect a full year of earnings, length of time. The second table
presents information on those changes.
3
<PAGE>
AVERAGE BALANCES, INTEREST EARNED OR PAID, AND INTEREST YIELDS/RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Month Ten Day Period
Year Ended December 31, 1998 Ended December 31, 1997
----------------------------------- -------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
----------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans receivable: (1)
Commercial $ 37,175 $ 3,234 8.70% $ 9,282 $ 435 8.82%
Consumer 6,048 649 10.73% 6,574 296 8.47%
Home equity 7,515 571 7.60% -- -- --
Residential mortgages 2,092 175 8.37% 1,785 84 8.86%
Cash Flow Manager 849 100 11.78% -- -- --
----------------------------------- -------------------------------
Total loans 53,679 4,729 8.81% 17,641 815 8.69%
Investment securities 20,415 1,254 6.14% 11,542 407 6.63%
Federal funds sold and other
interest on short term investments 9,564 489 5.11% 21,768 594 5.13%
----------------------------------- -------------------------------
Total interest earning assets 83,658 $ 6,472 7.74% 50,951 $ 1,816 6.71%
====================== ===================
Cash and due from banks 2,400 1,777
Other assets 4,439 2,895
Reserve for loan losses (734) (271)
-------- --------
Total assets $ 89,763 $ 55,352
======== ========
Liabilities and Equity
Savings deposits $ 2,016 $ 66 3.27% $ 1,616 $ 28 3.26%
Interest-bearing demand deposits 14,891 602 4.04% 6,979 132 3.56%
Time deposits less than $100,000 33,528 1,928 5.75% 14,553 440 5.69%
Time deposits $100,000 and greater 7,709 442 5.73% 2,242 63 5.29%
----------------------------------- -------------------------------
Total interest bearing deposits 58,144 3,038 5.22% 25,390 663 4.91%
Borrowed funds 376 16 4.14% 270 6 4.18%
Repurchase agreements 209 9 4.31% -- -- --
----------------------------------- -------------------------------
Total interest-bearing liabilities 58,729 $ 3,063 5.22% 25,660 $ 669 4.91%
====================== ===================
Non-interest bearing deposits 5,595 3,842
Other liabilities 1,008 711
-------- --------
Total liabilities 65,332 30,213
Stockholders' equity 24,431 25,139
-------- --------
Total liabilities and equity $ 89,763 $ 55,352
======== ========
Net interest spread (2) 2.52% 1.80%
Net interest income and net
interest margin (3) $ 3,409 4.07% $ 1,147 4.24%
</TABLE>
(1) Loans receivable include nonaccrual loans for which accrual of interest
has not been recorded. See Note 1 of the Financial Statements, "Income
Recognition on Impaired and Nonaccrual Loans"
(2) Net interest spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents the net interest income divided by average
interest-earning assets.
4
<PAGE>
RATE, VOLUME, AND TIME VARIANCE ANALYSIS
Year Ended December 31, 1998 vs.
Six Month Ten Day Period
Ended December 31, 1997
<TABLE>
<CAPTION>
(In thousands) Volume Rate Time Total
Variance Variance Variance Variance
---------------------------------------------------------
Interest Income:
<S> <C> <C> <C> <C>
Loans receivable $ 3,163 $ 23 $ 728 $ 3,914
Investment securities 559 (57) 345 847
Federal funds sold (624) (5) 524 (105)
---------------------------------------------------------
Total interest income 3,098 (39) 1,597 4,656
---------------------------------------------------------
Interest Expense:
Savings and interest-bearing
demand deposits and other 316 41 151 508
Time deposits 1,397 19 451 1,867
Borrowed funds 5 -- 5 10
Repurchase agreements 9 -- -- 9
---------------------------------------------------------
Total interest expense 1,727 60 607 2,394
---------------------------------------------------------
Increase (decrease) in net interest
income $ 1,371 $ (99) $ 990 $ 2,262
=========================================================
</TABLE>
Note: The rate and volume variance for each category has been allocated on a
consistent basis between rate and volume variances, based on a percentage
of rate, or volume, variance to the sum of the absolute two variances.
The time variance is based on 194 days of operations for the 1997 period.
PROVISION FOR LOAN LOSSES. The provision for loan losses is the amount charged
against earnings for the purpose of establishing an adequate allowance for
future loan losses. Loan losses are, in turn, charged to this allowance rather
than being reported as a direct expense. In 1998 and 1997, $752,000 and
$270,000, respectively, were expensed as loan loss provisions. The amount of the
allowance for loan losses is established based on management's estimate of the
inherent risks associated with lending activities, estimated fair value of
collateral, past experience and present indicators such as delinquency rates and
current market conditions. This estimate is regularly reviewed and modified, as
necessary. Due to the Bank's limited operating history, this allowance is
recorded primarily based on industry practices and consideration of local
economic factors. The allowance for loan losses was $1,138,000 and $427,000 on
December 31, 1998 and 1997, respectively, and represented approximately 1.40%
and 1.58% of total loans outstanding on those dates. During 1998, the Bank
charged off $41,000 in loans, net of $8,000 in recoveries. Charge-offs in 1997
amounted to $6,000 and there were no recoveries.
Management has allocated the allowance for loan losses by category. This
allocation is based on management's assessment of the risk associated with the
different types of lending activities and is not intended to be management's
judgement as to future loan losses by loan type.
5
<PAGE>
At December 31,
------------------------------------------------
(In thousands) 1998 1997
------------------------------------------------
Allowance Loans % to Allowance Loans % to
Amount Total Loans Amount Total Loans
------------------------------------------------
Commercial $ 809 76% $ 125 54%
Consumer 89 9 89 37
Residential mortgages 79 3 25 9
Equity lines 7 12 -- --
Unallocated 154 -- 227 --
------------------------------------------------
$1,138 100% $ 427 100%
================================================
The following table shows changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off by loan
category and additions to the allowance which have been charged to operating
expenses.
Analysis of Reserve for Loan Losses
<TABLE>
<CAPTION>
As of Or For the
Periods Ended
December, 31
-----------------
<S> <C> <C>
(In thousands) 1998 1997
-----------------
Average amount of loans outstanding, net of unearned income $53,679 $17,641
Amount of loans outstanding at period end, net of unearned income 81,434 27,066
Reserve for loan losses:
Balance at beginning of period $ 427 $ --
Adjustment for loans acquired
-- 163
Loans charged off:
Commercial 35 --
Consumer 14 6
------------------
Total charge-offs 49 6
------------------
Recoveries of loans previously charged off
Consumer 8 --
------------------
Total charge-offs 8 --
------------------
Net loans charged off 41 6
------------------
Provision for loan losses 752 270
------------------
Balance at December 31 $ 1,138 $ 427
==================
Ratio of net chargeoffs to average loans outstanding during the period 0.09% 0.03%
==================
</TABLE>
The following table shows the total of the nonperforming assets and impaired
loans in the Bank's portfolio as of December 31, 1998. There were no such assets
or loans at December 31, 1997.
6
<PAGE>
(In thousands)
Nonperforming assets:
Nonaccrual loans - Commercial $ 75
=====
Nonperforming assets to:
Loans outstanding at end of year 0.09%
Total assets at end of year 0.06%
Impaired loans - Commercial $ 479
=====
NONINTEREST INCOME. Noninterest income increased 335%, from $147,000 in 1997 to
$640,000 and in 1998. This increase is attributable primarily to the increase in
the number of months of operation for the related periods and to the increase in
deposit and loan bases on which fees are charged. Fees associated with service
charges on deposit accounts increased from $101,000 to $275,000. During 1998,
the Bank began to originate mortgage loans for other financial institutions.
Fees associated with this program resulted in an additional $290,000 in other
noninterest income during the year. In addition, the Bank realized a gain of
$60,000 on the sale of investment securities during 1998. There were no
securities gains or losses taken in 1997.
NONINTEREST EXPENSE. Noninterest expense represents the overhead expenses of the
Bank. Management monitors all categories of noninterest expense in an attempt to
improve productivity and operating performance. Noninterest expense increased
153% from $1.7 million in 1997 to $4.4 million in 1998. This increase is
attributable primarily to the increase in the number of months of operation for
the related periods and to the increase in branch locations and the related
increase in salaries and other overhead costs as a result of the growth of the
Bank. In addition to the effect the short year had on 1997, the following
categories of expenses and related causes for increases are discussed as
follows.
7
<PAGE>
Salary and benefit expense increased from $817,000 in 1997 to $2.1 million in
1998 as new personnel were hired for the new branches and departments added
during the year. Occupancy expense increased from $99,000 to $341,000 during
1998, primarily as a result of lease expenses associated with new locations.
Furniture and equipment expense increased from $62,000 in 1997 to $232,000 in
1998 due to the increase in these assets needed for the new locations. Other
operating expenses increased from $276,000 in 1997 to $682,000 in 1998 also as a
result of the growth of the Bank.
During 1998, the Bank incurred certain nonrecurring expenses of approximately
$204,000 associated with a pending merger with another financial institution.
See Note 2 to the Financial Statements for additional information.
PROVISION FOR INCOME TAXES. No federal or state income tax expense resulted from
either period due to the generation of net operating losses and the
establishment of a valuation allowance against deferred tax assets.
FINANCIAL CONDITION The Bank's financial condition is measured in terms of its
asset and liability composition, asset quality, capital resources, and
liquidity. The growth and composition of assets and liabilities during 1998 and
the second half of 1997 reflected generally favorable economic conditions. The
Bank is not engaged in investment strategies involving derivative financial
instruments. Asset and liability management is conducted without the use of
forward-based contracts, options, swap agreements, or other synthetic financial
instruments derived from the value of an underlying asset, reference rate, or
index.
ASSETS Total assets were $120.8 million and $68.9 million at December 31, 1998
and 1997, respectively. The increase in total assets of $51.9 million, or 75.4%
reflects the strong growth trend of the Bank since it's incorporation in 1997.
The largest component of asset growth was the increase in loans.
Total liabilities increased from $43.9 million in 1997 to $96.9 million in 1998.
The primary cause for the increase between the periods is an increase in
deposits.
Stockholders' equity decreased from $25.0 million in 1997 to $23.9 million in
1998. The decrease is due to the increase in the accumulated deficit as a result
of the current period net loss.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, including noninterest
bearing and interest bearing cash and federal funds sold, decreased from $19.4
million in 1997 to $13.5 million in 1998. The decrease reflects the Bank's cash
requirements needed to fund new loans during the year and the Bank's ability to
shift the proceeds received from the initial public offering into higher yield
loans as opposed to lower yield federal funds.
LOAN PORTFOLIO. Total gross loans were $81.5 million and $27.1 million as of
December 31, 1998 and 1997. Continued low interest rates during 1998 and 1997,
coupled with strong economic growth in the greater Raleigh (including Wake
County) and Sanford areas, were key factors in the growth of the loan portfolio
during those periods. At December 31, 1998, commercial loans, real estate loans,
consumer loans, and equity lines were $62.2 million, $2.1 million, $7.4 million,
and $9.8 million, respectively. At
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December 31, 1997, commercial loans, real estate loans, consumer loans, and
equity lines were $14.7 million, $2.3 million, $4.0 million and $6.1 million,
respectively. The commercial loan portfolio is comprised mainly of loans to
small businesses and there were no significant concentrations of credit. The
following tables reflects the maturities of the commercial loan portfolio and
the mix of the commercial loans that mature greater than one year in the loan
portfolio between fixed rate and adjustable rate notes.
(In thousands)
Commercial loans:
Due within one year $22,295
Due one through five years 31,508
Due after five years 8,393
-------
$62,196
=======
Commercial loans due after 1 year:
Fixed rate $17,373
Variable rate 22,528
-------
$39,901
=======
Although there were no large concentrations of credit to any particular
industry, the economic trends of the area served by the Bank are influenced by
the significant industries within the region. Virtually all the Bank's business
activity is with customers located in the Raleigh and Sanford areas. The
ultimate collectibility of the Bank's loan portfolio is susceptible to changes
in the market conditions of this geographic region.
The Bank uses a centralized risk management process to insure uniform credit
underwriting that adheres to Bank policy. Lending policies are reviewed on a
regular basis to confirm that the Bank is prudent in setting its underwriting
criteria. Credit risk is managed through a number of methods including loan
grading of commercial loans, committee approval of larger loans, and class and
purpose coding of loans. Management believes that early detection of credit
problems through regular contact with the Bank's clients coupled with consistent
reviews of the borrowers' financial condition are important factors in overall
credit risk management.
Management charged off $41,000 and $6,000 of loans, net of recoveries, as
uncollectible during 1998 and 1997, respectively. At December 31, 1998, the
allowance for loan losses as a percentage of' total loans was 1.40%. Management
believes the allowances for loan losses of $1.1 million provides adequate
coverage of the potential exposure in the loan portfolio.
INVESTMENT SECURITIES. Investment securities represent the second largest
component of earning assets. On December 31, 1998 and 1997, investments,
including securities available for sale and securities held to maturity totaled
$22.0 million and $19.5 million, respectively. At December 31, 1998, 90% was
classified as "available for sale" with the remaining 10% classified as "held to
maturity". This distribution allows flexibility in the management of interest
rate risk, liquidity, and loan portfolio growth. The following table reflects
the debt securities by contractual maturities as of December 31, 1998. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
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SECURITIES AVAILABLE FOR SALE PORTFILIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) 1 Year or Less 1 - 5 Years 5 or More Years Total
------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------
Obligations of US
Government Agencies $ 990 4.90% $ 7,054 5.90% $ 1,963 6.35% $10,007 5.89%
Mortgage Backed Securities -- -- 1,201 6.13% 8,538 5.96% 9,739 5.98%
------- ------- ------- -------
$ 990 $ 8,255 $10,501 $19,746
======= ======= ======= =======
SECURITIES HELD TO MATURITY PORTFILIO
(In thousands) 1 Year or Less 1 - 5 Years 5 or More Years Total
------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------
Obligations of US
Government Agencies $ -- -- $2,000 6.35% $ -- -- $2,000 6.35%
======= ====== ====== ======
</TABLE>
MONEY MARKET INVESTMENTS AND FEDERAL FUNDS. At year-end 1998 and 1997, the Bank
had $4.5 million and $16.8 million in short-term money market investments and
federal funds.
LIABILITIES During 1998 and 1997, the Bank relied on deposits and excess
liquidity to fund its earning assets.
DEPOSITS. Total deposits increased from $43.4 million at December 31, 1997 to
$88.6 million at December 31, 1998. Of these amounts, $7.5 million and $6.1
million were in the form of non-interest bearing demand deposits at December 31,
1998 and 1997, respectively, and $81.1 and $37.3 million were in the form of
interest bearing deposits at December 31, 1998 and 1997, respectively. Balances
in certificates of deposit of $100,000 and over were $11.6 million and $3.9
million at year-end 1998 and 1997, respectively.
The following table reflects the maturities of certificates of deposit of
$100,000 and over as of December 31, 1998.
Maturity
(In thousands)
Three months or less $4,532
Over three months to six months 2,546
Over six months to twelve months 4,013
Over twelve months to twenty-four months 529
----------
$11,620
==========
DEBT. At December 31, 1998, the Bank has an outstanding advance with the Federal
Home Loan Bank for $5.0 million. See Note 8 of the Financial Statements for
details regarding this advance. The Bank had no short-term or long-term
borrowings on December 31, 1997.
CAPITAL RESOURCES In June 1997, the Bank completed its initial public offering
of common stock. The offering, net of issuance costs, raised $26.0 million
dollars. Total shareholders' equity for 1998 and
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1997, excluding unrealized gains on available for sale securities of $112,000
and $5,000, respectively, was $23.8 million and $25.0 million, respectively. The
North Carolina Banking Commission and the FDIC prohibit the payment of any
dividends during the Bank's first three years of operation. Accordingly, the
Bank did not pay any dividends to its shareholders during 1998 or 1997. It is
not likely the Bank will declare or pay cash dividends in the foreseeable future
since earnings, if any, would be used to support growth in earning assets and
the opening of branch locations, should such action be pursued. At December 31,
1998, the Bank had a leverage ratio of 19.8%, a Tier 1 capital ratio of 24.5%,
and a risk based capital ratio of 25.8%. These ratios far exceed the federal
regulatory minimum requirements for a "well capitalized" bank.
ASSET/LIABILITY MANAGEMENT Asset/liability management functions to maximize
profitability within established guidelines for interest rate risk, liquidity,
and capital adequacy. Measurement and monitoring of liquidity, interest rate
risk, and capital adequacy are performed centrally through the Asset/Liability
Management Committee, and reported under guidelines established by management,
the Board of Directors and regulators. Oversight on asset/liability management
matters is provided by the Board of Directors through its Asset/Liability
Management Committee.
The Bank had $13.5 million in its most liquid assets, cash and cash equivalents
at December 31, 1998. The Bank's principal sources of funds are deposits,
short-term 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 83.5% of total
assets at December 31, 1998. In addition, Capital had an additional $2.4 million
remaining on it's line of credit with Federal Home Loan Bank of Atlanta and has
the ability to take advantage of various funding programs available from that
resource.
EFFECTS OF INFLATION The financial statements have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historic dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The rate of inflation has been relatively moderate over the
past few years. However, the effect of inflation on interest rates can
materially impact bank operations, which rely on the spread between the yield on
earning assets and rates paid on deposits and borrowings as the major source of
earnings. Operating costs, such as salaries and wages, occupancy and equipment
costs, can also be negatively impacted by inflation.
RECENT ACCOUNTING DEVELOPMENTS Please refer to Note 1 of the Bank's financial
statements for the year ended December 31, 1998 for a discussion of recent
accounting developments.
YEAR 2000 As the Year 2000 approaches, an important business issue has evolved
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.
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<PAGE>
Before it opened in June 1997, Capital Bank's management made the strategic
decision to use an outside data processing company (service bureau) to provide
computer processing systems for its primary banking products including loans,
deposits, ATM's, check processing and general ledger. The computer software used
by the service bureau was developed and is maintained by a third party vendor.
This same software is used by many banks throughout the country and uses a
five-digit date logic designed to avoid the problems associated with the two
digit logic discussed above.
In addition to the service bureau, Capital Bank utilizes personal computers
configured into five local area networks (LANS) which are, in turn, connected to
each other through a wide area network (WAN). All equipment was purchased new in
1997 and has subsequently been tested for Year 2000 readiness by an independent
consultant. The test results indicate that all equipment will function properly
in the Year 2000.
In addition to the service bureau applications, Capital Bank 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 of these software products are purchased or licensed from third party
vendors. It should be noted that Capital Bank does not write or develop any of
its own computer applications and all third party vendors have provided Capital
Bank with written certification that their software is Year 2000 compliant.
In addition to receiving these assurances from third party vendors, Capital Bank
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. In 1998, Capital Bank completed its
assessment of existing computer systems and applications and had identified
mission critical applications. Where possible, Capital Bank is developing plans
to test these systems and is in the process of reviewing third party test
results. However, the Year 2000 is a global issue which extends beyond the
control of Capital Bank and may effect the providers of services such as power
and telecommunications. These services are critical to the ongoing operations of
Capital Bank and in the unlikely event of an interruption in these services, it
is management's opinion that such a failure will be quickly resolved. As testing
of Capital Bank's mission critical systems is completed, Capital Bank will
develop detailed contingency plans as necessary for each system. Capital Bank
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. Capital Bank has budgeted
$43,000 for the Year 2000 program and has spent approximately $17,000 to date.
AS A LENDING INSTITUTION, CAPITAL BANK IS EXPOSED TO POTENTIAL RISK IF BORROWERS
SUFFER YEAR 2000 RELATED DIFFICULTIES AND ARE UNABLE TO REPAY THEIR LOANS. IN
JULY 1998, CAPITAL BANK SENT INFORMATIONAL MATERIAL AND A YEAR 2000
QUESTIONNAIRE TO ALL LARGE BORROWERS WHICH FOCUSED ON THEIR YEAR 2000 READINESS.
DURING THE THIRD QUARTER 1998, CAPITAL BANK'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.
CAPITAL BANK IS CURRENTLY EVALUATING THE INFORMATION OBTAINED FROM THESE
MEETINGS IN ORDER TO DETERMINE WHAT IMPACT, IF ANY, THE YEAR 2000 WILL HAVE ON
THEIR FINANCIAL PERFORMANCE AND THEIR ABILITY TO MAKE LOAN PAYMENTS. THUS FAR
NONE OF CAPITAL BANK'S BORROWERS HAVE REPORTED THE EXPECTATION OF MATERIAL
ADVERSE IMPACTS AS A RESULT OF THE YEAR 2000 ISSUE.
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<PAGE>
Based on the information now available, Capital Bank 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 Capital Bank's business, financial condition or results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Capital Bank 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 Banks performance under
different interest rate scenarios. Analyses are prepared quarterly which
evaluate the Banks performance in a base strategy which reflects the Bank's 1998
and 1999 operating plan. Three interest rate scenarios (Flat, Rising and
Declining) are applied to the base strategy to determine the effect of changing
interest rates on net interest income. The December 31, 1998 analysis of Capital
Bank shows it to be "asset sensitive".
For the upcoming twelve month period in the Flat rate scenario, Capital Bank is
projected to earn $5.9 million in net interest income. In the Rising rate
scenario, which contemplates a 300 basis point increase in interest rates over a
twelve month period, the bank is expected to see its annualized net interest
income improve by $155,000, or 2.64%. Conversely, the bank will see a decline in
earnings of $171,000, or 2.91%, if rates declined 300 basis points.
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<PAGE>
STOCK MARKET INFORMATION
Capital Bank common stock commenced trading on the OTC Bulletin Board on July
22, 1997 under the symbol "CBKN" and on December 18, 1997 was listed on the
NASDAQ Small Cap Market under the symbol "CBKN." On February 8, 1999, there were
approximately 872 shareholders of record and 1,684 beneficial holders of stock.
The following table sets forth market prices per share of common stock for the
periods indicated. The price ranges reflect the high and low sales price of
actual transactions.
1998 HIGH LOW CLOSE
First Quarter 16 12 3/4 15 3/4
Second Quarter 18 1/8 15 1/2 16 3/4
Third Quarter 16 3/4 12 12 3/4
Fourth Quarter 13 10 1/2 11
1997 HIGH LOW CLOSE
Third Quarter 13 1/8 11 3/4 12 1/4
Fourth Quarter 13 1/2 11 3/8 13
14
