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 March 31, 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.)
4400 Falls of Neuse Road
Raleigh, North Carolina 27609
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 878-3100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
As of May 5, 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. Financial Statements
Consolidated statements of financial condition at March 31, 2000
(Unaudited) and December 31, 1999 1
Consolidated statements of income (loss) for the three months ended
March 31, 2000 and March 31, 1999 (Unaudited) 2
Consolidated statements of cash flows for the three months ended
March 31, 2000 and March 31, 1999 (Unaudited) 3
Notes to consolidated financial statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6 - 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
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<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2000 and December 31, 1999
March 31, December 31,
ASSETS 2000 1999
- ----------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
<S> <C> <C>
Cash and due from banks $ 14,547 $ 9,702
Federal funds sold 3,030 1,960
Investment securities - available for sale, at fair value 47,005 46,581
Loans-net of unearned income 175,445 159,329
Allowance for loan losses (2,582) (2,328)
--------- ---------
Net loans 172,863 157,001
--------- ---------
Premises and equipment, net 3,654 3,501
Accrued interest receivable 1,395 1,244
Deposit premium and goodwill, net 1,563 1,617
Other assets 1,301 731
--------- ---------
Total assets $ 245,358 $ 222,337
========= =========
LIABILITIES
Deposits
Demand, non-interest bearing $ 12,978 $ 10,923
Savings and interest bearing demand deposits 42,270 42,144
Time deposits 134,462 110,178
--------- ---------
Total deposits 189,710 163,245
--------- ---------
Accrued interest payable 642 671
Repurchase agreements 6,010 4,818
Borrowings 15,000 20,000
Other liabilities 2,710 2,477
--------- ---------
Total liabilities 214,072 191,211
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 (1,887) (2,287)
Accumulated other comprehensive income (loss) (1,633) (1,393)
--------- ---------
Total stockholders' equity 31,286 31,126
--------- ---------
Total liabilities and stockholders' equity $ 245,358 $ 222,337
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended March 31, 2000 and 1999
2000 1999
- ------------------------------------------------------------------------------------
(In thousands except per share data) (Unaudited)
<S> <C> <C>
Interest income:
Loans and loan fees $ 3,666 $ 2,389
Investment securities 765 737
Federal funds and other interest income 131 99
------- -------
Total interest income 4,562 3,225
------- -------
Interest expense:
Deposits 2,085 1,547
Borrowings and repurchase agreements 322 118
------- -------
Total interest expense 2,407 1,665
------- -------
Net interest income 2,155 1,560
Provision for loan losses 255 204
------- -------
Net interest income after provision for loan losses 1,900 1,356
Noninterest income:
Service charges and other fees 153 97
Other noninterest income 224 175
------- -------
Total noninterest income 377 272
------- -------
Noninterest expenses:
Salaries and employee benefits 1,114 869
Occupancy 138 112
Data processing 93 81
Directors fees 60 79
Advertising 104 63
Furniture and equipment 90 63
Amortization of intangibles 54 54
Merger/acquisition related expenses 40 1,647
Other expenses 184 214
------- -------
Total noninterest expenses 1,877 3,182
------- -------
Net income (loss) before tax expense 400 (1,554)
Income tax expense (benefit) -- (36)
------- -------
Net income (loss) $ 400 $(1,518)
======= =======
Earnings per share - basic and diluted $ 0.11 $ (0.41)
======= =======
Dividends per share $ -- $ 0.05
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
<TABLE>
<CAPTION>
CAPITAL BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
2000 1999
- -------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 400 $ (1,518)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of deposit premium and goodwill 54 54
Depreciation 125 118
Amortization of premium on securities, net 10 3
MRP and ESOP compensation -- 209
Provision for loan losses 255 204
Changes in assets and liabilities:
Accrued interest receivable (151) (167)
Other assets (538) 221
Accrued interest payable and other liabilities 204 1,377
-------- --------
Net cash provided by operating activities 359 501
-------- --------
Cash Flows From Investing Activities
Loan originations, net of principal repayments (16,149) (8,482)
Additions to premises and equipment (278) (331)
Purchase of Federal Home Loan Bank stock -- (193)
Purchase of securities available for sale (1,468) (16,281)
Proceeds from maturities of securities available for sale 794 3,271
Proceeds from maturities of securities held to maturity -- 1,560
-------- --------
Net cash used in investing activities (17,101) (20,456)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 26,465 2,039
Net increase in repurchase agreements 1,192 (24)
Net increase (decrease) in borrowings (5,000) 3,586
Cash dividends -- (183)
-------- --------
Net cash provided by financing activities 22,657 5,418
-------- --------
Net change in cash and cash equivalents 5,915 (14,537)
Cash and cash equivalents:
Beginning 11,662 26,765
-------- --------
Ending $ 17,577 $ 12,228
======== ========
Supplemental Disclosure of Cash Flow Information
Transfers from loans to real estate acquired
through foreclosure $ 32 $ --
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
Notes to the Consolidated Financial Statements
1. Significant Accounting Policies and Interim Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position and results of operations for the periods presented
have been included. The results of operations for the three month period ended
March 31, 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. Capital 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.
The Bank operates through its corporate office in Raleigh, North Carolina, two
branches in Cary, North Carolina, three branches in Sanford, North Carolina, and
one branch in Siler City, 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 month
periods ended March 31, 2000 and 1999 are as follows:
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<TABLE>
<CAPTION>
2000 1999
---------------------
(In thousands) (Unaudited)
<S> <C> <C>
Three month period ended March 31, 2000 and 1999:
Net income (loss) before comprehensive items $ 400 $ (1,544)
Unrealized gains on securities available for sale (240) (337)
Comprehensive net income $ 160 $ (1,881)
</TABLE>
4. Earnings Per Share
The Bank is required to report a dual presentation of basic and diluted earnings
per share ("EPS"). Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. For loss periods, diluted EPS is the same as
basic EPS due to the fact that including common stock equivalents computed as a
result of the 312,298 stock options outstanding in the calculation of diluted
EPS would be antidilutive. For periods where the Bank has positive earnings,
diluted EPS are presented due to the effect of those same options. The following
tables provide a computation and reconciliation of basic and diluted EPS for the
three month periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
- -----------------------------------------------------------------------------------------
(In thousands except number of shares) (Unaudited)
<S> <C> <C>
Three month period ended March 31, 2000 and 1999:
Income available to stockholders - basic and diluted $ 400 $ (1,518)
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic 3,709,005 3,673,801
Incremental shares from assumed exercise of stock
options - antidilutive during loss periods 806 n/a
Weighted average number of shares outstanding - diluted 3,709,811 3,673,801
</TABLE>
Item 2
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The following discussion presents an overview of the unaudited financial
statements for the three month periods ended March 31, 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.
-5-
<PAGE>
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
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.
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 March 31, 2000
were $245.4 million compared to $222.3 million at December 31, 1999, an increase
of $23.0 million, or 10%. On March 31, 2000, loans were $175.4 million, up $16.1
million, or 10%, compared to December 31, 1999. Investment securities were $47.0
million and federal funds sold were $3.0 million at period end. During the three
month period, federal funds sold increased by $1.1 million due primarily to
monies received from significant increases in deposits which had not yet been
invested in securities or used to fund new loans. Earning assets represented 95%
of total
-6-
<PAGE>
assets on March 31, 2000. The allowance for loan losses on March 31, 2000 was
$2.6 million and represented approximately 1.47% of total loans. Management
believes that the amount of the allowance is adequate at this time.
Deposits on March 31, 2000 were $189.7 million, an increase of $26.5 million or
16% from December 31, 1999. This increase was primarily due to an advertising
campaign run by the Company with special rates and terms on certain Certificates
of Deposit, whose growth of $24.3 million represented 92% of the total deposit
growth. Borrowings decreased from $20.0 million at December 31, 1999 to $15.0
million at March 31, 2000, as the Company used funds received from the increase
in deposits to pay down a higher rate Federal Home Loan Bank advance. Total
consolidated stockholders' equity was $ 31.3 million at March 31, 2000, an
increase of $160,000 from December 31, 1999, due to net income partially offset
by declines in the market value of available for sale securities.
Results of Operations
For the three month period ended March 31, 2000, the Company reported net income
of $400,000 or $.11 per share compared to a loss of $1.5 million or $.41 per
share in the first quarter of 1999. Included in the income for the three month
period ended March 31, 2000 were $40,000 of certain nonrecurring charges related
to the acquisition of five branches from two other area financial institutions.
Included in the loss for the three month period ended March 31, 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 in the first
quarter of 1999 of approximately $129,000 or $0.04 per share for the three month
period ended March 31, 2000.
Net interest income in the first quarter was $2.2 million, up 38% compared to
$1.6 million in the first quarter of 1999. The Company's net interest margin
(net interest income as a percentage of average earning assets) was 3.82% for
the three month period ended March 31, 2000.
The provision for loan losses was $255,000 for the three period ended March 31,
2000. This provision was used to build the allowance for loan losses to a
prudent level to support the Company's actual loan growth. At March 31, 2000,
the allowance for loan losses was 1.47% of total loans. Loans 30 days or more
past due totaled $967,000 and represented .55% of total loans on March 31, 2000.
Non-interest income for the three month period ended March 31, 2000, was
$377,000 compared to $272,000 for the same period in 1999. The increase in
non-interest income is primarily attributable to increases in fees associated
with deposit accounts relative to the overall increase in deposits.
Non-interest expense for the three period ended March 31, 2000, was $1.9 million
compared to $3.2 million for the same period in 1999. Mergers and acquisitions
related expenses, the largest expense category during this period, decreased
from $1.6 million in 1999 relating to the establishment of a holding company and
the merger of Home Savings Bank, to $40,000 in 2000 relating to the acquisition
of five branches from two area financial institutions. Salaries and employee
benefits, representing the second largest expense category during the period,
increased from $869,000 for the three month period in 1999 to $1.1 million for
the same period in 2000. These increases reflect an increase in the number of
personnel employed by the Company as the
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<PAGE>
Company must maintain adequate staffing levels in order to meet customer needs
and to keep pace with its expected growth. As of March 31, 2000 the Company had
77 full-time equivalent employees. Occupancy costs, the third highest component
of non-interest expenses, increased from $112,000 for the three month period in
1999 to $138,000 for the same period in 2000. This increase is primarily
associated with the opening of a new branch in the Lee County area and the
leasing of additional office space as a result of growth in the marketing and
Human Resources area and the related growth in the number of personnel needed in
that department. Although management expects noninterest expense to increase on
an absolute basis as the Company continues its growth, these expenses as a
percentage of asset size, currently and operating revenue are anticipated to
decrease over time.
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
$17.6 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 March 31,
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.
Stockholder's equity was $31.3 million or $8.55 per share at March 31, 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 March 31, 2000, Capital Bank had a leverage
ratio of 13.4%, a Tier 1 capital ratio of 17.7%, and a total risk-based capital
ratio of 18.9%. These ratios far exceed the federal regulatory minimum
requirements for a "well-capitalized" bank. Management's challenge is to use
this capital to implement a prudent growth strategy of branch and bank
acquisitions while growing the existing branch structure through quality service
and responsiveness to its customers' needs, although there is no assurance that
the Company will meet these objectives.
Effects of Inflation
Inflation can have a significant effect on the operating results of all
industries. However, management believes the inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets, and on its need to closely monitor capital levels.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact, since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer-term interest-bearing assets
and liabilities, but the Company attempts to limit its long-term assets and
liabilities.
-8-
<PAGE>
Item 3 Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
The Company has not experienced any material change in its portfolio risk from
December 31, 1999 to March 31, 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
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.
-9-
<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: May 10, 2000 By: /s/Allen T. Nelson, Jr.,
Allen T. Nelson, Jr.,
Senior Vice President and CFO
-10-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,320
<INT-BEARING-DEPOSITS> 8,127
<FED-FUNDS-SOLD> 3,030
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,005
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 175,445
<ALLOWANCE> 2,582
<TOTAL-ASSETS> 245,358
<DEPOSITS> 189,710
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,362
<LONG-TERM> 15,000
0
0
<COMMON> 34,806
<OTHER-SE> (3,520)
<TOTAL-LIABILITIES-AND-EQUITY> 245,358
<INTEREST-LOAN> 3,666
<INTEREST-INVEST> 765
<INTEREST-OTHER> 131
<INTEREST-TOTAL> 4,562
<INTEREST-DEPOSIT> 2,085
<INTEREST-EXPENSE> 2,407
<INTEREST-INCOME-NET> 2,155
<LOAN-LOSSES> 255
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,877
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 400
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 3.69
<LOANS-NON> 65
<LOANS-PAST> 902
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,328
<CHARGE-OFFS> 2
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,582
<ALLOWANCE-DOMESTIC> 2,582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
