UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission File Number 0-30062
CAPITAL BANK CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-2101930
-------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4901 Glenwood Avenue
Raleigh, North Carolina 27612
-------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 645-6400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
As of November 10, 2000, there were issued and outstanding 3,658,689 shares of
the Registrant's common stock, no par value.
<PAGE>
Capital Bank Corporation
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1. Condensed Financial Statements
Consolidated statements of financial condition at September 30,
2000 (Unaudited) and December 31, 1999 1
Consolidated statements of income (loss) for the three months
ended September 30, 2000 and September 30, 1999 (Unaudited) 2
Consolidated statements of income (loss) for the nine months ended 3
September 30, 2000 and September 30, 1999 (Unaudited)
Consolidated statements of comprehensive income (loss) for the three
months ended September 30, 2000 and September 30, 1999 (Unaudited) 4
Consolidated statements of comprehensive income (loss) for the nine
months ended September 30, 2000 and September 30, 1999 (Unaudited) 4
Consolidated statements of cash flows for the nine months ended 5-6
September 30, 2000 and September 30, 1999 (Unaudited)
Notes to consolidated financial statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks:
Interest earning $ 11,451 $ 3,541
Non-interest earning 8,661 6,161
Federal funds sold 3,460 1,960
Investment securities - available for sale, at fair value 54,687 46,581
Loans-net of unearned income and deferred fees 232,373 159,329
Allowance for loan losses (3,169) (2,328)
------------- -------------
Net loans 229,204 157,001
------------- -------------
Premises and equipment, net 5,154 3,501
Accrued interest receivable 2,388 1,244
Deposit premium and goodwill, net 4,756 1,617
Other assets 1,905 731
------------- -------------
Total assets $ 321,666 $ 222,337
============= =============
LIABILITIES
Deposits:
Demand, non-interest bearing $ 20,506 $ 10,923
Savings and interest bearing demand deposits 64,408 42,144
Time deposits 181,869 110,178
------------- -------------
Total deposits 266,783 163,245
------------- -------------
Accrued interest payable 881 671
Repurchase agreements 7,475 4,818
Borrowings 10,000 20,000
Other liabilities 3,281 2,477
------------- -------------
Total liabilities 288,420 191,211
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized; 3,658,689 shares issued and outstanding 34,806 34,806
Accumulated deficit (740) (2,287)
Accumulated other comprehensive income (loss) (820) (1,393)
------------- -------------
Total stockholders' equity 33,246 31,126
------------- -------------
Total liabilities and stockholders' equity $ 321,666 $ 222,337
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
1
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
Interest income:
<S> <C> <C>
Loans and loan fees $ 5,179 $ 2,847
Investment securities 898 710
Federal funds and other interest income 322 205
----------------- -----------------
Total interest income 6,399 3,762
----------------- -----------------
Interest expense:
Deposits 3,291 1,700
Borrowings and repurchase agreements 279 294
----------------- -----------------
Total interest expense 3,570 1,994
----------------- -----------------
Net interest income 2,829 1,768
Provision for loan losses 255 225
----------------- -----------------
Net interest income after provision for loan losses 2,574 1,543
Noninterest income:
Service charges and other fees 265 114
Other noninterest income 374 220
----------------- -----------------
Total noninterest income 639 334
----------------- -----------------
Noninterest expenses:
Salaries and employee benefits 1,483 999
Occupancy 239 133
Data processing 171 92
Directors fees 58 64
Advertising 117 58
Furniture and equipment 143 77
Amortization of intangibles 141 54
Other expenses 261 215
----------------- -----------------
Total noninterest expenses 2,613 1,692
----------------- -----------------
Net income before income tax expense 600 185
Income tax expense - -
----------------- -----------------
Net income $ 600 $ 185
================= =================
Earnings per share - basic and diluted $ 0.16 $ 0.05
================= =================
Dividends per share $ - $ -
================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
<S> <C> <C>
Interest income:
Loans and loan fees $ 13,475 $ 7,760
Investment securities 2,504 2,183
Federal funds and other interest income 953 457
------------ ------------
Total interest income 16,932 10,400
------------ ------------
Interest expense:
Deposits 8,311 4,871
Borrowings and repurchase agreements 917 644
------------ ------------
Total interest expense 9,228 5,515
------------ ------------
Net interest income 7,704 4,885
Provision for loan losses 765 624
------------ ------------
Net interest income after provision for loan losses 6,939 4,261
Noninterest income:
Service charges and other fees 646 319
Other noninterest income 899 587
------------ ------------
Total noninterest income 1,545 906
------------ ------------
Noninterest expenses:
Salaries and employee benefits 3,996 2,845
Occupancy 550 371
Data processing 387 255
Directors fees 177 189
Advertising 328 188
Furniture and equipment 354 210
Amortization of intangibles 333 162
Merger/acquisition related expenses 90 1,647
Other expenses 722 572
------------ ------------
Total noninterest expenses 6,937 6,439
------------ ------------
Net income (loss) before income tax expense 1,547 (1,272)
Income tax expense (benefit) - (40)
------------ ------------
Net income (loss) $ 1,547 $ (1,232)
============ ============
Earnings per share - basic and diluted $ 0.42 $ (0.34)
============ ============
Dividends per share $ - $ 0.05
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
Three and Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
Three month period ended September 30, 2000 and 1999:
Net income before comprehensive items $ 600 $ 185
Unrealized gains on securities available for sale 649 183
------------- ------------
Comprehensive income $ 1,249 $ 368
============= ============
Nine month period ended September 30, 2000 and 1999:
Net income (loss) before comprehensive items $ 1,547 $ (1,232)
Unrealized gains (losses) on securities available for sale 573 (1,076)
------------- ------------
Comprehensive income (loss) $ 2,120 $ (2,308)
============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 1,547 $ (1,232)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of deposit premium and goodwill 323 162
Depreciation 451 288
Amortization of premium on securities, net 10 36
MRP and ESOP compensation - 279
Provision for loan losses 765 624
Changes in assets and liabilities:
Accrued interest receivable (1,144) (289)
Other assets (1,127) 167
Accrued interest payable and other liabilities 1,014 1,364
------------- ---------------
Net cash provided by operating activities 1,839 1,399
------------- ---------------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (47,540) (27,634)
Additions to premises and equipment (1,561) (853)
Purchase of Federal Home Loan Bank stock - (395)
Purchase of securities available for sale (11,398) (18,244)
Proceeds from maturities of securities available for sale 3,855 5,485
Proceeds from maturities of securities held to maturity - 3,560
Net cash from purchase of branches from
Centura Bank 37,013 -
------------- ---------------
Net cash used in investing activities (19,631) (38,081)
------------- ---------------
Cash Flows From Financing Activities
Net increase in deposits 37,045 14,135
Net increase in repurchase agreements 2,657 3,107
Net increase (decrease) in borrowings (10,000) 14,934
Cash dividends - (183)
------------- ---------------
Net cash provided by financing activities $ 29,702 $ 31,993
------------- ---------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Nine Months Ended
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
Net change in cash and cash equivalents $ 11,910 $ (4,689)
Cash and cash equivalents:
Beginning 11,662 26,765
----------- -----------
Ending $ 23,572 $ 22,076
=========== ===========
Supplemental Disclosure of Cash Flow Information
Transfers from loans to real estate acquired
through foreclosure $ 32 $ -
=========== ===========
Purchase of branches from Centura Bank:
Loans and other assets acquired $ 26,018 $ -
Goodwill 3,462 -
Deposits and other liabilities assumed 66,493 -
----------- -----------
Net cash and cash equivalents $ 37,013 $ -
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
Notes to the Consolidated Financial Statements
1. Significant Accounting Policies and Interim Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position and results of operations for the periods presented
have been included. The results of operations for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
of operations that may be expected for the year ended December 31, 2000.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the 1999 Capital Bank Corporation annual report.
2. Operating Structure
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 North
Carolina on May 30, 1997 and commenced operations on June 20, 1997. The Bank is
not a member of the Federal Reserve System and has no subsidiaries. The Bank is
a locally owned community bank engaged in general commercial banking, providing
a full range of banking services. The majority of the Bank's customers are
individuals and small to medium-size businesses. The Bank's primary source of
revenue is interest earned from loans to customers and from invested cash and
securities.
Prior to April 14, 2000, the Bank operated primarily throughout the central part
of North Carolina with branch facilities located in Raleigh (1), Cary (2),
Sanford (3), and Siler City (1). In April, 2000, the Bank acquired 5 branches
from another area financial institution which was accounted for as a purchase
transaction. The transaction included branches in the eastern part of North
Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). In
June, 2000, the Bank opened a new branch and moved its corporate headquarters to
the same facility on Glenwood Avenue in Raleigh, North Carolina.
As used in this report, the term "Company" refers to Capital Bank Corporation
and its subsidiary, Capital Bank.
3. Comprehensive Loss
Comprehensive income (loss) includes net income (loss) and all other changes to
the Company's equity, with the exception of transactions with shareholders
("other comprehensive income"). The Company's only components of other
comprehensive income relate to unrealized gains and losses on securities
available for sale. The Company's total comprehensive net loss and information
concerning the Company's other comprehensive income items for the three and nine
month periods ended September 30, 2000 and 1999 are as shown in the Condensed
Consolidated Statements of Comprehensive Income (Loss).
7
<PAGE>
4. Earnings Per Share
The Bank is required to report both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. For loss periods, diluted EPS is the same as basic
EPS due to the fact that including common stock equivalents computed as a result
of the 312,298 stock options outstanding in the calculation of diluted EPS would
not be dilutive. For periods where the Bank has positive earnings, diluted EPS
are presented due to the effect of those same options using the Treasury Stock
method. The following tables provide a computation and reconciliation of basic
and diluted EPS for the three and nine month periods ended September 30, 2000
and 1999.
<TABLE>
<CAPTION>
2000 1999
--------------------------------------
(In thousands except number of shares) (Unaudited)
Three month period ended September 30, 2000 and 1999:
<S> <C> <C>
Income available to stockholders - basic and diluted $ 600 $ 185
================ ===============
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 3,709,005 3,675,036
Incremental shares from assumed exercise of stock
options 8,444 7,147
---------------- ---------------
Weighted average number of shares outstanding - diluted 3,717,449 3,682,183
================ ===============
Nine month period ended September 30, 2000 and 1999:
Income (loss) available to stockholders - basic and diluted $ 1,547 $ (1,232)
================ ===============
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 3,709,005 3,674,605
Incremental shares from assumed exercise of stock
options - antidilutive during loss periods 5,666 n/a
---------------- ---------------
Weighted average number of shares outstanding - diluted 3,714,671 3,674,605
================ ===============
</TABLE>
An aggregate of approximately 215,000 options were not included in the diluted
calculation because the option exercise price exceeded the average fair market
value of the associated shares.
5. New Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities and in July 1999 issued SFAS 137 which deferred the
effective date of SFAS 133, as it pertains to the Company, to fiscal years
beginning after December 31, 2000. This statement is not expected to have a
material impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, ("SAB 101"), Revenue Recognition in financial
statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
8
<PAGE>
guidance for disclosures related to revenue recognition policies. It is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company will evaluate the impact of SAB 101 as it
enters into future collaboration agreements.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44") which clarifies the application of Accounting
Principles Board Opinion 25 for certain transactions. The interpretation
addresses many issues related to granting or modifying stock options including
changes in accounting for modifications of awards (increased life, reduction of
exercise price, etc.). It was effective July 1, 2000 but certain conclusions
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The effects of applying the interpretation are to be recognized on a
prospective basis from July 1, 2000. FIN 44 is not expected to have a material
impact on the Company.
Item 2
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The following discussion presents an overview of the unaudited financial
statements for the three and nine month periods ended September 30, 2000 and
1999 for Capital Bank Corporation and its wholly owned subsidiary, Capital Bank.
This discussion and analysis is intended to provide pertinent information
concerning financial position, results of operations, liquidity, and capital
resources. It should be read in conjunction with the unaudited financial
statements and related footnotes contained in Part I, Item 1 of this report.
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements, as well as the factors set forth in the Company's
periodic reports and other filings with the SEC.
Overview
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
9
<PAGE>
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. ("Home Savings Bank") 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.
In April, 2000, the Bank acquired 5 branches from another area financial
institution which was accounted for as a purchase transaction. The transaction
included branches in the eastern part of North Carolina including Oxford (2),
Warrenton (1), Seaboard (1), and Woodland (1). In June, 2000, the Bank opened a
new branch and moved its corporate headquarters to an office on Glenwood Avenue
in Raleigh, North Carolina.
As used in this report, the term "Company" refers to Capital Bank Corporation
and its subsidiary, Capital Bank, after the holding company reorganization.
The Company has no operations other than those of its subsidiary, Capital Bank.
The Bank is a full-service community bank. The Company's profitability depends
principally upon the net interest income, provision for loan losses, noninterest
income and noninterest expenses of the Bank.
Financial Condition
Total consolidated assets of the Company for the quarter ended September 30,
2000 were $322 million compared to $222 million at December 31, 1999, an
increase of $99 million, or 45%. On September 30, 2000, loans were $232 million,
up $73 million, or 46%, compared to December 31, 1999. Investment securities
were $55 million and federal funds sold were $3.5 million at September 30, 2000.
During the nine month period ended September 30, 2000, cash and cash
equivalents, including federal funds sold increased by $12 million due primarily
to monies received from the acquisition of 5 branches from another area
financial institution where the deposits and liabilities assumed exceeded the
loans and other assets received by about $37 million. Earning assets represented
94% of total assets on September 30, 2000. The allowance for loan losses on
September 30, 2000 was $3.2 million and represented approximately 1.36% of total
loans. Management believes that the amount of the allowance is adequate at this
time.
Deposits on September 30, 2000 were $267 million, an increase of $104 million or
63% from December 31, 1999. This increase was primarily due to the acquisition
of about $66 million in deposits from another area financial institution and a
large advertising campaign run by the Company with special rates and terms on
certain Certificates of Deposit, whose growth of $72 million represented 69% of
the total deposit growth. Borrowings decreased from $20 million at December 31,
1999 to $10 million at September 30, 2000, as the Company used funds received
from the increase in deposits to pay down higher rate Federal Home Loan Bank
advances. Total consolidated stockholders' equity was $33 million at September
30, 2000, an increase of $2.1 million from December 31, 1999, due to net income
and increases in the market value of available for sale securities.
10
<PAGE>
Results of Operations
For the three month period ended September 30, 2000, the Company reported net
income of $600,000 or $.16 per share compared to $185,000 or $.05 per share for
the same period in 1999. For the nine month period ended September 30, 2000, the
Company reported net income of $1.5 million or $.42 per share compared to a loss
of $1.2 million or $.34 per share for the same period of 1999. Included in the
income for the nine month period ended September 30, 2000 were $90,000 of
certain nonrecurring costs related to the acquisition of five branches from
another area financial institution. Included in the loss for the nine month
period ended September 30, 1999 were certain nonrecurring charges related to the
establishment of the bank holding company and the acquisition of Home Savings of
$1.6 million. Excluding those costs, the Company had consolidated net income
from operations of approximately $415,000 or $0.11 per share for the nine month
period ended September 30, 1999.
Net interest income in the third quarter of 2000 was $2.8 million, up 60%
compared to $1.8 million in the third quarter of 1999. Net interest income for
the nine month period ended September 30, 2000 was $7.7 million, up 58% compared
to $4.9 million for the same period in 1999. Increases are primarily due to
increased loan and deposit balances as compared to previous periods and the
resulting net interest spread on those balances. The Company's net interest
margin (net interest income as a percentage of average earning assets) was 3.82%
and 3.81% for the three and nine month periods ended September 30, 2000,
respectively.
The provision for loan losses was $255,000 and $765,000 for the three and nine
month periods ended September 30, 2000, respectively. This provision was used to
build the allowance for loan losses to a prudent level to support the Company's
loan growth. At September 30, 2000, the allowance for loan losses was 1.36% of
total loans. Loans 90 days or more past due totaled $365,000 and represented
.16% of total loans on September 30, 2000.
Non-interest income for the three and nine months period ended September 30,
2000, was $639,000 and $1.5 million, respectively, compared to $334,000 and
$906,000 for the same periods in 1999. The increases in non-interest income are
primarily attributable to increases in fees associated with deposit accounts
relative to the overall increase in deposits.
Non-interest expense for the three and nine month periods ended September 30,
2000, was $2.6 million and $6.9 million, respectively, compared to $1.7 million
and $6.4 million for the same periods in 1999. Salaries and employee benefits,
representing the largest expense category during the period, increased from
$999,000 and $2.8 million for the three and nine month periods in 1999 to $1.5
million and $4.0 million for the same periods in 2000. These increases reflect
an increase in the number of personnel employed by the Company as the Company
must maintain adequate staffing levels in order to meet customer needs and to
keep pace with its expected growth. As of September 30, 2000 the Company had 106
full-time equivalent employees. Mergers and acquisitions related expenses, the
second largest expense category during the nine month period ended September 30,
1999, decreased from $1.6 million in 1999 relating to the establishment of a
holding company and the merger of Home Savings Bank, to $90,000 in 2000 relating
to the acquisition of five branches from another area financial institution.
There were no mergers and acquisitions related expenses during the three month
period ended September 30, 1999. Occupancy costs, the third highest component of
non-interest expenses, increased from $133,000 and $371,000 for the three and
nine month periods in 1999, respectively to $239,000 and $550,000 for the same
11
<PAGE>
respective periods in 2000. This increase is primarily associated with the
addition of 5 branches as a result of the acquisition previously mentioned and
the opening of new branches in Lee County and Wake County. Although management
expects noninterest expense to increase on an absolute basis as the Company
continues its growth, these expenses as a percentage of asset size and operating
revenue are anticipated to decrease over time.
At December 31, 1999, the Company had net deferred tax assets of $1.6 million
resulting from timing differences associated with the deductibility of certain
expenses reflected on the financial statements. Due to prior net operating
losses, a valuation allowance was established for the net deferred tax assets in
the amount of $1.3 million. During 2000, the Company has generated taxable
income and the valuation allowance has been reversed to offset current tax
expense of $786,000. Management will continue to monitor its financial
performance to determine when the remaining allowance should be reversed.
Liquidity and Capital Resources
The Company's liquidity management involves planning to meet the Company's
anticipated funding needs at a reasonable cost. Liquidity management is guided
by policies formulated by the Company's senior management and the
Asset/Liability Management Committee of the Board of Directors. The Company had
$24 million in its most liquid assets, cash and cash equivalents at quarter end.
The Company's principal sources of funds are deposits, Federal Home Loan Bank
borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of
liquidity, together with equity capital funded 81% of total assets at September
30, 2000. In addition, the Company has the ability to take advantage of various
other funding programs available from the Federal Home Loan Bank of Atlanta.
Stockholders' equity was $33 million or $9.09 per share at September 30, 2000.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's growth for at least the next 12 months and to maintain
a well-capitalized position. At September 30, 2000, Capital Bank had a Tier 1
capital ratio of 12.0%, a total risk-based capital ratio of 13.2%, and a
leverage ratio of 9.4%. These ratios substantially exceed the federal regulatory
minimum requirements for a "well-capitalized" bank. Management's challenge is to
use this capital to implement a prudent growth strategy of branch and bank
acquisitions while growing the existing branch structure through quality service
and responsiveness to its customers' needs, although there is no assurance that
the Company will meet these objectives.
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact, since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer-term interest-bearing assets
12
<PAGE>
and liabilities, but the Company attempts to limit its long-term assets and
liabilities.
Recent Accounting Developments
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities and in July 1999 issued SFAS 137 which deferred the
effective date of SFAS 133, as it pertains to the Company, to fiscal years
beginning after December 31, 2000. This statement is not expected to have a
material impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, ("SAB 101"), Revenue Recognition in financial
statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. It is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company will evaluate the impact of SAB 101 as it
enters into future collaboration agreements.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44") which clarifies the application of Accounting
Principles Board Opinion 25 for certain transactions. The interpretation
addresses many issues related to granting or modifying stock options including
changes in accounting for modifications of awards (increased life, reduction of
exercise price, etc.). It was effective July 1, 2000 but certain conclusions
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The effects of applying the interpretation are to be recognized on a
prospective basis from July 1, 2000. FIN 44 is not expected to have a material
impact on the Company.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has not experienced any material change in its portfolio risk from
December 31, 1999 to September 30, 2000.
Part II - Other Information
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. In addition, the Company is not
aware of any threatened litigation, unasserted claims or assessments that could
have a material adverse effect on the Company's business, operating results or
condition.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
13
<PAGE>
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period covered by
this report.
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL BANK CORPORATION
Date: November 10, 2000 By: /s/ Allen T. Nelson, Jr.,
---------------------------
Allen T. Nelson, Jr.,
Senior Vice President and CFO
