FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-30062
CAPITAL BANK CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
(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, no 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. [X]
The aggregate market value of the registrant's Common Stock, no par
value per share, as of March 15, 2000, held by those persons deemed by the
registrant to be non-affiliates was approximately $22,893,000
As of March 15, 2000, there were 3,658,689 shares of the registrant's
Common Stock, no par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
1. Portions of the registrant's Annual Report to
Shareholders for the year ended December 31, 1999 Part II
2. Portions of the registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held on
April 20, 2000 Part III
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK
Annual Report on Form 10-K
INDEX
<S> <C>
PART I.....................................................................................................1
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................10
Item 3. Legal Proceedings..............................................................................11
Item 4. Submission of Matters To A Vote Of Security Holders............................................11
PART II...................................................................................................11
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................11
Item 6. Selected Financial Data........................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.....................................12
Item 8. Financial Statements and Supplementary Data....................................................12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........12
PART III..................................................................................................12
Item 10. Directors and Executive Officers of the Registrant............................................12
Item 11. Executive Compensation........................................................................12
Item 12. Security Ownership of Certain Beneficial Owners and Management................................12
Item 13. Certain Relationships and Related Transactions................................................13
PART IV...................................................................................................13
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K..............................14
Signatures.............................................................................................15
</TABLE>
2
<PAGE>
PART I
Item 1. Business.
General
Capital Bank Corporation (the "Company") is a bank holding company
incorporated under the laws of North Carolina on August 10, 1998. The Company's
primary function is to serve as the holding company for its wholly-owned
subsidiary, Capital Bank. 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. At a special meeting of
shareholders held on March 26, 1999, the shareholders of Capital Bank approved
the reorganization of Capital Bank into Capital Bank Corporation. In the holding
company reorganization, the shareholders of Capital Bank each received a right
to one share of Company stock for each share of Capital Bank stock that they
owned. Thus, the shareholders of Capital Bank before the holding company
reorganization are now the shareholders of the Company. In addition, on March
31, 1999 the Company completed its acquisition of Home Savings Bank of Siler
City SSB, Inc. in a stock-for-stock exchange in which the Company issued
1,181,038 shares of its Common Stock. On July 16, 1999, Home Savings Bank merged
with Capital Bank to form one subsidiary under Capital Bank Corporation. Prior
to the merger date, Home Savings Bank capitalized the holding company with an
upstream dividend of $100,000. In conjunction with the merger, the common stock
of Home Savings Bank was retired.
As used in this report, the term "Company" refers to Capital Bank
Corporation and its subsidiary, Capital Bank, after the holding company
reorganization.
As of December 31, 1999, the Company had assets of approximately $222.3
million, gross loans outstanding of approximately $159.3 million and deposits of
approximately $163.2 million. The Company'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 Company has two
branch offices in Cary, one in Siler City, and three in Sanford, North Carolina.
The Bank is a locally-owned community bank engaged in the general
commercial banking business in Wake, Chatham 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 and Chatham Counties are significant centers 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.
1
<PAGE>
Recent Developments
On January 21, 2000, the Company entered into a purchase and assumption
agreement to acquire five branches that are being divested in connection with
the merger of two other area financial institutions. Under this agreement, which
is subject to regulatory approval, the Company will acquire the deposits, most
of the loans and other assets of branches in Oxford (two locations), Warrenton,
Seaboard and Woodland, North Carolina. Management expects each transaction to
close in the second quarter of 2000.
Lending Activities and Deposits
Loan Types and Lending Policies. The Company 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 Company are influenced by the significant industries within
the region. Consistent with the Company's emphasis on being a community-oriented
financial institution, virtually all the Company's business activity is with
customers located in the Cary, Siler City, Raleigh and Sanford areas. The
ultimate collectibility of the Company's loan portfolio is susceptible to
changes in the market conditions of this geographic region.
The Company 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 Company 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 Company's 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, 1999, the
approximate composition of the Company's loan portfolio:
Loan Type Amount Percentage
--------- ------ ----------
(in thousands)
Commercial............................... $104,572 65.5%
Consumer................................. 11,444 7.2
Real Estate.............................. 31,533 19.8
Equity Lines............................. 12,008 7.5
------ ------
Total........................ $159,557 100.0%
======== ======
Deposits. The majority of the Company's customers are individuals and
small to medium-size businesses located in Wake, Chatham and Lee Counties, North
Carolina and contiguous areas. The Company's deposits and loans are well
diversified, with no material concentration in a single industry or group of
related industries. The management of the Company does not believe that the
deposits or the business of the Company 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 Company attempts to control deposit flow through the pricing of
2
<PAGE>
deposits and promotional activities. Management believes that the Company's
rates are competitive with those offered by other institutions in Cary, Sanford,
Siler City and Raleigh.
The following table sets forth the mix of depository accounts at the
Company as a percentage of total deposits as of December 31, 1999:
Non-interest bearing demand ..................... 6.7%
Interest checking ............................... 6.8
Market rate investment .......................... 15.9
Savings ........................................ 3.1
Time deposits
Under $100,000................................. 55.7
Equal to or over $100,000...................... 11.8
------
100.0 %
Competition
Commercial banking in North Carolina is extremely competitive in large
part due to statewide branching. The Company 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 Company's competitors have broader geographic markets and higher lending
limits than the Company 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 Company'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 Company believes that
it has certain competitive advantages that will distinguish it from its
competition. The Company 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 Company offers
customers modern, high-tech banking without forsaking community values such as
prompt, personal service and friendliness. The Company offers many personalized
services and intends to attract customers by being responsive and sensitive to
their individualized needs. The Company 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 Company
supports and participates in local events and its officers and directors serve
on boards of local civic and charitable organizations.
Employees
At March 15, 2000, the Company employed 77 persons, of which 74 were
full-time and 3 were part-time. None of its employees are represented by any
collective bargaining unit. The Company considers relations with its employees
to be good.
3
<PAGE>
Supervision and Regulation
Holding companies, banks and many of their non-bank affiliates are
extensively regulated under both federal and state law. The following is a brief
summary of certain statutes, rules and regulations affecting the Company and the
Bank. This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referred to below and is not intended to be
an exhaustive description of the statutes or regulations applicable to the
Company's or the Bank's business. Supervision, regulation and examination of the
Company and the Bank by bank regulatory agencies is intended primarily for the
protection of the Bank's depositors rather than holders of the Common Stock of
the Company.
Holding Company Regulation
General. The Company is a holding company registered with the Federal
Reserve under the Bank Holding Company Act of 1956 (the "BHCA"). As such, the
Company and the Bank are subject to the supervision, examination and reporting
requirements contained in the BHCA and the regulation of the Federal Reserve.
The BHCA requires that a bank holding company obtain the prior approval of the
Federal Reserve before (i) acquiring direct or indirect ownership or control of
more than five percent of the voting shares of any bank, (ii) taking any action
that causes a bank to become a subsidiary of the bank holding company, (iii)
acquiring all or substantially all of the assets of any bank or (iv) merging or
consolidating with any other bank holding company.
The BHCA generally prohibits a bank holding company, with certain
exceptions, from engaging in activities other than banking, or managing or
controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be closely
related to banking, or managing or controlling banks, as to be a proper incident
thereto. In determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. For
example, banking, operating a thrift institution, extending credit or servicing
loans, leasing real or personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance underwriting activities have all been determined by regulations of the
Federal Reserve to be permissible activities.
Pursuant to delegated authority, the Federal Reserve Bank of Richmond
has authority to approve certain activities of holding companies within its
district, including the Company, provided the nature of the activity has been
approved by the Federal Reserve. Despite prior approval, the Federal Reserve has
the power to order a holding company or its subsidiaries to terminate any
activity or to terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that continuation of such activity or such ownership
or control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that bank holding company.
Recent Developments. On November 12, 1999, the President of the United
States signed into law the Gramm-Leach-Bliley Act ("GLB"), which alters the
4
<PAGE>
regulatory framework for banking and other financial services companies. The GLB
creates a new type of holding company called a "financial holding company." The
new financial holding company structure allows banks, insurance companies, and
securities firms to affiliate within a single entity, provided that the
financial holding company satisfies and maintains certain new regulatory
standards. Bank holding companies that meet these standards may elect to become
financial holding companies, but if they remain bank holding companies, they are
subject to the restrictions on their activities existing prior to the GLB,
including those restrictions described above imposed by the BHCA.
The Company has not elected to become a financial holding company, so
it remains under essentially the same regulatory framework as it did before the
enactment of the GLB. However, the financial holding company structure created
by the GLB would allow insurance companies or securities firms operating under
the financial holding company structure to acquire the Company, and, if the
Company elects to become a financial holding company in the future, it could
acquire insurance companies or securities firms.
In addition to creating the more flexible financial holding company
structure, GLB introduced several additional customer privacy protections that
will apply to the Company and the Bank. Federal regulators have issued a draft
of proposed privacy regulations implementing these protections for comment.
Pursuant to the GLB's rulemaking provisions, regulations must be adopted by May
12, 2000, and institutions must begin privacy disclosures under the GLB within
six months of adoption of such regulations. The GLB's privacy provisions require
financial institutions to, among other things, (i) establish and annually
disclose a privacy policy, (ii) give consumers the right to opt out of
disclosures to nonaffiliated third parties, with certain exceptions, (iii)
refuse to disclose consumer account information to third-party marketers and
(iv) follow regulatory standards to protect the security and confidentiality of
consumer information.
Mergers and Acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions
of banks and bank holding companies without geographic limitation, subject to
any state requirement that the bank has been organized for a minimum period of
time, not to exceed five years, and the requirement that the bank holding
company, prior to, or following the proposed acquisition, controls no more than
10% of the total amount of deposits of insured depository institutions in the
U.S. and no more than 30% of such deposits in any state (or such lesser or
greater amount set by state law).
In addition, the IBBEA permits a bank to merge with a bank in another
state as long as neither of the states has opted out of the IBBEA prior to May
31, 1997. The state of North Carolina has "opted in" to such legislation,
effective June 22, 1995. In addition, a bank may establish and operate a de novo
branch in a state in which the bank does not maintain a branch if that state
expressly permits de novo interstate branching. As a result of North Carolina's
opt-in law, North Carolina law permits unrestricted interstate de novo
branching.
Additional Restrictions and Oversight. Subsidiary banks of a bank
holding company are subject to certain restrictions imposed by the Federal
Reserve on any extensions of credit to the bank holding company or any of its
subsidiaries, investments in the stock or securities thereof and the acceptance
of such stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
5
<PAGE>
property or furnishing of services. An example of a prohibited tie-in would be
any arrangement that would condition the provision or cost of services on a
customer obtaining additional services from the bank holding company or any of
its other subsidiaries.
The Federal Reserve may issue cease and desist orders against bank
holding companies and non-bank subsidiaries to stop actions believed to present
a serious threat to a subsidiary bank. The Federal Reserve also regulates
certain debt obligations, changes in control of bank holding companies and
capital requirements.
Under the provisions of the North Carolina law, the Company is
registered with and subject to supervision by the North Carolina Commissioner of
Banks (the "Commissioner").
Capital Requirements. The Federal Reserve has established risk-based
capital guidelines for bank holding companies and state member banks. The
minimum standard for the ratio of capital to risk-weighted assets (including
certain off balance sheet obligations, such as standby letters of credit) is
eight percent. At least half of this capital must consist of common equity,
retained earnings and a limited amount of perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less certain
goodwill items ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist
of mandatory convertible debt securities and a limited amount of other preferred
stock, subordinated debt and loan loss reserves.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent.
The guidelines also provide that bank holding companies experiencing
significant growth, whether through internal expansion or acquisitions, will be
expected to maintain strong capital ratios substantially above the minimum
supervisory levels without significant reliance on intangible assets. The same
heightened requirements apply to bank holding companies with supervisory,
financial, operational or managerial weaknesses, as well as to other banking
institutions if warranted by particular circumstances or the institution's risk
profile. Furthermore, the guidelines indicate that the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") will continue to consider a
"tangible Tier 1 Leverage Ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activity. The Federal Reserve has not advised the
Company of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio
applicable to it.
As of December 31, 1999, the Company had Tier 1 risk-adjusted, total
regulatory capital and leverage capital of approximately 19.31%, 20.56% and
15.49%, respectively, all in excess of the minimum requirements.
Bank Regulation
The Bank is subject to numerous state and federal statutes and
regulations that affect its business, activities, and operations, and is
supervised and examined by the Commissioner and the Federal Reserve. The Federal
Reserve and the Commissioner regularly examine the operations of banks over
which they
6
<PAGE>
exercise jurisdiction. They have the authority to approve or disapprove the
establishment of branches, mergers, consolidations, and other similar corporate
actions, and to prevent the continuance or development of unsafe or unsound
banking practices and other violations of law. The Federal Reserve and the
Commissioner regulate and monitor all areas of the operations of banks and their
subsidiaries, including loans, mortgages, issuances of securities, capital
adequacy, loss reserves, and compliance with the Community Reinvestment Act of
1977 (the "CRA") as well as other laws and regulations. Interest and certain
other charges collected and contracted for by banks are also subject to state
usury laws and certain federal laws concerning interest rates.
The deposit accounts of the Bank are insured by the Bank Insurance Fund
(the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a
maximum of $100,000 per insured depositor. The FDIC issues regulations and
conducts periodic examinations, requires the filing of reports and generally
supervises the operations of its insured banks. This supervision and regulation
is intended primarily for the protection of depositors. Any insured bank that is
not operated in accordance with or does not conform to FDIC regulations,
policies, and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.
Under the North Carolina corporation laws, the Company may not pay a
dividend or distribution, if after giving it effect, the Company would not be
able to pay its debts as they become due in the usual course of business or the
Company's total assets would be less than its liabilities. In general, the
Company's ability to pay cash dividends is dependent upon the amount of
dividends paid by the Bank. The ability of the Bank to pay dividends to the
Company is subject to statutory and regulatory restrictions on the payment of
cash dividends, including the requirement under the North Carolina banking laws
that cash dividends be paid only out of undivided profits and only if the bank
has surplus of a specified level. The Federal Reserve also imposes limits on the
Bank's payment of dividends.
Like the Company, the Bank is required by federal regulations to
maintain certain minimum capital levels. The levels required of the Bank are the
same as required for the Corporation. At December 31, 1999, the Bank had Tier 1
risk-adjusted, total regulatory capital and leverage capital of approximately
19.31%, 20.56% and 15.49%, respectively, all in excess of the minimum
requirements.
The Bank is subject to insurance assessments imposed by the FDIC.
Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule
providing for annual assessment rates ranging from 0 cents to 27 cents for every
$100 in assessable deposits, applicable to institutions insured by both the BIF
and the Savings Association Insurance Fund ("SAIF"). The actual assessment to be
paid by each insured institution is based on the institution's assessment risk
classification, which focuses on whether the institution is considered "well
capitalized," "adequately capitalized" or "under capitalized," as such terms are
defined in the applicable federal regulations. Within each of these three risk
classifications, each institution will be assigned to one of three subgroups
based on supervisory risk factors. In particular, regulators will assess
supervisory risk based on whether the institution is financially sound with only
a few minor weaknesses (Subgroup A), whether it has weaknesses which, if not
corrected, could result in an increased risk of loss to the BIF (Subgroup B) or
whether such weaknesses pose a substantial risk of loss to the BIF unless
corrective action is taken (Subgroup C). The FDIC also is authorized to impose
one or more special assessments in an amount deemed necessary to enable
7
<PAGE>
repayment of amounts borrowed by the FDIC from the United States Treasury
Department and, beginning in 1997, all banks are required to pay additional
annual assessments at rates set by the Financing Corporation, which was
established by the Competitive Equality Banking Act of 1987.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("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.
Banks are also subject to the CRA, which requires the appropriate
federal bank regulatory agency, in connection with its examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate-income neighborhoods. Each institution is
assigned one of the following four ratings of its record in meeting community
credit needs: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
Effective May 12, 2000, the GLB's "CRA Sunshine Requirements" call for
financial institutions to disclose publicly certain written agreements made in
fulfillment of the CRA. Banks that are parties to such agreements also must
report to federal regulators the amount and use of any funds expended under such
agreements on an annual basis, along with such other information as regulators
may require. This annual reporting requirement is effective for any agreements
made after May 12, 2000.
8
<PAGE>
Monetary Policy and Economic Controls
The Company and the Bank are directly affected by governmental policies
and regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the money
supply which, in turn, affects banks' lending abilities by increasing or
decreasing the cost and availability of funds to banks. The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in United
States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits, and
limitations on interest rates that banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types
of deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates has generally increased banks' cost of funds and made them more
sensitive to fluctuations in money market rates. In view of the 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 or the Company. As a result, banks, including
the Bank, face a significant challenge to maintain acceptable net interest
margins.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position With Company
- ---- --- ---------------------
James A. Beck 47 President and Chief Executive Officer
Allen T. Nelson, Jr. 50 Senior Vice President, Chief
Financial Officer and Secretary
Franklin G. Shell 41 Senior Vice President and Senior
Credit Officer
James A. Beck is currently President and Chief Executive Officer of the
Company, a position he has held since the Company 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
Company.
Allen T. Nelson, Jr. has been employed by the Company since February 2,
1998, as its Chief Financial Officer and Secretary. From December 1993 through
January 1998, Mr. Nelson served as the
9
<PAGE>
Senior Vice President and Chief Financial Officer for Jefferson Bankshares, Inc.
and its principal subsidiary, Jefferson National Bank, both based in
Charlottesville, Virginia.
Franklin G. Shell has been employed with the Company since April 14,
1997, as its Senior Vice President and Senior Lending Officer. Prior thereto,
from 1989, Mr. Shell was employed by the North Carolina-based bank, Branch
Banking and Trust Company, serving as a commercial loan officer in its Raleigh,
North Carolina office.
Item 2. Properties.
The Company currently leases an aggregate of 5,700 square feet of
office space located at 4400 Falls of Neuse Road, Raleigh, North Carolina for
the Company'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 November 1999, the Company entered into a lease agreement for
approximately 17,500 square feet, of which approximately 14,500 square feet is
for the Company's principal offices and the remainder for a new branch office.
The property is located at 4901 Glenwood Avenue, Raleigh, North Carolina. This
lease is scheduled to begin on May 1, 2000 and has a ten-year term with two
five-year renewal options. For the first twelve months, monthly rent for the
branch bank space is $5,375 and for the office space is $20,954. The monthly
rent is subject to annual cost of living increases after the first year.
In June 1997, the Company opened a branch office at 129 South Steele
Street, Sanford, North Carolina which it moved to 130 North Steele Street,
Sanford, North Carolina in November 1997. The Company 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 Company opened a branch office at 2800 Williams
Street, Sanford, North Carolina. The Company 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 Company 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 Company.
On September 8, 1998, the Company opened a branch office located at
1201 Kildaire Farm Road, Cary, North Carolina. The building, approximately 2,800
square feet, was purchased from another financial institution but the real
property, which consists of approximately 1.14 acres, 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.
On March 31, 1999, the Company completed the acquisition of Home
Savings Bank of Siler City, Inc., SSB and converted the existing branch in that
town, located at 300 East Raleigh Street, Siler City, North Carolina, into
another Capital Bank branch. The branch consists of approximately 1.25 acres of
real property and a free-standing building of approximately 7,400 square feet
which are owned by the Company.
On December 6, 1999, the Company opened a branch office located at 2222
Jefferson Davis Highway, Sanford, North Carolina. The branch, which was under
10
<PAGE>
construction for most of 1999, consists of approximately .73 acres of real
property and a free-standing building of approximately 2,450 square feet which
are owned by the Company.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party
or of which any of its property is subject. In addition, the Company is not
aware of any threatened litigation, unasserted claims or assessments that could
have a material adverse effect on the Company's business, operating results or
financial condition.
Item 4. Submission of Matters To A Vote Of Security Holders.
During the fourth quarter of the year ended December 31, 1999, there
were no matters submitted to a vote of the Company's shareholders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information relating to the market for the Company's Common Stock is
incorporated by reference from the inside back cover of the 1999 Annual Report
to Shareholders of Capital Bank Corporation, filed as Exhibit 13 to this report.
Information relating to dividends on the Company's Common Stock is incorporated
by reference from the section entitled "Capital Resources" on page 11 of the
1999 Annual Report, filed as Exhibit 13 to this report, and from Note 11 in the
Notes to Consolidated Financial Statements on page 11 of the 1999 Annual Report,
filed as Exhibit 13 to this report.
Recent Sales of Unregistered Securities. The Company did not sell any
securities in the fiscal year ended December 31, 1999 which were not registered
under the Securities Act of 1933, as amended, except that during such fiscal
year the Company granted options to employees and directors to acquire an
aggregate of 34,400 shares of its Common Stock at a weighted average exercise
price of $11.16 per share pursuant to the Company's Stock Option Plans.
Item 6. Selected Financial Data.
This information is incorporated by reference from the inside cover of
the 1999 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 4 through 12
of the 1999 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 12 of the 1999
Annual Report, filed as Exhibit 13 to this report.
11
<PAGE>
Item 8. Financial Statements and Supplementary Data.
This information is incorporated by reference from pages 13 through 29
of the 1999 Annual Report, filed as Exhibit 13 to this report.
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.
None.
PART III
This Part incorporates certain information from the definitive proxy
statement (the "2000 Proxy Statement") for the 2000 Annual Meeting of
Shareholders of Capital Bank Corporation, as filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year covered by this Report on Form 10-K.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Company's executive officers is included
under the caption "Executive Officers" on pages 11 through 12 of this report.
Information concerning the Company's directors and filing of certain reports of
beneficial ownership is incorporated by reference to the 2000 Proxy Statement.
Item 11. Executive Compensation.
This information is incorporated by reference to the Company's
definitive proxy statement, dated March 20,2000, as filed with the Securities
and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is incorporated by reference to the Company's
definitive proxy statement, dated March 20,2000, as filed with the Securities
and Exchange Commission.
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Company's
definitive proxy statement, dated March 20,2000, as filed with the Securities
and Exchange Commission.
12
<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 1999 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>
Consolidated Balance Sheets dated as of December 31, 1999 and 1998 108 - 109 13
Consolidated Statements of Operations for the years ended December 31, 110 - 111 14
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years 112 - 113 15
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 114 - 115 16
1999, 1998 and 1997
Notes to Consolidated Statements 116 - 144 17 - 29
Report of Independent Accountants 145 30
</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 Company filed no reports on Form 8-K in
the fourth quarter of the year ended December 31, 1999.
13
<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 Company's judgment concerning the future and are
subject to risks and uncertainties that could cause the Company'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 Company cautions that any such forward looking statements are
further qualified by important factors that could cause the Company's actual
operating results to differ materially from those in the forward looking
statements, including without limitation, the Company'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.
14
<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 16th day of March, 2000.
CAPITAL BANK CORPORATION
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 indicated and on March 16, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
--------------------------- President, Chief Executive Officer and Director
James A. Beck
Senior Vice President and Chief Financial Officer
---------------------------
Allen T. Nelson, Jr.
Director
---------------------------
Charles F. Atkins
Director
---------------------------
Lamar Beach
Director
---------------------------
Edwin E. Bridges
Director
---------------------------
William C. Burkhardt
Director
---------------------------
L.I. Cohen, Jr.
Director
---------------------------
David G. Gospodarek
Director
---------------------------
Carolyn W. Grant
Director
---------------------------
John F. Grimes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director
---------------------------
Darleen M. Johns
Director
---------------------------
Robert L. Jones
Chairman of the Board of Directors
---------------------------
Oscar A. Keller, III
Director
---------------------------
Oscar A. Keller, Jr.
Director
---------------------------
Vernon Malone
Director
---------------------------
George R. Perkins, III
Director
---------------------------
Donald W. Perry
Director
---------------------------
J. Rex Thomas
Director
---------------------------
Bruce V. Wainright
Director
---------------------------
Samuel J. Wornom, III
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Sequential Page
- ----------- ----------- Number (if
applicable)
--------------
<S> <C> <C>
3.01(1) Articles of Incorporation of the Company
3.02(1) Bylaws of the Company
4.01(1) Specimen Common Stock Certificate of the Company
10.01(1) Lease Agreement, dated January 4, 1994, between Buchanan Properties
Joint Venture and Triangle East Bank, together with assignment to
the Company.
10.02(1) Lease Agreement, dated February 1, 1992, between Moretti
Construction, Incorporated and Triangle Bank, together with
assignment to the Company.
10.03(1) Sublease, dated January 30, 1997 between Centura Bank and NB
Acquisition Corp., predecessor to the Company.
10.04(1) Agreement of Sublease, dated June 3, 1997, between Medical Records
Corporation and the Company.
10.05(1) Lease Agreement, dated July 10, 1997, between Forty-Four Hundred F-N
Associates and Dixon-Odom Company and the Company.
10.06(1,2) Amended and Restated Employment Agreement, dated May 22, 1997,
between NB Acquisition Corp., as predecessor to the Company, and
James A. Beck.
10.07(1,2) Letter agreement, dated April 10, 1997, between the Company and
Franklin G. Shell regarding employment terms.
10.08(1,2) Incentive Stock Option Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.09(1,2) Non-Qualified Stock Option Plan
10.10(1,2) Deferred Compensation Plan for Outside Directors
10.11(2) Change in Control Agreement, dated February 1, 2000 between Capital
Bank and Allen T. Nelson, Jr.
10.12(2) Change in Control Agreement, dated February 27, 2000 between
Capital Bank and Franklin G. Shell
10.13(1) Agreement, dated May 5, 1997, between Alphanumeric Systems Inc. and
the Company
10.14(1) Master Service Agreement, dated June 23, 1997, between Central
Service Corporation and the Company.
10.15(2) Letter agreement, dated X XX, 1998, between the Company and Allen T.
Nelson, Jr. regarding employment terms.
10.16 Lease Agreement, dated November 16, 1999, between Crabtree Park, LLC
and Capital Bank.
13 Portions of the Annual Report to Shareholders for fiscal year ended
December 31, 1999.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
99 Risk Factors Relating to the Company
</TABLE>
- --------------------------
1 Incorporated by reference to the Company's Registration Statement on Form 14
filed with the SEC on October 19, 1998, as amended on November 10, 1998,
December 21, 1998 and February 8, 1999.
2 Denotes a management contract or compensatory plan, contract or arrangement.
<PAGE>
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is entered
into this _____ day of __________________, 2000 by and between Capital Bank (the
"Bank") and Allen T. Nelson, Jr. (the "Executive").
RECITALS
WHEREAS, the board of directors of the Bank (the "Board") recognizes
that the possibility of a Change in Control (as defined below) exists and that a
Change in Control can result in significant distractions of its key management
personnel because of the uncertainties inherent in a Change in Control;
WHEREAS, the Board has determined that it is in the best interests of
the Bank to ensure the Executive's dedication and efforts on behalf of the Bank
in the event of a Change in Control;
WHEREAS, the Bank desires to enter into this Agreement with the
Executive to provide the Executive with certain payments and benefits in the
event that the Executive's employment with the Bank is terminated in connection
with a Change in Control; and
WHEREAS, the Executive acknowledges that these benefits are
consideration for his observing the non-competition and proprietary information
provisions contained herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the legal sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Change of Control Termination. The Executive shall be entitled to
receive payments and benefits pursuant to this Agreement upon a Change in
Control Termination (as defined below) of the Executive's employment with the
Bank.
2. Severance Payments and Benefits. Upon a Change in Control
Termination of the Executive's employment with the Bank, the Executive shall be
entitled to receive all of the following:
(a) All accrued compensation and any pro-rata bonuses the
Executive may have earned up to the date of termination;
1
<PAGE>
(b) A severance amount equal to three (3) times the sum of (i)
the amount of the Executive's then current annual base salary plus (ii) the
greater of the Executive's most recent annual bonus or the average of the
Executive's two most recent annual bonuses. The severance amount shall be paid
in thirty-six (36) equal monthly installments without interest commencing one
month after the date of termination;
(c) Continued participation in all life insurance, health,
accidental death and dismemberment, and disability plans and other benefit
programs in which the Executive is entitled to participate immediately prior to
the Change of Control Termination or, at the Executive's option, immediately
prior to the Change in Control for three (3) years after the date of
termination. The Executive's continued participation in such plans and programs
shall be at no greater cost to the Executive than the cost the Executive bore
for such participation immediately prior to termination or, at the Executive's
option, immediately prior to the Change in Control. Alternatively, the Bank
shall arrange upon comparable terms, and at no greater cost to the Executive
than the cost the Executive bore for such plans and programs prior to
termination or, at the Executive's option, immediately prior to the Change in
Control, to provide the Executive with benefits at least substantially similar
to those that the Executive is entitled to receive under such plans and
programs.
3. Definitions.
-------------
(a) "Cause" shall mean either of the following:
(i) The willful and continued failure by the
Executive to substantially perform the Executive's duties with the Bank (other
than any such failure resulting from the Executive's Disability) for a
significant period of time after a written demand for substantial performance is
delivered to the Executive by the Bank, which demand specifically identifies the
manner in which the Bank believes that the Executive has not substantially
performed the Executive's duties; or
(ii) The willful engaging by the Executive in gross
misconduct that is materially and demonstrably injurious to the Bank. No act or
failure to act on the Executive's part shall be considered "willful" unless done
or omitted to be done by the Executive in the absence of good faith and without
a reasonable belief that the Executive's action or failure to act was in the
best interests of the Bank.
(b) "Change in Control" shall mean any of the following:
(i) Any "person" (as such term is used in Sections
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Act")) acquiring "beneficial ownership" (as such term is used in Rule 13d-3
under the Act), directly or indirectly, of securities of the Bank representing
fifty percent (50%) or more of the combined voting power of the Bank's then
outstanding voting securities (the "Voting Power"), but excluding for this
purpose an
2
<PAGE>
acquisition by the Bank or an "affiliate" (as defined in Rule 12b-2
under the Act) or by an employee benefit plan of the Bank or of an affiliate.
(ii) The individuals who constitute the Board on the
effective date hereof (the "Incumbent Directors") cease to constitute at least a
majority of the Board. Any director whose nomination is approved by a majority
of the Incumbent Directors shall be considered an Incumbent Director; provided,
however that no Director whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Bank shall be considered an Incumbent Director.
(iii) The shareholders of the Bank approve a
reorganization, merger or consolidation following which the owners of the Voting
Power of the Bank immediately prior to the closing of such transaction do not
beneficially own, directly or indirectly, more than 50% of the Voting Power of
the successor entity.
(iv) The shareholders of the Bank approve a complete
liquidation or dissolution of the Bank, or a sale or other disposition of all or
substantially all of the assets of the Bank.
(c) "Change in Control Termination" shall mean a termination
in connection with a Change in Control, as follows:
(i) A termination by the Bank of the Executive's
employment during the period beginning ninety (90) days prior to and ending two
(2) years after a Change in Control for any reason other than Cause, Disability
or death.
(ii) A termination by the Executive of the
Executive's employment with the Bank within two (2) years after a Change in
Control for "Good Reason".
(d) "Disability" shall mean a complete inability of the
Executive substantially to perform his employment duties for the Bank for a
period of at least one hundred and eighty (180) consecutive days.
(e) "Good Reason" shall mean the occurrence after a Change in
Control of any of the following:
(i) Without the Executive's express written consent,
a material reduction in Executive's position or responsibilities relative to the
Executive's position or responsibilities immediately prior to such reduction;
(ii) A reduction in the Executive's base salary;
(iii) The Bank's requiring the Executive to relocate
his residence, or to relocate his principal business office to any place outside
a thirty (30) mile radius from Raleigh,
3
<PAGE>
North Carolina, except for reasonably required travel on the Bank's business
that is not greater than such travel requirements prior to the Change in
Control;
(iv) The Bank failing to continue in effect any
material compensation, welfare or benefit plan in which the Executive is
participating at the time of a Change in Control without substituting plans that
provide the Executive with substantially similar or greater benefits, the Bank
taking any action that adversely affects the Executive's participation in or
materially reduces the Executive's benefits under any such plan or the Bank
ceasing to provide the Executive with any material fringe benefit enjoyed by the
Executive at the time of the Change in Control;
(v) Any purported termination of the Executive's
employment for Cause or Disability without grounds therefor;
(vi) Any material breach by the Bank of any provision
of this Agreement; or
(vii) The failure of the Bank to obtain an agreement
satisfactory to the Executive from any successor or assign of the Bank to assume
and agree to perform this Agreement.
4. No Duty to Mitigate.
--------------------
The Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, and no
such payment shall be offset or reduced by the amount of any compensation or
benefits provided to the Executive in any subsequent employment. The severance
pay and benefits under this Agreement shall be in lieu of any other severance
pay to which the Executive may be entitled from the Bank.
5. Limitation on Payments.
-----------------------
To the extent that any of the payments and benefits provided for under this
Agreement or otherwise payable to the Executive constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), and but for this Section 5 would be subject to the excise
tax imposed by Section 4999 of the Code, the Bank shall reduce the aggregate
amount of such payments and benefits such that the present value thereof (as
determined under the Code and the applicable regulations) is equal to 2.99 times
the Executive's "base amount" as defined in Section 280G(b)(3) of the Code.
6. Covenant Not to Compete; Non-Solicitation.
------------------------------------------
(a) The Executive acknowledges that by virtue of the
Executive's employment with the Bank, the Executive shall have access to and
control of confidential and proprietary information concerning the Bank's
business and that the Bank's business depends to a considerable extent on the
individual skills, efforts, and leadership of the Executive. Accordingly and in
consideration of the Bank's commitments to the Executive under this
4
<PAGE>
Agreement, the Executive expressly covenants and agrees that the Executive shall
not, without the prior consent of the Bank:
(i) For two (2) years following a Change in Control
Termination, within the geographical areas set forth below, be employed (or
otherwise engaged) in a management capacity, any other capacity providing the
same or similar services that the Executive provided to the Bank, or any
capacity connected with the then primary banking activities of the Bank, by any
person or entity that engages in the then primary banking activities of the
Bank; provided, however, that in the event that any of the payments and benefits
provided under this Agreement are reduced pursuant to Section 5 above, the
limitation period of this Section 6(a)(i) shall be one (1) year;
(ii) For three (3) years following a Change in
Control Termination, on the Executive's own or another's behalf, whether as an
officer, director, stockholder, partner, associate, owner, employee, consultant
or otherwise, directly or indirectly:
(A) Within the geographical areas set forth
below, solicit or do business that is the same, similar to, or otherwise in
competition with the business engaged in by the Bank from or with persons or
entities who are customers of the Bank, who were customers of the Bank at any
time during the last year of the Executive's employment with the Bank, or to
whom the Bank made proposals for business at any time during the last year of
the Executive's employment with the Bank; or
(B) Offer employment to, or otherwise
solicit for employment, any employee or other person who was employed by the
Bank during the last year of the Executive's employment with the Bank.
(b) The restrictions set forth in this Section 6 apply to the
following geographical areas:
(i) Lee County, North Carolina and Wake County, North
Carolina; and
(ii) Any city, metropolitan area, or county in which
the Bank maintains an office on the date of termination of the Executive's
employment over which the Executive has had management responsibility.
(c) The Executive acknowledges that the covenants contained in
this Section 6 are reasonably necessary to protect the legitimate business
interests of the Bank and are reasonable with respect to scope, time, and
territory and are described with sufficient accuracy and definiteness to enable
him to understand the scope of the restrictions imposed on him.
5
<PAGE>
7. Proprietary Information and Property.
-------------------------------------
(a) The Executive shall not, at any time during or following
employment with the Bank, disclose or use, except in the course of his
employment with the Bank as may be required by law, any confidential or
proprietary information of the Bank received by the Executive while employed
hereunder, whether such information is in the Executive's memory or embodied in
writing or other physical form.
(b) Confidential or proprietary information shall include
information which is not generally available to the general public, or Bank's
competitors, or ascertainable through common sense or general business
knowledge; including, but not limited to data, compilations, methods, financial
data, financial plans, business plans, products plans, lists of actual or
potential customers, marketing information regarding executives and employees.
(c) All records, files or other objects maintained by or under
the control, custody or possession of the Bank or its agents in their capacity
as agents shall be and remain the Bank's property. Upon termination of his
employment, the Executive shall return to the Bank all property (including, but
not limited to, equipment, records, files, documents, credit cards, and keys)
which the Executive received in connection with his employment. At the Bank's
request, the Executive shall bring current all such records, files or documents
before returning them.
(d) Upon notice of cessation of his employment with the Bank,
the Executive shall fully cooperate with the Bank in winding up his pending work
and transferring his work to those individuals designated by the Bank.
(e) The terms and conditions of this Section 7 shall survive
expiration or termination of this Agreement or Employee's employment and shall
not be affected by any change or modification of this Agreement unless specific
reference is made to this Section 7.
8. Successors and Assigns.
-----------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Bank, its successors, and assigns, and the Bank shall require
any successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required to
perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive except by will or by the
laws of descent and distribution.
9. Modifications.
--------------
No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in writing signed by the Executive and the Bank. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with any conditional provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions of this Agreement at any prior or subsequent time.
6
10. Entire Agreement.
------------------
No agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party that are not
expressly set forth in this Agreement.
11. Governing Law.
-------------
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of North Carolina.
12. Severability.
------------
The provisions of this Agreement shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EXECUTIVE CAPITAL BANK
________________________________ By: _________________________________
Allen T. Nelson, Jr.
Title: _________________________________
7
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is entered
into this _____ day of __________________, 2000 by and between Capital Bank (the
"Bank") and Franklin G. Shell (the "Executive").
RECITALS
WHEREAS, the board of directors of the Bank (the "Board") recognizes
that the possibility of a Change in Control (as defined below) exists and that a
Change in Control can result in significant distractions of its key management
personnel because of the uncertainties inherent in a Change in Control;
WHEREAS, the Board has determined that it is in the best interests of
the Bank to ensure the Executive's dedication and efforts on behalf of the Bank
in the event of a Change in Control;
WHEREAS, the Bank desires to enter into this Agreement with the
Executive to provide the Executive with certain payments and benefits in the
event that the Executive's employment with the Bank is terminated in connection
with a Change in Control; and
WHEREAS, the Executive acknowledges that these benefits are
consideration for his observing the non-competition and proprietary information
provisions contained herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the legal sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Change of Control Termination. The Executive shall be entitled to
receive payments and benefits pursuant to this Agreement upon a Change in
Control Termination (as defined below) of the Executive's employment with the
Bank.
2. Severance Payments and Benefits. Upon a Change in Control
Termination of the Executive's employment with the Bank, the Executive shall be
entitled to receive all of the following:
(a) All accrued compensation and any pro-rata bonuses the
Executive may have earned up to the date of termination;
1
<PAGE>
(b) A severance amount equal to two (2) times the sum of (i)
the amount of the Executive's then current annual base salary plus (ii) the
greater of the Executive's most recent annual bonus or the average of the
Executive's two most recent annual bonuses. The severance amount shall be paid
in twenty-four (24) equal monthly installments without interest commencing one
month after the date of termination;
(c) Continued participation in all life insurance, health,
accidental death and dismemberment, and disability plans and other benefit
programs in which the Executive is entitled to participate immediately prior to
the Change of Control Termination or, at the Executive's option, immediately
prior to the Change in Control for two (2) years after the date of termination.
The Executive's continued participation in such plans and programs shall be at
no greater cost to the Executive than the cost the Executive bore for such
participation immediately prior to termination or, at the Executive's option,
immediately prior to the Change in Control. Alternatively, the Bank shall
arrange upon comparable terms, and at no greater cost to the Executive than the
cost the Executive bore for such plans and programs prior to termination or, at
the Executive's option, immediately prior to the Change in Control, to provide
the Executive with benefits at least substantially similar to those that the
Executive is entitled to receive under such plans and programs.
3. Definitions.
-----------
(a) "Cause" shall mean either of the following:
(i) The willful and continued failure by the
Executive to substantially perform the Executive's duties with the Bank (other
than any such failure resulting from the Executive's Disability) for a
significant period of time after a written demand for substantial performance is
delivered to the Executive by the Bank, which demand specifically identifies the
manner in which the Bank believes that the Executive has not substantially
performed the Executive's duties; or
(ii) The willful engaging by the Executive in gross
misconduct that is materially and demonstrably injurious to the Bank. No act or
failure to act on the Executive's part shall be considered "willful" unless done
or omitted to be done by the Executive in the absence of good faith and without
a reasonable belief that the Executive's action or failure to act was in the
best interests of the Bank.
(b) "Change in Control" shall mean any of the following:
(i) Any "person" (as such term is used in Sections
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Act")) acquiring "beneficial ownership" (as such term is used in Rule 13d-3
under the Act), directly or indirectly, of securities of the Bank representing
fifty percent (50%) or more of the combined voting power of the Bank's then
outstanding voting securities (the "Voting Power"), but excluding for this
purpose an
2
<PAGE>
acquisition by the Bank or an "affiliate" (as defined in Rule 12b-2
under the Act) or by an employee benefit plan of the Bank or of an affiliate.
(ii) The individuals who constitute the Board on the
effective date hereof (the "Incumbent Directors") cease to constitute at least a
majority of the Board. Any director whose nomination is approved by a majority
of the Incumbent Directors shall be considered an Incumbent Director; provided,
however that no Director whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Bank shall be considered an Incumbent Director.
(iii) The shareholders of the Bank approve a
reorganization, merger or consolidation following which the owners of the Voting
Power of the Bank immediately prior to the closing of such transaction do not
beneficially own, directly or indirectly, more than 50% of the Voting Power of
the successor entity.
(iv) The shareholders of the Bank approve a complete
liquidation or dissolution of the Bank, or a sale or other disposition of all or
substantially all of the assets of the Bank.
(c) "Change in Control Termination" shall mean a termination
in connection with a Change in Control, as follows:
(i) A termination by the Bank of the Executive's
employment during the period beginning ninety (90) days prior to and ending two
(2) years after a Change in Control for any reason other than Cause, Disability
or death.
(ii) A termination by the Executive of the
Executive's employment with the Bank within two (2) years after a Change in
Control for "Good Reason".
(iii) The Executive's voluntary resignation within
sixty (60) days after a Change in Control for any reason.
(d) "Disability" shall mean a complete inability of the
Executive substantially to perform his employment duties for the Bank for a
period of at least one hundred and eighty (180) consecutive days.
(e) "Good Reason" shall mean the occurrence after a Change in
Control of any of the following:
(i) Without the Executive's express written consent,
a material reduction in Executive's position or responsibilities relative to the
Executive's position or responsibilities immediately prior to such reduction;
(ii) A reduction in the Executive's base salary;
3
<PAGE>
(iii) The Bank's requiring the Executive to relocate
his residence, or to relocate his principal business office to any place outside
a thirty (30) mile radius from Raleigh, North Carolina, except for reasonably
required travel on the Bank's business that is not greater than such travel
requirements prior to the Change in Control;
(iv) The Bank failing to continue in effect any
material compensation, welfare or benefit plan in which the Executive is
participating at the time of a Change in Control without substituting plans that
provide the Executive with substantially similar or greater benefits, the Bank
taking any action that adversely affects the Executive's participation in or
materially reduces the Executive's benefits under any such plan or the Bank
ceasing to provide the Executive with any material fringe benefit enjoyed by the
Executive at the time of the Change in Control;
(v) Any purported termination of the Executive's
employment for Cause or Disability without grounds therefor;
(vi) Any material breach by the Bank of any provision
of this Agreement; or
(vii) The failure of the Bank to obtain an agreement
satisfactory to the Executive from any successor or assign of the Bank to assume
and agree to perform this Agreement.
4. No Duty to Mitigate.
--------------------
The Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, and no
such payment shall be offset or reduced by the amount of any compensation or
benefits provided to the Executive in any subsequent employment. The severance
pay and benefits under this Agreement shall be in lieu of any other severance
pay to which the Executive may be entitled from the Bank.
5. Limitation on Payments.
-----------------------
To the extent that any of the payments and benefits provided for under this
Agreement or otherwise payable to the Executive constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), and but for this Section 5 would be subject to the excise
tax imposed by Section 4999 of the Code, the Bank shall reduce the aggregate
amount of such payments and benefits such that the present value thereof (as
determined under the Code and the applicable regulations) is equal to 2.99 times
the Executive's "base amount" as defined in Section 280G(b)(3) of the Code.
6. Covenant Not to Compete; Non-Solicitation.
-----------------------------------------
(a) The Executive acknowledges that by virtue of the
Executive's employment
4
<PAGE>
with the Bank, the Executive shall have access to and control of confidential
and proprietary information concerning the Bank's business and that the Bank's
business depends to a considerable extent on the individual skills, efforts, and
leadership of the Executive. Accordingly and in consideration of the Bank's
commitments to the Executive under this Agreement, the Executive expressly
covenants and agrees that the Executive shall not, without the prior consent of
the Bank:
(i) For one (1) year following a Change in Control
Termination, within the geographical areas set forth below, be employed (or
otherwise engaged) in a management capacity, any other capacity providing the
same or similar services that the Executive provided to the Bank, or any
capacity connected with the then primary banking activities of the Bank, by any
person or entity that engages in the then primary banking activities of the
Bank;
(ii) For two (2) years following a Change in Control
Termination, on the Executive's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee, consultant or
otherwise, directly or indirectly:
(A) Within the geographical areas set forth
below, solicit or do business that is the same, similar to, or otherwise in
competition with the business engaged in by the Bank from or with persons or
entities who are customers of the Bank, who were customers of the Bank at any
time during the last year of the Executive's employment with the Bank, or to
whom the Bank made proposals for business at any time during the last year of
the Executive's employment with the Bank; or
(B) Offer employment to, or otherwise
solicit for employment, any employee or other person who was employed by the
Bank during the last year of the Executive's employment with the Bank.
(b) The restrictions set forth in this Section 6 apply to the
following geographical areas:
(i) Lee County, North Carolina and Wake County, North
Carolina; and
(ii) Any city, metropolitan area, or county in which
the Bank maintains an office on the date of termination of the Executive's
employment over which the Executive has had management responsibility.
(c) The Executive acknowledges that the covenants contained in
this Section 6 are reasonably necessary to protect the legitimate business
interests of the Bank and are reasonable with respect to scope, time, and
territory and are described with sufficient accuracy and definiteness to enable
him to understand the scope of the restrictions imposed on him.
5
<PAGE>
7. Proprietary Information and Property.
------------------------------------
(a) The Executive shall not, at any time during or following
employment with the Bank, disclose or use, except in the course of his
employment with the Bank as may be required by law, any confidential or
proprietary information of the Bank received by the Executive while employed
hereunder, whether such information is in the Executive's memory or embodied in
writing or other physical form.
(b) Confidential or proprietary information shall include
information which is not generally available to the general public, or Bank's
competitors, or ascertainable through common sense or general business
knowledge; including, but not limited to data, compilations, methods, financial
data, financial plans, business plans, products plans, lists of actual or
potential customers, marketing information regarding executives and employees.
(c) All records, files or other objects maintained by or under
the control, custody or possession of the Bank or its agents in their capacity
as agents shall be and remain the Bank's property. Upon termination of his
employment, the Executive shall return to the Bank all property (including, but
not limited to, equipment, records, files, documents, credit cards, and keys)
which the Executive received in connection with his employment. At the Bank's
request, the Executive shall bring current all such records, files or documents
before returning them.
(d) Upon notice of cessation of his employment with the Bank,
the Executive shall fully cooperate with the Bank in winding up his pending work
and transferring his work to those individuals designated by the Bank.
(e) The terms and conditions of this Section 7 shall survive
expiration or termination of this Agreement or Employee's employment and shall
not be affected by any change or modification of this Agreement unless specific
reference is made to this Section 7.
8. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Bank, its successors, and assigns, and the Bank shall require
any successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required to
perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive except by will or by the
laws of descent and distribution.
9. Modifications. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in writing signed by the Executive and the Bank. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with any conditional provision of this Agreement to be performed
6
<PAGE>
by such other party, shall be deemed a waiver of similar or dissimilar
provisions or conditions of this Agreement at any prior or subsequent time.
10. Entire Agreement.
----------------
No agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party that are not
expressly set forth in this Agreement.
11. Governing Law.
-------------
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of North Carolina.
12. Severability.
-------------
The provisions of this Agreement shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EXECUTIVE CAPITAL BANK
________________________________ By: _________________________________
Franklin G. Shell
Title: _________________________________
7
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF WAKE
THIS LEASE AGREEMENT (the "Lease") made and entered into as of the
_____ day of November, 1999, by and between CRABTREE PARK, LLC, a Georgia
limited liability company, hereinafter called "Landlord"; and CAPITAL BANK, a
North Carolina banking corporation hereinafter called "Tenant":
W I T N E S S E T H:
- - - - - - - - - -
In consideration of the mutual covenants and agreements contained
herein, the parties hereto agree for themselves, their successors and assigns,
as follows:
1. BASIC LEASE TERMS.
-----------------
The following terms shall have the following meanings in this Lease:
(a) Premises: Suite 100 containing approximately 17,577 rentable square
feet of office space on the first floor of the Building, as more
particularly described on the floor plan attached hereto as Exhibit A.
(b) Building: The Capital Bank Corporate Center, located at 4505
Creedmoor Road, Raleigh, North Carolina.
(c) Common Areas: All areas of the Building available for the common
use or benefit of all tenants primarily or to the public generally,
including without limitation, parking areas, driveways, sidewalks,
loading docks, the lobby, corridors, elevators, stairwells, entrances,
public restrooms, mechanical rooms, janitorial closets, telephone
rooms, mail rooms, electrical rooms, and other similar areas of the
Building providing for building systems, and any other common
facilities furnished by Landlord from time to time.
(d) Commencement Date: May 1, 2000 (subject to adjustment pursuant to
Section 3 of this Lease).
(e) Term; Expiration Date: The "Term" of this Lease shall be ten (10)
years commencing as of the Commencement Date and expiring on the tenth
anniversary of the Commencement Date or the Adjustment Date, as the
case may be (the "Expiration Date").
(f) Minimum Rental. During the first twelve months of the Term the
annual Minimum Rental for the Branch Bank portion of the Premises,
which consists of
1
<PAGE>
approximately 3,000 rentable square feet, shall be $21.50 per rentable
square foot, starting with the Commencement Date for such Branch Bank
portion, and the annual Minimum Rental for the Office portion of the
Premises, which consists of approximately 14,577 rentable square feet,
shall be $17.25 per rentable square foot,
starting with the Commencement Date for such Office portion. For each
successive twelve month period after the first twelve months following
the respective Commencement Dates the minimum annual rental for each
such portion shall increase by the lower of three (3%) percent per
annum, or the annual Cost of Living Increase (the "Additional Rent").
The Cost of Living Increase shall be determined by subtracting the
Minimum annual Rental from the product obtained by multiplying the
Minimum annual Rental by a fraction the denominator of which is the
Revised Consumer Price Index for All Urban Consumers - New Series
(1982-1984 = 100), Annual Averages and Changes, All Items, as published
by the Bureau of Labor Statistics, U. S. Department of Labor, for the
third month immediately preceding the commencing of the Lease Term for
the respective portion, and the numerator of which is the Price Index
for the third month immediately preceding the twelve month term just
concluding. Landlord shall notify Tenant in writing, giving
calculations as to the amount of Additional Rent, which Additional Rent
shall be payable at the same time as, and in addition to, the Minimum
annual Rental, but Minimum annual Rental shall never be less than
stated in this subparagraph. If Landlord has not furnished Tenant with
such notification, Tenant shall pay the Minimum annual Rental at the
rate it was obligated to pay during the preceding year until such
notification is received, at which time Tenant shall no later than at
the time the next rental installment is due pay any accrued Cost of
Living Increase owed.
(g) Operating Expense Stop: $5.00 per rentable square foot per year for
that portion of the Term during calendar year 2000, and thereafter
based on Actual Operating Expenses for each twelve months of the term
commencing January 1, 2001, such Actual Operating Expenses to be based
on actual expenses incurred during that portion of the Term in the year
2000 for the respective portions of the Property grossed up to reflect
95% occupancy of the Building and adjusted to reflect what they would
have been had the Term been a full twelve months in year 2000. The
components of Operating Expenses are those items described on Exhibit D
attached hereto and incorporated herein by this reference thereto.
Tenant shall have the option of auditing Landlord's Operating Expense
in accordance with the provisions set forth on Exhibit D.
(h) Tenant's Proportionate Share: A fraction, the numerator of which
shall be the number of rentable square feet within the Premises and the
denominator of which shall be the number of rentable square feet within
the Building, currently estimated to be 41.97% (17,577/41,883).
2
<PAGE>
(i) Notice Addresses:
Landlord: Crabtree Park, LLC
c/o Tri Properties, Inc.
4309 Emperor Boulevard, Suite 110
Durham, North Carolina 27703
Tenant: Capital Bank
4400 Falls of Neuse Road
Raleigh, North Carolina 27609
Attn: James A. Beck
Fax: 919-645-6401
With a copy to: Stephen T. Parascandola, Esq.
Smith Anderson Blount Dorsett Mitchell
& Jernigan
Post Office Box 2611
Raleigh, North Carolina 27602-2611
(j) Security Deposit: NONE.
(k) Broker(s): Tri Properties, Inc. and Thomas Commercial.
(l) Parking.
-------
Tenant shall have the right to use its Proportionate Share of the
remaining (after deducting the 14 reserved to Tenant) 140 unreserved parking
spaces on the Premises in the surface parking lot adjacent to the Building which
constitutes a portion of the Common Areas. In addition Tenant may designate up
to ten (10) reserved parking spaces immediately in front of the Branch Bank
portion of the Premises. Landlord agrees to provide four (4) reserved spaces at
the rear of the back parking lot for Capital Bank vehicles, the exact location
to be mutually agreed upon.
2. DESCRIPTION OF PREMISES.
-----------------------
Landlord hereby leases to Tenant, and Tenant hereby accepts and rents
from Landlord, the Premises within the Building; together with the nonexclusive
right to use the Common Areas. The rentable area of the Premises is determined
in accordance with the standards set forth in ANSI Z65.1-1996, as promulgated by
the Building Owners and Managers Association ("BOMA Standard"). In the event the
Tenant leases space on the second floor of the Building, that portion of the
rentable area of the Premises shall be determined by multiplying the rentable
area of the Premises by a "core factor" equal to twelve percent (12.0%).
3. TERM; COMMENCEMENT DATE; DELIVERY OF PREMISES.
---------------------------------------------
(a) Term. Unless otherwise adjusted as herein below provided, the Term
shall commence on the Commencement Date and expire on the Expiration Date. In
3
<PAGE>
the event the Commencement Date is a day other than the first day of the
calendar month, the Term shall be extended and shall expire on that date which
is ten (10) full years from the first day of the first full calendar month
immediately following the Commencement Date (the "Adjustment Date"). As used
herein, the term "Lease Year" shall mean each consecutive twelve-month period of
the Term, beginning with the Commencement Date (as same may be adjusted as
hereinbelow provided) or any anniversary thereof; provided, however, in the
event the Commencement Date is a day other than the first day of the calendar
month, "Lease Year One" shall be that period commencing on the Commencement Date
and continuing until the first anniversary of the Adjustment Date and each
succeeding Lease Year shall be a twelve-month period beginning with each
subsequent anniversary of the Adjustment Date.
(b) Commencement Date. Notwithstanding anything contained herein to the
contrary, the Commencement Date as to the Office portion, and the Commencement
Date as to the Branch Bank portion of the Premises respectively shall be deemed
to be the earlier of: (a) the date Tenant, or any person occupying any portion
of the Office portion or the Branch Bank portion of the Premises with Tenant's
permission, commences business operations from the Premises, or (b) the first
(1st) business day following the date of Landlord's delivery of the Premises to
Tenant upfitted in substantial accordance with the Plans (as hereinafter
defined) or the date on which Landlord would have delivered the Premises to
Tenant upfitted in substantial accordance with the Plans but for delays
attributable to or caused by Tenant or Tenant's Invitees (as hereinafter
defined); such Tenant caused delays including without limitation, delays
attributable to Tenant's failure timely to provide the Plans and any delays
actually resulting from change orders requested by Tenant, providing Landlord
shall give notice to Tenant that such change orders will actually cause delays.
Landlord shall act in good faith and use diligent efforts to deliver the
Premises upfitted in accordance with the Plans (including receipt of a
certificate of occupancy) to Tenant on or before June 1, 2000 (the "Target
Date"). Notwithstanding anything contained herein to the contrary, in no event
shall Landlord's completion of the Tenant Improvements be dependent upon, or the
Commencement Date delayed because of, the installation of any special equipment
or improvements to the Premises to be supplied and installed by Tenant. However
Landlord will allow Tenant access to that portion of the Premises it first
intends to occupy four weeks prior to the Commencement Date for installation of
its furniture, vault, ATM machine and other equipment, fixtures and to wire and
cable its computer and phone system throughout the Premises, but Tenant shall
during such installation use reasonable efforts to avoid interfering with any
construction on behalf of Landlord that is continuing.
Delays as used in this Lease shall include Tenant delays as set forth above,
those resulting from causes encompassed within the meaning of the term force
majeure, delays encountered by Landlord, despite reasonable and diligent efforts
to do so, in obtaining necessary permits for Landlord work from governmental
authorities, including but not limited to the City of Raleigh and the Department
of Transportation.
If Landlord fails to deliver the Premises upfitted in accordance with the Plans,
including a certificate of occupancy, on or before August 1, 2000, as such date
may be or is extended by Delays, but in no event later than September 1, 2000,
Tenant may at any time within ten business
4
<PAGE>
days after August 1, 2000 if not extended by Delays, or September 1, 2000 if
extended, (but not thereafter) by written notice to Landlord terminate this
Lease, and if so terminated Tenant shall have no further liability hereunder to
Landlord.
(c) Delivery of Premises. Landlord shall be responsible for the
construction of the building shell and the completion of "Landlord's Work" as
more particularly described on Exhibit "C" attached hereto. In addition,
Landlord will supervise the design, construction and installation of the initial
improvements in the Premises (the "Tenant Improvements") in accordance with the
Plans and the following terms and conditions. Landlord's engineer and/or
Tenant's architect shall, at Tenant's sole cost and expense (as part of the
Tenant Improvement Allowance (as hereinafter defined)), prepare the plans for
the design, construction and installation of the Tenant Improvements (the
"Plans") which shall be materially consistent with the preliminary space plans
prepared by Tenant and approved by Landlord. The final Plans, as reviewed and
approved by Landlord and Tenant, such approval not to be unreasonably withheld,
shall be attached hereto as Exhibit "C-1."
Landlord shall deliver the Premises to Tenant upon completion of the
construction of the Building in accordance with Landlord's Work and substantial
completion of the Tenant Improvements in accordance with the Plans using new
materials except where Landlord and Tenant mutually agree, such substantial
completion to be certified by Landlord's engineer or architect inspecting the
work and to include receipt of a certificate of occupancy permitting Tenant's
beneficial occupancy of the Premises. "Substantial Completion" shall include the
completion of all items of work that cannot be completed while Tenant is in
possession of the Premises without materially inconveniencing Tenant. If
Landlord for any reason whatsoever cannot deliver possession of the Premises to
Tenant in accordance with the terms hereof on or before the Target Date as
hereinabove specified, this Lease shall not be void or voidable nor shall
Landlord be liable to Tenant for any loss or damages resulting therefrom; but in
that event, except to the extent that any such delay is directly attributable to
Tenant or its agents, employees, contractors or subcontractors (hereinafter
collectively referred to as "Tenant's Invitees"), the Commencement Date shall be
adjusted to be the date when Landlord does in fact deliver possession of the
Premises to Tenant in accordance with the terms hereof.
Landlord shall contribute up to a maximum of $23.84 per rentable square
foot of the Premises (the "Tenant Improvement Allowance"), or $419,117.00 toward
only the following costs: (i) any cost of installing the Tenant Improvements on
an "as completed" basis which is performed in accordance with the Plans and
related to the work to be done for the purpose of preparing the Premises for
Tenant's occupancy and use, (ii) the cost of preparing the Plans, (iii) design
costs for architectural, mechanical, plumbing and electrical design, and (iv)
construction documents and permits; provided, however, in no event shall the
Tenant Improvement Allowance be used for any costs associated with Tenant's
personal property, equipment, trade fixtures or other items of a non-permanent
nature installed in the Premises, including without limitation, telephone and
data cable lines. In the event that either prior to the commencement of the
installation of the Tenant Improvements or at any time during or following the
installation of the Tenant Improvements, the reasonable, necessary and
pre-approved cost [which shall be conclusively established by Tenant's approval
of the Contract for such Improvements and any
5
<PAGE>
changes orders thereto] of the Tenant Improvements exceeds the Tenant
Improvement Allowance or Tenant requests any change to the aforementioned Plans
which has resulted or might result in an increase in the cost of the
installation of such Tenant Improvements so that the cost exceeds the Tenant
Improvement Allowance, then Tenant shall promptly deliver the necessary funds,
to the extent pre-approved by Tenant, to defray such excess cost to Landlord no
later than fifteen (15) days after Landlord demands same, such demand to be
accompanied by a corresponding certificate of completion by Tenant's architect
for the specific change order. Notwithstanding the foregoing, any change
order(s) requested by Tenant which will result in an increase in the cost of the
construction and installation of the Tenant Improvements shall be agreed to in
advance by Landlord and Tenant, and Tenant shall be obligated to pay Landlord an
additional construction management fee relative to such change order(s) equal to
four percent (4%) of any increase in the "hard cost" of the construction and
installation of the Tenant Improvements. Any savings or unused portion of the
Tenant Improvement Allowance after the Tenant Improvements are completed shall
be retained by Landlord.
4. RENTAL.
------
During the Term, Tenant shall pay to Landlord, in care of Landlord's
agent, Tri Properties, Inc. at the notice address set forth in Section 1(i)
herein, without notice, demand, reduction (except as may be applicable pursuant
to the paragraphs of this Lease entitled "Damage or Destruction of Premises" and
"Eminent Domain"), setoff or any defense, a total rental (the "Annual Rental")
consisting of the sum total of the following:
(a) Minimum Rental.
Beginning with the Commencement Date and continuing through the
Expiration Date or earlier termination of this Lease, Tenant shall pay Minimum
Rental in accordance with the schedule set forth in Section 1(f) in equal
monthly installments each in advance on or before the first day of each month.
If the Commencement Date is a date other than the first day of a calendar month,
the Minimum Rental shall be prorated daily from such date to the first day of
the next calendar month and paid on or before the Commencement Date.
(b) Additional Rental. [Intentionally Deleted]
(c) Operating and Maintenance Expenses.
Tenant shall pay Tenant's Proportionate Share (as set forth in Section
1(h)) of the reasonable costs and expenses paid or incurred by Landlord each
calendar year in the operation, repair and maintenance of the Building and the
Common Areas (the "Operating Expenses") to the extent such costs exceed the
Operating Expense Stop set forth in Section 1(g). For purposes hereof, Operating
Expenses is defined on Exhibit D. Landlord shall use good faith efforts to keep
the Operating Expenses in line with costs for other similarly situated
first-class buildings in the Raleigh/Durham market.
Notwithstanding the foregoing, if in any year the Building is less than
ninety-five percent (95%) occupied, the variable portion of Operating Expenses
shall be adjusted to reflect the level
6
<PAGE>
of such Operating Expenses which would reasonably be expected to be incurred by
Landlord if the Building was one hundred percent (100%) occupied.
Notwithstanding anything set forth herein, in no event shall Landlord's
collection of Operating Expenses result in a profit to Landlord.
(d) Payment of Operating Expenses.
Tenant shall pay to Landlord each month, along with Tenant's
installments of Minimum Rental (and Additional Rental, if applicable) an amount
(the "Tenant Contribution") equal to one-twelfth (1/12) of Tenant's
Proportionate Share of the Operating Expenses as hereinabove described for any
calendar year (including any applicable partial calendar year) to the extent
such costs exceed the Operating Expense Stop, as estimated by Landlord (in its
reasonable discretion). Landlord will make reasonable efforts to provide Tenant
with Landlord's estimate of Tenant's Contribution for the upcoming calendar year
on or before December 15 of each calendar year during the Term hereof. Not more
than once during any calendar year, Landlord may in good faith revise Tenant's
Proportionate Share of the Operating Expenses and upon Tenant's receipt of a
revised statement, Tenant shall pay Operating Expenses on the basis of such
Statement. If Landlord fails to notify Tenant of the revised amount of Tenant's
Contribution by such date, Tenant shall continue to pay the monthly
installments, if any, last payable by Tenant until notified by Landlord of such
new estimated amount. No later than May l of each calendar year of the Term,
Landlord shall deliver to Tenant a written statement setting forth the actual
amount of Tenant's Contribution for the preceding calendar year. Tenant shall
pay the total amount of any balance due shown on such statement within thirty
(30) days after Tenant's receipt thereof. In the event such annual costs
decrease for any such year, Landlord shall reimburse Tenant for any overage paid
and the monthly rental installments for the next period shall be reduced
accordingly. For the calendar year in which this Lease commences, Tenant's
Contribution shall be prorated from the Commencement Date through December 31 of
such year. Further, Tenant shall be responsible for the payment of Tenant's
Contribution for the calendar year in which this Lease expires, prorated from
January 1 thereof through the Expiration Date. Upon the Expiration Date,
Landlord may require Tenant to pay any unpaid estimated amount within thirty
(30) days after the Expiration Date, which estimate shall be made by Landlord
based upon actual and estimated costs for such year.
(e) Documentary Tax.
In the event that any documentary stamp tax, sales tax or any other tax
or similar charge (exclusive of any income tax payable by Landlord as a result
hereof) becomes applicable to the rental, leasing or letting of the Premises,
whether local, state or federal, and is required to be paid due to the execution
hereof or otherwise with respect to this Lease or the payments due hereunder,
the cost thereof shall be borne by Tenant and shall be paid promptly and prior
to same becoming past due. Tenant shall provide Landlord with copies of all paid
receipts respecting such tax or charge promptly after payment of same.
7
<PAGE>
(f) Late Payment.
If more than twice during any consecutive twelve month period any
monthly installment of Minimum Rental, Additional Rental (if any) or any other
sum due and payable pursuant to this Lease remains due and unpaid five (5) days
after said amount becomes due, Tenant shall pay as additional rent hereunder a
late payment charge equal to Five Hundred and No/100 Dollars ($500.00) on the
unpaid rent or other payment. Landlord agrees no more than twice during any
consecutive twelve month period to provide Tenant written notice of failure to
receive Rental due hereunder within ten (10) days after the date it becomes due.
All unpaid rent and other sums of whatever nature owed by Tenant to Landlord
under this Lease shall bear interest from the tenth (10th) day after the due
date thereof until paid at the lesser of two percent (2%) per annum above the
"prime rate" as published in The Wall Street Journal from time to time (the
"Prime Rate") or the maximum interest rate per annum allowed by law. Acceptance
by Landlord of any payment from Tenant hereunder in an amount less than that
which is currently due shall in no way affect Landlord's rights under this Lease
and shall in no way constitute an accord and satisfaction.
5. ALTERATIONS AND IMPROVEMENTS BY TENANT.
--------------------------------------
Tenant shall make no structural changes to the Premises or the Building
(or to the mechanical or building systems of the Building) and shall make no
changes of any kind respecting the Premises or the Building which are visible
from the exterior of the Premises without Landlord's prior written consent,
which consent shall not be unreasonably withheld, conditioned or delayed. Except
for minor interior cosmetic alterations, any other nonstructural changes or
other alterations, additions, or improvements to the Premises shall be made by
or on behalf of Tenant only with the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed. All alterations,
additions or improvements, including without limitation all partitions, walls,
railings, carpeting, floor and wall coverings and other fixtures (excluding,
however, Tenant's trade fixtures as described in the paragraph entitled "Trade
Fixtures and Equipment" below) made by, for, or at the direction of Tenant
shall, when made, become the property of Landlord, at Landlord's sole election
and shall, unless otherwise specified by Landlord remain upon the Premises at
the expiration or earlier termination of this Lease.
Notwithstanding anything contained herein to the contrary, all
alterations and improvements undertaken by Tenant shall be consistent with the
then-existing quality, color scheme (where appropriate), general aesthetic
appearance and tenor of the balance of the Building and, in any event, Landlord
may withhold its consent to any proposed alteration or improvement by Tenant
unless Tenant agrees to remove said improvement at the end of the Term and/or
restore the Premises to the condition in which it existed prior to the
undertaking of the proposed alteration or improvement. Further, all alterations
and improvements to the Premises, including without limitation the Tenant
Improvements, whether undertaken by Tenant or Landlord shall be subject to a fee
(the "Construction Management Fee"), save and except any cosmetic work or minor
repairs performed by Tenant providing Landlord neither needs to nor is involved
in such work or repairs. Tenant agrees to pay Landlord the Construction
Management Fee as follows: Five percent (5%) of the total cost of planning and
constructing any alterations and improvements if such construction costs exceed
Ten Thousand and No/100 Dollars ($10,000.00).
8
<PAGE>
6. USE OF PREMISES.
---------------
(a) Tenant shall use the Premises only for general office purposes and
retail banking and other financial services, but for no other purposes without
Landlord's consent, which consent shall not be unreasonably withheld or delayed.
Landlord agrees not to lease any portion of the Premises to a thrift, bank or
credit union. Except for conditions which existed prior to the Commencement of
the Term, Tenant shall comply with all laws, ordinances, orders, regulations or
zoning classifications of any lawful governmental authority, agency or other
public or private regulatory authority (including insurance underwriters or
rating bureaus) having jurisdiction over the Premises. Tenant shall not do any
act or follow any practice relating to the Premises, the Building or the Common
Areas which shall constitute a nuisance or detract in any way from the
reputation of the Building as a real estate development comparable to other
comparable buildings in the Raleigh/Durham market taking into account rent and
other relevant factors. Tenant's duties in this regard shall include allowing no
noxious or offensive odors, fumes, gases, smoke, dust, steam or vapors, or any
loud or disturbing noise or vibrations to originate in or emit from the
Premises. In addition, Tenant shall not conduct a sale of any personal property
on or about the Premises, the Building or in the Common Areas without the prior
written consent of Landlord.
(b) Without limiting the generality of (a) above, and excepting only
office supplies and cleaning materials used by Tenant in its ordinary day to day
business operations (but not held for sale, storage or distribution) and then
only to the extent used, stored, transported and disposed of strictly in
accordance with all applicable laws, regulations and manufacturer's
recommendations, the Premises shall not be used for the treatment, storage,
transportation to or from, use or disposal of toxic or hazardous wastes,
materials, or substances, or any other substance that is prohibited, limited or
regulated by any governmental or quasi-governmental authority or that, even if
not so regulated, could or does pose a hazard to health and safety of the
occupants of the Building or surrounding property (collectively "Hazardous
Substances"). Landlord and Tenant shall be liable for, and shall indemnify and
hold the other harmless from, all costs, damages and expenses (including
reasonable attorneys' fees) incurred in connection with the use, storage,
discharge or disposal of any Hazardous Substances by such other party or such
other party's Invitees.
(c) Tenant shall exercise due care in its use and occupancy of the
Premises and shall not commit or allow waste to be committed on any portion of
the Premises; and at the expiration or earlier termination of this Lease, Tenant
shall deliver the Premises to Landlord in the same condition in which it existed
as of the Commencement Date, ordinary wear and tear, approved alterations, fire
or other casualty and acts of God alone excepted.
(d) Tenant's use and occupancy of the Premises shall include the use in
common with others entitled thereto of the Common Areas and all other
improvements provided by Landlord for the common use of the Building tenants,
and any other common facility as may be designated from time to time by the
Landlord, subject, however, to the terms and conditions of this Lease and to the
reasonable rules and regulations for use therefor as prescribed from time to
time by the Landlord. Tenant, its employees, agents, customers and invitees
shall have the nonexclusive use (in common with other benefiting tenants) to use
the common areas for purposes intended and the non-exclusive use of the adjacent
surface parking areas in accordance with Section 1(l) herein.
9
<PAGE>
Tenant shall not at any time unreasonably interfere with the use of the common
areas by Landlord, another tenant or any other person entitled to use the same.
Landlord reserves the right, from time to time, to alter any of the common
areas, to exercise control and management of the same, and to establish, modify,
change and enforce such reasonable rules and regulations as Landlord in its
reasonable discretion may deem desirable for the management of the Building or
the common areas.
(e) Tenant shall save Landlord harmless from any claims, liabilities,
penalties, fines, costs, expenses or damages resulting from the failure of
Tenant to comply with the provisions of this paragraph 6. This indemnification
shall survive the termination or expiration of this Lease.
7. SERVICES BY LANDLORD.
--------------------
Landlord shall cause to be furnished to the Premises (subject to
reimbursement as part of the Operating Expenses) in common with other tenants
during Standard Hours of Operation, Monday through Friday and Saturday
(excluding holidays), the following services: janitorial services (once per
working day after normal weekday working hours as provided for in Exhibit B);
water for drinking, kitchen, lavatory and toilet purposes; operatorless elevator
service; electricity for general office space and banking use (including
fluorescent lighting replacements to building standard fixtures only); trash
removal in accordance with city schedules; prompt removal of snow and ice in the
parking lot and walkways when and if weather requires, and heating and air
conditioning for reasonably comfortable use and occupancy of the Premises
similar to other Class A buildings in the area, providing heating and cooling
conforming to any governmental regulation prescribing limitations thereon shall
be deemed to comply with this service. All additional costs resulting from
Tenant's extraordinary usage of heating, air conditioning or electricity shall
be paid by Tenant, but Tenant shall not install equipment with unusual demands
for any of the foregoing without Landlord's prior written consent which Landlord
may withhold if it determines that in its reasonable opinion such equipment may
not be safely used in the Premises or that electrical service is not adequate
therefor. Notwithstanding anything contained herein to the contrary, Landlord
reserves the right to contract with any third party provider of such utilities
to provide such services to the Premises and the Building in the most economical
manner and Tenant shall not contract with any other third party provider to
supply such utilities to the Premises without Landlord's prior written consent.
So long as Landlord is not negligent in performing its obligations hereunder and
otherwise acts reasonably and in good faith, there shall be no abatement or
reduction of rent by reason of any of the foregoing services not being
continuously provided to Tenant.
Landlord agrees to provide heating and air conditioning after-hours
(i.e., hours before or after the Standard Hours of Operation) at Tenant's
request after reasonable notice and if the area to be served is zoned for this
purpose. The cost of after-hours service of heating or air conditioning shall be
additional rent payable monthly by Tenant at $25.00 per hour.
10
<PAGE>
As used herein, "Standard Hours of Operation" shall mean and refer to
those hours of operation at the Building, which are 7:30 a.m. to 6:30 p.m.
Monday through Friday and 8:00 a.m. through 1:00 p.m. on Saturday, except
holidays. Holidays shall mean and refer to each of the following days (on the
day set aside for observance): New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day, provided, however, that
notwithstanding anything else to the contrary set forth herein, Landlord
acknowledges and agrees that "Standard Hours of Operation" shall always include
any days on which it is common banking industry practice to remain open for
business or which Tenant is required by applicable law and/or governmental
authorities having jurisdiction to remain open for business.
Except where resulting from Landlord's negligence or willful
misconduct, Landlord shall not be liable to Tenant for any damage caused to
Tenant and its property due to the Building or any part or appurtenance thereof
being improperly constructed or being or becoming out of repair, or arising from
the leaking of a pipe, facility or system for any utility. Tenant shall promptly
report to Landlord any defective condition in or about the Premises actually
known to Tenant, and the failure to so report results in other damage that could
have reasonably been avoided, then Tenant shall be liable for the same.
8. TAXES ON LEASE AND TENANT'S PROPERTY.
-------------------------------------
(a) Tenant shall pay any taxes, documentary stamps or assessments of
any nature which may be imposed or assessed upon this Lease, Tenant's occupancy
of the Premises or Tenant's trade fixtures, equipment, machinery, inventory,
merchandise or other personal property located on the Premises and owned by or
in the custody of Tenant as promptly as all such taxes or assessments may become
due and payable without any delinquency.
(b) Landlord shall pay, subject to reimbursement from Tenant as
provided in the paragraph entitled "Rental" of this Lease, all ad valorem
property taxes which are now or hereafter assessed upon the Building and the
Premises, except as otherwise expressly provided in this Lease.
9. INSURANCE AND INDEMNITY.
-----------------------
(a) Fire and Extended Coverage Insurance. Landlord throughout the term
of this Lease shall maintain and pay for fire and casualty special form "all
risk" insurance, with extended coverage (including boiler and machinery
coverage), covering the Building equal to at least ninety five percent (95%) of
the replacement cost thereof. Tenant shall not do or cause to be done or permit
on the Premises anything deemed extra hazardous on account of fire and Tenant
shall not use the Premises, the Common Areas or the Building in any manner which
will cause an increase in the premium rate for any insurance in effect on the
Building or a part thereof. If, because of anything done, caused to be done,
permitted or omitted by Tenant or Tenant's Invitees, the premium rate for any
kind of insurance in effect on the Building or any part thereof shall be raised,
Tenant shall pay Landlord on demand the amount of any such increase in premium
which Landlord shall pay for such insurance and if Landlord shall demand that
Tenant remedy the condition which caused any such increase in an insurance
premium rate, Tenant shall
11
<PAGE>
remedy such condition within five (5) days after
receipt of such demand. Tenant shall maintain and pay for all fire and extended
coverage insurance on its contents in the Premises, including trade fixtures,
equipment, machinery, merchandise or other personal property belonging to or in
the custody of Tenant. Landlord shall have no liability to Tenant for any direct
or indirect loss of earnings or other expense due to any casualty or cause,
including, but not limited to, vandalism and theft, and Tenant may insure
against the same if Tenant elects to do so. Throughout the term Landlord agrees
to carry a flood insurance policy for the Building and to cover damages to the
Building and/or such of Tenant's contents in the Building as Tenant has listed
on a schedule delivered to Landlord at the commencement of the Term, which shall
be conclusive as to such covered contents unless Tenant updates such schedule
every two years. Tenant and Landlord shall first furnish to each other copies of
insurance policies or certificates of insurance evidencing the required coverage
prior to the Commencement Date and thereafter prior to each policy renewal date.
(b) Liability Insurance. At all times during the term of this Lease,
Tenant shall, at its sole cost and expense, keep in force adequate public
liability insurance under the terms of a commercial general liability policy
(occurrence coverage) in the amount of not less than Three Million and No/100
Dollars ($3,000,000.00) single limit with such company(ies) licensed to do
business in North Carolina and as shall from time to time be reasonably
acceptable to Landlord (and to any lender having a mortgage interest in the
Premises) and naming Landlord and Landlord's agent as an additional insured
(and, if requested by Landlord from time to time, naming Landlord's mortgagee as
an additional insured). In the event Tenant employs any contractor to perform
any work in the Premises, Tenant shall provide Landlord with insurance
certificates naming Landlord and such other parties as Landlord may designate as
additional insureds under policies of builders risk and general liability
insurance and shall also provide Landlord with evidence of satisfactory workers
compensation coverage in accordance with applicable statutory requirements. All
policies of insurance required to be maintained by Tenant shall be with
companies rated A-X or better in the most current issue of Best's Insurance
Reports and shall have a deductible of $25,000.00 or less. Such insurance shall
include, without limitation, personal injury and contractual liability coverage
for the performance by Tenant of the indemnity agreements set forth in this
Lease. Tenant shall first furnish to Landlord copies of policies or certificates
of insurance evidencing the required coverage prior to the Commencement Date and
thereafter prior to each policy renewal date. All policies required of Tenant
hereunder shall contain a provision whereby the insurer is not allowed to cancel
or change materially the coverage without first giving thirty (30) days' written
notice to Landlord.
(c) Indemnity. Except in those cases caused by Landlord's or Tenant's
negligence or willful misconduct, Landlord or Tenant shall indemnify and save
the other harmless against any and all claims, suits, demands, actions, fines,
damages, and liabilities, and all costs and expenses thereof (including without
limitation reasonable attorneys' fees) attributable to the other party's use or
occupancy of the Premises, or otherwise arising out of injury to persons
(including death) or property occurring in, on or about, or arising out of the
Premises or other areas in the Building if caused or occasioned wholly or in
part by any act or omission of the other party or the other party's Invitees,
except to the extent caused by the gross negligence or willful misconduct of the
other party. The non-prevailing party shall also pay all costs, expenses and
reasonable attorneys'
12
<PAGE>
fees that may be incurred by the prevailing party in
enforcing the agreements of this Lease, whether incurred as a result of
litigation or otherwise. Each party shall give the other party immediate notice
of any such happening causing injury to persons or property.
10. LANDLORD'S COVENANT TO REPAIR AND REPLACE.
-----------------------------------------
(a) During the Term, Landlord shall be responsible for necessary
repairs or replacements to the Building, including without limitation, the roof,
parking lot, and central plumbing and electrical systems serving the Building,
except for repairs or replacements to any Tenant Improvements or any trade
fixtures or equipment required or requested by Tenant, or otherwise necessitated
by the negligence, misconduct, acts or omissions of Tenant or Tenant's Invitees,
which shall be made at Tenant's sole cost and expense, unless such amounts are
paid to Landlord pursuant to an insurance policy. Landlord shall maintain the
Building in a manner which is comparable with other comparable buildings in the
Raleigh/Durham market, taking into account rent and other relevant factors, and
in compliance with applicable laws, regulations, ordinances and codes; however,
any non-compliance shall not materially impair Tenant's use and enjoyment of the
Premises or constitute a threat or danger to the health or safety of Tenant or
Tenant's Invitees. Landlord's repairs and replacements shall be made as soon as
reasonably possible using due diligence and reasonable efforts, taking into
account in each instance all circumstances surrounding the repair or replacement
including without limitation, the materiality of the repair or replacement to
Tenant's use and operation of its business within the Premises and the relation
thereof to the enjoyment of same, such period not to exceed ten (10) days after
receiving written notice from Tenant of the need for repairs or such longer
period of time as is reasonably necessary under the circumstances so long as
Landlord is diligently pursuing the completion of same; provided, however, in no
event shall such period of time exceed twenty (20) days (subject to extension by
Delays) after receipt of written notice from Tenant. If Landlord cannot, using
due diligence, complete its repairs within the time period herein specified and
such failure to repair has a material adverse impact on Tenant's use or
occupancy of the Premises, then (unless the need for such repairs or
replacements is the result of the negligence, misconduct or acts or omissions of
Tenant or Tenant's Invitees, in which event Tenant shall not be entitled to any
remedy), such failure to repair shall be deemed to be a Landlord default
hereunder. If the need for such repairs or replacements is the result of the
negligence, misconduct or acts or omissions of Tenant or Tenant's Invitees, and
the expense of such repairs or replacements are not fully covered and paid by
Landlord's insurance, then Tenant shall pay Landlord the full amount of expenses
not covered. Landlord's duty to repair or replace as prescribed in this
paragraph shall be Tenant's sole remedy and shall be in lieu of all other
warranties or guaranties of Landlord, express or implied.
(b) Landlord shall not be liable for any failure to make any repairs or
to perform any maintenance required of Landlord hereunder unless Landlord fails
to undertake promptly and diligently pursue such repairs or maintenance after
written notice from Tenant setting forth the need for such repair(s) or
replacement(s) in reasonable detail has been received by Landlord. Except as set
forth in the paragraph of this Lease, entitled "Damage or Destruction of
Premises", there shall be no abatement of rent. There shall be no liability of
Landlord by reason of any reasonable injury to or interference with Tenant's
business arising from the making of any
13
<PAGE>
repairs, replacements, alterations or
improvements to any portion of the Building or the Premises, or to fixtures,
appurtenances and equipment therein except to the extent of Landlord's
negligence or misconduct. Except for Landlord's default as set forth above,
Tenant waives the right to make repairs at Landlord's expense under any law,
statute or ordinance now or hereafter in effect.
11. PROPERTY OF TENANT.
------------------
All property placed on the Premises by, at the direction of, or with
the consent of Tenant or Tenant's Invitees, shall be at the risk of Tenant or
the owner thereof and Landlord shall not be liable for any loss of or damage to
said property resulting from any cause whatsoever except to the extent of any
loss or damage caused by the negligence or misconduct of Landlord or its
employees, contractors or agents, provided same is not covered by the insurance
Tenant is required to maintain under the terms of this Lease.
12. TRADE FIXTURES AND EQUIPMENT.
----------------------------
Prior to installation, Tenant shall furnish to Landlord notice of all
trade fixtures and equipment which it intends to install within the Premises and
the installation of same shall be subject to Landlord's consent. So long as no
Event of Default has occurred and is continuing hereunder, any trade fixtures
and equipment installed in the Premises at Tenant's expense and identified by
Tenant in notice to Landlord shall remain Tenant's personal property and Tenant
shall have the right at any time during the Term to remove such trade fixtures
and equipment. Upon removal of any trade fixtures and equipment, Tenant shall
immediately restore the Premises to substantially the same condition in which it
existed as of the Commencement Date, ordinary wear and tear and acts of God
alone excepted. Any trade fixtures not removed by Tenant at the expiration or an
earlier termination of the Lease shall, at Landlord's sole election, either (i)
become the property of Landlord, in which event Landlord shall be entitled to
handle and dispose of same in any manner Landlord deems fit without any
liability or obligation to Tenant or any other third party with respect thereto,
or (ii) be subject to Landlord's removing such property from the Premises and
storing same, all at Tenant's expense and without any recourse against Landlord
with respect thereto. Without limiting the generality of the foregoing, the
following property shall in no event be deemed to be "trade fixtures" and Tenant
shall not remove any such property from the Premises under any circumstances,
regardless of whether installed by Landlord or Tenant: (a) any air conditioning,
air ventilating or heating fixtures or equipment; (b) any lighting fixtures or
equipment; (c) any carpeting or other permanent floor coverings; (d) any
paneling or other wall coverings; (e) plumbing fixtures and equipment; or (f)
permanent shelving. Tenant, at Tenant's sole cost, will have the right to
install an ATM kiosk, vault and safe at a location acceptable to Landlord. Upon
the expiration or termination of the Lease, Landlord will require the vault to
be removed and Tenant shall restore any damages to the Premises occasioned by
such removal. All other Tenant fixtures, except for the ATM machine and other
banking equipment, will remain part of the Premises.
14
<PAGE>
13. DAMAGE OR DESTRUCTION OF PREMISES.
----------------------------------
If the Premises are damaged by fire or other casualty, but are not
rendered untenantable for Tenant's business, either in whole or in part,
Landlord shall cause such damage to be repaired without unreasonable delay and
the Annual Rental shall not abate. If by reason of such casualty the Premises
are rendered untenantable for Tenant's business, either in whole or in part,
Landlord shall cause the damage to the physical structure of the Building
(excluding any tenant improvements or alterations therein) to be repaired or
replaced without unreasonable delay, and, in the interim, the Annual Rental
shall be proportionately reduced as to such portion of the Premises as is
rendered untenantable. Any such abatement of rent shall not, however, create an
extension of the Term. Provided, however, if by reason of such casualty, the
Premises are rendered untenantable in some material portion, and Landlord, in
its reasonable estimation, notice of which is given to Tenant within thirty (30)
days of the date of the casualty, determines that the amount of time required to
repair the damage using due diligence is in excess of one hundred eighty (180
days)(as measured from the issuance of the applicable building permits necessary
for the reconstruction of the Building with such period to be extended by Force
Majeure), then either party shall have the right to terminate this Lease by
giving written notice of termination within thirty (30) days after the date of
casualty, and the Annual Rental shall (i) abate as of the date of such casualty
in proportion to the part of the Premises rendered untenantable and (ii) abate
entirely as of the effective date of the termination of this Lease.
Notwithstanding the foregoing, in the event the casualty giving rise to an
election to terminate is caused by the negligence, misconduct or acts or
omissions of Tenant or Tenant's Invitees, Tenant shall have no right to
terminate this Lease. Notwithstanding the other provisions of this paragraph, in
the event there should be a casualty loss to the Premises during the last Lease
Year of the Term, Landlord may, at its option, terminate this Lease by giving
written notice to Tenant within thirty (30) days after the date of the casualty
and the Annual Rental shall abate as of the date of such notice. Tenant shall
give Landlord prompt notice of any fire or other casualty in the Premises
actually known to Tenant. Notwithstanding anything contained in this Section to
the contrary, Landlord shall only be obligated to restore the Premises to a
building standard condition unless Tenant makes available to Landlord proceeds
from Tenant's insurance sufficient to repair and restore the Premises to the
condition in which it existed immediately prior to such casualty, including
those items in excess of building standard.
14. GOVERNMENTAL ORDERS.
-------------------
Except as hereinbelow set forth regarding compliance of the physical
structure of the Building with applicable governmental regulations, and except
for any defects, violations or conditions existing prior to the Commencement
Date, Tenant agrees, at its own expense, to comply promptly with all
requirements of any legally constituted public authority that may be in effect
from time to time made necessary by reason of Tenant's use or occupancy of the
Premises. Landlord agrees to comply promptly with any such requirements if
pre-existing, or not made necessary by reason of Tenant's use or occupancy.
Except as otherwise set forth herein, it is agreed that: (a) Tenant is
exclusively responsible for all compliance with all requirements of any legally
constituted public authority in the event non-compliance relates to the design
of the interior of the Premises pursuant to the Plans or Tenant's use of
Premises and (b) in the event of
15
<PAGE>
any non-compliance for which Landlord is responsible, Landlord shall not be
deemed in breach of this Lease if such non-compliance does not materially impair
Tenant's use of, or operations from, the Premises or threaten or endanger the
health or safety of Tenant or Tenant's Invitees.
15. MUTUAL WAIVER OF SUBROGATION.
----------------------------
For the purpose of waiver of subrogation, the parties mutually release
and waive unto the other all rights to claim damages, costs or expenses for any
injury to property caused by a casualty or any other matter whatsoever in, on or
about the Premises if the amount of such damage, cost or expense has been paid
to such damaged party under the terms of any policy of insurance or would have
been paid if the injured party had carried the insurance required of it
hereunder. All insurance policies carried with respect to this Lease, if
permitted under applicable law, shall contain a provision whereby the insurer
waives, prior to loss, all rights of subrogation against either Landlord or
Tenant.
16. SIGNS AND ADVERTISING.
---------------------
(a) Landlord shall install, at Tenant's sole cost and expense, tenant
identification signage in accordance with Landlord's approved building standards
at or near the suite entrance to the Premises and in the directory located in
the lobby of the Building.
(b) In order to provide architectural control for the Building, Tenant
shall not install any exterior signs, marquees, billboards, outside lighting
fixtures and/or other decorations on the Building, the Premises or the Common
Areas, except for banners allowed by the City (but for no longer than so
allowed). Landlord shall have the right to remove any such sign or other
decoration restore fully the Building, the Premises or the Common Areas at the
cost and the expense of Tenant if any such exterior work is done without
Landlord's prior written approval, which approval will not be unreasonably
withheld, conditioned or delayed. Tenant shall not permit, allow or cause to be
used in, on or about the Premises any sound production devices, mechanical or
moving display devices, bright lights, or other advertising media, the effect of
which would be visible or audible from the exterior of the Premises.
(c) Notwithstanding the foregoing, Tenant at Tenant's expense, will
have the right to install a minimum of three (3) internally illuminated exterior
building signs substantially similar to the specifications on Exhibit E1
conforming to City of Raleigh codes and regulations, and one backlit sign on the
ATM machine. The cost of production, installation and maintenance of the signs
will be solely Tenant's. Tenant will provide, at Tenant's cost, ground
directional signage to direct bank customers to the drive through and ATM
facility. Landlord agrees that Tenant can have up to the maximum amount of
signage allowed by the City of Raleigh.
(d) Landlord shall provide an exterior buildings ground sign
substantially similar to Exhibit E2 (which Exhibit shall be added to this Lease
within thirty days of execution by both parties upon Landlord's approval, not to
be unreasonably withheld) which shall principally identify Tenant's name and
logo, and also have identification for at least two other tenants. Tenant's name
and logo shall be at least twice as large as such other tenants' names and logos
on
16
<PAGE>
such signage. All costs associated with the production and installation of
the exterior ground sign will be at Landlord's expense. Tenant will be
responsible for the cost of its lettering to go on the ground sign, the design
of which shall be furnished by Tenant with Landlord's approval, not to be
unreasonably withheld. Maintenance of the sign will be an Operating Expense.
17. LANDLORD'S RIGHT OF ENTRY.
-------------------------
Landlord, and those persons authorized by it, shall have the right to
enter the Premises at all reasonable times and upon reasonable notice for the
purposes of making repairs, making connections, installing utilities, providing
services to the Premises or for any other tenant, making inspections or showing
the same to prospective purchasers, lenders or prospective tenants during the
last twelve months of this Lease term, as well as at any time without notice in
the event of emergency involving possible injury to property or persons in or
around the Premises or the Building.
18. Intentionally deleted.
19. EMINENT DOMAIN.
--------------
If any substantial portion of the Premises is taken under the power of
eminent domain (including any conveyance made in lieu thereof) or if such taking
shall materially impair the normal operation of Tenant's business, then either
party shall have the right to terminate this Lease by giving written notice of
such termination within thirty (30) days after such taking. If neither party
elects to terminate this Lease, Landlord shall repair and restore the Premises
to the best possible tenantable condition (but only to the extent of any
condemnation proceedings made available to Landlord) and the Annual Rental shall
be proportionately and equitably reduced as of the date of the taking. All
compensation awarded for any taking (or the proceeds of a private sale in lieu
thereof) shall be the property of Landlord unless such award is for compensation
for damages to the Tenant's interest in the Premises [which interest may not be
deemed to include any value to the unexpired portion of the Term; provided,
however, Landlord shall not have any interest in any separate award made to
Tenant for loss of business, moving expense, tenancy interest other than the
unexpired portion of the Term, or the taking of Tenant's trade fixtures or
equipment if a separate award for such items is made to Tenant. In no event
shall Tenant be entitled to any compensation for the loss of its leasehold
estate.
20. EVENTS OF DEFAULT AND REMEDIES.
------------------------------
(a) Upon the occurrence of any one or more of the following events (the
"Events of Default," any one an "Event of Default"), Landlord shall have the
right to exercise any rights or remedies available in this Lease, at law or in
equity. Events of Default shall be:
(i) Tenant's failure to pay any rental or other sum of money
payable hereunder within five (5) days after receipt of notice of
delinquency, provided Landlord shall not be required to give such
notice more than twice in any consecutive twelve (12) month period;
17
<PAGE>
(ii) Tenant's failure to perform any other of the terms,
covenants or conditions contained in this Lease if not remedied within
thirty (30) days after receipt of written notice thereof, or if such
default cannot be remedied within such period, Tenant does not within
thirty (30) days after written notice thereof commence such act or acts
as shall be necessary to remedy the default and shall not thereafter
diligently prosecute such cure and complete such act or acts within
ninety (90) days after written notice thereof:
(iii) Tenant shall become bankrupt or insolvent, or file any
debtor proceedings, or file pursuant to any statute a petition in
bankruptcy or insolvency or for reorganization, or file a petition for
the appointment of a receiver or trustee for all or substantially all
of Tenant's assets and such petition or appointment shall not have been
set aside within sixty (60) days from the date of such petition or
appointment, or if Tenant makes an assignment for the benefit of
creditors, or petitions for or enters into an arrangement; or
(iv) A default by Tenant under any other lease heretofore or
hereafter made by Tenant for any other space in the Building.
(b) In addition to its other remedies, Landlord, upon an Event of
Default by Tenant, shall have the immediate right, after any applicable grace
period expressed herein, to terminate and cancel this Lease and/or terminate
Tenant's right of possession and if authorized by court order to reenter and
remove all persons and properties from the Premises. If Landlord reenters the
Premises, it may either terminate this Lease or, from time to time without
terminating this Lease, terminate Tenant's right of possession and make such
alterations and repairs as may be necessary or appropriate to relet the Premises
and relet the Premises upon such terms and conditions as Landlord deems
commercially reasonable without any responsibility on Landlord whatsoever to
account to Tenant for any surplus rents collected. No retaking of possession of
the Premises by Landlord shall be deemed as an election to terminate this Lease
unless a written notice of such intention is given by Landlord to Tenant at the
time of reentry; but, notwithstanding any such reentry or reletting without
termination, Landlord may at any time thereafter elect to terminate for such
previous default. In the event of an elected termination by Landlord, whether
before or after reentry, Landlord may recover from Tenant damages, including the
costs of recovering the Premises and any costs incurred in reletting the
Premises, and Tenant shall remain liable to Landlord for the total Annual Rental
as would have been payable by Tenant hereunder for the remainder of the term
less the rentals actually received from any reletting or, at Landlord's
election, less the reasonable rental value of the Premises for the remainder of
the term. In determining the Annual Rental which would be payable by Tenant
subsequent to default, except with respect to Minimum Rental (which shall be
calculated in accordance with Section 1(g) hereof), the Annual Rental for each
Lease Year of the unexpired term shall be equal to the Annual Rental payable by
Tenant for the last Lease Year prior to the default. If any rent owing under
this Lease is collected by or through an attorney, Tenant agrees to pay
Landlord's reasonable attorneys' fees to the extent allowed by applicable law.
18
<PAGE>
21. SUBORDINATION.
-------------
This Lease is subject and subordinate to any and all mortgages or deeds
of trust currently existing on the property of which the Premises is a part, and
this clause shall be self-operative without any further instrument necessary to
effect such subordination; however, if requested by Landlord, Tenant shall
promptly execute and deliver to Landlord any such certificate(s) in a
commercially reasonable form as Landlord may reasonably request evidencing the
subordination of this Lease to, or the assignment of this Lease as additional
security for, such mortgages or deeds of trust; provided, further, Landlord
shall use reasonable efforts to obtain a non-disturbance agreement in a
commercially reasonable form from any such mortgagee, trustee or beneficiary
currently having an interest in all or any portion of the Premises. Subject to
the condition precedent that Landlord provide Tenant with a non-disturbance
agreement in a commercially reasonable form in favor of Tenant from any
mortgagee, trustee or beneficiary, this Lease shall be subject and subordinate
to any mortgage or deed of trust which may hereafter encumber the property of
which the Premises is a part. Tenant's obligations under this Lease shall
continue in full force and effect notwithstanding any such default proceedings
under a mortgage or deed of trust and shall attorn to the mortgagee, trustee or
beneficiary of such mortgage or deed of trust, and their successors or assigns,
and to the transferee under any foreclosure or default proceedings. Tenant will,
upon request by Landlord, execute and deliver to Landlord or to any other person
designated by Landlord, any instrument or instruments in a commercially
reasonable form required to give effect to the provisions of this paragraph.
22. ASSIGNMENT AND SUBLETTING.
-------------------------
Tenant shall not assign, sublet, mortgage, pledge or encumber this
Lease, the Premises, or any interest in the whole or in any portion thereof,
directly or indirectly, without the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed. In the event of any
assignment, sublease, mortgage, pledge or encumbrance, Tenant shall: (i) remain
primarily liable for the performance of all terms of this Lease, (ii) pay all
reasonable costs incurred by Landlord in connection with such assignment,
sublease or mortgage, including without limitation, reasonable attorneys' fees
and a $500.00 processing fee, (iii) and, after deducting reasonable expenses
actually incurred to pay leasing commissions, tenant improvements and other
costs incurred in subleasing the space, pay to Landlord one-half (1/2) of any
rental or any fees or charges received by Tenant in excess of the Annual Rental
payable to Landlord hereunder as further rental under this Lease. Landlord's
consent to one assignment or sublease will not waive the requirement of its
consent to any subsequent assignment or sublease as required herein. Any
attempted assignment or sublease by Tenant in violation of the terms and
conditions of this numbered paragraph 22 shall be null and void. Upon notice to
Landlord of a proposed sublease or assignment of all or any portion of the
Premises (the "Proposed Space"), Landlord shall have the option, within fifteen
(15) days after its receipt of such notice, to terminate this Lease with respect
to the Proposed Space, whereupon the parties hereto shall have no further rights
or liabilities with respect to the Proposed Space except as otherwise expressly
set forth herein.
In the event of a proposed assignment of this Lease or subletting of
all or a part of the Premises, Tenant shall submit to Landlord, in writing, (i)
the name of the proposed assignee or
19
<PAGE>
sublessee, (ii) current financial statements available to Tenant disclosing the
financial condition of the proposed assignee or subtenant, (iii) the nature of
the business of the proposed assignee or sublessee, and its proposed use of the
Premises (any assignment or subletting being subject to restrictions on use
contained in this Lease, the violation of which by the proposed assignee or
sublessee shall constitute absolute grounds for Landlord's denial of the
requested assignment or subletting, such grounds not being the exclusive grounds
for denial under clause (iii)) and (iv) the proposed commencement date of the
assignment or subletting, together with a copy of the proposed assignment or
sublease. Within thirty (30) days after its receipt of such notice, Landlord
shall either approve or disapprove such proposed assignment or sublease in
writing. Tenant shall promptly deliver a copy of the fully executed assignment
or sublease to Landlord upon its receipt of same.
Notwithstanding the foregoing, Tenant will not require Landlord consent
nor pay any additional rent or fees: (a) to sublease a portion of its space to
an insurance, securities, commercial leasing, investment banking company, or
other financial services company, provided each sublease does not exceed more
than 500 usable square feet, or (b) to assign this Lease in the event of a
merger or other change of control event where the proposed assignee is engaged
in the same or similar business and is at least as creditworthy as Tenant, or is
under common corporate control with Tenant.
Notwithstanding anything in this Lease to the contrary, unless approved
by Landlord, Tenant further agrees that any assignment or sublease shall be
subject to the following additional limitations: (i) in no event may Tenant
assign this Lease or sublet all or any portion of the Premises to an existing
Tenant of the Building or its subtenant or assignee; (ii) in no event shall the
proposed subtenant or assignee be a person or entity with whom Landlord or its
agent is negotiating and to or from whom Landlord, or its agent, has given or
received any written or oral proposal within the past six (6) months regarding a
lease of space in the Building; and (iii) Tenant shall not publicly advertise
the rate for which Tenant is willing to sublet the Premises; and all public
advertisements of the assignment of the Lease or sublet of the Premises, or any
portion thereof, shall be subject to prior written approval by Landlord, such
approval not to be unreasonably withheld or delayed. Said public advertisement
shall include, but not be limited to, the placement or display of any signs or
lettering on the exterior of the Premises or on the glass or any window or door
of the Premises or in the interior of the Premises if it is visible from the
exterior.
23. LANDLORD DEFAULT.
----------------
In the event of any default by Landlord under this Lease, Tenant will
give Landlord written notice specifying such default with particularity, and
Landlord shall thereupon have ten business (10) days (or such longer period as
may reasonably be required in the exercise of due diligence) in which to cure
any such default. Unless and until Landlord fails to so cure any default after
such notice, Tenant shall not have any remedy or cause of action by reason
thereof. All obligations of Landlord hereunder will be construed as covenants,
not conditions. Notwithstanding any other provisions of this Lease to the
contrary, Tenant shall look solely to Landlord's equity in the Building, and not
to any other or separate business or non-business
20
<PAGE>
assets of Landlord, or any partner, shareholder, officers or representative of
Landlord, for the satisfaction of any claim brought by Tenant against Landlord,
and if Landlord shall fail to perform any covenant, term or condition of this
Lease upon Landlord's part to be performed, and as a consequence of such
default, Tenant shall recover a money judgment against Landlord, such judgment
shall be satisfied only: (i) out of the proceeds of sale received upon levy
against Landlord's equity in the Building, and/or (ii) to the extent not
encumbered by a secured creditor, out of the rents or other incomes receivable
by Landlord from the Building, and/or (iii) by withholding rent against an
unsatisfied court judgment that Tenant has obtained against the Landlord which
judgment is not on appeal, provided that all rental payments in dispute shall be
paid to a mutually acceptable escrow agent while such approval is pending.
Further, in the event the owner of Landlord's interest in this Lease is at any
time a partnership, joint venture or unincorporated association, Tenant agrees
that the members or partners of such partnership, joint venture or
unincorporated association shall not be personally or individually liable or
responsible for the performance of any of Landlord's obligations hereunder.
24. TRANSFER OF LANDLORD'S INTEREST.
-------------------------------
If Landlord shall sell, assign or transfer all or any part of its
interest in the Building or in this Lease to a successor in interest which
expressly assumes the obligations of Landlord hereunder, then Landlord shall
thereupon be released or discharged from all future covenants and obligations
hereunder, and Tenant shall look solely to such successor in interest for
performance of all of Landlord's subsequent obligations. Tenant's obligations
under this Lease shall in no manner be affected by Landlord's sale, assignment,
or transfer of all or any part of such interest(s) of Landlord, and Tenant shall
thereafter attorn and look solely to such successor in interest as the Landlord
hereunder.
25. COVENANT OF QUIET ENJOYMENT.
---------------------------
Landlord represents that it has full right and authority to lease the
Premises and Tenant shall peacefully and quietly hold and enjoy the Premises for
the full Term hereof so long as no Event of Default occurs hereunder.
26. ESTOPPEL CERTIFICATES.
---------------------
Within ten (10) days after receipt of a request by Landlord or any
Landlord mortgagee, Tenant shall deliver a written estoppel certificate, in form
supplied by or acceptable to Landlord or the Landlord mortgagee, certifying any
facts that are then true with respect to this Lease, including without
limitation that this Lease is in full force and effect, that no Event of Default
exists on the part of Landlord or Tenant, that Tenant is in possession, that
Tenant has commenced the payment of rent, and that Tenant claims no defenses or
offsets with respect to payment of rentals under this Lease. Likewise, within
ten (10) days after a request by Tenant, Landlord shall deliver to Tenant a
similar estoppel certificate covering such matters as are reasonably required by
Tenant.
21
<PAGE>
27. PROTECTION AGAINST LIENS.
------------------------
Tenant shall do all things necessary to prevent the filing of any
mechanics', materialmen's or other types of liens whatsoever, against all or any
part of the Premises by reason of any claims made by, against, through or under
Tenant. If any such lien is filed against the Premises, Tenant shall either
cause the same to be discharged of record within twenty (20) days after filing
or, if Tenant in its discretion and in good faith determines that such lien
should be contested, it shall furnish such security as may be necessary to
prevent any foreclosure proceedings against the Premises during the pendency of
such contest. If Tenant shall fail to discharge such lien within said time
period or fail to furnish such security, then Landlord may at its election, in
addition to any other right or remedy available to it, discharge the lien by
paying the amount claimed to be due or by procuring the discharge by giving
security or in such other manner as may be allowed by law. If Landlord acts to
discharge or secure the lien then Tenant shall immediately reimburse Landlord
for all sums paid and all costs and expenses (including reasonable attorneys'
fees) incurred by Landlord involving such lien together with interest on the
total expenses and costs at an interest rate equal to the Prime Rate plus five
percent (5%).
28. MEMORANDUM OF LEASE.
-------------------
If requested by Tenant, Landlord shall execute a recordable Memorandum
or Short Form Lease, prepared at Tenant's expense, specifying the exact term of
this Lease and such other terms as the parties shall mutually determine.
29. FORCE MAJEURE.
-------------
In the event Landlord or Tenant shall be delayed, hindered or prevented
from the performance of any act required hereunder, by reason of governmental
restrictions, scarcity of labor or materials, strikes, fire, or any other
reasons beyond its reasonable control, the performance of such act shall be
excused for the period of delay, and the period for performance of any such act
shall be extended as necessary to complete performance after the delay period.
However, the provisions of this paragraph shall in no way be applicable to
Tenant's obligations to pay Annual Rental or any other sums, monies, costs,
charges or expenses required by this Lease.
30. REMEDIES CUMULATIVE - NONWAIVER.
-------------------------------
Unless otherwise specified in this Lease, no remedy of Landlord or
Tenant shall be considered exclusive of any other remedy, but each shall be
distinct, separate and cumulative with other available remedies. Each remedy
available under this Lease or at law or in equity may be exercised by Landlord
or Tenant from time to time as often as the need may arise. No course of dealing
between Landlord and Tenant or any delay or omission of Landlord or Tenant in
exercising any right arising from the other party's default shall impair such
right or be construed to be a waiver of a default.
22
<PAGE>
31. HOLDING OVER.
------------
If Tenant remains in possession of the Premises or any part thereof
after the expiration of the Term, whether with or without Landlord's
acquiescence, Tenant shall be deemed only a tenant at will and there shall be no
renewal of this Lease without a written agreement signed by both parties
specifying such renewal. The "monthly" rental payable by Tenant during any such
tenancy at will period shall be one hundred fifty percent (150%) of the monthly
installments of Annual Rental payable during the final Lease Year immediately
preceding such expiration. Tenant shall also remain liable for any and all
damages, direct and consequential, suffered by Landlord as a result of any
holdover without Landlord's unequivocal written acquiescence.
32. NOTICES.
-------
Any notice allowed or required by this Lease shall be deemed to have
been sufficiently served if the same shall be in writing and placed in the
United States mail, via certified mail or registered mail, return receipt
requested, with proper postage prepaid or delivered by a nationally recognized
overnight courier and addressed to the appropriate party at the address set
forth in Section 1(i) hereof.
The addresses of Landlord and Tenant and the party, if any, to whose
attention a notice or copy of same shall be directed may be changed or added
from time to time by either party giving notice to the other in the prescribed
manner.
33. LEASING COMMISSION.
------------------
Landlord and Tenant represent and warrant each to the other that they
have not dealt with any broker(s) or any other person claiming any entitlement
to any commission in connection with this transaction except the Broker(s) set
forth in Section 1(k) hereof. Tenant agrees to indemnify and save Landlord and
Landlord's agent, Tri Properties Inc., and Tenant's agent, Thomas Commercial,
harmless from and against any and all claims, suits, liabilities, costs,
judgments and expenses, including reasonable attorneys' fees, for any leasing
commissions or other commissions, fees, charges or payments resulting from or
arising out of their respective actions in connection with this Lease. Landlord
agrees to indemnify and save Tenant harmless from and against any and all
claims, suits, liabilities, costs, judgments and expenses, including reasonable
attorneys' fees, for any leasing commissions or other commissions, fees, charges
or payments resulting from or arising out of its actions in connection with this
Lease. Landlord agrees to be responsible for the leasing commission due Broker
pursuant to a separate written agreement between Landlord and Broker, and to
hold Tenant harmless respecting same.
34. MISCELLANEOUS.
-------------
(a) Rules and Regulations.
Landlord shall have the right from time to time to prescribe reasonable
rules and regulations (the "Rules and Regulations") for Tenant's use of the
Premises and the Building. A copy of Landlord's current Rules and Regulations
respecting the Premises and the Building is attached hereto as Exhibit "B".
Tenant shall abide by and actively enforce on all Tenant's
23
<PAGE>
Invitees such regulations including without limitation rules governing parking
of vehicles in designated areas and during designated times.
(b) Evidence of Authority.
If requested by Landlord, Tenant shall furnish appropriate legal
documentation evidencing the valid existence and good standing of Tenant and the
authority of any parties signing this Lease to act for Tenant.
(c) Nature and Extent of Agreement.
This Lease, together with all exhibits hereto, contains the complete
agreement of the parties concerning the subject matter, and there are no oral or
written understandings, representations, or agreements pertaining thereto which
have not been incorporated herein. This Lease creates only the relationship of
landlord and tenant between the parties, and nothing herein shall impose upon
either party any powers, obligations or restrictions not expressed herein. This
Lease shall be construed and governed by the laws of the state in which the
Premises are located.
(d) Binding Effect.
This Lease shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, successors and assigns. This Lease
shall not be binding on Landlord until executed by an authorized signatory of
Landlord and delivered to Tenant. No amendment or modification to this Lease
shall be binding upon Landlord unless same is in writing and executed by an
authorized signatory of Landlord.
(e) Captions and Headings.
The captions and headings in this Lease are for convenience and
reference only, and they shall in no way be held to explain, modify, or construe
the meaning of the terms of this Lease.
(f) Lease Review.
The submission of this Lease to Tenant for review does not constitute a
reservation of or option for the Premises, and this Lease shall become effective
as a contract only upon execution and delivery by Landlord and Tenant.
(g) Prevailing Party.
If either Landlord or Tenant places in the hands of an attorney the
enforcement of this Lease or any portion thereof, for the collection of any rent
due or to become due hereunder, or recovery of the possession of the Premises,
or file suit upon same, the non-prevailing (or defaulting) party shall pay the
other party reasonable attorney's fees and court costs.
24
<PAGE>
(h) Representations and Warranties.
The person or persons executing this Lease on behalf of Tenant
represent, covenant and warrant to Landlord as of the date Tenant executes and
delivers this Lease that: (a) Tenant is duly constituted, in good standing and
qualified to do business in the State of North Carolina, (b) Tenant has paid all
corporate taxes (if applicable), (c) Tenant will file when due all forms,
reports, fees and other documents necessary to comply with applicable laws, and
(d) the signatories signing on behalf of Tenant have the requisite authority to
bind Tenant pursuant to Tenant's organizational documents (i.e. partnership
agreement, operating agreement or bylaws) or a certified copy of a resolution
from Tenant authorizing same.
The person or persons executing this Lease on behalf of Landlord
represent, covenant and warrant to Tenant as of the date Landlord executes and
delivers this Lease that: (a) Landlord is duly constituted, in good standing and
qualified to do business in the State of North Carolina; (b) Landlord has paid
all business taxes; (c) Landlord will file when due all forms, reports, and
other documents and pay all fees necessary to comply with applicable laws, and
(d) the signatories signing on behalf of Landlord have the requisite authority
to bind Landlord pursuant to Landlord's organizational documents, or a certified
copy of a resolution from Landlord authorizing same.
(i) Building Access.
There shall be open access to the Building during Standard Hours of
Operation. At all other times, access to the Building may be restricted, at
Landlord's election, by use of a card access system at an entrance to the
Building. Landlord shall furnish Tenant at no cost up to four (4) access cards
per 1,000 rentable square feet occupied by Tenant (as of the Commencement Date)
for entering the Building. Additional cards and replacement cards (for lost
access cards) shall be made available to Tenant at a charge equal to $20.00 per
card upon Landlord's receipt of an order signed by Tenant, and Landlord reserves
the right to increase the charge if necessary to cover its costs of obtaining
and processing such additional or replacement cards. Tenant shall promptly
provide Landlord with written notice of any lost or stolen access cards for the
Building. Landlord shall replace all defective or worn access cards without
charge. All cards shall remain the property of Landlord. No additional locks
shall be allowed on any exterior door of the Premises without Landlord's written
permission and locks on any interior door shall be permitted only to the extent
such locks are permissible under applicable laws and relevant insurance
requirements. Upon termination of this Lease, Tenant shall surrender to Landlord
all access cards and keys related to the Premises, and give to Landlord the
combination of all locks for sages, safe cabinets and vault doors, if any, to
remain in the Premises and in the event Tenant fails to return all such access
cards to Landlord at the end of the Term, Tenant shall pay Landlord $20.00 for
each such access card not returned to Landlord.
Landlord agrees that Tenant may control all cards providing access to
the first floor space if Tenant provides all maintenance and janitorial
services, but as to any area where Landlord is to provide maintenance and
janitorial services, Landlord must be provided access to such area(s).
25
<PAGE>
35. OPTIONS TO EXTEND.
------------------
As set forth on Addendum No. 3 which is attached hereto.
36. RIGHT OF FIRST OFFER.
----------------------
If during the first four (4) years of the Term space becomes available
("Available Space") in the Building to lease and Landlord be willing and ready
to lease such Available Space, Landlord shall give Tenant written notice
thereof, and of the terms on which Landlord is willing to lease the same. Tenant
shall have ten (10) business days following the date Tenant receives the notice
within which to agree to lease the Additional Space on the terms set forth in
Landlord's notice. Unless Landlord otherwise agrees Tenant may not elect to
lease less than all the Available Space described in the Notice, and if Tenant
does not deliver to Landlord within the aforesaid ten business day period a
written agreement to lease the Available Space on the exact terms offered,
Landlord shall have no further obligation to Tenant with respect to such Space
under this Section. Landlord shall have no obligation to give Tenant a Right of
First Offer for any space with respect to which tenants existing as of the date
of this Lease have a right to lease.
37. SEVERABILITY.
------------
If any term or provision of this Lease or the application thereof to
any person or circumstance shall, to any extent, be invalid or unenforceable,
the remainder of this Lease, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and enforced to the fullest extent permitted by law
notwithstanding the invalidity of any other term or provision hereof.
38. REVIEW OF DOCUMENTS.
-------------------
If, following the execution of this Lease, either party hereto requests
that the other party execute any document or instrument that is other than (i) a
document or instrument the form of which is attached hereto as an exhibit, or
(ii) a document that solely sets forth facts or circumstances that are then
existing and reasonably ascertainable by the requested party with respect to the
Lease, then the party making such request shall be responsible for paying the
out-of-pocket costs and expenses, including without limitation, the attorneys'
fees, incurred by the requested party in connection with the review (and, if
applicable, the negotiations) related to such document(s) or instrument(s),
regardless of whether such document(s) or instrument(s) is (are) ever executed
by the requested party. In the event the requesting party is Tenant, all such
costs and expenses incurred by Landlord in connection with its review and
negotiation of any such document(s) or instrument(s) shall be deemed to be
additional rental due hereunder and shall be payable by Tenant promptly upon
demand.
26
<PAGE>
39. LEASE CONDITIONAL ON RECEIPT OF APPLICABLE REGULATORY
-----------------------------------------------------
APPROVALS.
---------
Notwithstanding any other provision contained in this Lease to the
contrary, this Lease is subject to Tenant obtaining approval at this site from
all applicable regulatory authorities, including the North Carolina Banking
Commission and the FDIC. Tenant agrees to diligently and continuously pursue
obtaining such approvals. If approval by all such regulatory authorities is not
obtained within ninety (90) days from Lease execution, Tenant shall have the
option within the next succeeding ten days by written notice to Landlord to
cancel this Lease. At such time as the required regulatory approvals are
obtained Tenant shall give Landlord prompt written notice thereof.
40. COMMISSIONER OF BANKS PROVISION.
--------------------------------
Notwithstanding any other provisions contained in this Lease, in the
event the Tenant is closed or taken over by the North Carolina Commissioner of
Banks, or other bank supervisory authority, the Landlord may terminate the Lease
only with the concurrence of the Commissioner of Banks or other bank supervisory
authority, and any such authority shall in any event have the election either to
continue or to terminate the Lease. Provided, that in the event this Lease is
terminated, the maximum claim of Landlord for damages or indemnity for injury
resulting from the rejection or abandonment of the unexpired term of the Lease
shall in no event be in an amount exceeding the rent reserved by the Lease,
without acceleration, for the year next succeeding the date of the surrender of
the premises to the Landlord, or the date of re-entry of the Landlord, whichever
first occurs, whether before or after the closing of the bank, plus an amount
equal to the unpaid rent accrued, without acceleration up to such date.
41. LANDLORD'S WORK.
----------------
Within thirty (30) days after Lease Execution, Landlord, at Landlord's
expense will deliver detailed exterior building construction drawings and site
plan outlining the work to be completed by Landlord (the "Landlord's Work"), for
Tenant's review and written approval. Notwithstanding any other provision in
this Lease to the contrary, if Tenant and Landlord cannot agree on the
Landlord's Work to be completed, or if any regulatory authority prohibits the
installation of a driveway from Glenwood Avenue to the Building, as shown on
Exhibit F, Tenant, at Tenant's option, can cancel this Lease within five (5)
days after failure to agree on Landlord's Work or learning the driveway will be
prohibited, by written notice and Tenant shall have no further obligations under
this Lease.
42. PROPERTY ADDRESS.
-----------------
Landlord agrees to cooperate with and assist Tenant in Tenant's efforts
to obtain from the City of Raleigh an address for the Premises showing them to
be on Glenwood Avenue.
[SIGNATURES BEGIN ON FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties have caused this Lease to be duly
executed and sealed pursuant to authority duly given as of the day and year
first above written.
27
<PAGE>
"LANDLORD"
CRABTREE PARK, LLC (SEAL)
By: THE SBJ GROWTH, L.P., a Georgia limited
partnership, d/b/a in North Carolina as The
SBJ Growth Limited Partnership, Its
Managing Member
By: Northside
Distribution Trust
#1, Northside
Distribution Trust
#2, Northside
Distribution Trust
#3, and Northside
Distribution Trust
#4, being all of
the general
partners of The
SBJ Growth, L.P.
By: _____________________________ (SEAL)
Elliott Cohen, not individually,
but solely as Trustee of the
aforesaid four Trusts
Date: _____________________________
"TENANT"
[CORPORATE SEAL] CAPITAL BANK
ATTEST By: ______________________________
Name: ______________________________
____________________ Title: ______________________________
__________ Secretary
Date: ______________________________
<PAGE>
EXHIBIT "A"
FLOOR PLAN
[GRAPHIC - FLOOR PLAN]
<PAGE>
EXHIBIT "B"
RULES AND REGULATIONS
The following rules and regulations have been adopted by the Landlord
for the care, protection and benefit of the Building and for the general comfort
and welfare of the tenants:
1. The sidewalks, entrances, halls, passages, elevators and stairways
shall not be obstructed by the Tenant or used by him for any other purpose than
for ingress and egress.
2. Toilet rooms and other water apparatus shall not be used for any
purpose other than those for which they are constructed.
3. The Tenant shall not do anything in the Premises, or bring or keep
anything therein, which shall in any way conflict with any law, ordinance, rule
or regulation affecting the occupancy and use of the Premises, which are or may
hereafter be enacted or promulgated by any public authority or by the Board of
Fire Underwriters.
4. In order to insure proper use and care of the Premises, neither the
Tenant nor agent nor employee of the Tenant shall:
(a) Allow any furniture, packages or articles of any kind to remain in
corridors except for short periods incidental to moving same in or out of
Building or to cleaning or rearranging occupancy of leased space.
(b) Maintain or utilize bicycles or other vehicles in the Building.
(c) Mark or defile elevators, toilet rooms, walls, windows, doors or
any part of the Building.
(d) Keep animals or birds on the Premises.
(e) Deposit waste paper, dirt or other substances in corridors,
stairways, elevators, toilets, restrooms, or any other part of the Building not
leased to him.
(f) Drill holes, drive nails or screws into walls, floors, doors, or
partitions or otherwise unless written consent is first obtained from the
Landlord. However, Tenant will be allowed to hang or attach pictures, wall
hangings, blackboards and similar items providing that the method of hanging
does not permanently damage the walls, and holes created are patched, or covered
on removal.
(g) Operate any machinery within the Building except customary office
and banking equipment, including dictaphones, calculators, electric typewriters,
and the like. Special equipment or machinery not commonly used or operated by
banks may be operated only with the prior written consent of the Landlord.
<PAGE>
(h) Tamper or interfere in any way with windows, doors, locks, air
conditioning controls, heating, lighting, electric or plumbing fixtures.
(i) Leave Premises unoccupied without locking all doors, extinguishing
lights and turning off all water outlets.
(j) Install or operate vending machines of any kind in the Premises
without written consent of Landlord, which consent shall not be unreasonably
withheld, conditioned or delayed.
5. The Landlord shall have the right to prohibit any advertising by the
Tenant which, in its opinion, tends to damage the reputation of the Building or
its desirability, and upon written notice from Landlord, the Tenant shall
discontinue any such advertising.
6. The Tenant will reimburse the Landlord for the cost of repairing any
damage to the Premises or other parts of the Building caused by the Tenant or
the agents or employees of the Tenant, including replacing any glass broken.
7. The Landlord shall furnish a reasonable number of door keys for the
needs of the Tenant, which shall be surrendered on expiration of the Lease. The
Tenant shall not alter the locks or effect any substitution without notification
to the Landlord, and as to areas where Landlord is to provide maintenance and/or
janitorial services if there is an alteration or substitution Tenant shall
provide access for such purposes or Landlord shall be relieved of any further
obligation to provide such services.
8. The Tenant shall not install in the Premises any metal safes or
permit any concentration of excessive weight in any portion thereof without
first having obtained the written permission of Landlord.
9. The Landlord reserves the right at all times to exclude newsboys,
loiterers, vendors, solicitors and peddlers, from the Building and to require
registration, satisfactory identification and credentials from all persons
seeking access to any part of the Building outside of ordinary business hours.
Ordinary business hours shall mean Monday through Friday, 7:30 a.m. to 6:30
p.m., and 8:00 a.m. to 1:00 p.m. on Saturday, except on legal holidays. The
Landlord will exercise its best judgment in the execution of such control but
shall not be held liable for the granting or refusal of such access. Except for
Tenant's Customers or Invitees, the Landlord reserves the right to exclude the
general public from the Building after ordinary business hours and on weekends
and holidays.
10. The attaching of wires to the outside of the Building is absolutely
prohibited, and no wires shall be run or installed in any part of the Building
without the Landlord's permission and direction.
11. Requests for services of janitors or other Building employees must
be made to the Landlord. Agents or employees of Landlord shall not perform any
work or do anything outside of their regular duties unless under special
instructions from Landlord.
<PAGE>
12. Signs or any other tenant identification shall be in accordance
with building standard signage. No signs of any nature shall be placed in the
windows so as to be visible from the exterior of the Building. All signs not
approved in writing by the Landlord shall be subject to removal without notice.
13. Any improvements or alterations to the Premises by Tenant shall be
approved in advance by the Landlord and all such work, if approved, shall be
done at the Tenant's sole expense under the supervision of the Landlord.
14. Tenant shall have a non-exclusive right to use all driveways and
parking areas designated for Tenant and Tenant's employees, if deemed necessary
by Landlord.
15. If additional drapes or window decorations are desired by Tenant,
they shall be approved by Landlord and installed at the Tenant's expense under
the direction of the Landlord. Lining on drapes visible from the exterior shall
be of a color approved by Landlord.
16. The possession of weapons, including concealed handguns, is
strictly forbidden on the Premises.
17. No smoking shall be permitted within any portion of the Building.
18 . The Landlord shall have the right to make such other and further
reasonable rules and regulations as, in the judgment of the Landlord, may from
time to time be necessary for the safety, care and cleanliness of the Premises,
the Building or adjacent areas, and for the preservation of good order therein
effective five (5) days after all tenants have been given written notice
thereof.
<PAGE>
EXHIBIT "C"
LANDLORD'S WORK
On or before the Commencement Date, Landlord agrees to complete the
following improvements: (To Be Added).
<PAGE>
EXHIBIT "C-1"
PLANS
[To Be Attached]
<PAGE>
EXHIBIT "D"
OPERATING EXPENSES - RIGHT TO AUDIT
The term "Operating Expense" as used herein shall include
actual costs of operation, repair and maintenance as determined by generally
accepted accounting principles and shall include by way of illustration, but
without limitation: ad valorem real and personal property taxes, reasonable
legal or consulting fees incurred in contesting or attempting to reduce such
taxes, hazard and liability insurance premiums, utilities, heat, air
conditioning, janitorial services, labor, materials, supplies, equipment and
tools, permits, licenses, inspection fees, management fees equal to, but not
exceeding 4% of gross rents, reasonable amortization of capital improvements
which will improve the efficiency of operating, managing, or maintaining the
building or which will reduce the operating expenses, and Common Area Expenses.
Common Area Expenses shall be defined as those expenses incurred in maintaining
the Common Areas of the building, including, but not limited to, the parking
areas, sidewalks, landscaping, common hallways and stairwells, exterior lighting
and security costs, roofs, storage facilities and trash receptacles. The
following expenses are excluded from Operating Expenses: any payments (such as
salaries or fees) to Landlord's executive personnel; costs for items that, by
generally accepted accounting principles, should be capitalized (such as HVAC
replacement), unless those costs actually reduce Operating Expenses and are
amortized over the reasonable life of the capital item in accordance with
generally accepted accounting principles and the yearly amortization does not
exceed the actual cost reduction for the relevant year; depreciation (unless it
is related to an allowable capital item) or interest; taxes on Landlord's
business (such as income, excess profits, franchise, capital stock, estate,
inheritance); leasing commissions; legal fees; costs to correct design or
construction defects in existence prior to the Commencement Date; expenses paid
directly by a tenant for any reason (such as excessive utility use); costs for
improving any tenant's space; greater than five percent (5%) increase in
management fees or employees' salaries or benefits or both; any repair or other
work necessitated by condemnation, fire, or other casualty; services or benefits
or both provided to some tenants but not to Tenant; and any costs, fines, and
the like due to Landlord's violation of any governmental rule or authority.
If Tenant disputes the amount of Operating Expenses as set
forth in the statement from the Landlord within forty-five (45) days after
receipt thereof, and providing Tenant is not then in default under this Lease
beyond applicable cure periods, Tenant shall have the right upon written notice
to have Landlord's books and records relating to Operating Expenses audited by a
qualified professional selected by Tenant or by Tenant itself at Landlord's
place of business and in such a manner as not to interfere with Landlord's
business. If after such audit, Tenant still disputes the amount of operating
expenses, a certification as to the proper amount shall be made by Landlord's
independent certified public accountant in consultation with Tenant's
professional, which certification shall be final and conclusive. If such audit
reveals that Operating Expenses were overstated by five percent (5%) or more in
the calendar year audited, Landlord shall reimburse Tenant for its reasonable
costs in doing the audit, and if such audit reveals that Operating Expenses were
overstated by any amount at all, Landlord shall, within thirty (30) days after
the certification, pay to Tenant the amount of any overstatement which it had
collected from
<PAGE>
Tenant. However, if such certification does not show that
Landlord had made such an overstatement then Tenant shall pay both the costs of
its professional as well as the reasonable charges of Landlord's independent
certified public accountant engaged to determine the correct amount of operating
expenses. If the certification shows that Landlord has undercharged Tenant then
Tenant shall within thirty (30) days pay to Landlord the amount of any
undercharge.
<PAGE>
ADDENDUM NO. 1
Landlord agrees to substantially complete the renovations to the exterior of the
Building, including a driveway cutoff to Glenwood Avenue, prior to the Lease
Commencement Date.
Landlord agrees to fully complete such renovations within forty-five (45) days
of Lease Commencement Date as set forth in Section 3(b).
<PAGE>
LEASE ADDENDUM NO. 2
WORK LETTER FOR TENANT UPFIT
1. TENANT IMPROVEMENTS. Tenant shall prepare the space plans
(collectively hereinafter referred to as the "Space Plans") relating to the
initial tenant improvements to be constructed within the Premises (the "Tenant
Improvements"), which Space Plans shall be prepared by Tenant's architect and/or
engineer and shall be in a condition suitable for approval. Tenant shall deliver
the Space Plans to Landlord for its review and approval on or before one (1)
month after the lease execution by both parties, Landlord's approval with
respect to the Space Plans not to be unreasonably withheld or delayed, and in no
event later than five (5) days. Upon such Landlord approval, the Space Plans
shall be attached as Exhibit A to this Lease and made a part hereof (said Space
Plans to be replaced with the final Plans upon completion of same by Tenant).
Tenant shall prepare the final architectural drawings for the Tenant
Improvements (hereinafter referred to as the "Plans") within four (4) weeks from
Final Space Plan Approval, and such Plans will be used in obtaining all
applicable building permits and for pricing the Project for the Tenant
Improvements. Landlord shall deliver to Tenant three (3) weeks from Final
Architectural Plans, the construction budget for the Tenant Improvements (the
"Construction Budget"). Tenant shall have seven (7) business days following its
receipt of the Construction Budget to notify Landlord in writing of any
objections thereto and Tenant's failure to object within said seven (7) business
day period shall be deemed Tenant's approval of the proposed Construction
Budget. Any reasonable delays in finalizing the Construction Budget resulting
from Tenant's objection thereto shall be deemed "Tenant delays" for purposes
hereof.
Any and all other tenant improvements and tenant upfit of any type
whatsoever, and all plans and specifications relating thereto, shall require the
prior approval of the Landlord which approval shall take into account the
quality and first-class character of the Building, but shall not be withheld or
delayed.
Landlord's Agent will supervise the construction and installation of
the Tenant Improvements in a good and workmanlike manner and in accordance with
the Plans. Provided Tenant is not in default hereunder beyond any applicable
notice and cure period, Landlord agrees to bear the cost of the Tenant
Improvements on an "as completed" basis up to a maximum of Twenty-Three and
84/100 Dollars ($23.84) (the "Tenant Allowance") per rentable square foot of the
Premises for the construction of Tenant Improvements, including all fees and
charges relating to Tenant's preparation of all Plans hereunder. Any reasonable
and pre-approved costs for the Tenant Improvements in excess of the Tenant
Allowance shall be paid by Tenant (except to the extent due to Building defects
or Landlord's negligence or misconduct) within fifteen (15) days after receipt
of Landlord's invoice for completed work.
In connection with the upfitting of the Premises, Tenant agrees to pay
Landlord a construction management fee equal to four percent (4%) of the total
"hard cost" of constructing the Tenant Improvements to the extent such cost is a
change order after the approved Construction Budget.
<PAGE>
Except as herein provided, no part of the Tenant Improvements shall be
of such a nature that they will require changes outside the Building, except for
the constructing of the exterior teller line. No part of the Tenant Improvements
shall adversely affect the legality of use or occupancy of the Building or
result in increased costs of fire insurance for the Building. Landlord agrees to
assign to Tenant (to the extent transferable) its interest in any warranties or
guaranties issued in connection with the construction of Tenant Improvements to
the extent Tenant is responsible for the repair or replacement of same. Landlord
shall use commercially reasonable efforts to obtain customary warranties or
guaranties, and will assign all of those which are assignable to Tenant.
Tenant and its design firm will have access to the Premises and
Building during construction of all Tenant Improvements and other tenant upfit,
and have the right to inspect the same.
2. TENANT'S ACCEPTANCE AND MAINTENANCE OF PREMISES; UP-FIT
IMPROVEMENTS. Tenant shall have thirty (30) days from its occupancy of the
Premises to notify Landlord of any patent construction defects, after which
Tenant represents to the Landlord that Tenant has examined and inspected the
same, finds the Premises to be as represented by the Landlord and satisfactory
for Tenant's intended use, and evidences Tenant's acceptance "where is" and "as
is," except for latent defects in the construction of the Building (excluding
any improvements installed or constructed by Tenant or its agents) identified by
Tenant within one (1) year(s) after the Commencement Date. Landlord makes no
representation or warranty as to the condition or suitability of the Premises.
Tenant shall maintain (and so deliver at the end of the Lease) each and every
part of the Premises (excluding exterior drives, walks and parking areas and
common areas in the Building to be maintained by Landlord) in as good repair and
condition as received, and shall make at Tenant's sole cost and expense such
replacements, restorations, renewals or repairs, in quality equivalent to the
original work replaced, as may be reasonably required to so maintain the same,
excepting only ordinary wear and tear and other matters for which Tenant is not
responsible hereunder. Tenant, however, shall make no structural or exterior
alterations of the Premises without Landlord's prior written consent, not to be
unreasonably withheld or delayed, and any work performed by Tenant shall be done
in a good and workmanlike manner, and so as not to unreasonably disturb or
inconvenience other tenants in the Building. With respect to interior
alterations (other than minor, nonstructural alterations of a cosmetic nature)
to be undertaken during the term of this Lease, subject to the prior written
approval of Landlord which shall not be unreasonably withheld or delayed and
provided Tenant is not in default hereunder beyond any applicable cure period,
Tenant may make interior alterations required for Tenant's business, including,
without limitation, the reconfiguration of partition walls within the Premises.
Tenant shall not at any time permit any work to be performed on the Premises
except by duly licensed contractors or artisans, each of whom must carry general
public liability insurance, and copies of certificates evidencing same shall be
furnished Landlord. At no time may Tenant do any work that results in a claim of
lien against Landlord. Provided that Landlord has originally approved the
alteration or improvement, and unless removal is required by Landlord when
Landlord's approval of a proposed Tenant alteration or improvement is originally
made Tenant shall not be required to remove such an alteration or improvement
from the Premises. If removal is required, Tenant shall remove the
<PAGE>
specified alteration or improvement at Tenant's sole cost and expense, ordinary
wear and tear only excepted. All alterations and improvements to the Premises,
whether undertaken by Tenant or Landlord, other than the Tenant Improvements
(which are subject to a separate construction management fee as described in
Section 1 herein), shall be subject to a fee (the "Construction Management
Fee"). Tenant agrees to pay Landlord the Construction Management Fee as follows:
(a) five percent (5%) of the total cost of planning and
constructing any alterations and improvements if such
construction costs exceed Ten Thousand and No/100 Dollars
($10,000.00); and
<PAGE>
ADDENDUM NO.3
TO
LEASE AGREEMENT
OPTION TO EXTEND LEASE TERM
1. Lease. "Lease" shall mean the Lease dated the day of November, 1999,
to which this Addendum is attached between CRABTREE PARK, LLC ("Landlord") and
CAPITAL BANK ("Tenant").
2. Initial Lease Term. For the purposes of this Addendum, "Initial
Lease Term" shall mean the Lease Term as defined in the Lease.
3. Option to Extend. Provided, both at the time Tenant gives Landlord
written notice of its intention to exercise its rights under this Section, as
hereinafter provided, and at the time the Initial Lease Term expires, that there
is no outstanding Default by Tenant, and that Tenant (or an approved assignee or
sublessee) is occupying the Premises, then Tenant shall have the right and
option to extend the initial Lease Term (the "Renewal Options") for the "Renewal
Lease Terms" as hereinafter defined. Tenant shall exercise said option by giving
Landlord written notice at least two hundred seventy (270) days prior to the
expiration of the Initial Lease Term, and the First Renewal Lease Term
respectively. If such notice shall not be so given by Tenant to Landlord prior
to said two hundred seventy (270) day period, such right and option to extend
this Lease shall thereupon cease and terminate. If Tenant shall exercise said
option as aforesaid, the respective rights, duties and obligations of Landlord
and Tenant shall, during the Renewal Lease Terms, be governed by the terms and
conditions of the Lease. Notice to extend once given shall be irrevocable.
4. First Renewal Lease Term. "First Renewal Lease Term" shall mean the
period commencing upon the expiration of the Initial Lease Term and expiring
five (5) years thereafter subject to earlier termination upon any termination of
this Lease pursuant to the terms of this Lease.
5. Lease Term. The "Lease Term", as used in the Lease, shall mean the
Initial Lease Term and, if the Renewal Options are exercised, the Renewal Lease
Terms, but if only the Option for the First Renewal Lease Term is exercised then
the Initial Lease Term and the First Renewal Lease Term.
6. Base Rent for the First Renewal Lease Term. If Tenant exercises the
Renewal Option for the First Renewal Lease Term, the Base Rent shall be adjusted
upward for the First Renewal Lease Term in the same proportion by which the
Consumer Price Index for all Urban Wage Earners and Clerical Workers (U.S. city
average) (the "Index"), for the month immediately prior to the commencement of
the First Renewal Lease Term, has increased over the Index for the month
immediately prior to the Rent Commencement Date, as defined in the Lease. Said
adjusted rent shall be the Base Rent for the first year of the First Renewal
Lease Term and the adjustment set forth in Section 1(f) shall be made for each
successive year of the First
<PAGE>
Renewal Lease Term. In the event that the United States Bureau of Labor
Statistics shall discontinue the issuance of the Index, then the rental
adjustment provided for herein shall be made on the basis of changes in the most
comparable and recognized cost of living index then issued and available, which
is published by the United States Government.
7. Second Renewal Lease Term. If Tenant has exercised the Option for
the First Renewal Lease Term, and the same conditions exist as were a
pre-requisite for exercise of that Option, then Tenant may by giving the same
notice elect to extend the Term for one additional five (5) year period. The
Rental during the Second Renewal Lease Term shall be the Fair Market Rental
Rate. The term "Fair Market Rental Rate" shall mean the market rental rate for
the time period such determination is being made for office space in class A
office buildings in the metropolitan Raleigh area ("AREA") of comparable
condition for space of equivalent quality, size, utility, and location. Such
determination shall take into account all relevant factors, including, without
limitation, the following matters: the credit standing of Tenant; the length of
the term; expense stops; with regard to extension options only, the fact that
Landlord will experience no vacancy period and that Tenant will not suffer the
costs and business interruption associated with moving its offices and
negotiating a new lease; construction allowances and other tenant concessions
that would be available to tenants comparable to Tenant in the AREA (such as
moving expense allowance, free rent periods, lease assumptions and take-over
provisions, if any, but specifically excluding the value of improvements
installed in the Premises at Tenant's cost), and whether adjustments are then
being made in determining the rental rates for expansions and renewals in the
AREA because of concessions being offered by Landlord to Tenant (or the lack
thereof for the Space (defined below) for the extended Term in questions). For
purposes of such calculation, it will be assumed that Landlord is paying a
representative of Tenant a brokerage commission in connection with leasing the
Space in question or extension Term in questions, based on the then current
market rates.
Determination. Landlord shall deliver to Tenant notice of the
Fair Market Rental Rate (the "FMR Note") for the space in question (the "Space")
or the extended Term in question within 30 days after Tenant exercises the
option giving rise for the need to determine the Fair Market Rental Rate. If
Tenant disagrees with Landlord's assessment of the Fair Market Rental Rate
specified in a FMR Notice, then it shall so notify Landlord in writing within
ten business days after delivery of such FMR Notice; otherwise, the rate set
forth in such notice shall be the Fair Market Rental Rate. If Tenant timely
delivers to Landlord written notice that it disagrees with Landlord's assessment
of the Fair Market Rental Rate, then Landlord and Tenant shall meet to attempt
to determine the Fair market Rental Rate. If Tenant and Landlord are unable to
agree on such Fair Market Rental Rate within ten business days after Tenant
notifies Landlord of its disagreement with Landlord's assessment thereof, then
Landlord and Tenant shall each appoint an independent real estate appraiser with
at least five years' commercial real estate appraisal experience in the AREA
market. The two appraisers shall then, within ten days after their designation,
select an independent third appraiser with like qualifications. If the two
appraisers are unable to agree on the third appraiser within such ten-day
period, either Landlord or Tenant, by giving five days prior written notice
thereof to the other, may apply to the then presiding Clerk of Superior Court of
Wake County for selection of a third appraiser who meets the qualifications
stated above. Within 20 business days after the selection of the third
appraiser, a majority of the appraisers shall determine the Fair Market Rental
Rate. If a majority of the appraisers is unable
<PAGE>
to agree upon the Fair Market Rental Rate by such time, the two closest
appraisals shall be averaged and the average will be the Fair Market Rental
Rate. Tenant and Landlord shall each bear the entire cost of the appraiser
selected by it and shall share equally the cost of the third appraiser.
8. Termination of Renewal Option on Transfer by Tenant. In those
situations where Landlord consent to an Assignment or Subletting is required
hereunder, Landlord may condition such consent so that the Renewal Option will
automatically terminate.
<PAGE>
ADDENDUM NO. 4
This lease is subject to Cotton Incorporated executing a Lease Cancellation
Agreement for this space not later than December 31, 1999, and the Cotton space
will be vacated no later than February 15, 2000.
<PAGE>
OFFICE LEASE AGREEMENT
BY AND BETWEEN
CRABTREE PARK, LLC
(AS LANDLORD)
AND
CAPITAL BANK
(AS TENANT)
<PAGE>
TABLE OF CONTENTS
Section Nos. Page
1. BASIC LEASE TERMS...........................................1
-----------------
2. DESCRIPTION OF PREMISES.....................................3
-----------------------
3. TERM; COMMENCEMENT DATE; DELIVERY OF PREMISES...............3
---------------------------------------------
4. RENTAL......................................................6
------
5. ALTERATIONS AND IMPROVEMENTS BY TENANT......................8
--------------------------------------
6. USE OF PREMISES.............................................9
---------------
7. SERVICES BY LANDLORD.......................................10
--------------------
8. TAXES ON LEASE AND TENANT'S PROPERTY.......................11
------------------------------------
9. INSURANCE AND INDEMNITY....................................11
-----------------------
10. LANDLORD'S COVENANT TO REPAIR AND REPLACE..................13
-----------------------------------------
11. PROPERTY OF TENANT.........................................14
------------------
12. TRADE FIXTURES AND EQUIPMENT...............................14
----------------------------
13. DAMAGE OR DESTRUCTION OF PREMISES..........................15
---------------------------------
14. GOVERNMENTAL ORDERS........................................15
-------------------
15. MUTUAL WAIVER OF SUBROGATION...............................16
----------------------------
16. SIGNS AND ADVERTISING......................................16
---------------------
17. LANDLORD'S RIGHT OF ENTRY..................................17
-------------------------
19. EMINENT DOMAIN.............................................17
--------------
20. EVENTS OF DEFAULT AND REMEDIES.............................17
------------------------------
21. SUBORDINATION..............................................19
-------------
22. ASSIGNMENT AND SUBLETTING..................................19
-------------------------
23. LANDLORD DEFAULT...........................................20
----------------
24. TRANSFER OF LANDLORD'S INTEREST............................21
-------------------------------
25. COVENANT OF QUIET ENJOYMENT................................21
---------------------------
26. ESTOPPEL CERTIFICATES......................................21
---------------------
27. PROTECTION AGAINST LIENS...................................22
------------------------
28. MEMORANDUM OF LEASE........................................22
-------------------
29. FORCE MAJEURE..............................................22
-------------
30. REMEDIES CUMULATIVE -- NONWAIVER...........................22
--------------------------------
31. HOLDING OVER...............................................23
------------
32. NOTICES....................................................23
-------
33. LEASING COMMISSION.........................................23
------------------
34. MISCELLANEOUS..............................................23
-------------
35. OPTIONS TO EXTEND..........................................26
-----------------
36. RIGHT OF FIRST OFFER.......................................26
--------------------
37. SEVERABILITY.............................................. 26
------------
38. REVIEW OF DOCUMENTS...................................... 26
-------------------
39. CONDITIONAL ON REGULATORY APPROVAL.........................26
----------------------------------
40. COMMISSIONER OF BANKS PROVISION............................27
-------------------------------
41. LANDLORD'S WORK........................................... 27
---------------
42. PROPERTY ADDRESS...........................................27
----------------
<PAGE>
EXHIBIT 13
Annual Report to Shareholders
Capital Bank Corporation
Annual Report
1999
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
As of and for the Years As of and for the Years
(In thousands except share and per share data) Ended December 31 (1) Ended September 30 (1)
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data
Cash and Due From Banks $ 9,702 $ 10,365 $ 3,559 $ 803 $ 6,703
Federal Funds Sold 1,960 16,400 26,487 975 1,750
Securities 46,581 37,626 34,345 19,289 7,916
Gross Loans 159,329 110,779 58,894 30,314 30,354
Allowance for Loan Losses 2,328 1,457 705 280 280
Total Assets 222,337 179,993 126,934 52,363 47,785
Deposits 163,245 137,343 90,358 41,667 41,369
Borrowings 20,000 5,066 194 300 --
Repurchase Agreements 4,818 2,501 -- -- --
Shareholders' Equity 31,126 33,507 34,305 9,186 5,409
Summary of Operations
Interest Income $ 14,553 $ 10,530 $ 5,717 $ 3,992 $ 3,386
Interest Expense 7,656 5,527 2,952 2,149 1,897
-----------
Net Interest Income 6,897 5,003 2,765 1,843 1,489
Provision for Loan Losses 924 792 270 -- --
-----------
Net Interest Income After Provision For Loan Losses 5,973 4,211 2,495 1,843 1,489
Non-interest Income 1,260 716 235 78 60
Non-interest Expense Excluding Non-recurring
Merger Related Costs 6,477 5,525 2,983 1,049 682
-----------
Pre-tax Net Income (Loss) before Non-recurring
Merger Related Costs 756 (598) (253) 872 867
Non-recurring Merger Related Costs 1,647 288 -- -- --
Income Tax Expense (Benefit) (40) 10 557 356 313
-----------
Net Income (Loss) $ (851) $ (896) $ (810) $ 516 $ 554
===========
Per Share Data (2)
Net Income (Loss) Before Non-recurring Merger
Related Costs $ .22 (.17) (.33) .55 --
Net Income (Loss) (.23) (.25) (.33) .55 --
Book Value 8.51 9.19 9.38 9.96 --
Number of Common Shares 3,658,689 3,658,689 3,658,689 922,686 --
Selected Ratios
Return On Average Assets (0.42)% (0.60)% (0.98)% 0.92% 1.22%
Return on Average Shareholders' Equity (2.68)% (2.62)% (3.65)% 4.18% 10.80%
Average Shareholders' Equity to Average Total Assets 15.81% 23.08% 26.91% 21.89% 11.33%
Net Interest Margin 3.61% 3.55% 3.52% 3.43% 3.38%
</TABLE>
<PAGE>
(1) Capital Bank opened for business on June 20, 1997. Capital Bank
Corporation formed March 31, 1999. Balances for years ended December 31,
1998 and 1997 have been restated to reflect the combined balances of
Capital Bank and Home Savings Bank for those periods. Years ended
September 30, 1996 and 1995 reflect only the balances of Home Savings
Bank.
(2) Per share data for 1996 calculated beginning on the date Home Saving Bank
converted to a stock institution.
<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 region 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. On June 23 1997, two branches in Sanford, North Carolina were acquired
from another financial institution. During 1998, the Bank opened branches in two
Cary, North Carolina locations. At a special meeting of shareholders held on
March 26, 1999, the shareholders of Capital Bank approved the reorganization of
Capital Bank into a bank holding company named "Capital Bank Corporation" (the
"Company"). In the holding company reorganization, the shareholders of Capital
Bank each received a right to one share of Company stock for each share of
Capital Bank stock that they owned. Thus, the shareholders of Capital Bank
before the holding company reorganization are now the shareholders of the
Company. In addition, on March 31, 1999 the Company completed its acquisition of
Home Savings Bank of Siler City SSB, Inc. in a stock-for-stock exchange in which
the Company issued 1,181,038 shares of its Common Stock. On July 16, 1999, Home
Savings Bank merged with Capital Bank to form one subsidiary under Capital Bank
Corporation. Prior to the merger date, Home Savings Bank capitalized the holding
company with an upstream dividend of $100,000. In conjunction with the merger,
the common stock of Home Savings Bank was retired. As used in this report, the
term "Company" refers to Capital Bank Corporation and its subsidiary, Capital
Bank, after the holding company reorganization.
As a result of the reorganization, acquisition, and subsequent merger, which was
accounted for as a pooling-of-interests transaction, all amounts in these
statements are restated to reflect a consolidated basis as if the current
organization had been in place during all operating periods.
The holding company conducts no business other than holding stock in Capital
Bank. As a community bank, the Bank's profitability depends primarily upon its
levels of net interest income, which is the difference between interest income
from interest-earning assets and interest expense on interest-bearing
liabilities. The Bank's operations are also affected by its 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 Corporation. This discussion is designed to provide more
comprehensive information about the major components of the Company'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 Company's consolidated financial statements, the
related notes and the selected financial data presented elsewhere in this
report.
Results of Operations Capital Bank Corporation reported net losses of $851,000,
$896,000, and $810,000 for years ended December 31, 1999, 1998, and 1997,
respectively. On a per share basis, the losses were $.23, $.25, and $.33 for
those same periods. Excluding nonrecurring merger related costs associated with
the merger with Home Savings Bank, the Company recorded net income for 1999 of
$796,000, or $.22 per share. The 1998 net loss before those nonrecurring merger
related costs was $608,000, or $.17 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
operating losses were in line with management expectations.
<PAGE>
Net Interest Income. Net interest income is the difference between total
interest income and total interest expense and is the Company'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 $5.0
million in 1998 to $6.9 million in 1999, an increase of $1.9 million or 38%.
This increase is primarily due to a significant increase in the volume of
interest-bearing assets and liabilities between the two years. Net interest
income increased between 1997 and 1998 by $2.2 million or 81% from its 1997
amount of $2.7 million. This increase was partially the result of 1998 being the
first full year of operations for Capital Bank, prior to the merger with Home
Savings Bank as compared to the shorter 1997 period. In addition, there was also
a significant increase in the volume of interest-bearing assets and liabilities
between those two years as well. 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 $191.2 million and $141.1 million
for 1999 and 1998, respectively, and the net interest margin was 3.61% and 3.55%
for those same periods. The increase in the net interest margin is primarily due
to changes in the mix of interest-earning assets as the Company was able to use
some of the lower
<PAGE>
yielding federal funds sold to fund higher yielding loans. The loan to total
interest-earning asset mix changed from 60% in 1998 to 69% in 1999. In addition,
the costs of funds, or rates paid on interest-bearing liabilities declined from
1998 to 1999.
Interest income increased 38% in 1999 to $14.6 million, after an 84% increase in
1998 to $10.5 million from the $5.7 million earned in 1997. For each year, this
increase is primarily due to the significant increase in the loan portfolio and
the resulting mix of interest-earning assets as described above. The average
yields on interest-earning assets increased from 7.27% in 1997 to 7.46% in 1998
and 7.61% in 1999. These increases are all attributable primarily to the
portfolio shift from lower rate federal funds, which had average balances of
$12.3 million, $21.4 million, and $15.7 million for 1999, 1998, and 1997,
respectively to higher yielding loans, which had average balances of $131.3
million, $85.1 million, and $40.1 million for those same periods.
Interest expense increased 39% in 1999 to $7.7 million, after an 87% increase in
1998 to $5.5 million from the $3.0 million earned in 1997. This increase is
primarily due to a significant increase in interest-bearing deposits, which went
from $57.5 million in 1997 to $106.3 million in 1998 to $138.5 million in 1999.
The average rates on interest-bearing liabilities decreased from 5.16% in 1998
to 4.86% in 1999. The decrease during 1999 reflects the decline in rates offered
from the previous year. During 1998, the average rates on interest-bearing
liabilities increased to 5.16% from 5.10% in 1997. 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 Company'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 daily
average asset or liability balance. Changes in net interest income from year to
year can be explained in terms of fluctuations in volume and rate. The second
table presents information on those changes.
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------------- --------------------------------------
Average Amount Average Average Amount Average
Balance Earned Rate Balance Earned Rate
------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans receivable: (1)
Commercial $78,840 $ 6,685 8.48% $ 37,175 $ 3,237 8.71%
Consumer 9,979 924 9.26% 6,332 673 10.63%
Home equity 10,566 857 8.11% 7,515 571 7.60%
Residential mortgages 31,301 2,472 7.90% 33,243 2,665 8.02%
Cash Flow Manager 573 82 14.31% 849 100 11.78%
------------------------------------- --------------------------------------
Total loans 131,259 11,020 8.40% 85,114 7,246 8.51%
Investment securities 47,664 2,898 6.08% 34,533 2,147 6.22%
Federal funds sold and other
interest on short term investments 12,255 635 5.18% 21,426 1,137 5.31%
------------------------------------- --------------------------------------
Total interest earning assets 191,178 $14,553 7.61% 141,073 $10,530 7.46%
========================= ========================
Cash and due from banks 4,946 3,050
Other assets 6,360 5,173
Reserve for loan losses (1,850) (1,030)
------------ --------------
Total assets $200,634 $ 148,267
============ ==============
Liabilities and Equity
Savings deposits $ 5,466 $ 160 2.93% $ 5,203 $ 162 3.11%
Interest-bearing demand deposits 31,851 1,160 3.64% 23,627 925 3.92%
Time deposits 101,178 5,356 5.29% 77,485 4,399 5.68%
------------------------------------- --------------------------------------
Total interest bearing deposits 138,495 6,676 4.82% 106,315 5,486 5.16%
Borrowed funds 15,261 821 5.38% 510 32 6.27%
Repurchase agreements 3,802 159 4.18% 209 9 4.31%
------------------------------------- --------------------------------------
Total interest-bearing liabilities 157,558 $ 7,656 4.86% 107,034 $ 5,527 5.16%
========================= ========================
Non-interest bearing deposits 8,757 5,661
Other liabilities 2,607 1,349
------------ --------------
Total liabilities 168,921 114,043
Stockholders' equity 31,713 34,224
------------ --------------
Total liabilities and equity $200,634 $ 148,267
============ ==============
Net interest spread (2) 2.75% 2.30%
Net interest income and net
interest margin (3) $ 6,897 3.61% $ 5,003 3.55%
</TABLE>
<PAGE>
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31, 1997
------------------------------------
Average Amount Average
Balance Earned Rate
-------------------------------------
Assets
Loans receivable: (1)
Commercial $ 4,641 $ 435 9.37%
Consumer 3,659 323 8.83%
Home equity - - -
Residential mortgages 31,772 2,553 8.04%
Cash Flow Manager - - -
------------------------------------
Total loans 40,072 3,311 8.26%
Investment securities 22,877 1,528 6.68%
Federal funds sold and other
interest on short term investments 15,690 878 5.60%
------------------------------------
Total interest earning assets 78,640 $ 5,717 7.27%
========================
Cash and due from banks 1,427
Other assets 2,806
Reserve for loan losses (415)
------------
Total assets $82,458
============
Liabilities and Equity
Savings deposits $ 4,107 $ 127 3.09%
Interest-bearing demand deposits 12,461 454 3.64%
Time deposits 40,913 2,339 5.72%
------------------------------------
Total interest bearing deposits 57,481 2,920 5.08%
Borrowed funds 395 32 8.10%
Repurchase agreements - - -
------------------------
Total interest-bearing liabilities 57,876 $ 2,952 5.10%
========================
Non-interest bearing deposits 1,995
Other liabilities 399
------------
Total liabilities 60,269
Stockholders' equity 22,189
------------
Total liabilities and equity $82,458
============
Net interest spread (2) 2.17%
Net interest income and net
interest margin (3) $ 2,765 3.52%
</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"
<PAGE>
(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.
<PAGE>
Rate & Volume Variance Analysis
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, 1999 December 31, 1998
vs. 1998 vs. 1997
(In thousands) Volume Rate Total Volume Rate Total
Variance Variance Variance Variance Variance Variance
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 3,874 $ (100) $ 3,774 $ 3,835 $ 100 $ 3,935
Investment securities 798 (47) 751 725 (106) 619
Federal funds sold (475) (27) (502) 304 (45) 259
---------------------------- -----------------------------
Total interest income 4,197 (174) 4,023 4,864 (51) 4,813
---------------------------- -----------------------------
Interest Expense:
Savings and interest-bearing
demand deposits and other 300 (67) 233 462 44 506
Time deposits 1,254 (297) 957 2,076 (16) 2,060
Borrowed funds 794 (5) 789 7 (7) --
Repurchase agreements 150 -- 150 9 -- 9
---------------------------- -----------------------------
Total interest expense 2,498 (369) 2,129 2,554 21 2,575
---------------------------- -----------------------------
Increase (decrease) in net interest
income $ 1,699 $ 195 $ 1,894 $ 2,310 $ (72) $ 2,238
============================ =============================
</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.
<PAGE>
Provision for Loan Losses. The provision for loan losses is the amount charged
against earnings for the purpose of establishing an adequate allowance for loan
losses. Loan losses are, in turn, charged to this allowance rather than being
reported as a direct expense. In 1999, 1998 and 1997, amounts expensed as loan
loss provisions were $924,000, $792,000 and $270,000, respectively. 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 Company'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 $2.3 million and $1.4
million on December 31, 1999 and 1998, respectively, and represented
approximately 1.46% and 1.32% of total loans outstanding on those dates. During
1999, the Company charged off $53,000 in loans, net of $19,000 in recoveries.
During 1998, the Company charged off $40,000 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 expected loan losses by loan type.
At December 31,
-------------------------------------------------------
(In thousands) 1999 1998
-------------------------------------------------------
Allowance Loans % to Allowance Loans % to
Amount Total Loans Amount Total Loans
-------------------------------------------------------
Commercial $ 1,424 61% $ 894 61%
Consumer 161 7 106 7
Residential mortgages 250 11 205 14
Equity lines 115 5 98 7
Unallocated 378 16 154 11
----------------------------------------------------
$ 2,328 100% $ 1,457 100%
=======================================================
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.
<PAGE>
Analysis of Reserve for Loan Losses
<TABLE>
<CAPTION>
As of Or For the
Years Ended
December, 31
----------------------------------------
(In thousands) 1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Average amount of loans outstanding, net of unearned income $ 131,259 $ 85,114 $ 40,072
Amount of loans outstanding at year end, net of unearned income 159,329 110,779 58,894
Reserve for loan losses:
Balance at beginning of period $ 1,457 $ 705 $ 278
Adjustment for loans acquired - - 163
Loans charged off:
Commercial 39 34 -
Consumer 33 14 6
----------------------------------------
Total charge-offs 72 48 6
----------------------------------------
Recoveries of loans previously charged off:
Commercial - -
Consumer 19 8 -
----------------------------------------
Total charge-offs 19 8 -
----------------------------------------
Net loans charged off 53 40 6
----------------------------------------
Provision for loan losses 924 792 270
----------------------------------------
Balance at December 31 $ 2,328 $ 1,457 $ 705
========================================
Ratio of net chargeoffs to average loans outstanding during the year 0.05% 0.06% 0.01%
========================================
</TABLE>
The following table shows the total of the
nonperforming assets and impaired loans in the Company's portfolio as of
December 31, 1999 and 1998.
(In thousands) 1999 1998
------ ------
Nonperforming assets:
Nonaccrual loans - Commercial $ 41 $ 75
Nonaccrual loans - Consumer 51 --
---- ----
Total Nonaccrual loans $ 92 $ 75
==== ====
Nonperforming assets to:
Loans outstanding at end of year 0.06% 0.07%
Total assets at end of year 0.04% 0.04%
Impaired loans - Commercial $ -- $479
==== ====
<PAGE>
Noninterest Income. Noninterest income was $1,260,000, $716,000, and $235,000
for years ended December 31, 1999, 1998, and 1997, respectively. The increases
for those periods as a percentage of the prior years recorded balance are 76%
for 1999 and 205% for 1998. The increases are attributable primarily to the
increase in deposit and loan bases on which fees are charged and to the increase
in fees earned on mortgage loans brokered to other financial institutions as
described below. Fees associated with service charges on deposit accounts
increased from $140,000 in 1997 to $304,000 in 1998 and $461,000 in 1999. During
1998, the Company began to originate mortgage loans for other financial
institutions. Fees associated with this program resulted in other noninterest
income during the year of $635,000 in 1999 and $290,000 in 1998. In addition,
the Company realized a gain of $64,000 on the sale of investment securities
during 1998. There were no securities gains or losses taken in 1999 or 1997.
Noninterest Expense. Noninterest expense represents the overhead expenses of the
Company. Management monitors all categories of noninterest expense in an attempt
to improve productivity and operating performance.
<PAGE>
Noninterest expense increased 40% to $8.1 million in 1999 from $5.8 million in
1998. The expense recorded during 1998 was an increase of 95% from the $3.0
million amount recorded in 1997. The increase in 1999 included certain
nonrecurring expenses of approximately $1,647,000 associated with the merger of
Home Savings Bank and the formation of the holding company. See Note 2 to the
Financial Statements for additional information. Nonrecurring expenses recorded
during 1998 in connection with this event were $288,000. In addition, the
increase in noninterest expense for 1999 reflected the compensation costs
associated with the additional personnel needed to maintain a rapidly growing
company, which increased from 57 full time equivalent employees in 1998 to 73
full time equivalent employees in 1999. Fulltime equivalent employees increased
due to the addition of another branch, going from 6 locations in 1998 to 7 in
1999, an expansion of the commercial lending area, expansion of the mortgage
lending group, and a general increase in the amount of business the bank
processes daily.
The increase in noninterest expense between 1998 and 1997 is attributable
primarily to the increase in the number of months of operation for Capital Bank
prior to the merger with Home Savings Bank 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 Company. Specific categories of expenses and related
causes for increases are discussed as follows:
Salary and benefit expense for the years ended December 31, 1999, 1998, and 1997
was $3.2 million, $2.7 million and $1.5 million, respectively. Increases each
year were the result of new personnel hired as new branches and departments were
added each the year. Occupancy expense increased from $133,000 in 1997 to
$379,000 in 1998 and to $503,000 in 1999. The increases were primarily a result
of lease expenses associated with new locations. Furniture and equipment expense
increased from $79,000 in 1997 to $244,000 in 1998 and $301,000 in 1999 due to
the increase in these assets needed for the new locations. Other operating
expenses increased from $535,000 in 1997 to $822,000 in 1998 and $945,000 in
1999, also as a result of the growth of the Company.
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 Company'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 1999 and
1998 reflected generally favorable economic conditions and the Company's
business development activities. The Company 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 $222.3 million and $180.0 million at December 31, 1999
and 1998, respectively. The increase in total assets of $42.3 million, or 24%
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 $146.5 million in 1998 to $191.2 million in
1999. The primary causes for the increase between the periods is an increase in
deposits and borrowing from the Federal Home Loan Bank which were used to fund
loan growth.
Stockholders' equity decreased from $33.5 million in 1998 to $31.1 million in
1999. The decrease is due to the increase in the accumulated deficit as a result
of the current period net loss and a decline of $1.6 million in the market value
of the Company's investment portfolio as a result of the changing interest rate
environment.
<PAGE>
Cash and Cash Equivalents. Cash and cash equivalents, including noninterest
bearing and interest bearing cash and federal funds sold, decreased from $26.8
million in 1998 to $11.7 million in 1999. The decrease reflects the Bank's cash
requirements needed to fund new loans during the year.
Loan Portfolio. Total gross loans were $159.3 million and $110.8 million as of
December 31, 1999 and 1998. Strong economic growth in the greater Raleigh
(including Wake County), Siler City, and Sanford areas, continued low interest
rates during 1998 and early 1999, and the Company's business development
activities were key factors in the growth of the loan portfolio during those
periods. At December 31, 1999, commercial loans, real estate loans, consumer
loans, and equity lines were $104.6 million, $31.5 million, $11.4 million, and
$12.0 million, respectively. At December 31, 1998, commercial loans, real estate
loans, consumer loans, and equity lines were $62.6 million, $31.1 million, $7.6
million, and $9.8 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.
<PAGE>
(In thousands)
Commercial loans:
Due within one year $37,226
Due one through five years 55,080
Due after five years 12,266
------------
$104,572
============
Commercial loans due after 1 year:
Fixed rate $35,066
Variable rate 32,280
------------
$67,346
============
Nonperforming Assets and Impaired Loans
(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
============
Analysis of Reserve for Loan Losses
<TABLE>
<CAPTION>
As of Or For the
Periods Ended
December, 31
-----------------------------
(In thousands) 1998 1997
-----------------------------
<S> <C> <C>
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>
<PAGE>
Allocation of Reserve for Loan Losses
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
(In thousands) 1998 1997
---------------------------------------------------
Loans % to Loans % to
Amount Total Loans Amount Total Loans
---------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 809 76% $ 125 54%
Consumer 89 9 50 37
Residential mortgages 79 3 25 9
Equity lines 7 12 - -
Unallocated 154 - 227 -
---------------------------------------------------
$ 1,138 100% $ 427 100%
===================================================
</TABLE>
Although there were no large concentrations of credit to any particular
industry, the economic trends of the area served by the Company are influenced
by the significant industries within the region. Virtually all the Company's
business activity is with customers located in the Wake, Lee and Chatham county
areas. The ultimate collectibility of the Company 's loan portfolio is
susceptible to changes in the market conditions of this geographic region.
The Company uses a centralized risk management process to insure uniform credit
underwriting that adheres to Company policy. Lending policies are reviewed on a
regular basis to confirm that the Company 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 Company 's clients coupled with
consistent reviews of the borrowers' financial condition are important factors
in overall credit risk management.
Management charged off $53,000, $40,000 and $6,000 of loans, net of recoveries,
as uncollectible during 1999, 1998 and 1997, respectively. At December 31, 1999,
the allowance for loan losses as a percentage of' total loans was 1.46%.
Management believes the allowances for loan losses of $2.3 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, 1999 and 1998, investments,
including securities available for sale and securities held to maturity, totaled
$45.6 million and $37.0 million, respectively. At December 31, 1999, all
investments were classified as "available for sale". This classification 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, 1999. 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.
Securities Available For Sale Portfolio
<TABLE>
<CAPTION>
(In thousands) 1 Year or Less 1 - 5 Years 5 - 10 Years 10 or More Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of US
Government Agencies $ 999 6.08% $ 19,454 6.13% $ 1,885 5.99% $ 3,841 6.52% $ 26,179 6.17%
Mortgage Backed Securities - - 1,702 6.29% 9,384 6.38% 8,316 6.25% $ 19,402 6.32%
$ 999 $ 21,156 $ 11,269 $ 12,157 $ 45,581
====== ======== ======== ======== ========
</TABLE>
Money Market Investments and Federal Funds. At year-end 1999 and
1998, the Company had $2.0 million and $16.4 million in short-term money market
investments and federal funds.
Liabilities During 1999 and 1998, the Company relied on deposits and excess
liquidity to fund its earning assets.
Deposits. Total deposits increased from $137.3 million at December 31, 1998 to
$163.2 million at December 31, 1999. Of these amounts, $10.9 million and $7.5
million were in the form of non-interest bearing demand deposits at December 31,
1999 and 1998, respectively, and $152.3 million and $129.8 million were in the
form of interest bearing deposits at December 31, 1999 and 1998, respectively.
Balances in certificates of deposit of $100,000 and over were $19.2 million and
$14.9 million at year-end 1999 and 1998, respectively.
<PAGE>
The following table reflects the maturities of certificates of deposit of
$100,000 and over as of December 31, 1999.
Maturity
(In thousands)
Three months or less $ 4,436
Over three months to six months 7,031
Over six months to twelve months 5,510
Over twelve months 2,270
------------
$19,247
============
Debt. At December 31, 1999 and 1998, the Company had outstanding advances with
the Federal Home Loan Bank for $20.0 million and $5.0 million, respectively. See
Note 8 of the Financial Statements for details regarding this advance.
Capital Resources Total shareholders' equity for 1999 and 1998, excluding
unrealized losses on available for sale securities of $1.4 million in 1999 and
unrealized gains on available for sale securities of $235,000 in 1998, was $32.5
million and $33.3 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 Company did not pay any dividends to its
shareholders during 1999 or 1998. However, prior to the merger with Capital Bank
Corporation, Home Saving Bank paid dividends to its shareholders, which are
reflected in these consolidated financial statements (See Note 11). It is not
likely the Company 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,
1999, the Company had a leverage ratio of 15.5%, a Tier 1 capital ratio of
19.3%, and a risk based capital ratio of 20.6%. 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 Company had $11.7 million in its most liquid assets, cash and cash
equivalents at December 31, 1999. The Company '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 78.8% of total
assets at December 31, 1999. In addition, Capital had an additional $13.4
million remaining on its 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
<PAGE>
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 Company's financial
statements for the year ended December 31, 1999 for a discussion of recent
accounting developments.
Year 2000 The "Year 2000 Issue" ("Y2K") 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. Like most financial service providers, the Company could have been
significantly affected by the Y2K issue.
<PAGE>
The Company made the transition into the year 2000 with no known material
problems arising as a result of the Y2K issue. Based upon testing and the
occurrence of subsequent daily operations since January 1, 2000, the Company's
systems reacted and continue to function in a normal fashion. While there are
several date sensitive time periods which will still require monitoring, such as
December 31, 2000, management does not expect any significant problems to occur.
Capital Bank budgeted $93,000 for the Year 2000 program and has spent
approximately $89,000 to date.
Quantitative and Qualitative Disclosure About Market Risk Capital Bank
Corporation utilizes an outside asset liability management advisory firm to help
management evaluate interest rate risk and develop asset/liability management
strategies. One tool used is a computer simulation model which projects the
Company's performance under different interest rate scenarios. Analyses are
prepared quarterly which evaluate the Company's performance in a base strategy
which reflects the Company's 1999 and 2000 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, 1999 analysis of the Company indicates that Capital Bank
Corporation has negligible interest rate risk exposure over a twelve-month time
horizon.
For the upcoming twelve month period in the Flat rate scenario, Capital Bank
Corporation is projected to earn $9.2 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 Company is expected to see its annualized
net interest income improve by $4,000, or 0.04%. Conversely, the bank will see a
decline in net interest income of $203,000, or 2.20%, if rates declined 300
basis points.
<PAGE>
<TABLE>
<CAPTION>
Capital Bank Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------------------
(In thousands, except share data)
1999 1998
---- ----
Assets
Cash and due from banks:
<S> <C> <C>
Interest-earning $ 3,541 $ 5,544
Noninterest earning 6,161 4,821
Federal funds sold 1,960 16,400
Securities (Note 3):
Available for sale 26,179 15,057
Held to maturity (estimated market value of $3,566 at
December 31, 1998) -- 3,560
Mortgage-backed securities available for sale (Note 3) 19,402 18,404
Federal Home Loan Bank stock (Note 4) 1,000 605
Loans (Note 5) 159,329 110,779
Less allowance for loan losses (2,328) (1,457)
--------- ---------
Net loans 157,001 109,322
--------- ---------
Accrued interest receivable 1,244 853
Premises and equipment, net (Note 6) 3,501 2,592
Deposit premium and goodwill, net 1,617 1,833
Other assets 731 1,002
--------- ---------
Total assets $ 222,337 $ 179,993
========= =========
Liabilities and Shareholders' Equity
Deposits (Note 7):
Demand deposits $ 10,923 $ 7,539
Savings and interest bearing checking 16,239 12,409
Money market deposit accounts 25,905 23,280
Time deposits less than $100,000 90,931 79,197
Time deposits $100,000 and greater 19,247 14,918
--------- ---------
Total deposits 163,245 137,343
--------- ---------
Repurchase agreements 4,818 2,501
Federal Home Loan Bank advances (Note 8) 20,000 5,066
Accrued interest payable 671 501
Other liabilities 2,477 1,075
--------- ---------
Total liabilities 191,211 146,486
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commitments and contingencies (Notes 10, 11, 12 and 13)
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized,
<S> <C> <C>
3,658,689 issued and outstanding in 1999 and 1998 34,806 34,788
Unearned ESOP shares -- (66)
Deferred stock awards -- (195)
Accumulated other comprehensive income (loss) (1,393) 235
Accumulated deficit (2,287) (1,255)
--------- ---------
Total shareholders' equity 31,126 33,507
--------- ---------
Total liabilities and shareholders' equity $ 222,337 $ 179,993
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
<TABLE>
<CAPTION>
Capital Bank Corporation
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998, and 1997
- -------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
1999 1998 1997
------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans and fees on loans $ 11,020 $ 7,246 $ 3,311
Investment securities 2,898 2,147 1,528
Federal funds and other interest income 635 1,137 878
-------- -------- --------
Total interest income 14,553 10,530 5,717
-------- -------- --------
Interest expense:
Deposits 6,676 5,486 2,920
Borrowings 821 32 32
Repurchase agreements 159 9 --
-------- -------- --------
Total interest expense 7,656 5,527 2,952
-------- -------- --------
Net interest income 6,897 5,003 2,765
Provision for loan losses 924 792 270
-------- -------- --------
Net interest income after provision for loan losses 5,973 4,211 2,495
-------- -------- --------
Other operating income:
Service charges and fees 461 304 140
Net gain on sale of securities -- 64 --
Other fees and income 799 348 95
-------- -------- --------
Total other operating income 1,260 716 235
-------- -------- --------
Other operating expenses:
Personnel 3,422 2,700 1,498
Advertising 276 199 131
Occupancy 503 379 133
Furniture and equipment 301 244 79
Data processing 328 280 127
Professional fees 257 397 198
Director fees 229 288 168
Amortization of intangibles 216 216 114
Merger expenses 1,647 288 --
Other 945 822 535
-------- -------- --------
Total other operating expenses 8,124 5,813 2,983
-------- -------- --------
Net loss before income tax expense (benefit) (891) (886) (253)
Income tax expense (benefit) (40) 10 557
-------- -------- --------
Net loss $ (851) $ (896) $ (810)
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net loss per share - basic and diluted $ (.23) $ (.25) $ (.33)
======== ======== ========
Dividends per share $ .05 $ .10 $ .18
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Capital Bank Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1999, 1998, and 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Changes in Shareholders' Equity As of and for the
years ended December 31, 1999, 1998, and 1997
(In thousands)
Accumulated
Other Stock Unearned Deferred Retained
Common Comprehensive Subscriptions ESOP Stock Earnings
Stock Income (Loss) Receivable Shares Awards (Deficit) Total
-------------- ----------------- ------------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 9,059 $ (106) $ - $ (266) $ (368) $ 1,258 $ 9,577
Issuance of stock 25,748 - (983) - - - 24,765
Proceeds from stock
subscriptions - - 983 - - - 983
Commissions paid on
issuance of stock (75) - - - - - (75)
Release of ESOP shares 23 - - 71 - - 94
MRP amortization - - - - 97 - 97
Net loss - - - - - (810) (810)
Other comprehensive income - 120 - - - - 120
-----------
Comprehensive loss (690)
Cash dividends paid - - - - - (446) (446)
------------ ----------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 1997 34,755 14 - (195) (271) 2 34,305
Release of ESOP shares 33 - - 129 - - 162
MRP amortization - - - - 76 - 76
Net loss - - - - - (896) (896)
Other comprehensive income - 221 - - - - 221
-----------
Comprehensive loss (675)
Cash dividends paid - - - - - (361) (361)
------------ ----------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 1998 34,788 235 - (66) (195) (1,255) 33,507
Release of ESOP shares 18 - - 66 - - 84
MRP amortization - - - - 195 - 195
Net loss - - - - - (851) (851)
Other comprehensive income (loss) - (1,628) - - - - (1,628)
-----------
Comprehensive loss (2,479)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Cash dividends paid - - - - - (181) (181)
------------ ----------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 1999 $ 34,806 $ (1,393) $ - $ - $ - $ (2,287) $ 31,126
============ ================= ============ =========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Capital Bank Corporation
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998, and 1997
Capital Bank
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss $ (851) $ (896) $ (810)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of deposit premium and goodwill 216 216 114
Depreciation 397 268 84
Amortization (accretion) of premiums/discount on securities, net 47 18 (10)
MRP and ESOP compensation 279 217 218
Gain on sale of investments - (64) -
Provision for loan losses 924 792 270
Change in deferred taxes (273) - 384
Changes in assets and liabilities:
Accrued interest receivable (391) (253) (331)
Accrued interest payable 170 118 49
Other assets 544 (825) (194)
Other liabilities 1,402 (153) (1,213)
------------ ------------ -------------
Net cash provided by (used in) operating activities 2,464 (562) (1,439)
------------ ------------ -------------
Cash flows from investing activities:
Net increase in loans (48,603) (51,925) (17,559)
Additions to premises and equipment (1,306) (1,797) (608)
Purchase of Federal Home Loan Bank stock (395) (106) (183)
Purchase of securities available for sale (14,964) (12,935) (12,528)
Purchase of securities held-to-maturity - - (9,004)
Purchase of mortgage-backed securities available for sale (6,281) (11,641) -
Proceeds from maturities of securities available for sale 7,450 10,613 2,873
Proceeds from maturities of securities held to maturity 3,560 8,000 3,000
Proceeds from sales of securities available for sale - 3,055 -
Proceeds from maturities of certificates of deposit - - 200
Net cash received from branch acquisitions - - 10,289
------------ ------------ -------------
Net cash used by investing activities (60,539) (56,736) (23,520)
------------ ------------ -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 25,902 46,985 24,977
Net increase in repurchase agreements 2,317 2,501 -
Proceeds from Federal Home Loan Bank borrowings 20,000 5,000 -
Principal repayments of Federal Home Loan Bank borrowings (5,000) - -
Principal repayments of ESOP Note (66) (108) (581)
Cash dividends paid (181) (361) (446)
Net proceeds received from sale of stock - - 25,673
------------ ------------ -------------
Net cash provided by financing activities 42,972 54,017 49,623
------------ ------------ -------------
Net change in cash and cash equivalents (15,103) (3,281) 24,664
Cash and cash equivalents at beginning of period 26,765 30,046 5,382
------------ ------------ -------------
Cash and cash equivalents at end of period $11,662 $26,765 $30,046
============ ============ =============
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 7,486 $ 5,357 $ 2,542
============ ============ =============
Cash payments (receipts) for taxes $ 287 $ 286 $ (305)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
12
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Nature of Operations
Capital Bank Corporation (the "Company") is a bank holding company
incorporated under the laws of North Carolina on August 10, 1998 (See
Note 2). The Company's primary function is to serve as the holding
company for its wholly-owned subsidiary, Capital Bank (the "Bank"). The
Bank operates 7 branches in central North Carolina and is engaged in
general commercial banking, providing a full range of banking services.
The majority of the Bank's customers are individuals and small to
medium size businesses. The Bank's primary source of revenue is
interest earned from loans to customers and from invested cash and
securities.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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;
3. Securities Available for Sale - Debt and equity securities not
classified as either held to maturity securities or trading
<PAGE>
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.
13
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1999, there were no loans material to the financial
statements considered to be impaired. At December 31, 1998, the
recorded investment in loans which had been identified by the Bank as
impaired loans totaled $479,000. The average balance during 1999 and
1998 for impaired loans was approximately $160,000 and $490,000,
respectively. Total income related to impaired loans from the point in
time when those loans were deemed to be impaired as reflected in the
1998 Statements of Operations was approximately $4,000.
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.
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 probable 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.
<PAGE>
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.
14
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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. 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 3 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 $547,000 and $331,000 at
December 31, 1999 and 1998, 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 years ended December 31, 1999, 1998, and 1997 was $216,000,
$216,000, and $114,000, respectively.
The Company evaluates intangible assets for potential impairment by
analyzing the operating results, trends and prospects of the Company.
The Company 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 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 Company cannot determine that the benefits
will more likely than not be realized.
<PAGE>
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company applies a financial-components approach that focuses on
control when accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
approach provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. Due to the small number of transactions and the
immateriality of revenue associated with these transactions, there was
no material impact on results of operations or financial position due
to the adoption of this statement.
15
<PAGE>
Capital Bank Corporation
Notes to Consolidated 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 3,676,432, 3,647,377 and 2,460,266 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" as of December 31, 1997. 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.
Comprehensive Loss
The Company 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 Company's only components of
other comprehensive income relate to unrealized gains and losses on
available for sale securities. Information concerning the Company's
other comprehensive income (loss) for the years ended December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------- -------- --------
(In thousands)
Unrealized gains (losses) on securities available for sale $(1,628) $ 285 $ 120
Reclassification of gains recognized in net loss -- (64) --
------- ------- -------
Other comprehensive income (loss) $(1,628) $ 221 $ 120
======= ======= =======
</TABLE>
Segment Information
During the year ended December 31, 1998, the Company 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.
<PAGE>
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 Company 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 overall performance of the institution, versus the individual
branches or products.
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
16
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
recognition of those plans. The adoption of SFAS No. 132 did not have a
material effect on the Company's consolidated financial statements.
Reclassifications
Certain items included in the 1998 and 1997 financial statements have
been reclassified to conform to the 1999 presentation. These
reclassifications have no effect on the net loss or shareholders'
equity previously reported.
New Pronouncements
The Company will adopt the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective with the
fiscal quarter beginning July 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 Company'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 two branches located in Sanford,
North Carolina from a large community bank. A summary of the
acquisition is as follows:
(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 March 26, 1999, pursuant to the reorganization of the Bank into a
holding company structure, the common stock of the Bank was converted
on a share-for-share basis into common stock in the Company that have
<PAGE>
rights, privileges and preferences identical to the common stock of the
Bank. On March 31, 1999, the Company completed its acquisition of Home
Savings Bank of Siler City SSB, Inc. ("Home Savings") through the
issuance of 1.28 shares of the Company's common stock for each share of
Home Saving's outstanding common stock, or 1,181,038 shares. The
acquisition was accounted for as a pooling-of-interests. On July 16,
1999, Home Savings merged with the Bank to form one subsidiary under
the Company. Separate results of pooled entities for the years ended
December 31, 1998 and 1997 are as follows:
17
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Home
Company Savings Combined
----------- ------------ -------------
(In thousands)
1998:
Total interest income $ 6,472 $ 4,058 $ 10,530
Net interest income 3,409 1,594 5,003
Net income (loss) (1,124) 228 (896)
1997:
Total interest income $ 1,816 $ 3,901 $ 5,717
Net interest income 1,147 1,618 2,765
Net income (loss) (722) (88) (810)
</TABLE>
Prior to the merger with the Company, Home Savings reported total
interest income of $994,000, net interest income of $418,000 and a net
loss of $1,285,000 for the three months ended March 31, 1999.
3. Securities
Securities at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
--------------- ---------------- ---------------- ----------------
1999
----
Available for sale:
U.S. Agency obligations $ 26,916 $ 29 $ 766 $ 26,179
Mortgage-backed securities 20,058 5 661 19,402
--------------- ---------------- ---------------- ----------------
$ 46,974 $ 34 $ 1,427 $ 45,581
=============== ================ ================ ================
1998
----
Available for sale:
U.S. Agency securities 14,938 132 13 15,057
Mortgage-backed securities: 18,288 156 40 18,404
--------------- ---------------- ---------------- ----------------
$ 33,226 $ 288 $ 53 $ 33,461
=============== ================ ================ ================
Held to Maturity:
U.S. Agency securities $ 3,560 $ 6 $ - $ 3,566
=============== ================ ================ ================
</TABLE>
<PAGE>
The amortized cost and estimated market values of securities at
December 31, 1999 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.
18
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Estimated
Amortized Market
(In thousands) Cost Value
---------------------------------
Available for sale:
Due in one year or less $ 1,000 $ 999
Due after one year through five years 21,732 21,156
Due after five years through ten years 11,654 11,269
Due after ten years 12,588 12,157
----------- -----------
$ 46,974 $ 45,581
----------- -----------
During the year ended December 31, 1998, the Company had gross realized
gains of $64,000 on sales of available for sale securities with book
values of $3,055,000. There were no sales of securities during the
periods ended December 31, 1999 or 1997.
Securities with an amortized cost of $31,142,000 were pledged as of
December 31, 1999 to secure public deposits, repurchase agreements, 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.
5. Loans and Allowance for Loan Losses
The composition of the loan portfolio by loan classification at
December 31, 1999 and 1998 is as follows:
(In thousands) 1999 1998
--------------------------
Commercial $104,572 $ 62,551
Consumer 11,444 7,586
Home Equity Lines 12,008 9,801
Residential mortgages 31,533 31,059
-------- --------
159,557 110,997
Less deferred loan fees, net 228 218
-------- --------
$159,329 $110,779
======== ========
A summary of activity in the allowance for loan losses for the years
ended December 31, 1999, 1998, and 1997 is as follows:
19
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
-----------------------------------
Balance at beginning of period $ 1,457 $ 705 $ 278
Adjustment for loans acquired -- -- 163
Provision for loan losses 924 792 270
Loans charged-off, net of recoveries (53) (40) (6)
------- ------- -------
Balance at end of period $ 2,328 $ 1,457 $ 705
======= ======= =======
At December 31, 1999, nonperforming assets consisted of nonaccrual
loans in the amount of $92,000. At December 31, 1998, nonperforming
assets consisted of nonaccrual loans in the amount of $75,000. At
December 31, 1999 and 1998, there were no loans past due greater than
90 days and still accruing interest.
In the normal course of business certain directors and executive
officers of the Company, including their immediate families and
companies in which they have an interest, may be loan customers. Total
loans to such groups at December 31, 1999 and activity during the year
ended December 31, 1999, is summarized as follows:
(In thousands)
Beginning balance $ 6,472
New loans 4,736
Principal repayments (3,105)
----------
Ending balance $ 8,103
==========
In addition, such groups had available lines of credit in the amount of
$875,000 at December 31, 1999. The Company paid an aggregate of
approximately $274,000, $176,000 and $312,000 to companies owned by
members of the board of directors for equipment and construction and
consulting services during 1999, 1998 and 1997, respectively.
6. Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 are as follows:
1999 1998
----------------------------
(In thousands)
Land $ 592 $ 394
Buildings and leasehold improvements 2,226 1,667
Furniture and equipment 1,660 1,142
Automobiles 108 85
Construction in progress 13 4
------- -------
4,599 3,292
Less accumulated depreciation and amortization (1,098) (700)
------- -------
$ 3,501 $ 2,592
======= =======
20
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Deposits
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:
(In thousands)
2000 $ 78,607
2001 20,567
2002 10,904
2003 -
2004 100
-----------
$ 110,178
8. Federal Home Loan Bank Advances
Advances from the Federal Home Loan had a weighed average rate of 5.19%
at December 31, 1999 and were collateralized by certain securities
(Note 3). Advances outstanding at December 31, 1999 mature from April
through December 2009.
At December 31, 1999, the Company had an additional $13,351,000 of
credit available with the FHLB.
9. Income Taxes
Income taxes charged to operations for the years ended December 31,
1999, 1998, and 1997 consist of the following components:
(In thousands) 1999 1998 1997
----------------------------
Current income tax expense (benefit) $ 233 $ 10 $ 173
Deferred income tax expense (273) - 384
-------- -------- --------
Total income tax expense $ (40) $ 10 $ 557
======== ======== ========
Income tax expenses and benefits recorded during the years ended
December 31, 1998 and 1997 reflect only those taxes paid or refunded
for Home Savings Bank prior to the merger date. Capital Bank has not
recorded any expense for those periods due to the generation of net
operating losses and the establishment of a valuation allowance against
deferred tax assets.
Deferred tax assets reflected on the financial statements of Home
Savings Bank prior to the merger date were fully reserved during the
1997 year due to the net losses incurred as a result of consolidating
the financial statements of the two entities. Those assets would not
have been reserved prior to 1997 since Capital Bank was not yet in
<PAGE>
operation before that time and, accordingly, had not yet recorded any
losses. The entry to reserve the deferred tax assets of Home Savings
Bank as of December 31, 1997 resulted in additional income tax expenses
of $404,000.
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 change in the valuation allowance on the net deferred tax asset for
the years ended December 31, 1999, 1998 and 1997 and certain
non-deductible merger expenses in those years.
Significant components of deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
21
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands) 1999 1998
------------------------
Deferred tax assets:
Allowance for loan losses $ 766 $ 401
Preopening expenditures 97 135
Amortization 70 42
Directors fees 308 121
Deferred compensation 350 184
Deferred loan fees and costs 24 85
Other 93 59
Net operating loss - 148
----------- ----------
Total deferred tax assets 1,708 1,175
Valuation allowance (1,320) (1,050)
----------- ----------
Net deferred tax assets 388 125
----------- ----------
Deferred tax liabilities:
Depreciation (64) (74)
FHLB Stock (51) (51)
----------- ----------
Total deferred tax liabilites (115) (125)
----------- ----------
Net deferred tax assets $ 273 $ - 273 -
=========== ==========
10. Leases
The Company has noncancelable operating leases for its corporate office
and branch locations that expire at various times through 2007. Future
minimum lease payments under the leases for years subsequent to
December 31, 1999 are as follows:
(In thousands)
2000 $ 123
2001 57
2002 57
2003 57
2004 47
Thereafter 91
---------
---------
$ 432
=========
During 1999, 1998, and 1997, payments under operating leases were
$212,000, $162,000, and $64,000 respectively.
11. Regulatory Matters and Restrictions
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
<PAGE>
that, if undertaken, could have a direct material effect on the
consolidated 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, 1999, the most recent notification from regulators, 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. Management believes, as of December
31, 1999, that the Company meets all capital requirements to which it
is subject.
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.
22
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Dividends as shown in the consolidated financial statements of the
Company reflect only those dividends paid by Home Savings prior to the
effective merger date.
To be categorized as well capitalized, the Company and the Bank must
maintain minimum amounts and ratios. The Bank's actual capital amounts
and ratios as of December 31, 1999 and December 31, 1998 and the
minimum requirements are presented in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Minimum Requirements for:
Actual Adequacy Purposes To Be Well Capitalized
-------------------- --------------------- --------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- --------------
1999
Total Capital (to Risk Weighted Assets) $ 32,798 20.56% $ 12,763 8.00% $ 15,954 10.00%
Tier I Capital (to Risk Weighted Assets) 30,800 19.31% 6,381 4.00% 9,572 6.00%
Tier I Capital (to Average Assets) 30,800 15.49% 7,955 4.00% 9,944 5.00%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Minimum Requirements for:
Actual Adequacy Purposes To Be Well Capitalized
--------------------- -------------------------------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- -------------
1998
Total Capital (to Risk Weighted Assets) $33,152 29.58% $ 8,965 8.00% $ 11,207 10.00%
Tier I Capital (to Risk Weighted Assets) 31,751 28.33% 4,483 4.00% 6,724 6.00%
Tier I Capital (to Average Assets) 31,751 22.07% 5,754 4.00% 7,193 5.00%
</TABLE>
12. Employee Benefit Plans
401(k) Plan
The Company instituted a 401(k) plan for the benefit of its employees,
which includes provisions for employee contributions, subject to
limitation under 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 Company'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 Company may make additional
contributions on a discretionary basis. Aggregate contributions for
1999, 1998, and 1997 were $132,000, $70,000, and $19,000, respectively.
Defined Benefit Plan
The employees of the former Home Savings participated in a
non-contributory defined benefit pension plan. The Company is in the
process of terminating this plan. As of December 31, 1999, the plan was
still active, and an estimated termination accrual of $33,000 has been
recorded. Net periodic pension cost for the years ended September 30,
1999, 1998 and 1997 included the following components:
23
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
-------------------------------
Service cost for benefits earned $ 24,979 $ 50,465 $ 43,815
Interest cost on projected benefit obligation 23,630 16,753 12,408
Actual return on plan assets (23,820) (20,718) (11,034)
Net amortization and deferral 10,375 9,526 1,503
-------- -------- --------
$ 35,164 $ 56,026 $ 46,692
======== ======== ========
</TABLE>
The following schedule sets forth the plan's funded status at September
30, 1999 and 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
--------------------------
(In thousands)
Vested benefit obligation $ 210,956 $ 170,131
========= =========
Accumulated benefit obligation $ 212,288 $ 170,711
========= =========
Projected benefit obligation $ 386,179 $ 306,540
Plan assets at fair value (296,326) (203,362)
--------- ---------
Projected benefit obligation in excess of plan assets 89,853 103,178
Unrecognized net obligation (14,535) (15,479)
Unrecognized prior service cost 24,289 26,371
Unrecognized net loss (86,238) (73,761)
--------- ---------
Accrued pension liability recognized in other liabilities $ 13,369 $ 40,309
========= =========
</TABLE>
The assumed discount rate used in the determination of the actuarial
present value of accumulated plan benefits was 7% at September 30, 1999
and 1998. The assumed long-term rate of return on plan assets was 7%,
and the assumed rate of compensation increase was 6%, for the fiscal
years ended September 30, 1999 and 1998.
Total pension plan expense charged to operations for the fiscal years
ended September 30, 1999, 1998 and 1997 was $39,000, $60,000 and
$49,000, respectively.
Employee Stock Ownership Plan
<PAGE>
The employees of the former Home Savings participated in an Employee
Stock Ownership Plan ("ESOP"). The ESOP used $717,000 in borrowings to
purchase the equivalent of 91,875 shares of the Company's stock upon
the mutual to stock conversion of Home Savings. These shares were
allocated to employees and expensed at fair market value at the time
they were committed to be released through the repayment of the
associated borrowings. The ESOP debt was fully repaid by December 31,
1999. The principal balance of the ESOP loan at December 31, 1998 was
$66,000. The financial statements for the years ended December 31,
1999, 1998 and 1997 include compensation expense of $20,000, $140,000
and $125,000 and interest expense of $3,000, $11,000 and $20,000,
respectively, related to the ESOP. In addition, during 1999, an expense
of $52,000 related to the ESOP was charged to merger related expenses.
The Savings Bank guaranteed the repayment of the ESOP debt to the
outside lender and, accordingly, recorded the debt on its balance sheet
with a corresponding contra-equity account.
24
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Management Recognition Plan (MRP)
On July 17, 1996, prior to the merger with the Company, Home Savings
adopted an MRP Plan and committed to provide funding to the MRP Plan to
purchase 35,854 shares of Home Saving's common stock, converted to
45,893 shares of the Company's stock, on that date. On July 17, 1996,
33,724 shares, with a market value of $382,032, were issued to the MRP
Plan and awarded to certain officers and employees as restricted stock
which were to vest at a rate of 20% per year over the five year period
ending July 17, 2001. The remaining 9,507 shares could have been
purchased and awarded at the discretion of the Board of Directors to
participants in the future by Trustees of the MRP Plan. The plan
contained provisions providing for forfeiture of unvested shares in the
event of termination of employment, and vesting in the event of death,
disability, or change in control. Per the terms of the plan, all
unvested shares as of March 31, 1999, the effective date of the merger,
became fully vested.
The shares issued to the MRP plan were recorded as outstanding shares,
and the unvested portion has been recorded as unearned compensation
through a contra equity account. The consolidated statements of
operations for the years ended December 31, 1999, 1998, and 1997
include compensation expense of $19,000, $76,000 and $97,000,
respectively, relating to the scheduled vesting of MRP shares. In
addition, during 1999, an expense of $175,000 related to the MRP was
charged to merger related expenses.
13. Stock Options
The Company'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 200,000 shares for each of the 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 years ending December 31, 1999,
1998 and 1997 of the Company's Plan, including the weighted average
exercise price ("WAEP") is presented below:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------------------------------------------------------------
Shares WAEP Shares WAEP Shares WAEP
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year 180,851 $ 11.51 105,101 $ 9.79 63,101 $ 8.98
Granted 34,400 11.16 75,750 13.90 42,000 11.00
------- --------- ------- --------- ------- ---------
Outstanding at end of year 215,251 $ 11.46 180,851 $ 11.51 105,101 $ 9.79
======= ========= ======= ========== ======= =========
Options exercisable at year-end 143,931 $ 11.20 90,192 $ 10.44 25,621 $ 10.01
======= ========= ======= ========= ======= ========
</TABLE>
The following table summarizes information about the Plan's stock
options at December 31, 1999:
25
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Remaining
Number Contractual Number
Exercise Price Outstanding Life Exercisable
-------------- ----------- ----------- -----------
$8.98 63,101 6.8 years 63,101
$10.25 3,000 9.3 years 450
$11.00 43,000 7.5 years 23,800
$11.25 31,400 9.3 years 4,710
$13.75 18,000 8.1 years 3,600
$14.00 56,750 8.6 years 48,270
----------- -----------
215,251 143,931
=========== ===========
The Company accounts for its Plans under the provisions of APB Opinion
No. 25. However, the Company is required to disclose the pro forma
effects on net income as if it had recorded compensation based on the
fair value of options granted. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants:
1999 1998 1998
--------------------------------------
Dividend yield - - -
Expected volatility 30.3% 33.5% 15.0%
Riskfree interest rate 5.11% 5.40% 5.75%
Expected Life 7 years 7 years 6 years
The weighted average fair value of options granted during 1999, 1998
and 1997 was $4.19, $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:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Net (loss) As reported $ (851) $ (896) $ (810)
Pro forma (998) (1,258) (839)
Net (loss) per share - Basic and diluted As reported $ (0.23) $ (0.25) $ (0.33)
Pro forma (0.27) (0.34) (0.34)
</TABLE>
14. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company 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, 1999, these financial instruments were
<PAGE>
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 Company 's exposure to credit loss in the event of nonperformance
by the other party is represented by the contractual amount of those
instruments. The Company 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 Company, 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
26
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
$35,845,000 and $777,000, respectively, at December 31, 1999 and
$22,842,000 and $155,000, respectively, at December 31, 1998.
The Bank's lending in concentrated primarily in Wake, Chatham, 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 Company's financial instruments, the fair
value of such instruments has been derived based on management's
assumptions with 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 Company 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,
1999 and 1998 were as follows:
(In thousands) 1999 1998
--------------------------------
Loans:
Carrying amount $ 157,001 $ 109,322
Estimated fair value 155,958 110,295
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 $59,884,000 and $47,727,000 at
December 31, 1999 and 1998, 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.
<PAGE>
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, 1999 and 1998
were as follows:
(In thousands) 1999 1998
--------------------------
Certificates of deposits:
Carrying amount $110,178 $ 94,115
Estimated fair value 110,488 94,470
Advances from the FHLB:
Carrying amount $ 20,000 $ 5,000
Estimated fair value 19,661 5,000
27
<PAGE>
Capital Bank Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
There is no material difference between the carrying amount and
estimated fair value of off-balance sheet items totaling $36,622,000
and $22,997,000 at December 31, 1999 and 1998, respectively, which are
primarily comprised of unfunded loan commitments.
The Company's remaining assets and liabilities are not considered
financial instruments.
28
<PAGE>
Report of Independent Accountants
The Board of Directors and Shareholders
Capital Bank Corporation
Raleigh, North Carolina
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Capital Bank Corporation at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
January 28, 2000
Raleigh, North Carolina
29
<PAGE>
Board of Directors - Capital Bank and Capital Bank Corporation
<TABLE>
<CAPTION>
<S> <C>
O. A. Keller, III Oscar A. Keller, Jr.
(Chairman of the Board) President and Chief Executive Officer
President and Chief Executive officer Parkview Retirement Home, Inc.
Earthtec Environmental, Inc.
Vernon Malone
Charles F. Atkins Retired Educator
President Wake County Commissioner
Cam-L Corporation
George R. Perkins, III
Lamar Beach Vice President - Sales
Retired Frontier Spinning Mills
Former Chief Executive Officer - Spanco Corporation
Don W. Perry
James A. Beck Vice President
President and Chief Executive Officer Lee Brick & Tile
Capital Bank Corporation
J. Rex Thomas
President
David J. Gospodarek, CPA Grubb & Ellis/Thomas Linderman, Inc.
Gospodarek, Lunsford & Associates
Bruce V. Wainright, DDS
Carolyn W. Grant President, Bruce V. Wainright, D.D.S., P.A.
Investment Broker
Trademark Properties Samuel J. Wornom, III
President and Chief Executive Officer
John F. Grimes Nouveau Properties
Partner
Budd Tire Company
Executive Officers
Darleen M. Johns
President and Chief Executive Officer James A. Beck
Alphanumeric Systems, Inc. President and Chief financial Officer
Robert L. Jones Allen T. Nelson, Jr.
Chairman Senior Vice President, Secretary and
DJB Construction Group Chief Financial Officer
Franklin G. Shell
Senior Vice President
Senior Lending Officer
Charlie T. Bowers, Jr.
Sanford Market CEO
William L. Dawkins
Raleigh Market CEO
Ernest F. McAllister
Cary Market CEO
Edwin E. Bridges
Chatham County Market CEO
</TABLE>
<PAGE>
Annual Meeting
The 2000 Annual Meeting of the Shareholders of Capital Bank Corporation will be
held at 2:30 p.m., Thursday, April 20, 2000, at the Brick City Chop House, 101
S. Steele Street, Sanford, North Carolina.
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 March 31, 1999, shares of
Capital Bank stock were converted on a share-for-share basis into common stock
of Capital Bank Corporation. On February 23, 2000, there were approximately 769
shareholders of record and 1,438 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.
1999 High Low Close
First Quarter 12 9 3/4 9 15/16
Second Quarter 11 3/4 9 10 1/8
Third Quarter 11 9 9
Fourth Quarter 10 7 1/2 7 3/4
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
<TABLE>
<CAPTION>
<S> <C>
Banking Offices
Raleigh - Main Office and Corporate Headquarters Cary - Harrison Ave.
4400 Falls of Neuse Rd. 915 North Harrison Ave.
P.0. Box 18949 Cary, NC 27513
Raleigh, NC 27619-8949 (919) 319-1049
(919) 978-3100
Cary - Kildaire Farm Rd.
Sanford - Main Office 1201 Kildaire Farm Rd.
130 N. Steele Street Cary, NC 27511
Sanford, NC 27330 (919) 469-9400
(919) 775-4000
Siler City
Sanford - Kendale Plaza 300 East Raleigh St.
2800 Williams Street Siler City, NC 27344
Sanford, NC 27330 (919) 742-4186
(919) 775-2900
Financial Information
Sanford - Tramway Crossing To obtain financial information or a copy of the
2222 Jefferson Davis Highway Company's Annual Report or Form 10-K, please contact:
Sanford, NC 27330
(919) 776-2222 Allen T. Nelson, Jr.
Senior Vice President and Chief Financial Officer
Transfer Agent Capital Bank Corporation
Registrar and Transfer Company P. 0. Box 18949
10 Commerce Drive Raleigh, NC 27619-8949
Cranford, NJ 07016 (919) 874-6321
(800)456-0596
www.capitalbank-nc.com
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
Capital Bank
EXHIBIT 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Capital Bank Corporation on Form S-8 (File No. 333-76919) of our report dated
January 28, 2000, on our audits of the financial statements of Capital Bank
Corporation as of December 31, 1999 and 1998, and for each of the years in the
three year period ended December 31, 1999, which report has been included in
this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,161
<INT-BEARING-DEPOSITS> 3,541
<FED-FUNDS-SOLD> 1,960
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,581
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 159,329
<ALLOWANCE> 2,328
<TOTAL-ASSETS> 222,337
<DEPOSITS> 163,245
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,966
<LONG-TERM> 20,000
0
0
<COMMON> 34,806
<OTHER-SE> (3,680)
<TOTAL-LIABILITIES-AND-EQUITY> 222,337
<INTEREST-LOAN> 3,260
<INTEREST-INVEST> 715
<INTEREST-OTHER> 178
<INTEREST-TOTAL> 4,153
<INTEREST-DEPOSIT> 1,805
<INTEREST-EXPENSE> 2,141
<INTEREST-INCOME-NET> 2,012
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,685
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 381
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 3.81
<LOANS-NON> 92
<LOANS-PAST> 488
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,054
<CHARGE-OFFS> 26
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,328
<ALLOWANCE-DOMESTIC> 2,328
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99
Risk Factors Relating to the Company
We Have Not Been Profitable Since We Opened in June 1997
The Bank was incorporated under the laws of the State of North Carolina
on May 30, 1997 and opened on June 20, 1997. The Company was incorporated under
the laws of the State of North Carolina on August 10, 1998. As a result, the
Company has minimal operating history against which to compare historical
performance. To date, the Company has operated at a loss in each reporting
period. For year ended December 31, 1997, the Company had a net loss of
$810,000. For year ended December 31, 1998, the Company had a net loss of
$896,000. For year ended December 31, 1999, the Company had a net loss of
$851,000, including non-recurring merger related costs of $1.6 million. These
results are consistent with the Company's management projections and are also
consistent with the performance of most banks of its type that are in their
first three to four years of operations. However, while exclusive of
non-recurring merger related costs, the Company has reached a level of
profitability, the Company cannot predict with certainty its future
profitability.
We Depend Heavily on Our CEO, James Beck
The Company currently depends heavily on the services of its Chief
Executive Officer, James A. Beck, and a number of other key management
personnel. Even though the Company carries a $2 million key man life insurance
policy on Mr. Beck, the loss of his services or of other key personnel could
affect the Company in a material and adverse way. The Company's success will
also depend in part on its ability to attract and retain additional qualified
management personnel who have experience both in sophisticated banking matters
and in operating a small to mid-size bank. Competition for such personnel is
strong in the banking industry and the Company may not be successful in
attracting or retaining the personnel it requires. The Company attempts to
effectively compete in this area by offering financial packages that include
incentive-based compensation and the opportunity to join in the rewarding work
of building a new bank.
Government Regulations May Prevent or Impair Our Ability to Pay
Dividends, Engage in Acquisitions or Operate in Other Ways
Current and future legislation and the policies established by federal
and state regulatory authorities will affect the Company's operations. The
Company is subject to supervision and periodic examination by the FDIC and the
North Carolina State Banking Commission. Banking regulations, designed primarily
for the protection of depositors, may limit our growth and the return to you,
our investors, by restricting our activities, such as:
o the payment of dividends to our shareholders;
o possible mergers with or acquisitions by other institutions;
o our desired investments;
o loans and interest rates;
o interest rates paid on our deposits;
o the possible expansion of our branch offices;
<PAGE>
o our ability to provide securities or trust services.
The Company also is subject to capitalization guidelines set forth in
Federal legislation, and could be subject to enforcement actions to the extent
that the Company is found by regulatory examiners to be undercapitalized. The
Company cannot predict what changes, if any, will be made to existing federal
and state legislation and regulations or the effect that such changes may have
on the future business and earnings prospects of the Company. The cost of
compliance with regulatory requirements may adversely affect the Company's
ability to operate profitably.
Technological Advances Impact our Business
The banking industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, on our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations. Many of our competitors have substantially greater resources
than we do to invest in technological improvements. We may not be able to
effectively implement new technology-driven products and services or
successfully market such products and services to our customers.
Our Trading Volume Has Been Low Compared With Larger Banks
The trading volume in Company stock on the Nasdaq SmallCap Market has
been comparable to other similarly-sized banks since trading began in December
1997. Nevertheless, this trading is relatively low when compared with more
seasoned companies listed on the Nasdaq SmallCap Market or other stock
exchanges. Thus, the market in the Company's stock is limited in scope relative
to other companies. In addition, we cannot say with any certainty that an active
and liquid trading market for the Company's stock will develop.
Our Results are Impacted by the Economic Conditions of the Research Triangle
Our operations are concentrated in Eastern North Carolina, primarily in
Wake and Lee Counties, which include the area known as the "Research Triangle."
As a result of this geographic concentration, our results may correlate to the
economic conditions in these areas. A deterioration in economic conditions in
our market areas, particularly in the industries on which these areas depend,
may adversely affect the quality of our loan portfolio and the demand for our
products and services, and accordingly, our results of operations.
We Compete With Much Larger Companies for Some of the Same Business
The banking and financial services business in the Company's market
areas is highly competitive and is becoming more competitive as a result
primarily of:
o changes in regulations;
o changes in technology and product delivery systems; and
o the accelerating pace of consolidation among financial services
providers.
<PAGE>
We may not be able to compete effectively in our markets, and our
results of operations could be adversely affected by the nature or pace of
change in competition. We compete for loans, deposits and customers with various
bank and nonbank financial services providers, many of which are much larger in
total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services.
Credit Quality
A significant source of risk for us arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. We have
underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that we believe are
appropriate to minimize this risk by assessing the likelihood of nonperformance,
tracking loan performance and diversifying our loan portfolio. Such policies and
procedures, however, may not prevent unexpected losses that could adversely
affect our results of operations.
Potential Risks Associated with Acquisitions
We intend to continue to explore expanding a branch system through
selective acquisitions of existing banks or bank branches in Wake County, and
perhaps Lee and Chatham Counties, North Carolina. We cannot say with any
certainty that we will be able to consummate, or if consummated, successfully
integrate future acquisitions, or that we will not incur disruptions and
unexpected expenses in integrating such acquisitions. In the ordinary course of
business, we evaluate potential acquisitions that would bolster our ability to
cater to the small business, individual and residential lending markets of Wake,
Chatham and Lee Counties, North Carolina. In attempting to make such
acquisitions, we anticipate competing with other financial institutions, many of
which have greater financial and operational resources. In addition, since the
consideration for an acquired bank or branch may involve cash, notes or the
issuance of shares of Common Stock, existing shareholders could experience
dilution in the value of their shares of Common Stock in connection with such
acquisitions. Any given acquisition, if and when consummated, may adversely
affect our results of operations or overall financial condition.
