Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
Commission file number: 0-18460
COMMUNITY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
South Carolina 57-0866395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1402-C Highway 72 West
Greenwood, South Carolina 29649
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 941-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class On Which Reported
- ------------------- -----------------
Common Stock, par value $1.00 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 25, 2002 was approximately $31.9 million based upon the last
sale price reported for such date on the American Stock Exchange, which was
$12.30 per share. On that date, the number of shares outstanding of the
Registrant's common stock, $1.00 par value, was 3,313,368.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 2002 Annual
Meeting of Stockholders (Part III).
PART I
Item 1. Business.
General
Community Capital Corporation (the "Company") is a bank holding company
headquartered in Greenwood, South Carolina. The Company was incorporated under
the laws of the State of South Carolina on April 8, 1988 as a holding company
for Greenwood Bank & Trust (the "Greenwood Bank") which opened in 1989.
The Company was formed principally in response to perceived opportunities
resulting from takeovers of several South Carolina-based banks by large
southeastern regional bank holding companies. In many cases, when these
consolidations occur, local boards of directors are dissolved and local
management is relocated or terminated. The Company believes this situation
creates favorable opportunities for new community banks with local management
and local directors. Management believes that such banks can be successful in
attracting individuals and small to medium-sized businesses as customers who
wish to conduct business with a locally owned and managed institution that
demonstrates an active interest in their business and personal financial
affairs.
In 1994, the Company made the strategic decision to expand beyond the Greenwood
County area by creating an organization of independently managed community banks
that serve their respective local markets, but which share a common vision and
benefit from the strength, resources and economies of a larger institution. In
1995, the Company opened Clemson Bank & Trust in Clemson, South Carolina (the
"Clemson Bank"). In 1997, the Company opened Community Bank & Trust in Barnwell,
South Carolina (formerly the Bank of Barnwell County, the "Barnwell Bank"), The
Bank in Belton, South Carolina (formerly the Bank of Belton, the "Belton Bank"),
and Mid State Bank in Newberry, South Carolina (formerly the Bank of Newberry
County, the "Newberry Bank"). During 2000, each of these five community banks
(collectively, the "Banks") operated as a wholly-owned subsidiary of the Company
and engaged in a general commercial banking business, emphasizing the banking
needs of individuals and small to medium-sized businesses in each Bank's primary
service area. Each of the Banks was a state chartered Federal Reserve member
bank. On January 1, 2001, the Company merged the five Banks into one bank known
as CapitalBank.
Market Areas
At December 31, 2001, CapitalBank had banking locations in Greenwood, Clemson,
Abbeville, Belton, Honea Path, Anderson, Newberry, and Saluda, South Carolina.
The following table sets forth certain information concerning CapitalBank at
December 31, 2001:
Number of Total Total Total
Locations Assets Loans Deposits
--------- -------- -------- --------
(Dollars in thousands)
CapitalBank.................. 12 $399,899 $250,526 $258,846
CapitalBank offers a full range of commercial banking services, including
checking and savings accounts, NOW accounts, IRA accounts, and other savings and
time deposits of various types ranging from money markets to long-term
certificates of deposit. CapitalBank also offers a full range of consumer credit
and short-term and intermediate-term commercial and personal loans. CapitalBank
conducts residential mortgage loan origination activities pursuant to which
mortgage loans are sold to investors in the secondary markets. Servicing of such
loans is not retained by CapitalBank.
CapitalBank also offers trust and related fiduciary services. Discount
securities brokerage services are available through a third-party brokerage
service which has contracted with CapitalBank.
2
Lending Activities
General. Through CapitalBank, the Company offers a range of lending services,
including real estate, consumer, and commercial loans, to individuals and small
business and other organizations that are located in or conduct a substantial
portion of their business in CapitalBank's market areas. The Company's total
loans at December 31, 2001, were $252 million, or 80.12% of total earning
assets. The interest rates charged on loans vary with the degree of risk,
maturity, and amount of the loan, and are further subject to competitive
pressures, availability of funds, and government regulations. The Company has no
foreign loans or loans for highly leveraged transactions.
The Company's primary focus has been on commercial and installment lending to
individuals and small to medium-sized businesses in its market areas, as well as
residential mortgage loans. These loans totaled approximately $252 million, and
constituted approximately 80.12% of the Company's loan portfolio, at December
31, 2001.
The following table sets forth the composition of the Company's loan portfolio
for each of the five years in the period ended December 31, 2001.
Loan Composition
(Dollars in thousands)
December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial, financial and agricultural............. 13.26% 18.54% 13.58% 16.80% 24.19%
Real estate:
Construction................................. 5.26 7.27 13.09 13.72 8.61
Mortgage:
Residential.................................. 49.25 39.89 30.17 30.51 27.48
Commercial (1)............................... 23.58 21.45 26.67 20.87 21.81
Consumer and other................................. 8.65 12.85 16.49 18.10 17.91
Total loans........................................ 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
Total loans (dollars).............................. $251,947 $280,506 $219,054 $172,545 $149,127
======== ======== ======== ======== ========
- ----------
(1) The majority of these loans are made to operating businesses where real
property has been taken as additional collateral.
Loan Approval. Certain credit risks are inherent in the loan making process.
These include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions, and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility. The Company attempts to minimize
loan losses through various means and uses standardized underwriting criteria.
During 2001, these means included the use of policies and procedures that impose
officer and customer lending limits and require loans in excess of certain
limits to be approved by the Board of Directors of CapitalBank.
Loan Review. The Company has a continuous loan review process designed to
promote early identification of credit quality problems. All loan officers are
charged with the responsibility of reviewing all past due loans in their
respective portfolios. CapitalBank establishes watch lists of potential problem
loans.
Deposits
The principal sources of funds for CapitalBank are core deposits, consisting of
demand deposits, interest-bearing transaction accounts, money market accounts,
saving deposits, and certificates of deposit. Transaction accounts include
checking and negotiable order of withdrawal (NOW) accounts that customers use
for cash management and that provide CapitalBank with a source of fee income and
cross-marketing opportunities, as well as a low-cost source of funds. Time and
savings accounts also provide a relatively stable source of funding. The largest
source of funds for CapitalBank is certificates of deposit. Certificates of
deposit in excess of $100,000 are held primarily by
3
customers in CapitalBank's market areas. Deposit rates are set weekly by senior
management of CapitalBank, subject to approval by management of the Company.
Management believes that the rates CapitalBank offers are competitive with other
institutions in CapitalBank's market areas.
Competition
CapitalBank generally competes with other financial institutions through the
selection of banking products and services offered, the pricing of services, the
level of service provided, the convenience and availability of services, and the
degree of expertise and the personal manner in which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. South Carolina law
also permits regional interstate banking whereby out-of-state banks and bank
holding companies are allowed to acquire and merge with South Carolina banks and
bank holding companies, as long as the South Carolina State Board of Financial
Institutions gives prior approval for the acquisition or merger. Many large
banking organizations currently operate in the market areas of CapitalBank,
several of which are controlled by out-of-state ownership. In addition,
competition between commercial banks and thrift institutions (savings
institutions and credit unions) has been intensified significantly by the
elimination of many previous distinctions between the various types of financial
institutions and the expanded powers and increased activity of thrift
institutions in areas of banking that previously had been the sole domain of
commercial banks. Recent legislation, together with other regulatory changes by
the primary regulators of the various financial institutions, has resulted in
the almost total elimination of practical distinctions between a commercial bank
and a thrift institution. Consequently, competition among financial institutions
of all types is largely unlimited with respect to legal ability and authority to
provide most financial services. See "Government Supervision and Regulation."
CapitalBank faces increased competition from both federally-chartered and
state-chartered financial and thrift institutions, as well as credit unions,
consumer finance companies, insurance companies and other institutions in
CapitalBank's market areas. Some of these competitors are not subject to the
same degree of regulation and restriction imposed upon CapitalBank. Many of
these competitors also have broader geographic markets and substantially greater
resources and lending limits than CapitalBank and offer certain services that
CapitalBank does not currently provide. In addition, many of these competitors
have numerous branch offices located throughout the extended market areas of
CapitalBank that the Company believes may provide these competitors with an
advantage in geographic convenience that CapitalBank does not have at present.
Such competitors may also be in a position to make more effective use of media
advertising, support services, and electronic technology than can CapitalBank.
Employees
The Company and CapitalBank currently have in the aggregate 131 full-time
employees and 21 part-time employees.
Government Supervision and Regulation
General
The Company and CapitalBank are subject to an extensive collection of state and
federal banking laws and regulations that impose specific requirements and
restrictions on, and provide for general regulatory oversight with respect to,
virtually all aspects of the Company's and CapitalBank's operations. These
regulations are generally intended to provide protections for CapitalBank's
depositors and borrowers, rather than for shareholders of the Company. The
Company and CapitalBank are also affected by government monetary policy and by
regulatory measures affecting the banking industry in general. The actions of
the Federal Reserve System affect the money supply and, in general,
CapitalBank's lending abilities in increasing or decreasing the cost and
availability of funds to CapitalBank. Additionally, the Federal Reserve System
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 the reserve
4
requirements against bank deposits and limitations on interest rates which banks
may pay on time and savings deposits.
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and CapitalBank. 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 business of the Company and CapitalBank. Any
change in applicable laws or regulations may have a material adverse effect on
the business and prospects of the Company and CapitalBank.
The Company
The Company is a bank holding company within the meaning of the Federal Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the South Carolina
Banking and Branching Efficiency Act of 1996, as amended (the "South Carolina
Act"). The Company is registered with both the Federal Reserve System and the
South Carolina State Board of Financial Institutions (the "State Board"). The
Company is required to file with both of these agencies annual reports and other
information regarding its business operations and those of its subsidiaries. It
is also subject to the supervision of, and to regular examinations by, these
agencies. The regulatory requirements to which the Company is subject also set
forth various conditions regarding the eligibility and qualifications of its
directors and officers.
The BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before (i) it or any of its subsidiaries (other than a
bank) acquires substantially all of the assets of any bank, (ii) it acquires
ownership or control of any voting shares of any bank if after such acquisition
it would own or control, directly or indirectly, more than 5% of the voting
shares of such bank, or (iii) it merges or consolidates with any other bank
holding company. Under the South Carolina Act, it is unlawful without the prior
approval of the State Board for any South Carolina bank holding company (i) to
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank or any other bank holding company, (ii) to acquire all or
substantially all of the assets of a bank or any other bank holding company, or
(iii) to merge or consolidate with any other bank holding company.
The BHCA and the Federal Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either the Federal Reserve Board's approval must be
obtained or notice must be furnished to the Federal Reserve Board and not
disapproved prior to any person or company acquiring control of a bank holding
company, such as the Company, subject to certain exemptions for certain
transactions.
Under the BHCA, a bank holding company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve Board,
by order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve Board has determined by
regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial adviser, owning savings associations and making
investments in certain corporations or projects designed primarily to promote
community welfare.
In determining whether an activity is so closely related to banking as to be
permissible for bank holding companies, the Federal Reserve Board is required to
consider whether the performance of the particular activities by a bank holding
company or its subsidiaries can reasonably be expected to produce benefits to
the public such as greater convenience, increased competition and gains in
efficiency that outweigh possible adverse effects such as undue concentration of
resources, decreased or unfair competition, conflicts of interests and unsound
banking practices. Generally, bank holding companies are required to obtain
prior approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board. Despite prior approval, the
Federal Reserve Board may order a bank 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 the holding company's
continued
5
ownership, activity or control constitutes a serious risk to the financial
safety, soundness or stability of any of its bank subsidiaries.
The BHCA and the Federal Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either the Federal Reserve Board's approval must be
obtained or notice must be furnished to the Federal Reserve Board and not
disapproved prior to any person or company acquiring control of a bank holding
company, such as the Company, subject to certain exemptions. Control is
conclusively presumed to exist when an individual or company acquires 25 percent
or more of any class of voting securities of the bank holding company. Control
is rebuttably presumed to exist if a person acquires 10 percent or more, but
less than 25 percent, of any class of voting securities and either the bank
holding company has registered securities under Section 12 of the Securities
Exchange Act of 1934 or no other person owns a greater percentage of that class
of voting securities immediately after the transaction.
The Federal Reserve Board, pursuant to regulation and published policy
statements, has maintained that a bank holding company must serve as a source of
financial strength to its subsidiary banks. In adhering to the Federal Reserve
Board policy, the Company may be required to provide financial support to a
subsidiary bank at a time when, absent such Federal Reserve Board policy, the
Company may not deem it advisable to provide such assistance. Under the BHCA,
the Federal Reserve Board may also require a bank holding company to terminate
any activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Board's determination that the
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition.
CapitalBank
CapitalBank is subject to various statutory requirements and rules and
regulations promulgated and enforced primarily by the State Board, the Federal
Reserve System, and the FDIC. The State Board and the FDIC regulate or monitor
all areas of CapitalBank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuances of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices.
The Federal Reserve System and the FDIC also require CapitalBank to maintain
certain capital ratios (see "Federal Capital Regulations"), and the provisions
of the Federal Reserve Act require CapitalBank to observe certain restrictions
on any extensions of credit to the Company, or with certain exceptions, other
affiliates, on investments in the stock or other securities of other banks, and
on the taking of such stock or securities as collateral on loans to any
borrower. In addition, CapitalBank is prohibited from engaging in certain
"tie-in" or "tying" arrangements in connection with any extension of credit, or
the providing of any property or service. Tying is generally defined as any
arrangement in which a bank requires a customer who wants one service, such as
credit, to buy other products or services from the bank or its affiliates as a
condition of receiving the first service. The regulatory requirements to which
CapitalBank is subject also set forth various conditions regarding the
eligibility and qualification of their directors and officers.
Dividends
Although the Company is not presently subject to any direct legal or regulatory
restrictions on dividends (other than the South Carolina state business
corporation law requirements that dividends may be paid only if such payment
would not render the Company insolvent or unable to meet its obligations as they
come due), the Company's ability to pay cash dividends will depend primarily
upon the amount of dividends paid by CapitalBank and any other subsequently
acquired entities. CapitalBank is subject to regulatory restrictions on the
payment of dividends, including the prohibition of payment of dividends from
CapitalBank's capital. All dividends of CapitalBank must be paid out of the
respective undivided profits then on hand, after deducting expenses, including
losses and bad debts.
6
In addition, as a member of the Federal Reserve System, CapitalBank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of such bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend) and the
approval of the Federal Reserve Board is required if the total of all dividends
declared by any CapitalBank in any calendar year exceeds the total of its net
profits for that year combined with that Bank's retained net profits for the
preceding two years, less any required transfers to surplus. CapitalBank is
subject to various other federal and state regulatory restrictions on the
payment of dividends.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") established two insurance funds under the jurisdiction of the FDIC:
the Savings Association Fund and the Bank Insurance Fund (see "FDIC
Regulations"). FIRREA also imposed, with certain exceptions, a "cross guaranty"
on the part of commonly controlled depository institutions such as CapitalBank.
Under this provision, if one depository institution subsidiary of a multi-bank
holding company fails or requires FDIC assistance, the FDIC may assess a
commonly controlled depository institution for the estimated losses suffered by
the FDIC. The FDIC's claim is junior to the claims of nonaffiliated depositors,
holders of secured liabilities, general creditors and subordinated creditors but
is superior to the claims of shareholders.
FDIC Regulations
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. Deposits in CapitalBank are insured by
the FDIC up to a maximum amount (generally $100,000 per depositor, subject to
aggregation rules), and the FDIC maintains an insurance fund for commercial
banks with insurance premiums from the industry used to offset losses from
insurance payouts when banks fail. CapitalBank pays premiums to the FDIC on
their deposits. Under FDIC rules, a depository institution pays to the FDIC a
premium of from $0.00 to $0.31 per $100 of insured deposits depending on its
capital levels and risk profile, as determined by its primary federal regulator
on a semi-annual basis.
Federal Capital Regulations
In an effort to achieve a measure of capital adequacy that is more sensitive to
the individual risk profiles of financial institutions, the Federal Reserve
Board, the FDIC, and other federal banking agencies have adopted risk-based
capital adequacy guidelines for banking organizations insured by the FDIC,
including CapitalBank. The capital adequacy guidelines issued by the Federal
Reserve Board are applied to bank holding companies, such as the Company, on a
consolidated basis with the banks owned by the holding company. These guidelines
redefine traditional capital ratios to take into account assessments of risks
related to each balance sheet category, as well as off-balance sheet financing
activities. The guidelines define a two-tier capital framework. Tier 1 capital
consists of common and qualifying preferred shareholders' equity, excluding the
unrealized gain (loss) on available-for-sale securities, less goodwill and other
adjustments. Tier 2 capital consists of mandatory convertible, subordinated and
other qualifying term debt, preferred stock not qualifying for Tier 1, and a
limited allowance for credit losses up to a designated percentage of
risk-weighted assets. Under the guidelines, institutions must maintain a
specified minimum ratio of "qualifying" capital to risk-weighted assets. At
least 50% of an institution's qualifying capital must be "core" or "Tier 1"
capital, and the balance may be "supplementary" or "Tier 2" capital. The
guidelines imposed on the Company and CapitalBank include a minimum leverage
ratio standard of capital adequacy. The leverage standard requires top-rated
institutions to maintain a minimum Tier 1 capital to assets ratio of 3%, with
institutions receiving less than the highest rating required to maintain a
minimum ratio of 4% or greater, based upon their particular circumstances and
risk profiles. Each of the Company's and CapitalBank's leverage and risk-based
capital ratios at December 31, 2001, exceeded their respective fully phased-in
minimum requirements.
Other Regulations
Interest and certain other charges collected or contracted for by CapitalBank is
subject to state usury laws and certain federal laws concerning interest rates.
CapitalBank's loan operations are also subject to certain federal laws
7
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Community
Reinvestment Act of 1977 requiring financial institutions to meet their
obligations to provide for the total credit needs of the communities they serve,
including investing their assets in loans to low- and moderate-income borrowers,
the Home Mortgage Disclosure Act of 1975 requiring financial institutions to
provide information to enable public officials to determine whether a financial
institution is fulfilling its obligations to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act governing the manner in which consumer debts may be
collected by collection agencies, and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of CapitalBank also are subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that Act,
which govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Interstate and Intrastate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "1994 Act"), eligible bank holding companies in any state are permitted,
with Federal Reserve Board approval, to acquire banking organizations in any
other state. As such, all existing regional compacts and substantially all
regional limitations on interstate acquisitions of banking organizations have
been eliminated. The 1994 Act also removed substantially all of the existing
prohibitions on interstate branching by banks. A bank operating in any state is
now entitled to establish one or more branches within any other state without,
as formerly required, the establishment of a separate banking structure within
the other state. The South Carolina Act permits the acquisition of South
Carolina banks and bank holding companies by, and mergers with, out-of-state
banks and bank holding companies with the prior approval of the State Board. The
South Carolina Act also permits South Carolina state banks, with prior approval
of the State Board, to operate branches outside the State of South Carolina.
Although the 1994 Act has the potential to increase the number of competitors in
the marketplace of CapitalBank, the Company cannot predict the actual impact of
such legislation on the competitive position of CapitalBank.
Gramm-Leach Bliley Act
The Gramm-Leach-Bliley Act (popularly referred to as the Financial Services
Modernization Act of 1999 prior to enactment) (the "GLB Act") became effective
March 11, 2000. The GLB Act accomplished a variety of purposes, including
facilitating the affiliation among banks, securities firms, and insurance
companies and providing privacy protections for customers. Specifically, the GLB
Act (a) amends the Banking Act of 1933 (the Glass-Steagall Act) to repeal the
prohibitions against affiliation of any Federal Reserve member bank, such as
CapitalBank, with an entity engaged principally in securities activities, and to
repeal the prohibitions against simultaneous service by any officer, director,
or employee of a securities firm as an officer, director, or employee of any
member bank; (b) amends the BHCA to permit bank holding companies to own shares
in non-banking organizations whose activities have been determined by the
Federal Reserve System to be permissible for bank holding companies; (c) creates
a new type of bank, wholesale financial institutions (also referred to as
"woofies"), which are regulated by the BHCA and are not able to accept insured
deposits, potentially giving holding companies with woofies greater flexibility
to engage in non-financial investments; (d) subject to specified exemptions,
pre-empts state anti-affiliation laws restricting transactions among insured
depository institutions, wholesale financial institutions, insurance concerns,
and national banks; (e) amends the BHCA and the Federal Deposit Insurance Act to
mandate public meetings concerning proposed large bank mergers and acquisitions;
(f) amends the Electronic Fund Transfer Act to mandate certain fee disclosures
related to electronic fund transfer services; and (g) imposes certain
obligations on financial institutions to protect the privacy and confidentiality
of customer nonpublic personal information, including the requirements that
financial institutions establish standards for safeguards to protect privacy and
confidentiality, provide the standards to customers at the time of establishing
the customer relationship and annually during the continuation of the
relationship, condition disclosure of the private information to nonaffiliated
third parties on the
8
giving of specific disclosures to consumers and giving consumers the opportunity
to prevent such disclosure to third parties.
Although the GLB Act has the potential to mix commerce and banking and increase
the Company's and CapitalBank's abilities to diversify into a variety of areas,
the Company cannot predict the actual impact of such legislation on the Company
or CapitalBank.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this PART I, Item 1 (Business) and in
PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) that are not historical facts are forward-looking
statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. The Company cautions readers of this Annual
Report on Form 10-K that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Although the
Company's management believes that their expectations of future performance are
based on reasonable assumptions within the bounds of their knowledge of their
business and operations, there can be no assurance that actual results will not
differ materially from their expectations.
Factors that could cause actual results to differ from expectations include,
among other things, the challenges, costs and complications associated with the
continued development of CapitalBank; the ability of the Company to effectively
integrate and staff the operations of CapitalBank as well as the operations
allocated to the base of deposits acquired in connection with branch
acquisitions; the ability of the Company to retain and deploy in a timely manner
the cash associated with branch acquisitions into assets with satisfactory
yields and credit risk profiles; the potential that loan charge-offs may exceed
the allowance for loan losses or that such allowance will be increased as a
result of factors beyond the control of the Company; the Company's dependence on
senior management; competition from existing financial institutions operating in
the Company's market areas as well as the entry into such areas of new
competitors with greater resources, broader branch networks and more
comprehensive services; the potential adverse impact on net income of rapidly
declining interest rates; adverse changes in the general economic conditions in
the geographic markets served by the Company; the challenges and uncertainties
in the implementation of the Company's expansion and development strategies; the
potential negative effects of future legislation affecting financial
institutions; and other factors described in this report and in other reports
filed by the Company with the Securities and Exchange Commission.
Item 2. Properties.
The Company operates out of an approximately 3,000 square foot building located
on approximately one acre of land leased from a third party in Greenwood, South
Carolina. At December 31, 2001, CapitalBank operated twelve full service
branches in South Carolina, three of which are located in Greenwood, two of
which are located in Belton, and one of which is located in each of Anderson,
Newberry, Clemson, Saluda, Prosperity, Honea Path, and Calhoun Falls. Of
CapitalBank's branches, seven are located on land owned by CapitalBank, four are
located on land owned by the Company and leased to CapitalBank, and one is
located on land CapitalBank leases from a former director of the Company.
Item 3. Legal Proceedings.
The Company and CapitalBank are parties to legal proceedings which have arisen
in the ordinary course of their respective businesses. None of these proceedings
is expected to have a material effect on the consolidated financial condition of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
not declared or distributed any cash dividends to its shareholders since
its organization in 1988. On September
The common stock of the Company (the "Common Stock") is listed for trading on
the American Stock Exchange under the symbol "CYL". The following table reflects
the high and low sales price per share for the Common Stock reported on the
American Stock Exchange for the periods indicated.
Year Quarter High Low
2001 Fourth.................. $11.24 $10.25
Third................... 11.50 9.45
Second.................. 10.10 8.10
First................... 8.75 5.38
2000 Fourth.................. $ 6.88 $ 4.75
Third................... 7.25 6.06
Second.................. 7.50 6.00
First................... 8.75 6.00
As of March 25, 2002, there were 3,313,368 shares of Common Stock outstanding
held by approximately 1,200 shareholders of record.
On September 17, 2001 and on December 10, 2001, the Company paid cash dividends
to its shareholders of record as of August 31, 2001, and November 19, 2001
respectively, at $0.03 per share. Prior to such dividends, the Company had not
declared or distributed any cash dividends to its shareholders since its
organization in 1988. The Board of Directors of the Company expects comparable
dividends to be paid to the shareholders of the Company for the foreseeable
future. Notwithstanding the foregoing, the future dividend policy of the Company
is subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial condition, cash
requirements, and general business conditions. The Company's ability to
distribute cash dividends will depend entirely upon CapitalBank's ability to
distribute dividends to the Company. As a state bank, CapitalBank is subject to
legal limitations on the amount of dividends each is permitted to pay. In
particular, CapitalBank must receive the approval of the State Board prior to
paying dividends to the Company. Furthermore, neither CapitalBank nor the
Company may declare or pay a cash dividend on any of their capital stock if they
are insolvent or if the payment of the dividend would render them insolvent or
unable to pay their obligations as they become due in the ordinary course of
business. See "Government Supervision and Regulation -- Dividends."
Item 6. Selected Financial Data
The following selected consolidated financial data for the five years ended
December 31, 2001 are derived from the consolidated financial statements and
other data of the Company. The consolidated financial statements for the years
ended December 31, 1997 through 2001, were audited by Tourville, Simpson &
Caskey, L.L.P., independent auditors. The selected consolidated financial data
should be read in conjunction with the consolidated financial statements of the
Company, including the accompanying notes, included elsewhere herein.
10
Year Ended December 31, 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands, except per share)
Income Statement Data:
Interest income $ 26,961 $ 29,722 $ 23,199 $ 21,043 $ 14,443
Interest expense 13,675 16,636 11,850 11,198 7,172
-------- -------- -------- -------- --------
Net interest income 13,286 13,086 11,349 9,845 7,271
Provision for loan losses 1,920 471 1,037 1,836 608
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 11,366 12,615 10,312 8,009 6,663
Net securities gains (losses) 290 -- 175 220 (1)
Noninterest income 9,824 3,303 3,005 2,797 1,572
Noninterest expense 15,102 13,976 12,014 10,228 7,248
-------- -------- -------- -------- --------
Income before income taxes 6,378 1,942 1,478 798 986
Income tax expense 1,900 290 150 34 220
-------- -------- -------- -------- --------
Net income $ 4,478 $ 1,652 $ 1,328 $ 764 $ 766
======== ======== ======== ======== ========
Balance Sheet Data:
Assets $340,682 $422,250 $359,668 $321,031 $248,861
Earning assets 314,769 387,146 328,478 295,213 227,372
Securities (1) 62,806 106,041 108,926 120,695 77,480
Loans (2) 251,947 280,506 219,054 172,545 149,127
Allowance for loan losses 4,103 3,060 2,557 2,399 1,531
Deposits 258,330 332,976 257,247 260,120 186,861
Federal Home Loan Bank advances 31,270 32,399 20,729 9,434 16,350
Shareholders' equity 39,273 35,144 31,218 33,430 31,928
Per Share Data (3):
Basic earnings per Share $ 1.31 $ 0.48 $ 0.40 $ 0.24 $ 0.26
Diluted earnings per share 1.26 0.48 0.40 0.23 0.26
Book value (period end)(4) 11.66 10.79 10.10 10.81 10.47
Tangible book value (period end)(4) 10.37 8.72 8.48 9.01 9.45
Performance Ratios:
Return on average assets 1.19% 0.41% 0.40% 0.27% 0.40%
Return on average equity 11.68 4.57 3.90 2.33 2.68
Net interest margin (5) 4.08 3.83 3.96 3.77 4.23
Efficiency (6) 72.71 81.75 79.55 78.50 79.91
Allowance for loan losses to loans 1.63 1.09 1.17 1.39 1.03
Net charge-offs to average loans 0.34 0.12 0.47 0.62 0.15
Nonperforming assets to period end loans (2) 0.68 0.25 0.56 0.78 0.63
Capital and Liquidity Ratios:
Average equity to average assets 10.22 9.07 10.22 11.47 14.92
Leverage (4.00% required minimum) 10.21 7.02 8.37 8.89 12.08
Tier 1 risk-based capital ratio 14.26 10.05 11.85 13.78 17.65
Total risk-based capital ratio 15.53 11.12 12.90 15.00 18.61
Average loans to average deposits 90.03 86.46 72.97 69.65 76.78
- --------------
1. Securities held-to-maturity are stated at amortized cost, and securities
available-for-sale are stated at fair value.
2. Loans are stated before the allowance for loan losses.
3. All share and per-share data have been adjusted to reflect the 5% common
stock dividends in September 1998, June 2000 and June 2001.
4. Excludes the effect of any outstanding stock options.
5. Tax equivalent net interest income divided by average earning assets.
6. Noninterest expense divided by the sum of tax equivalent net interest
income and noninterest income, excluding gains and losses on sales of
assets and the writedown of intangible assets related to the sale of those
assets.
Nonperforming loans and nonperforming assets do not include loans past due 90
days or more that are still accruing interest.
Quarterly Operating Results
(Dollars in thousands 2001 Quarter ended 2000 Quarter ended
----------------------------------------- -----------------------------------------
except per share) Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Net interest income $3,392 $3,212 $3,266 $3,416 $3,587 $3,360 $3,105 $3,034
Provision for loan losses 820 600 400 100 195 15 84 177
Noninterest income 1,341 1,215 6,666 892 569 871 988 875
Noninterest expense 3,131 2,941 5,522 3,508 3,569 3,628 3,454 3,325
Net income 600 666 2,662 550 333 483 464 372
Basic earnings per share 0.18 0.19 0.77 0.17 0.10 0.14 0.14 0.10
Diluted earnings per share 0.17 0.18 0.74 0.17 0.10 0.14 0.14 0.10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the preceding
"Selected Financial Data" and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Annual Report.
The financial information provided below has been rounded in order to simplify
its presentation. However, the ratios and percentages provided below are
calculated using the detailed financial information contained in the Financial
Statements, the Notes thereto and the other financial data included elsewhere in
this Annual Report.
General
Community Capital Corporation (the "Company") serves as a bank holding company
for CapitalBank (the "Bank"). The Bank was formed on January 1, 2001 during a
restructuring that consolidated the company's operations into a single
subsidiary. CapitalBank operates twelve branches throughout South Carolina. The
Bank offers a full range of banking services, including a wealth management
group featuring a wide array of financial services, with personalized attention,
local decision making and strong emphasis on the needs of individuals and small
to medium-sized businesses.
The Company was formed in 1988 to serve as a holding company for Greenwood
National Bank, which later changed its name to Greenwood Bank & Trust (the
"Greenwood Bank"). In 1994 the Company made the decision to expand beyond
Greenwood County by creating an organization of independent banks in four
additional markets. In June 1995, the Company opened Clemson Bank and Trust (the
"Clemson Bank") in Clemson, South Carolina. In 1996 and 1997, the Company opened
Community Bank and Trust (the "Barnwell Bank"), The Bank (the "Belton Bank"),
and Mid State Bank (the "Newberry Bank"). The Company formed a separate trust
organization in 1997 known as Community Trust Company. In May 2000, Community
Trust Company was sold. During 1997 and 1998, the Company also acquired several
Carolina First branches.
As discussed, on January 1, 2001, the Company merged the five subsidiary banks
into one bank charter known as CapitalBank. The Company made the decision to
restructure the organization into one bank in order to improve operational
efficiencies, provide new opportunities for employees, and improve service to
customers. Customers will receive the benefit of being able to transact business
at any of CapitalBank's branches, through the ATM network, and through the
internet banking products. Additionally, management believes that the new
centralized credit function will provide additional controlled decisions while
streamlining the credit process. Centralized deposit pricing will support
management's strategy from market to market. It is believed that the name
recognition will be enhanced.
On January 29, 2001, CapitalBank, the new bank subsidiary, announced that it had
signed a definitive agreement with Enterprise Bank of South Carolina to sell its
five branch offices located in Barnwell, Blackville, Williston, Springfield and
Salley, South Carolina. On May 14, 2001, CapitalBank sold the five branches,
which had approximately $67.1 million in deposits.
12
Results of Operations
Year ended December 31, 2001, compared with year ended December 31, 2000
Net interest income increased $200,000, or 1.53%, to $13.3 million in 2001 from
$13.1 million in 2000. The increase in net interest income was due primarily to
an increase in net interest margin. Average earning assets decreased $18.9
million, or 5.19%, and average interest-bearing liabilities decreased $23.7
million, or 7.17%, due primarily to the sale of the five branches.
The Company's tax equivalent net interest spread and tax equivalent net interest
margin were 3.58% and 4.08%, respectively, in 2001 compared to 3.36% and 3.83%
in 2000. The increase in the net interest spread was primarily the result of the
decrease in yields on interest-bearing liabilities used to fund loans and
securities. Yields on interest-bearing liabilities decreased from 5.03% in 2000
to 4.46% in 2001. Yields on interest-earning assets decreased 35 basis points;
however, yields on interest-bearing liabilities decreased 57 basis points.
The provision for loan losses was $1.9 million in 2001 compared to $471,000 in
2000. The significant amount charged to the provision in 2001 was primarily the
result of management's efforts to fund the allowance for potential problem loans
and to protect against a deteriorating economy. The Company's allowance for loan
losses was 1.63% of total loans outstanding at December 31, 2001. In addition,
the provision was funded to maintain the allowance for loan losses at a level
sufficient to cover known and inherent losses in the loan portfolio.
Noninterest income increased $6.8 million, or 206.06%, to $10.1 million in 2001
from $3.3 million in 2000, which was primarily attributable to the premium on
the branches sold to Enterprise Bank. The premium totaled $5.8 million. Service
charges on deposit accounts increased $422,000 or 24.74% to $2.1 million in
2001. Residential mortgage origination fees increased $319,000, or 63.41% to
$822,000 in 2001. Noninterest income in 2001 included $290,000 from the gain on
sales of nonmarketable equity securities as compared to no gains in 2000.
Noninterest income for the year ended December 31, 2000 included $150,000 from
the gain on the sale of Community Trust Company.
Noninterest expense increased $1.1 million, or 7.86%, to $15.1 million in 2001
from $14.0 million in 2000. The primary component of noninterest expense was
salaries and employee benefits, which decreased $265,000, or 3.90%, to $6.5
million in 2001 from $6.8 million in 2000. The decrease is attributable to a
decrease in the number of employees due to the sale of the branches. Other
categories of expenses decreased due to the sale of the branches and improved
efficiency from the consolidation of the subsidiary banks. Net occupancy expense
was $749,000 in 2001 compared to $880,000 in 2000, and furniture and equipment
expense was $1.4 million in 2001 compared to $1.6 million in 2000. The most
significant increase in noninterest expense was in the amortization of
intangible assets. The Company recorded amortization of intangible assets
related to the sale of branches of $1.9 million. Total amortization of
intangible assets was $2.4 million in 2001, as compared to $612,000 in 2000. The
Company's efficiency ratio was 72.71% in 2001 compared to 81.75% in 2000.
Net income increased $2.8 million, or 164.71%, to $4.5 million in 2001 from $1.7
million in 2000. Basic earnings per share was $1.31 in 2001, compared to $0.48
in 2000. Diluted earnings per share was $1.26 in 2001, compared to $0.48 in
2000. Return on average assets during 2001 was 1.19% compared to 0.41% during
2000, and return on average equity was 11.68% during 2001 compared to 4.57%
during 2000.
Year ended December 31, 2000, compared with year ended December 31, 1999
Net interest income increased $1.8 million, or 15.3%, to $13.1 million in 2000
from $11.3 million in 1999. The increase in net interest income was due
primarily to an increase in average earning assets. Average earning assets
increased $59.0 million, or 19.32%, due to the growth of the subsidiary banks in
2000.
The Company's tax equivalent net interest spread and tax equivalent net interest
margin were 3.36% and 3.83%, respectively, in 2000 compared to 3.48% and 3.96%
in 1999. The decrease in the net interest spread was primarily the result of the
increase in yields on interest-bearing liabilities used to fund loans and
securities. Yields on interest-bearing liabilities increased from 4.36% in 1999
to 5.03% in 2000.
13
The provision for loan losses was $471,000 in 2000 compared to $1.0 million in
1999. The higher amount charged to the provision in 1999 was primarily to fund
potential problem loans at the Greenwood and Barnwell Banks. The Company's
allowance for loan losses was 1.09% of total loans outstanding at December 31,
2000. In addition, the provision was funded to match the growth in the loan
portfolio from the growth of the subsidiary banks and the subsidiary banks'
efforts to maintain their respective allowances for loan losses at levels
sufficient to cover known and inherent losses in their loan portfolios.
Noninterest income increased $123,000, or 3.9%, to $3.3 million in 2000 from
$3.2 million in 1999, which was primarily attributable to increased service
charges on deposit accounts and an increase in other operating income. The
increase in service charges on deposit accounts was attributable to the increase
in the number of deposit accounts from the growth of the subsidiary banks. Other
operating income increased $42,000 or 6.29% to $710,000 in 2000. Noninterest
income in 1999 included $175,000 from the gain on sales of securities
available-for-sale, compared to no gains in 2000. Noninterest income for the
year ended December 31, 2000 included $150,000 from the gain on the sale of
Community Trust Company.
Noninterest expense increased $2.0 million, or 16.3%, to $14.0 million in 2000
from $12.0 million in 1999. The primary component of noninterest expense is
salaries and employee benefits, which increased $1.1 million, or 19.3%, to $6.8
million in 2000 from $5.7 million in 1999. The increase is attributable to an
increase in the number of employees due to the growth of the subsidiary banks
and annual pay raises. Other categories of expenses increased due to the growth
of the subsidiary banks and from the acquisition of the two branches in 2000.
Net occupancy expense was $880,000 in 2000 compared to $819,000 in 1999, and
furniture and equipment expense was $1.6 million in 2000 compared to $1.2
million in 1999. The Company recorded amortization of intangible assets related
to acquisitions of $612,000 in 2000 compared to $537,000 in 1999. The Company's
efficiency ratio was 81.75% in 2000 compared to 79.55% in 1999.
Net income increased $324,000, or 24.40%, to $1.7 million in 2000 from $1.3
million in 1999. Basic earnings per share was $0.48 in 2000, compared to $0.40
in 1999. Diluted earnings per share was $0.48 in 2000, compared to $0.40 in
1999. Return on average assets during 2000 was 0.41% compared to 0.40% during
1999, and return on average equity was 4.57% during 2000 compared to 3.90%
during 1999.
Net Interest Income
General. The largest component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's interest-earning assets and
the rates paid on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch and the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.
14
Average Balances, Income and Expenses, and Rates
Year ended December 31, 2001 2000 1999
--------------------------- --------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------ -------- ------- ------ -------- ------- ------
Assets:
Earning Assets:
Loans (1)(3) $259,661 $22,404 8.63% $254,064 $23,552 9.27% $188,672 $16,613 8.81%
Securities, taxable (2) 52,302 3,053 5.84 78,246 4,593 5.87 86,761 5,037 5.81
Securities, nontaxable (2)(3) 25,878 2,018 7.80 26,671 2,119 7.95 24,505 1,968 8.03
Nonmarketable equity
securities 5,583 226 4.05 5,329 308 5.78 4,758 295 6.20
Federal funds sold and other 2,078 75 3.61 87 6 6.90 696 34 4.89
-------- ------- -------- ------- -------- -------
Total earning assets 345,502 27,776 8.04 364,397 30,578 8.39 305,392 23,947 7.84
-------- ------- -------- ------- -------- -------
Cash and due from banks 8,859 9,728 8,117
Premises and equipment 12,140 14,024 10,835
Other assets 12,028 13,109 11,711
Allowance for loan losses (3,316) (2,814) (2,509)
-------- -------- --------
Total assets $375,213 $398,444 $333,546
======== ======== ========
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction
accounts $100,319 2,463 2.45% $ 99,718 3,553 3.56% $ 81,210 2,373 2.92%
Savings deposits 30,012 1,182 3.94 29,051 1,096 3.77 26,658 954 3.58
Time deposits 131,842 7,401 5.61 136,144 7,878 5.79 125,596 6,375 5.08
Other short-term borrowings 10,085 411 4.07 29,182 1,772 6.07 20,928 1,169 5.59
Federal Home Loan Bank
advances 31,408 1,958 6.23 31,943 1,931 6.05 16,108 865 5.37
Long-term debt 2,191 156 7.12 3,299 286 8.67 1,114 80 7.18
Obligations under capital leases 1,036 104 10.04 1,239 120 9.69 463 34 7.34
-------- ------- -------- ------- -------- -------
Total interest-bearing 306,893 13,675 4.46 330,576 16,636 5.03 272,077 11,850 4.36
liabilities -------- ------- -------- ------- -------- -------
Demand deposits 26,248 28,925 25,101
Accrued interest and other
liabilities 3,742 2,813 2,289
Shareholders' equity 38,330 36,130 34,079
-------- -------- --------
Total liabilities and $375,213 $398,444 $333,546
shareholders' equity ======== ======== ========
Net interest spread 3.58% 3.36% 3.48%
Net interest income $14,101 $13,942 $12,097
======= ======= =======
Net interest margin 4.08% 3.83% 3.96%
(1) The effect of loans in nonaccrual status and fees collected is not
significant to the computations. All loans and deposits are domestic.
(2) Average investment securities exclude the valuation allowance on securities
available-for-sale.
(3) Fully tax-equivalent basis at 38% tax rate for nontaxable securities and
loans.
15
Average Balances, Income and Expenses, and Rates. The previous table sets forth,
for the periods indicated, certain information related to the Company's average
balance sheet and its average yields on assets and average costs of liabilities.
Such yields are derived by dividing income or expense by the average balance of
the corresponding assets or liabilities. Average balances have been derived from
the daily balances throughout the periods indicated.
Analysis of Changes in Net Interest Income. The following table sets forth the
effect which the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 2001 to 2000 and 2000 to 1999.
Analysis of Changes in Net Interest Income
2001 Compared With 2000 2000 Compared With 1999
------------------------------- -------------------------------
Variance Due to Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ------- ---------- -------- -------
Earning Assets
Loans $ 509 $(1,657) $(1,148) $6,030 $ 909 $6,939
Securities, taxable (1,517) (23) (1,540) (499) 55 (444)
Securities, nontaxable (64) (37) (101) 173 (22) 151
Nonmarketable equity securities 14 (96) (82) 34 (21) 13
Federal funds sold and other 73 (4) 69 (38) 10 (28)
------- ------- ------- ------ ------ ------
Total interest income (985) (1,817) (2,802) 5,700 931 6,631
------- ------- ------- ------ ------ ------
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts 21 (1,111) (1,090) 601 579 1,180
Savings and market rate investments 36 50 86 88 54 142
Time deposits (240) (237) (477) 563 940 1,503
------- ------- ------- ------ ------ ------
Total interest-bearing deposits (183) (1,298) (1,481) 1,252 1,573 2,825
Other short-term borrowings (907) (454) (1,361) 494 109 603
Federal Home Loan Bank advances (32) 59 27 945 121 1,066
Long-term debt (85) (45) (130) 186 20 206
Obligations under capital leases (20) 4 (16) 72 14 86
------- ------- ------- ------ ------ ------
Total interest expense (1,227) (1,731) (2,961) 2,949 1,837 4,786
------- ------- ------- ------ ------ ------
Net interest income $ 245 $ (86) $ 159 $2,751 $ (906) $1,845
======= ======= ======= ====== ====== ======
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
Interest Sensitivity. The Company monitors and manages the pricing and maturity
of its assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on its net interest income. The
principal monitoring technique employed by the Company is the measurement of the
Company's interest sensitivity "gap," which is the positive or negative dollar
difference between assets and liabilities that are subject to interest rate
repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities
available-for-sale, replacing an asset or liability at maturity, or adjusting
the interest rate during the life of an asset or liability. Managing the amount
of assets and liabilities repricing in the same time interval helps to hedge the
risk and minimize the impact on net interest income of rising or falling
interest rates.
16
The following table sets forth the Company's interest rate sensitivity at
December 31, 2001.
Interest Sensitivity Analysis
Greater
After One After Three Than One
Within Through Through Within Year or
December 31, 2001 One Three Twelve One Non-
(Dollars in thousands) Month Months Months Year Sensitive Total
-------- --------- ----------- -------- --------- --------
Assets
Earning assets:
Loans (1) $ 71,723 $ 11,947 $135,679 $219,349 $30,993 $250,342
Securities -- 146 5,138 5,284 57,522 62,806
Federal funds sold and other 16 -- -- 16 -- 16
-------- -------- -------- -------- ------- --------
Total earning assets 71,739 12,093 140,817 224,649 88,515 313,164
-------- -------- -------- -------- ------- --------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits 32,504 -- -- 32,504 -- 32,504
Savings deposits 88,516 -- -- 88,516 -- 88,516
Time deposits 18,759 25,048 55,753 99,560 12,658 112,218
-------- -------- -------- -------- ------- --------
Total interest-bearing deposits 139,779 25,048 55,753 220,580 12,658 233,238
Other short-term borrowings 7,464 -- -- 7,464 -- 7,464
Federal Home Loan Bank advances -- -- -- -- 31,269 31,269
Obligations under capital leases 16 33 156 205 735 940
-------- -------- -------- -------- ------- --------
Total interest-bearing liabilities 147,259 25,081 55,909 228,249 44,662 272,911
-------- -------- -------- -------- ------- --------
Period gap $(75,520) $(12,988) $ 84,908 $ (3,600) $43,853
======== ======== ======== ======== =======
Cumulative gap $(75,520) $(88,508) $ (3,600) $ (3,600) $40,253
======== ======== ======== ======== =======
Ratio of cumulative gap to total earning assets (24.11)% (28.26)% (1.15)% (1.15)% 12.85%
(1) Excludes nonaccrual loans.
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give the Company the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity date. Other short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase. Federal funds
purchased are reflected at the earliest pricing interval since funds can be
repriced daily. Securities sold under agreements to repurchase are reflected at
the maturity date of each repurchase agreement which generally matures within
one day. Advances from the Federal Home Loan Bank are reflected at their
contractual maturity dates. Obligations under capital leases are reflected at
each payment date.
17
The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability sensitive. The Company
is liability sensitive within the one year period. However, the Company's gap
analysis is not a precise indicator of its interest sensitivity position. The
analysis presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a
substantial portion of core deposits may change contractually within a
relatively short time frame, but those rates are viewed by management as
significantly less interest-sensitive than market-based rates such as those paid
on non-core deposits. Accordingly, management believes a liability-sensitive gap
position is not as indicative of the Company's true interest sensitivity as it
would be for an organization which depends to a greater extent on purchased
funds to support earning assets. Net interest income may be impacted by other
significant factors in a given interest rate environment, including changes in
the volume and mix of earning assets and interest-bearing liabilities.
Provision and Allowance for Loan Losses
General. The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. On a quarterly basis, the Company's Board of
Directors reviews and approves the appropriate level for CapitalBank's allowance
for loan losses based upon management's recommendations, the results of the
internal monitoring and reporting system, analysis of economic conditions in its
markets, and a review of historical statistical data for both the Company and
other financial institutions.
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Company's income statement, are made periodically to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. Loan losses and recoveries are charged
or credited directly to the allowance. The amount of the provision is a function
of the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the
reserve during a given period, and current and anticipated economic conditions.
The Company's allowance for loan losses is based upon judgments and assumptions
of risk elements in the portfolio, future economic conditions, and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquency, chargeoffs, and general and economic conditions in the
service area. The adequacy of the allowance for loan losses and the
effectiveness of the Company's monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.
Based on present information and an ongoing evaluation, management considers the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable but which may or may not be valid. Thus, there can be
no assurance that chargeoffs in future periods will not exceed the allowance for
loan losses or that additional increases in the allowance for loan losses will
not be required. The Company does not allocate the allowance for loan losses to
specific categories of loans but evaluates the adequacy on an overall portfolio
basis utilizing a risk grading system.
18
The following table sets forth certain information with respect to the Company's
allowance for loan losses and the composition of chargeoffs and recoveries for
each of the last five years.
Allowance for Loan Losses
Year Ended December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total loans outstanding at end of period $251,947 $280,506 $219,054 $172,545 $149,127
======== ======== ======== ======== ========
Average loans outstanding $259,661 $254,064 $188,672 $161,695 $113,080
======== ======== ======== ======== ========
Balance of allowance for loan losses at beginning
of period $ 3,060 $ 2,557 $ 2,399 $ 1,531 $ 837
Allowance for loan losses from acquisitions -- 335 -- 38 255
Loan losses:
Commercial and industrial 406 113 287 135 92
Real estate - mortgage 160 122 306 43 9
Consumer 409 305 449 885 68
-------- -------- -------- -------- --------
Total loan losses 975 540 1,042 1,063 169
-------- -------- -------- -------- --------
Recoveries of previous loan losses:
Commercial and industrial 8 73 -- -- --
Real estate - mortgage 16 14 17 -- --
Consumer 74 150 146 57 --
-------- -------- -------- -------- --------
Total recoveries 98 237 163 57 --
-------- -------- -------- -------- --------
Net loan losses 877 303 879 1,006 169
Provision for loan losses 1,920 471 1,037 1,836 608
-------- -------- -------- -------- --------
Balance of allowance for loan losses at end of period $ 4,103 $ 3,060 $ 2,557 $ 2,399 $ 1,531
======== ======== ======== ======== ========
Allowance for loan losses to period end loans 1.63% 1.09% 1.17% 1.39% 1.03%
Net chargeoffs to average loans 0.34 0.12 0.47 0.62 0.15
Nonperforming Assets. The following table sets forth the Company's nonperforming
assets for the dates indicated.
Nonperforming Assets
December 31,
------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
------ ---- ------ ------ ----
Nonaccrual loans $1,567 $637 $1,223 $1,348 $678
Restructured or impaired loans -- -- -- -- --
------ ---- ------ ------ ----
Total nonperforming loans $1,567 $637 $1,223 $1,348 $678
Other real estate owned 148 58 -- -- 262
------ ---- ------ ------ ----
Total nonperforming assets $1,715 $695 $1,223 $1,348 $940
====== ==== ====== ====== ====
Loans 90 days or more past due and still
accruing interest $ -- $164 $ 109 $ 112 $ 84
Nonperforming assets to period end loans 0.68% 0.25% 0.56% 0.78% 0.63%
19
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all interest which has been accrued on the loan but remains unpaid is reversed
and deducted from current earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. When a problem loan is
finally resolved, there may ultimately be an actual write-down or chargeoff of
the principal balance of the loan which would necessitate additional charges to
earnings. For all periods presented, the additional interest income, which would
have been recognized into earnings if the Company's nonaccrual loans had been
current in accordance with their original terms, is immaterial.
Total nonperforming assets increased to $1.7 million at December 31, 2001, from
$695,000 at December 31, 2000. This amount consists primarily of nonaccrual
loans which totaled $1.6 million at December 31, 2001. Nonperforming assets were
0.68% of total loans at December 31, 2001. The allowance for loan losses to
period end nonperforming assets was 239.2% at December 31, 2001.
Potential Problem Loans. At December 31, 2001, through its internal review
mechanisms, the Company had identified $9.2 million of criticized loans and
$10.5 million of classified loans. The results of this internal review process
are the primary determining factor in management's assessment of the adequacy of
the allowance for loan losses.
The Company's criticized loans increased from $6.5 million at December 31, 2000
to $9.2 million at December 31, 2001. Total classified loans increased from $3.4
million at December 31, 2000 to $10.5 million at December 31, 2001. The increase
in criticized and classified loans is attributable to the overall decline of the
economy. Management is committed to addressing potential problem loans.
Noninterest Income and Expense
Noninterest Income. Noninterest income increased $6.8 million, or 206.06%, to
$10.1 million in 2001 from $3.3 million in 2000, which was primarily
attributable to the gain recognized on the sale of the five branches in 2001.
The premium on this sale totaled $5.8 million. The Company had $290,000 in gains
on the sale of nonmarketable equity securities in 2001, compared to no gains on
sales of securities in 2000. Residential mortgage origination fees increased
$319,000, or 63.42% to $822,000 in 2001 from $503,000 in 2000.
The following table sets forth, for the periods indicated, the principal
components of noninterest income:
Noninterest Income
Year Ended December 31,
-------------------------
(Dollars in thousands) 2001 2000 1999
------- ------ ------
Service charges on deposit accounts $ 2,128 $1,706 $1,513
Residential mortgage origination fees 822 503 672
Gains on sales of securities available-for-sale 290 -- 175
Commissions from sales of mutual funds 32 105 54
Income from fiduciary activities 131 129 98
Gain on sale of branches 5,791 -- --
Gain on sale of Community Trust Company -- 150 --
Other income 920 710 668
------- ------ ------
Total noninterest income $10,114 $3,303 $3,180
======= ====== ======
Noninterest Expense. Noninterest expense increased $1.1 million, or 7.86%, to
$15.1 million in 2001 from $14.0 million in 2000. The primary component of
noninterest expense was salaries and benefits, which decreased
20
$265,000, or 3.90%, to $6.5 million in 2001 from $6.8 million in 2000. The
decrease represents the number of employees that staffed the branches sold in
2001. Other categories of expenses decreased due to the sale of the branches as
well. Net occupancy expense was $749,000 in 2001 compared to $880,000 in 2000,
and furniture and equipment expenses was $1.4 million in 2001 compared to $1.6
million in 2000. The most significant increase in noninterest expense was in the
amortization of intangible assets. The Company recorded amortization of
intangible assets related to the sale of branches of $1.9 million. Total
amortization of intangible assets was $2.4 million in 2001, as compared to
$612,000 in 2000. The Company's efficiency ratio was 72.71% in 2001 compared to
81.75% in 2000.
The following table sets forth, for the periods indicated, the primary
components of noninterest expense:
Noninterest Expense
Year Ended December 31,
-----------------------------
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Salaries and employee benefits $ 6,522 $ 6,787 $ 5,690
Net occupancy expense 749 880 819
Furniture and equipment expense 1,440 1,631 1,178
Amortization of intangible assets 2,440 612 537
Director and committee fees 130 202 76
Data processing and supplies 410 361 205
Mortgage loan department expenses 278 130 247
Banking assessments 57 131 77
Professional fees and services 404 476 432
Postage and freight 339 380 312
Supplies 424 419 391
Credit card expenses 188 201 188
Telephone expenses 288 402 307
Other 1,433 1,364 1,555
------- ------- -------
Total noninterest expense $15,102 $13,976 $12,014
======= ======= =======
Efficiency ratio 72.71% 81.75% 79.55%
Income Taxes. The Company's income tax expense was $1.9 million, an increase of
$1.6 million from the 2000 amount of $290,000. The increase is primarily
attributable to an increase in income before taxes of $4.4 million when compared
to 2000. As discussed, the gain on the sale of branches resulted in an increase
in income before taxes. In 2000, the amount of nontaxable income from securities
offset the majority of income before taxes.
Earning Assets
Loans. Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the higher
yields are the inherent credit and liquidity risks which management attempts to
control and counterbalance. Loans averaged $259.6 million in 2001 compared to
$254.1 million in 2000, an increase of $5.5 million, or 2.20%. At December 31,
2001, total loans were $251.9 million compared to $280.5 million at December 31,
2000. The decrease in loans during 2001 was primarily due to the sale of the
five branches. The following table sets forth the composition of the loan
portfolio by category at the dates indicated and highlights the Company's
general emphasis on mortgage lending.
21
Composition of Loan Portfolio
December 31, 2001 2000 1999
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
(Dollars in thousands) Amount Total Amount Total Amount Total
-------- ---------- -------- ---------- -------- ----------
Commercial and
industrial $ 33,395 13.26% $ 52,005 18.54% $ 29,740 13.58%
Real estate
Construction 13,252 5.26 20,393 7.27 28,664 13.09
Mortgage-residential 124,091 49.25 111,897 39.89 66,092 30.17
Mortgage-
nonresidential 59,417 23.58 60,159 21.45 58,419 26.67
Consumer 18,227 7.23 33,721 12.02 32,256 14.73
Other 3,565 1.42 2,331 0.83 3,883 1.76
-------- ------ -------- ------ -------- ------
Total loans 251,947 100.00% 280,506 100.00% 219,054 100.00%
====== ====== ======
Allowance for
loan losses (4,103) (3,060) (2,557)
-------- -------- --------
Net loans $247,844 $277,446 $216,497
======== ======== ========
December 31, 1998 1997
--------------------- ---------------------
Percent of Percent of
(Dollars in thousands) Amount Total Amount Total
-------- ---------- -------- ----------
Commercial and
industrial $ 28,991 16.80% $ 36,079 24.19%
Real estate
Construction 23,665 13.72 12,838 8.61
Mortgage-residential 52,635 30.51 40,977 27.48
Mortgage-
nonresidential 36,017 20.87 32,518 21.81
Consumer 29,784 17.26 25,747 17.27
Other 1,453 0.84 968 0.64
-------- ------ -------- ------
Total loans 172,545 100.00% 149,127 100.00%
====== ======
Allowance for
loan losses (2,399) (1,531)
-------- --------
Net loans $170,146 $147,596
======== ========
The principal component of the Company's loan portfolio is real estate mortgage
loans. At December 31, 2001, this category totaled $183.5 million and
represented 72.8% of the total loan portfolio, compared to $172.1 million, or
61.3%, at December 31, 2000.
In the context of this discussion, a "real estate mortgage loan" is defined as
any loan, other than loans for construction purposes, secured by real estate,
regardless of the purpose of the loan. It is common practice for financial
institutions in the Company's market areas to obtain a security interest in real
estate, whenever possible, in addition to any other available collateral. This
collateral is taken to reinforce the likelihood of the ultimate repayment of the
loan and tends to increase the magnitude of the real estate loan portfolio
component.
Real estate construction loans decreased $7.1 million, or 34.80%, to $13.3
million at December 31, 2001, from $20.4 million at December 31, 2000.
Residential mortgage loans, which is the largest category of the Company's
loans, increased $12.2 million, or 10.90%, to $124.1 million at December 31,
2001, from $111.9 million at December 31, 2000. Residential real estate loans
consist of first and second mortgages on single or multi-family residential
dwellings. Nonresidential mortgage loans, which include commercial loans and
other loans secured by multi-family properties and farmland, decreased $742,000,
or 1.23%, to $59.4 million at December 31, 2001, from $60.2 million at December
31, 2000. The overall increase in real estate lending was attributable to the
continued demand for residential and commercial real estate loans in our
markets. The Bank has been able to compete favorably for residential mortgage
loans with other financial institutions by offering fixed rate products having
three and five year call provisions.
Commercial and industrial loans decreased $18.6 million, or 35.79%, to $33.4
million at December 31, 2001, from $52.0 million at December 31, 2000.
Consumer loans decreased $15.5 million, or 45.95%, to $18.2 million at December
31, 2001, from $33.7 million at December 31, 2000.
The Company's loan portfolio reflects the diversity of its markets. The
Company's twelve branches are located from the northern Midlands of South
Carolina through the Upstate. Primary market areas include Anderson, Belton,
Clemson, Greenwood, Newberry and Saluda. The economies of these markets are
varied and represent different industries including medium and light
manufacturing, higher education, regional health care, and distribution
facilities. These areas are expected to remain stable with continual growth. The
diversity of the economy creates opportunities for all types of lending. The
Company does not engage in foreign lending.
22
The repayment of loans in the loan portfolio as they mature is also a source of
liquidity for the Company. The following table sets forth the Company's loans
maturing within specified intervals at December 31, 2001.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 2001 Over One
Year
One Year or Through Over Five
(Dollars in thousands) Less Five Years Years Total
----------- ---------- --------- --------
Commercial and industrial $17,392 $ 15,260 $ 743 $ 33,395
Real estate 74,234 96,470 26,056 196,760
Consumer and other 7,516 13,219 1,057 21,792
------- -------- ------- --------
$99,142 $124,949 $27,856 $251,947
------- -------- ------- --------
Loans maturing after one year with:
Fixed interest rates $152,167
Floating interest rates 638
--------
$152,805
========
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval as well as modification of terms upon their maturity.
Consequently, management believes this treatment presents fairly the maturity
and repricing structure of the loan portfolio shown in the above table.
Investment Securities. The investment securities portfolio is a significant
component of the Company's total earning assets. Total securities averaged $83.8
million in 2001, compared to $110.2 million in 2000 and $116.0 million in 1999.
At December 31, 2001, the total securities portfolio was $62.8 million.
Securities designated as available-for-sale totaled $56.9 million and were
recorded at estimated fair value. Securities designated as held-to-maturity
totaled $550,000 and were recorded at amortized cost. The securities portfolio
also includes nonmarketable equity securities totaling $5.4 million which are
carried at cost because they are not readily marketable or have no quoted market
value. These include investments in Federal Reserve Bank stock, Federal Home
Loan Bank stock, the stock of four unrelated financial institutions, and the
stock of a financial services company that offers internet banking.
The following table sets forth the book value of the securities held by the
Company at the dates indicated.
Book Value of Securities
December 31, 2001 2000
------- -------
(Dollars in thousands)
U.S. Treasury securities $ -- $ --
U.S. Government agencies and corporations 13,148 50,544
State, county, and municipal securities 25,338 26,611
Other (trust preferred securities) 750 --
------- -------
39,236 77,155
Mortgage-backed securities 18,165 24,262
Nonmarketable equity securities 5,405 5,500
------- -------
Total securities $62,806 $106,917
======= ========
The following table sets forth the scheduled maturities and average yields of
securities held at December 31, 2001.
23
Investment Securities Maturity Distribution and Yields
After One But After Five But
December 31, 2001 Within One Year Within Five Years Within Ten Years Over Ten Years
--------------- ----------------- ---------------- ----------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ -------- ------ ------- ------- ------
U.S. Government agencies $5,138 5.13% $7,833 5.43% $ -- --% $ -- --%
Obligations of state and
local governments (2) 145 5.85 1,301 6.64 6,405 7.10 18,236 6.89
------ ------ ------ -------
Total securities (1) $5,283 5.15% $9,134 5.60% $6,405 7.10% $18,236 6.89%
====== ====== ====== =======
(1) Excludes mortgage-backed securities totaling $18.1 million with a yield of
6.23% and nonmarketable equity securities.
(2) The yield on state and local governments is presented on a tax equivalent
basis using a federal income tax rate of 34%.
Other attributes of the securities portfolio, including yields and maturities,
are discussed above in "--Net Interest Income-- Interest Sensitivity."
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold and interest-bearing deposits with other banks, averaged $2.1
million in 2001, compared to $87,000 in 2000 and $696,000 in 1999. At December
31, 2001, short-term investments totaled $16,000. These funds are a source of
the Company's liquidity. Federal funds are generally invested in an earning
capacity on an overnight basis.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities decreased $23.7 million, or 7.17%, to
$306.9 million in 2001, from $330.6 million in 2000. Average interest-bearing
deposits decreased $2.7 million, or 1.02%, to $262.2 million in 2001, from
$264.9 million in 2000.
Deposits. Average total deposits decreased $5.4 million, or 1.84%, to $288.4
million during 2001, from $293.8 million during 2000. At December 31, 2001,
total deposits were $258.3 million compared to $333.0 million a year earlier, a
decrease of 22.43%.
The following table sets forth the deposits of the Company by category at the
dates indicated.
Deposits
December 31, 2001 2000 1999
--------------------- --------------------- ---------------------
(Dollars in Percent of Percent of Percent of
thousands) Amount Deposit Amount Deposit Amount Deposits
-------- ---------- -------- ---------- -------- ----------
Demand deposit
accounts $ 25,083 9.70% $ 32,197 9.67% $ 27,422 10.66%
NOW accounts 32,504 12.58 53,949 16.20 45,560 17.71
Money market
accounts 61,863 23.95 55,007 16.52 38,419 14.93
Savings accounts 26,653 10.32 30,543 9.17 26,642 10.36
Time deposits
less than
$100,000 72,636 28.12 114,454 34.38 91,671 35.64
Time deposits
of $100,000
or over 39,591 15.33 46,826 14.06 27,533 10.70
-------- ------ -------- ------ -------- ------
Total deposits $258,330 100.00% $332,976 100.00% $257,247 100.00%
======== ====== ======== ====== ======== ======
Deposits
December 31, 1998 1997
--------------------- ---------------------
(Dollars in Percent of Percent of
thousands) Amount Deposits Amount Deposits
-------- ---------- -------- ----------
Demand deposit
accounts $ 23,491 9.03% $ 19,460 10.41%
NOW accounts 45,854 17.63 30,562 16.36
Money market
accounts 30,161 11.60 20,812 11.14
Savings accounts 25,202 9.69 15,127 8.09
Time deposits
less than
$100,000 104,491 40.17 73,827 39.51
Time deposits
of $100,000
or over 30,921 11.88 27,073 14.49
Total deposits -------- ------ -------- ------
$260,120 100.00% $186,861 100.00%
======== ====== ======== ======
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits decreased $67.4 million to
$218.7 million at December 31, 2001.
24
Deposits, and particularly core deposits, have historically been the Company's
primary source of funding and have enabled the Company to meet successfully both
its short-term and long-term liquidity needs. Management anticipates that such
deposits will continue to be the Company's primary source of funding in the
future. The Company's loan-to-deposit ratio was 97.53% at December 31, 2001, and
84.2% at the end of 2000. The maturity distribution of the Company's time
deposits of $100,000 or more at December 31, 2001, is set forth in the following
table.
Maturities of Certificates of Deposit of $100,000 or More
After Six
After Three Through
Within Three Through Six Twelve After Twelve
(Dollars in thousands) Months Months Months Months Total
------------ ----------- --------- ----------- -------
Certificates of deposit of $100,000 or more $16,530 $11,634 $7,390 $4,037 $39,591
Approximately 41.8% of the Company's time deposits of $100,000 or more had
scheduled maturities within three months and 71.1% had maturities within six
months. Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. Some financial institutions
partially fund their balance sheets using large certificates of deposit obtained
through brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, the Company does not
solicit brokered deposits.
Borrowed Funds. Borrowed funds consist of short-term borrowings and advances
from the Federal Home Loan Bank. Short-term borrowings are primarily federal
funds purchased from correspondent banks and securities sold under agreements to
repurchase.
Average short-term borrowings were $10.1 million in 2001, a decrease of $19.1
million from 2000. Federal funds purchased from correspondent banks averaged
$5.5 million in 2001. At December 31, 2001, federal funds purchased totaled $2.4
million. Securities sold under agreements to repurchase averaged $4.6 million in
2001. At December 31, 2001, securities sold under agreements to repurchase
totaled $5.1 million.
Average Federal Home Loan Bank advances during 2001 were $31.4 million compared
to $31.9 million during 2000, a decrease of $500,000. Advances from the Federal
Home Loan Bank are collateralized by one-to-four family residential mortgage
loans and the Company's investment in Federal Home Loan Bank stock. At December
31, 2001, borrowings from the Federal Home Loan Bank were $31.3 million compared
to $32.4 million a year earlier. Although management expects to continue using
short-term borrowing and Federal Home Loan Bank advances as secondary funding
sources, core deposits will continue to be the Company's primary funding source.
Of the $31.3 million advances from the Federal Home Loan Bank outstanding at
December 31, 2001, $10,045,000 mature in 2003, $8,000,000 mature in 2005,
$1,500,000 mature in 2008, $725,000 in 2009, and $11,000,000 in 2010.
Capital
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance-sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital of the Company consists of common
shareholders' equity, excluding the unrealized gain (loss) on available-for-sale
securities, minus intangible assets. The Company's Tier 2 capital consists of
the allowance for loan losses subject to certain limitations. A bank holding
company's qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.
The holding company and CapitalBank are also required to maintain capital at a
minimum level based on average total assets (as defined), which is known as the
leverage ratio. Only the strongest bank holding companies and
25
banks are allowed to maintain capital at the minimum requirement of 3%. All
others are subject to maintaining ratios 1% to 2% above the minimum.
The Company and CapitalBank exceeded the Federal Reserve's fully phased-in
regulatory capital ratios at December 31, 2001, 2000 and 1999, as set forth in
the following table.
Analysis of Capital
December 31, 2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Tier 1 capital $ 34,767 $ 28,943 $ 29,000
Tier 2 capital 3,101 3,060 2,557
-------- -------- --------
Total qualifying capital $ 37,868 $ 32,003 $ 31,557
======== ======== ========
Risk-adjusted total assets
(including off-balance-sheet exposures) $241,202 $287,856 $244,648
======== ======== ========
Tier 1 risk-based capital ratio 14.26% 10.05% 11.85%
Total risk-based capital ratio 15.53% 11.12% 12.90%
Tier 1 leverage ratio 10.21% 7.02% 8.37%
Tier 1 Risk- Total Risk- Tier 1
The Bank's capital ratios at December 31, 001 were: Based Based Leverage
------------ ----------- --------
13.03% 14.30% 9.33%
Liquidity Management and Capital Resources
Liquidity management involves monitoring the Company's sources and uses of funds
in order to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Without proper liquidity management, the Company would
not be able to perform the primary function of a financial intermediary and
would, therefore, not be able to meet the needs of the communities it serves.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control.
The Company's loans-to-assets ratio and loans-to-funds ratio increased from 2000
to 2001. The loans-to-assets ratio at December 31, 2001 was 73.95% compared to
66.4% at December 31, 2000, and the loans-to-funds ratio at December 31, 2001
was 84.71% compared to 73.4% at December 31, 2000. The amount of advances from
the Federal Home Loan Bank were approximately $31.2 million at December 31, 2001
compared to $32.4 million at December 31, 2000. Management expects to continue
using these advances as a source of funding. Additionally, the Company had
approximately $58.6 million of unused lines of credit for federal funds
purchases and $56.9 million of securities available-for-sale at December 31,
2001 as sources of liquidity.
The Company depends on dividends from CapitalBank as its primary source of
liquidity. The ability of CapitalBank to pay dividends is subject to general
regulatory restrictions which may, but are not expected to, have a material
impact on the liquidity available to the Company. The Company paid stock
dividends in September 1998, June 2000 and May 2001 and may do so in the future.
The Company paid cash dividends in September 2001, December 2001 and has
declared a cash dividend for March 2002.
26
Accounting Rule Changes
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 eliminates the pooling of
interests method of accounting for business combinations and requires the use of
the purchase method. The Statement also requires that intangible assets be
reported separately from goodwill. This Statement is effective for all
transactions initiated after June 30, 2001. Under SFAS 142, goodwill is no
longer subject to amortization; however, it should be evaluated for impairment
on at least an annual basis and adjusted to its fair value. In addition, an
acquired intangible should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of intent to do so. However, the FASB recommends that financial
institutions continue to follow the basic guidelines of SFAS 72 in recording and
amortizing goodwill and other unidentifiable intangible assets. The Company
adopted SFAS 141 on