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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, 2002
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 21, 2003 was approximately $42.5 million based upon the last
sale price reported for such date on the American Stock Exchange, which was
$14.20 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On March 21, 2003, the number of shares outstanding of the Registrant's
common stock, $1.00 par value, was 3,490,208.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 2003 Annual
Meeting of Stockholders (Part III).
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this report on Form 10-K that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this report that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of us to be materially different from those
expressed or implied by such forward-looking statements. Although we believe
that our expectations of future performance is based on reasonable assumptions
within the bounds of our knowledge of our business and operations, we have no
assurance that actual results will not differ materially from our expectations.
Factors that could cause actual results to differ from expectations include,
among other things: (1) the challenges, costs, and complications associated with
the continued development of our branches; (2) 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 us; (3) our dependence
on senior management; (4) competition from existing financial institutions
operating in our market areas as well as the entry into such areas of new
competitors with greater resources, broader branch networks, and more
comprehensive services; (5) adverse conditions in the stock market, the public
debt market, and other capital markets (including changes in interest rate
conditions); (6) changes in deposit rates, the net interest margin, and funding
sources; (7) inflation, interest rate, market, and monetary fluctuations; (8)
risks inherent in making loans including repayment risks and value of
collateral; (9) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a deterioration in credit
quality or a reduced demand for credit, including the resultant effect on our
loan portfolio and allowance for loan losses; (10) fluctuations in consumer
spending and saving habits; (11) the demand for our products and services; (12)
technological changes; (13) the challenges and uncertainties in the
implementation of our expansion and development strategies; (14) the ability to
increase market share; (15) the adequacy of expense projections and estimates of
impairment loss; (16) the impact of changes in accounting policies by the
Securities and Exchange Commission; (17) unanticipated regulatory or judicial
proceedings; (18) the potential negative effects of future legislation affecting
financial institutions (including without limitation laws concerning taxes,
banking, securities, and insurance); (19) the effects of, and changes in, trade,
monetary and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System; (20) the timely development
and acceptance of products and services, including products and services offered
through alternative delivery channels such as the Internet; (21) the impact on
our business, as well as on the risks set forth above, of various domestic or
international military or terrorist activities or conflicts; (22) other factors
described in this report and in other reports we have filed with the Securities
and Exchange Commission; and (23) our success at managing the risks involved in
the foregoing.
PART I
Item 1. Business.
General
Community Capital Corporation is a bank holding company headquartered in
Greenwood, South Carolina. We were incorporated under the laws of the State of
South Carolina on April 8, 1988 as a holding company for Greenwood Bank & Trust,
which opened in 1989.
We were 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. We believe 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, we 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, we opened Clemson Bank & Trust in Clemson, South Carolina. In 1997, we
opened Community Bank & Trust in Barnwell, South Carolina, TheBank in
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Belton, South Carolina, and Mid State Bank in Newberry, South Carolina. During
2000, each of these five community 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 five community banks was a state
chartered Federal Reserve member bank. On January 1, 2001, we merged the five
community banks into one bank known as CapitalBank.
Market Areas
At December 31, 2002, CapitalBank had banking locations in Greenwood, Clemson,
Abbeville, Belton, Greenville, Honea Path, Anderson, Newberry, and Saluda, South
Carolina.
The following table sets forth certain information concerning CapitalBank at
December 31, 2002:
Number of Total Total Total
Locations Assets Loans Deposits
--------- -------- -------- --------
(Dollars in thousands)
CapitalBank....................... 13 $380,771 $288,842 $276,561
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 that has contracted with CapitalBank.
Lending Activities
General. Through CapitalBank, we offer 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. Our total loans at December 31,
2002, were $288.8 million, or 83.14% 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. We have no foreign loans or loans for highly leveraged
transactions.
Our 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 $204.9 million, and
constituted approximately 70.27% of our loan portfolio, at December 31, 2002.
The following table sets forth the composition of our loan portfolio for each of
the five years in the period ended December 31, 2002.
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Loan Composition
(Dollars in thousands)
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Commercial, financial and agricultural........ 10.48% 13.26% 18.54% 13.58% 16.80%
Real estate:
Construction............................ 4.48 5.26 7.27 13.09 13.72
Mortgage:
Residential............................. 52.91 49.25 39.89 30.17 30.51
Commercial (1).......................... 25.25 23.58 21.45 26.67 20.87
Consumer and other............................ 6.88 8.65 12.85 16.49 18.10
Total loans................................... 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
Total loans (dollars)......................... $288,842 $248,390 $280,506 $219,054 $172,545
======== ======== ======== ======== ========
(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. We attempt to minimize loan losses
through various means and use standardized underwriting criteria. During 2002,
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. We have 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 customers in CapitalBank's
market areas. Deposit rates are set weekly by senior management of CapitalBank,
subject to approval by our management. 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 South Carolina State Board
of Financial Institutions 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
4
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 we believe 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
Including the employees of CapitalBank, we currently have in the aggregate 138
full-time employees and 22 part-time employees.
Government Supervision and Regulation
General
We, along with 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 our and CapitalBank's operations. These regulations are
generally intended to provide protections for CapitalBank's depositors and
borrowers, rather than for our shareholders. We, along with 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
requirements against bank deposits, and limitations on interest rates that banks
may pay on time and savings deposits.
The following is a brief summary of certain statutes, rules, and regulations
affecting CapitalBank and us. 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 our and CapitalBank's business. Any change in
applicable laws or regulations may have a material adverse effect on our and
CapitalBank's business and prospects.
The Company
We are a bank holding company within the meaning of the Federal Bank Holding
Company Act of 1956, as amended, and the South Carolina Banking and Branching
Efficiency Act of 1996, as amended. We are registered with both the Federal
Reserve System and the South Carolina State Board of Financial Institutions. We
are required to file with both of these agencies annual reports and other
information regarding our business operations and those of our subsidiaries. We
are also subject to the supervision of, and to regular examinations by, these
agencies. The regulatory requirements to which we are subject also set forth
various conditions regarding the eligibility and qualifications of our directors
and officers.
The Federal Bank Holding Company Act of 1956, as amended, requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it (i) or any of its subsidiaries (other than a bank) acquires substantially all
of the assets of any bank, (ii) 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) merges
or
5
consolidates with any other bank holding company. Under the South Carolina
Banking and Branching Efficiency Act of 1996, as amended, a South Carolina bank
holding company shall not, without the prior approval of the South Carolina
State Board of Financial Institutions, (i) 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) acquire all or substantially all of the assets of a bank
or any other bank holding company, or (iii) merge or consolidate with any other
bank holding company.
The Federal Bank Holding Company Act of 1956, as amended, generally prohibits a
bank holding company 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 must 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 must 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 the
Federal Reserve Board has reasonable cause to believe that the holding company's
continued ownership, activity, or control constitutes a serious risk to the
financial safety, soundness, or stability of any of its bank subsidiaries.
The Federal Bank Holding Company Act of 1956, as amended, 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 us, 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, we may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, we may not deem
it advisable to provide such assistance. Under Federal Bank Holding Company Act
of 1956, as amended, 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 South Carolina State Board
of Financial Institutions, the Federal Reserve System, and the FDIC. The South
Carolina State Board of Financial Institutions 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.
6
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 us, 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 may not engage 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 we are 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 us insolvent or unable to meet our obligations as they come
due), our 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.
In addition, as a member of the Federal Reserve System, CapitalBank may not
declare 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 CapitalBank's net profits of the preceding two consecutive
half-year periods (in the case of an annual dividend). CapitalBank must obtain
the approval of the Federal Reserve Board if the total of all dividends declared
by CapitalBank in any calendar year exceeds the total of its net profits for
that year combined with CapitalBank'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
established two insurance funds under the jurisdiction of the FDIC: the Savings
Association Fund and the Bank Insurance Fund (see "FDIC Regulations"). The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 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 its
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 us, 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
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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 us 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 our and CapitalBank's
leverage and risk-based capital ratios at December 31, 2002 exceeded their
respective fully phased-in minimum requirements.
Other Regulations
Interest and certain other charges collected or contracted for by CapitalBank
are subject to state usury laws and certain federal laws concerning interest
rates. CapitalBank's loan operations are also subject to certain federal laws
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,
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
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 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 Banking
and Branching Efficiency Act of 1996, as amended 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
South Carolina State Board of Financial Institutions. The South Carolina Banking
and Branching Efficiency Act of 1996, as amended also permits South Carolina
state banks, with prior approval of the South Carolina State Board of Financial
Institutions, to operate branches outside the State of South Carolina. Although
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 has the
potential to increase the number of competitors in the marketplace of
CapitalBank, we 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) became effective March 11, 2000.
The Gramm-Leach-Bliley 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
Gramm-Leach-Bliley 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 Federal Bank
Holding Company Act of 1956, as amended, 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
8
holding companies; (c) creates a new type of bank, wholesale financial
institutions (also referred to as "woofies"), that are regulated by the Federal
Bank Holding Company Act of 1956, as amended, 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 Federal Bank Holding Company Act of 1956, as
amended, 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 giving of specific disclosures to consumers, and giving
consumers the opportunity to prevent such disclosure to third parties.
Although the Gramm-Leach-Bliley Act has the potential to mix commerce and
banking and increase our and CapitalBank's abilities to diversify into a variety
of areas, we cannot predict the actual impact of such legislation on CapitalBank
or us.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. It
mandated sweeping reforms and implemented a number of requirements for public
companies. Among the reforms and new requirements, some of which are not yet
effective based on implementing rules, are the following:
o Creation of the Public Company Accounting Oversight Board to oversee
audits of public companies.
o Implementation of a variety of requirements designed to ensure greater
auditor independence, including the prohibition of certain services
that auditors had traditionally provided to clients.
o Implementation of a variety of requirements regarding audit
committees, including that they be entirely independent; that they
establish procedures for the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters; and that issuers disclose whether at least one member of the
committee is a "financial expert."
o Requirement that changes in equity ownership by directors, officers,
and 10% stockholders be reported more promptly, generally by the end
of the second business day following the trade (subject to limited
exceptions).
o Requirement that CEOs and CFOs certify that the financial information
in each annual and quarterly report fairly presents in all material
respects the financial condition and results of operations of the
issuer as of, and for, the periods presented in the report, and
establish and maintain internal controls designed to ensure discovery
of material information.
o Implementation of rules relating to disclosure of all material
off-balance sheet transactions and obligations and regarding the
presentation of pro-forma financial information in any press release
or other public disclosure that was "non-GAAP."
o Requirement that issuers disclose whether they have adopted a code of
ethics for senior executives and any waivers or changes in the code.
o Requirement that CEOs and CFOs disgorge incentive compensation and
profits from their sales of company securities after restatement of
financial information.
o Prohibition against directors and executive officers from transacting
in company equity securities received in connection with employment
during any pension fund blackout of such equity.
o Requirement that SEC review each issuer's periodic reports at least
once every three years.
o Acceleration of the time schedule during which Forms 10-K and 10-Q and
8-K must be filed for certain issuers and expansion of the items
reportable under Form 8-K.
o Issuance of new requirements regarding the obligations of attorneys to
report evidence of a material violation of securities law or breach of
fiduciary duty to the issuer's chief legal counsel or chief executive
officer and ultimately to the Board of Directors.
o Adoption of new rules regarding statutes of limitation and penalties
with respect to securities law violations.
Though the Sarbanes-Oxley Act will have a meaningful impact on our operations,
we do not believe that we will be affected by Sarbanes-Oxley in ways that are
materially different or more onerous than other public companies of similar size
and nature.
Item 2. Properties.
We operate 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, 2002, CapitalBank operated thirteen full service
branches in South Carolina, three of which are located in Greenwood and one of
which is located in each of Anderson, Newberry, Belton, Greenville, 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 us and leased to CapitalBank, one is located on land CapitalBank leases from
one of our former directors, and one is located on land CapitalBank leases from
a third party.
Item 3. Legal Proceedings.
We and CapitalBank are parties to legal proceedings that have arisen in the
ordinary course of our respective businesses. None of these proceedings is
expected to have a material effect on our consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Our 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 our common stock reported on the American Stock Exchange for the
periods indicated.
Year Quarter High Low
- ---- ------- ------ ------
2002 Fourth .......................... $14.50 $12.00
Third ........................... 15.60 11.95
Second .......................... 14.75 12.25
First ........................... 12.70 11.25
2001 Fourth .......................... $11.24 $10.25
Third ........................... 11 50 9.45
Second .......................... 10.10 8.10
First ........................... 8.75 5.38
9
As of March 21, 2003, there were 3,490,208 shares of our common stock
outstanding held by approximately 1,200 shareholders of record.
Until September 17, 2001, we had not declared or distributed any cash dividends
to our shareholders since our organization in 1988. 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.
On January 16, 2002, the Board of Directors declared a cash dividend of $0.03
per share, which was paid to shareholders on March 8, 2002. On April 17, 2002,
the Board of Directors declared a cash dividend of $0.04 per share, which was
paid to shareholders on June 7, 2002. On July 18, 2002, the Board of Directors
declared a cash dividend of $0.05 per share, which was paid to shareholders on
September 6, 2002. On October 16, 2002, the Board of Directors declared a cash
dividend of $0.05 per share, which was paid to shareholders on December 6, 2002.
Our Board of Directors expects comparable dividends to be paid to our
shareholders for the foreseeable future. Notwithstanding the foregoing, our
future dividend policy 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. Our ability to
distribute cash dividends will depend entirely upon CapitalBank's ability to
distribute dividends to us. 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 South Carolina State Board of
Financial Institutions prior to paying dividends to us. Furthermore, neither we
nor CapitalBank may declare or pay a cash dividend on any of our capital stock
if we are insolvent or if the payment of the dividend would render us insolvent
or unable to pay our obligations as they become due in the ordinary course of
business. See "Government Supervision and Regulation -- Dividends. "
Equity Compensation Plan Information
The following table sets forth, as of the end of December 31, 2002, certain
information relating to our compensation plans (including individual
compensation arrangements) under which our common stock are authorized for
issuance.
Number of shares of our
common stock remaining
and available for future
Number of shares of our issuance under equity
common stock to be issued Weighted-average exercise compensation plans
upon exercise of price of outstanding (excluding shares of our
outstanding options, options, warrants, common stock reflected in
Plan Category(1) warrants, and rights rights column (a))
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 548,852 $9.34 111,807
Equity compensation plans not
approved by security holders -0- $ 0 -0-
Total 548,852 $9.34 111,807
(1) Disclosures are provided with respect to any compensation plan and
individual compensation arrangement of us or of our subsidiaries or
affiliates) under which our common stock are authorized for issuance to
employees or non-employees (such as directors, consultants, advisors,
vendors, customers, suppliers, or lenders) in exchange for consideration in
the form of goods or services as described in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
10
Item 6. Selected Financial Data
Selected Financial Data
The following selected consolidated financial data for the five years ended
December 31, 2002 are derived from our consolidated financial statements and
other data. The selected consolidated financial data should be read in
conjunction with our consolidated financial statements, including the
accompanying notes, included elsewhere herein.
Year Ended December 31,
(Dollars in thousands, except per share) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Income Statement Data:
Interest income $ 22,204 $ 26,961 $ 29,722 $ 23,199 $ 21,043
Interest expense 7,793 13,675 16,636 11,850 11,198
-------- -------- -------- -------- --------
Net interest income 14,411 13,286 13,086 11,349 9,845
Provision for loan losses 773 1,920 471 1,037 1,836
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 13,638 11,366 12,615 10,312 8,009
Net securities gains 106 290 -- 175 220
Noninterest income 4,433 9,824 3,303 3,005 2,797
Noninterest expense 11,892 15,102 13,976 12,014 10,228
-------- -------- -------- -------- --------
Income before income taxes 6,285 6,378 1,942 1,478 798
Income tax expense 1,683 1,900 290 150 34
-------- -------- -------- -------- --------
Net income $ 4,602 $ 4,478 $ 1,652 $ 1,328 $ 764
======== ======== ======== ======== ========
Balance Sheet Data:
Assets $380,765 $340,682 $422,250 $359,668 $321,031
Earning assets 347,377 314,769 387,146 328,478 295,213
Securities (1) 55,812 62,806 106,041 108,926 120,695
Loans (2) 288,842 248,390 280,506 219,054 172,545
Allowance for loan losses 4,282 4,103 3,060 2,557 2,399
Deposits 276,561 258,330 332,976 257,247 260,120
Federal Home Loan Bank advances 31,140 31,270 32,399 20,729 9,434
Shareholders' equity 44,408 39,273 35,144 31,218 33,430
Per Share Data (3):
Basic earnings per share $ 1.34 $ 1.31 $ 0.48 $ 0.40 $ 0.24
Diluted earnings per share 1.26 1.26 0.48 0.40 0.23
Book value (period end) (4) 12.71 11.66 10.79 10.10 10.81
Tangible book value (period end) (4) 11.57 10.37 8.72 8.48 9.01
Cash dividends 0.17 0.06 -- -- --
Performance Ratios:
Return on average assets 1.28% 1.19% 0.41% 0.40% 0.27%
Return on average equity 11.11 11.68 4.57 3.90 2.33
Net interest margin (5) 4.50 4.08 3.83 3.96 3.77
Efficiency (6) 61.45 72.71 81.75 79.55 78.50
Allowance for loan losses to loan 1.48 1.65 1.09 1.17 1.39
Net charge-offs to average loans 0.22 0.34 0.12 0.47 0.62
Nonperforming assets to period end loans (2)(7) 0.71 0.68 0.25 0.56 0.78
Capital and Liquidity Ratios:
Average equity to average assets 11.71 10.22 9.07 10.22 11.47
Leverage (4.00% required minimum) 10.59 10.21 7.02 8.37 8.89
Tier 1 risk-based capital ratio 14.16 14.26 10.05 11.85 13.78
Total risk-based capital ratio 15.41 15.53 11.12 12.90 15.00
Average loans to average deposits 103.86 90.03 86.46 72.97 69.65
- ----------
Securities held-to-maturity are stated at amortized cost, and securities
available-for-sale are stated at fair value.
Loans are stated before the allowance for loan losses and include loans held for
sale.
All share and per-share data have been adjusted to reflect the 5% common stock
dividends in September 1998, June 2000 and June 2001.
Excludes the effect of any outstanding stock options.
Tax equivalent net interest income divided by average earning assets.
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.
11
Selected Financial Data (continued)
(Dollars in thousands) 2002 Quarter ended 2001 Quarter ended
-------------------------------------- --------------------------------------
except per share Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Net interest income $3,567 $3,644 $3,634 $3,566 $3,392 $3,212 $3,266 $3,416
Provision for loan losses 110 340 213 110 820 600 400 100
Noninterest income 1,335 1,102 1,005 1,097 1,341 1,215 6,666 892
Noninterest expense 3,086 3,000 2,869 2,937 3,131 2,941 5,522 3,508
Net income 1,273 1,026 1,149 1,154 600 666 2,662 550
Basic earnings per share 0.36 0.29 0.34 0.35 0.18 0.19 0.77 0.17
Diluted earnings per share 0.35 0.28 0.31 0.32 0.17 0.18 0.74 0.17
Basis of Presentation
The following discussion should be read in conjunction with the preceding
"Selected Financial Data" and our 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 serves as a bank holding company for CapitalBank.
CapitalBank was formed on January 1, 2001 during a restructuring that
consolidated our operations into a single subsidiary. CapitalBank operates
thirteen branches throughout South Carolina. CapitalBank 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.
We were formed in 1988 to serve as a holding company for Greenwood National
Bank, which later changed its name to Greenwood Bank & Trust. In 1994 we made
the decision to expand beyond Greenwood County by creating an organization of
independent banks in four additional markets. In June 1995, we opened Clemson
Bank and Trust in Clemson, South Carolina. In 1996 and 1997, we opened Community
Bank and Trust, TheBank, and Mid State Bank. We formed a separate trust
organization in 1997 known as Community Trust Company. In May 2000, Community
Trust Company was sold. During 1997 and 1998, we also acquired several Carolina
First branches.
As discussed, on January 1, 2001, we merged the five subsidiary banks into one
bank charter known as CapitalBank. We 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 are
able to 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, we believe that the new centralized credit
function provides additional controlled decisions while streamlining the credit
process. Centralized deposit pricing supports management's strategy from market
to market. We also believe that the name recognition has enhanced our business.
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.
Results of Operations
Year ended December 31, 2002, compared with year ended December 31, 2001
Net interest income increased $1.1 million, or 8.47%, to $14.4 million in 2002
from $13.3 million in 2001. The increase in net interest income was due
primarily to an increase in the volume of average loans and the decrease in
yields on average interest bearing liabilities. Average earning assets decreased
$13.7 million, or 3.96%, and average interest-bearing liabilities decreased
$18.5 million, or 6.04%, due primarily to the sale of the five branches in 2001.
12
Results of Operations (continued)
Our tax equivalent net interest spread and tax equivalent net interest margin
were 4.14% and 4.50%, respectively, in 2002 compared to 3.58% and 4.08% in 2001.
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 4.46% in 2001 to 2.70% in
2002. Yields on interest-earning assets decreased 120 basis points. However,
yields on interest-bearing liabilities decreased 176 basis points.
The provision for loan losses was $773,000 in 2002 compared to $1.9 million in
2001. 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. Our allowance for loan losses
was 1.48 of total loans outstanding at December 31, 2002. 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 decreased $5.6 million, or 55.12%, to $4.5 million in 2002
from $10.1 million in 2001, which was primarily attributable to the premium on
the branches sold to Enterprise Bank in 2001. The premium totaled $5.8 million.
Service charges on deposit accounts increased $450,000, or 21.15% to $2.6
million in 2002. Residential mortgage origination fees decreased $96,000, or
11.68% to $726,000 in 2002 from $822,000 in 2001. Mortgage originations have
declined as rates leveled off and as fewer customers are refinancing their
mortgages. Noninterest income in 2002 included $106,000 from the gain on sales
of securities available for sale, whereas, noninterest income for 2001 included
$290,000 from the gain on sales of nonmarketable equity securities. Income from
fiduciary activities increased $150,000, or 114.50% to $281,000 in 2002 from
$131,000 in 2001. Commissions on the sale of mutual funds increased $74,000, or
231.25% to $106,000 in 2002 compared to $32,000 in 2001.
Noninterest expense decreased $3.2 million, or 21.26%, to $11.9 million in 2002
from $15.1 million in 2001. The primary component of noninterest expense was
salaries and employee benefits, which decreased $104,000, or 1.59%, to $6.4
million in 2002 from $6.5 million in 2001. Many of the categories of expenses
decreased in 2002 compared to 2001 because of the sale of the branches to
Enterprise Bank in 2001. 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 $697,000 in 2002 compared to $749,000 in 2001,
and furniture and equipment expense was $1.0 million in 2002 compared to $1.4
million in 2001. Another significant decrease in noninterest expense was in the
amortization of intangible assets. Total amortization of intangible assets was
$346,000 in 2002, as compared to $2.4 million in 2001. This significant decrease
was also due to the sale of the five branches to Enterprise Bank. Our efficiency
ratio was 61.45% in 2002 compared to 72.71% in 2001.
Net income increased $124,000, or 2.77%, to $4.6 million in 2002 from $4.5
million in 2001. Basic earnings per share was $1.34 in 2002, compared to $1.31
in 2001. Diluted earnings per share was $1.26 in 2002, compared to $1.26 in
2001. Return on average assets during 2002 was 1.28% compared to 1.19% during
2001, and return on average equity was 10.93% during 2002 compared to 11.68%
during 2001.
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.
Our 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
13
Results of Operations (continued)
problem loans and to protect against a deteriorating economy. Our 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 to
Enterprise Bank. 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. We recorded amortization of intangible assets
related to the sale of branches to Enterprise Bank of $1.9 million. Total
amortization of intangible assets was $2.4 million in 2001, as compared to
$612,000 in 2000. Our 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.
Net Interest Income
General. The largest component of our net income is our 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 our interest-earning assets and the rates
paid on our 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 our interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents our net interest margin.
14
Net Interest Income (continued)
Average Balances, Income and Expenses, and Rates
Year ended December 31, 2002 2001 2000
--------------------------- --------------------------- ---------------------------
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)/ $274,365 $19,338 7.05% $259,661 $22,404 8.63% $254,064 $23,552 9.27%
Securities, taxable/(2)/ 26,461 1,494 5.65 52,302 3,053 5.84 78,246 4,593 5.87
Securities, nontaxable/(2)(3)/ 25,372 1,687 6.65 25,878 2,018 7.80 26,671 2,119 7.95
Nonmarketable equity
securities 5,345 188 3.52 5,583 226 4.05 5,329 308 5.78
Federal funds sold
and other 261 4 1.53 2,078 75 3.61 87 6 6.90
-------- -------- ------- -------- -------
Total earning assets 331,804 22,711 6.84 345,502 27,776 8.04 364,397 30,578 8.39
-------- ------- -------- ------- -------- -------
Cash and due from banks 7,897 8,859 9,728
Premises and equipment 10,113 12,140 14,024
Other assets 13,529 12,028 13,109
Allowance for loan losses (4,213) (3,316) (2,814)
-------- -------- --------
Total assets $359,130 $375,213 $398,444
======== ======== ========
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction
accounts 95,323 1,068 1.12% $100,319 2,463 2.45% $ 99,718 $ 3,553 3.56%
Savings deposits 27,840 745 2.68 30,012 1,182 3.94 29,051 1,096 3.77
Time deposits 113,946 3,605 3.16 131,842 7,401 5.61 136,144 7,878 5.79
Other short-term borrowings 19,217 344 1.79 10,085 411 4.07 29,182 1,772 6.07
Federal Home Loan Bank
advances 31,198 1,947 6.24 31,408 1,958 6.23 31,943 1,931 6.05
Long-term debt -- -- 2,191 156 7.12 3,299 286 8.67
Obligations under capital
leases 836 84 10.05 1,036 104 10.04 1,239 120 9.69
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 288,360 7,793 2.70 306,893 13,675 4.46 330,576 16,636 5.03
-------- ------- -------- ------- -------- -------
Demand deposits 27,044 26,248 28,925
Accrued interest and other
liabilities 2,321 3,742 2,813
Shareholders' equity 41,405 38,330 36,130
-------- --------
Total liabilities and
shareholders' equity $359,130 $375,213 $398,444
======== ======== ========
Net interest spread 4.14% 3.58% 3.36%
Net interest income $ 14,918 $ 14,101 $ 13,942
======== ======== ========
Net interest margin 4.50% 4.08% 3.83%
- ----------
/(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
Net Interest Income (continued)
Average Balances, Income and Expenses, and Rates. The previous table sets forth,
for the periods indicated, certain information related to our average balance
sheet and our 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 that the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 2002 to 2001 and 2001 to 2000.
Analysis of Changes in Net Interest Income
2002 Compared With 2001 2001 Compared With 2000
--------------------------------- ---------------------------------
Variance Due to Variance Due to
--------------------------------- ---------------------------------
(Dollars in thousands) Volume/(1)/ Rate/(1)/ Total Volume/(1)/ Rate/(1)/ Total
- ---------------------- ----------- --------- ------- ----------- --------- -------
Earning Assets
Loans $ 1,214 $(4,280) $(3,066) $ 509 $(1,657) $(1,148)
Securities, taxable (1,463) (96) (1,559) (1,517) (23) (1,540)
Securities, nontaxable (38) (293) (331) (64) (37) (101)
Nonmarketable equity securities (10) (28) (38) 14 (96) (82)
Federal funds sold and other (43) (28) (71) 73 (4) 69
------- ------- ------- ------- ------- -------
Total interest income (340) (4,725) (5,065) (985) (1,817) (2,802)
------- ------- ------- ------- ------- -------
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts (117) (1,278) (1,395) 21 (1,111) (1,090)
Savings and market rate investments (81) (356) (437) 36 50 86
Time deposits (900) (2,896) (3,796) (240) (237) (477)
------- ------- ------- ------- ------- -------
Total interest-bearing deposits (1,098) (4,530) (5,628) (183) (1,298) (1,481)
Other short-term borrowings 244 (311) (67) (907) (454) (1,361)
Federal Home Loan Bank advances (14) 3 (11) (31) 58 27
Long-term debt (78) (78) (156) (85) (45) (130)
Obligations under capital leases (20) -- (20) (20) 4 (16)
------- ------- ------- ------- ------- -------
Total interest expense (966) (4,916) (5,882) (1,226) (1,735) (2,961)
------- ------- ------- ------- ------- -------
Net interest income $ 626 $ 190 $ 817 $ 244 $ (82) $ 159
======= ======= ======= ======= ======= =======
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
Interest Sensitivity. We monitor and manage the pricing and maturity of our
assets and liabilities in order to diminish the potential adverse impact that
changes in interest rates could have on our net interest income. The principal
monitoring technique we employ is the measurement of our 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
Net Interest Income (continued)
The following table sets forth our interest rate sensitivity at December 31,
2002.
Interest Sensitivity Analysis
Greater
After One After Three Than One
Within Through Through Within Year or
December 31, 2002 One Three Twelve One Non-
(Dollars in thousands) Month Months Months Year Sensitive Total
- ---------------------- -------- --------- ----------- -------- --------- --------
Assets
Earning assets:
Loans/(1)/ $ 90,189 $ 13,707 $ 40,332 $144,228 $145,405 $289,633
Securities 502 617 7,627 8,746 47,066 55,812
Federal funds sold and other 39 -- -- 39 -- 39
-------- -------- -------- -------- -------- --------
Total earning assets 90,730 14,324 47,959 153,013 192,471 345,484
-------- -------- -------- -------- -------- --------
Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits 102,416 -- -- 102,416 -- 102,416
Savings deposits 27,948 -- -- 27,948 -- 27,948
Time deposits 13,911 21,126 50,716 85,753 31,022 116,775
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 144,275 21,126 50,716 216,117 31,022 247,139
Other short-term borrowings 25,850 -- -- 25,850 -- 25,850
Federal Home Loan Bank advances -- 10,015 -- 10,015 21,125 31,140
Obligations under capital leases 18 37 173 228 505 733
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 170,043 31,178 50,889 252,210 52,652 304,862
-------- -------- -------- -------- -------- --------
Period gap $(79,413) $(16,854) $ (2,930) $(99,197) $139,819
======== ======== ======== ======== ========
Cumulative gap $(79,413) $(96,267) $(99,197) $(99,197) $ 40,622
======== ======== ======== ======== ========
Ratio of cumulative gap to total earnings
assets (22.99)% (27.86)% (28.71)% (28.71)% 11.76%
/(1)/ Excludes nonaccrual loans and includes loans held for sale.
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 that give us 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 because funds can be repriced daily.
Securities sold under agreements to repurchase are reflected at the maturity
date of each repurchase agreement that 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
Net Interest Income (continued)
We generally would benefit from increasing market rates of interest when we have
an asset-sensitive gap position and generally would benefit from decreasing
market rates of interest when we are liability sensitive. We are liability
sensitive within the one year period. However, our gap analysis is not a precise
indicator of our 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 us as significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Accordingly, we
believe a liability-sensitive gap position is not as indicative of our true
interest sensitivity as it would be for an organization that 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. We have developed policies and procedures for evaluating the overall
quality of our credit portfolio and the timely identification of potential
problem credits. On a quarterly basis, the Board of Directors reviews and
approves the appropriate level for CapitalBank's allowance for loan losses based
upon our 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 us and other financial institutions.
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on our income statement, are made periodically to maintain the
allowance at an appropriate level based on our 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.
Our 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, we monitor the overall portfolio quality through observable trends in
delinquency, charge offs, and general and economic conditions in the service
area. The adequacy of the allowance for loan losses and the effectiveness of our
monitoring and analysis system are also reviewed periodically by the banking
regulators and our independent auditors.
Based on present information and an ongoing evaluation, we consider the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Our judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events that we believe to be
reasonable but that may or may not be valid. Thus, we have no assurance that
charge offs 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.
We do 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
Provision and Allowance for Loan Losses (continued)
The following table sets forth certain information with respect to our allowance
for loan losses and the composition of charge offs and recoveries for each of
the last five years.
Allowance for Loan Losses
Year Ended December 31,
(Dollars in thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Total loans outstanding at end of year $288,842 $248,390 $280,506 $219,054 $172,545
======== ======== ======== ======== ========
Average loans outstanding $274,365 $259,661 $254,064 $188,672 $161,695
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of period $ 4,103 $ 3,060 $ 2,557 $ 2,399 $ 1,531
Allowance for loan losses from acquisitions -- -- 335 -- 38
Loan losses:
Commercial and industrial 337 406 113 287 135
Real estate - mortgage 131 160 122 306 43
Consumer 255 409 305 449 885
-------- -------- -------- -------- --------
Total loan losses 723 975 540 1,042 1,063
-------- -------- -------- -------- --------
Recoveries of previous loan losses:
Commercial and industrial 45 8 73 -- --
Real estate - mortgage 15 16 14 17 --
Consumer 69 74 150 146 57
-------- -------- -------- -------- --------
Total recoveries 129 98 237 163 57
-------- -------- -------- -------- --------
Net loan losses 594 877 303 879 1,006
Provision for loan losses 773 1,920 471 1,037 1,836
-------- -------- -------- -------- --------
Balance of allowance for loan losses
at end of period $ 4,282 $ 4,103 $ 3,060 $ 2,557 $ 2,399
======== ======== ======== ======== ========
Allowance for loan losses to period end loans 1.48% 1.65% 1.09% 1.17% 1.39%
Net charge offs to average loans 0.22 0.34 0.12 0.47 0.62
Nonperforming Assets. The following table sets forth our nonperforming assets
for the dates indicated.
Nonperforming Assets
December 31,
----------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------ ------ ---- ------ ------
Nonaccrual loans $1,893 $1,567 $637 $1,223 $1,348
Restructured or impaired loans -- -- -- -- --
------ ------ ---- ------ ------
Total nonperforming loans 1,893 1,567 637 1,223 1,348
Other real estate owned 150 148 58 -- --
------ ------ ---- ------ ------
Total nonperforming assets $2,043 $1,715 $695 $1,223 $1,348
====== ====== ==== ====== ======
Loans 90 days or more past due and
still accruing interest $ 128 $ -- $164 $ 109 $ 112
Nonperforming assets to period end loans 0.71% 0.69% 0.25% 0.56% 0.78%
19
Provision and Allowance for Loan Losses (continued)
Accrual of interest is discontinued on a loan when we believe, 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 that
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, we may ultimately write-down or charge off of the principal balance of
the loan that would necessitate additional charges to earnings. For all periods
presented, the additional interest income, which would have been recognized into
earnings if our nonaccrual loans had been current in accordance with their
original terms, is immaterial.
Total nonperforming assets increased to $2.0 million at December 31, 2002, from
$1.7 million at December 31, 2001. This amount consists primarily of nonaccrual
loans that totaled $1.9 million at December 31, 2002. Nonperforming assets were
0.70% of total loans at December 31, 2002. The allowance for loan losses to
period end nonperforming assets was 209.6% at December 31, 2002.
Potential Problem Loans. At December 31, 2002, through our internal review
mechanisms, we had identified $3.4 million of criticized loans and $9.4 million
of classified loans. The results of this internal review process are the primary
determining factor in our assessment of the adequacy of the allowance for loan
losses.
Our criticized loans decreased from $9.2 million at December 31, 2001 to $3.4
million at December 31, 2002. The decrease was due to the improvement in credit
quality of several large loans that allowed us to upgrade these loans. Total
classified loans decreased from $10.5 million at December 31, 2001 to $9.4
million at December 31, 2002. We are committed to addressing potential problem
loans.
Noninterest Income and Expense
Noninterest Income. Noninterest income decreased $5.6 million, or 55.12%, to
$4.5 million in 2002 from $10.1 million in 2001, which was primarily
attributable to the gain recognized on the sale of the five branches to
Enterprise Bank in 2001. The premium on this sale totaled $5.8 million. We had
$106,000 in gains on the sale of securities available for sale, whereas in 2001
we realized a gain of $290,000 on the sales of nonmarketable equity securities.
Residential mortgage origination fees decreased $96,000, or 11.68% to $726,000
in 2002 from $822,000 in 2001. Mortgage originations have declined as rates
leveled off and as fewer customers are refinancing their mortgages. Income from
fiduciary activities increased $150,000, or 114.50% to $281,000 in 2002 from
$131,000 in 2001. Commissions on the sale of mutual funds increased $74,000, or
231.25% to $106,000 in 2002 compared to $32,000 in 2001.
20
Noninterest Income and Expense (continued)
The following table sets forth, for the periods indicated, the principal
components of noninterest income:
Noninterest Income
Year Ended December 31,
-------------------------
(Dollars in thousands) 2002 2001 2000
------ ------- ------
Service charges on deposit accounts $2,578 $ 2,128 $1,706
Residential mortgage origination fees 726 822 503
Gains on sales of securities available-for-sale 106 -- --
Gains on sales of nonmarketable equity securities -- 290 --
Commissions from sales of mutual funds 106 32 105
Income from fiduciary activities 281 131 129
Gain on sale of branches -- 5,791 --
Gain on sale of Community Trust Company -- -- 150
Other income 742 920 710
------ ------- ------
Total noninterest income $4,539 $10,114 $3,303
====== ======= ======
Noninterest Expense. Noninterest expense decreased $3.2 million, or 21.26%, to
$11.9 million in 2002 from $15.1 million in 2001. The primary component of
noninterest expense was salaries and benefits, which decreased $104,000, or
1.59%, to $6.4 million in 2002 from $6.5 million in 2001. Many of the categories
of expenses decreased in 2002 compared to 2001 because of the sale of the
branches to Enterprise Bank in 2001. Net occupancy expense was $697,000 in 2002
compared to $749,000 in 2001, and furniture and equipment expenses was $1.0
million in 2002 compared to $1.4 million in 2001. Another significant decrease
in noninterest expense was in the amortization of intangible assets. Total
amortization of intangible assets was $346,000 in 2002, as compared to $2.4
million in 2001. We recorded amortization of intangible assets related to the
sale of branches to Enterprise Bank of $1.9 million in 2001. Our efficiency
ratio was 61.45% in 2002 compared to 72.71% in 2001.
The following table sets forth, for the periods indicated, the primary
components of noninterest expense:
Noninterest Expense
Year Ended December 31,
---------------------------
(Dollars in thousands) 2002 2001 2000
------- ------- -------
Salaries and employee benefits $ 6,418 $ 6,522 $ 6,787
Net occupancy expense 697 749 880
Furniture and equipment expense 1,050 1,440 1,631
Amortization of intangible assets 346 2,440 612
Director and committee fees 167 130 202
Data processing and supplies 578 410 361
Mortgage loan department expenses 122 278 130
Banking assessments 45 57 131
Professional fees and services 287 404 476
Postage and freight 205 339 380
Supplies 283 424 419
Credit card expenses 36 188 201
Telephone expenses 268 288 402
Other 1,390 1,433 1,364
------- ------- -------
Total noninterest expense $11,892 $15,102 $13,976
======= ======= =======
Efficiency ratio 61.45% 72.71% 81.75%
Income Taxes. Our income tax expense was $1.7 million, a decrease of $217,000
from the 2001 amount of $1.9 million. The slight decrease was partially due to
the decrease in income before taxes.
21
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 that we attempt to control
and counterbalance. Loans averaged $274.4 million in 2002 compared to $259.6
million in 2001, an increase of $14.8 million, or 5.7%. At December 31, 2002,
total loans were $288.8 million compared to $248.3 million at December 31, 2001.
The following table sets forth the composition of the loan portfolio by category
at the dates indicated and highlights our general emphasis on mortgage lending.
Composition of Loan Portfolio
December 31, 2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
(Dollars in of of of of of
thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial
and industrial $ 30,092 10.42% $ 33,395 13.26% $ 52,005 18.54% $ 29,740 13.58% $ 28,991 16.80%
Real estate
Construction 13,049 4.52 13,252 5.26 20,393 7.27 28,664 13.09 23,665 13.72
Mortgage -
residential 154,257 53.41 124,091 49.25 111,897 39.89 66,092 30.17 52,635 30.51
Mortgage-
nonresidential 73,610 25.48 59,417 23.58 60,159 21.45 58,419 26.67 36,017 20.87
Consumer and
other 17,834 6.17 18,235 8.65 36,052 12.85 36,139 16.49 31,237 18.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 288,842 100.00% 248,390 100.00% 280,506 100.00% 219,054 100.00% 172,545 100.00%
====== ====== ====== ====== ======
Allowance for
loan losses (4,282) (4,103) (3,060) (2,557) (2,399)
-------- -------- -------- -------- --------
Net loans $284,560 $244,287 $277,446 $216,497 $170,146
======== ======== ======== ======== ========
The principal component of our loan portfolio is real estate mortgage loans. At
December 31, 2002, this category totaled $227.9 million and represented 78.2% of
the total loan portfolio, compared to $183.5 million, or 72.8%, at December 31,
2001.
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. Financial institutions in our market
areas typically 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 $203,000, or 1.53%, to $13.0 million at
December 31, 2002, from $13.3 million at December 31, 2001. Residential mortgage
loans, which is the largest category of our loans, increased $30.2 million, or
24.31%, to $154.3 million at December 31, 2002, from $124.1 million at December
31, 2001. 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, increased $14.2 million or 23.89%, to $73.6 million at
December 31, 2002 from $59.4 million at December 31, 2001. The overall increase
in real estate lending was attributable to the continued demand for residential
and commercial real estate loans in our markets. CapitalBank 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 $2.8 million, or 8.52%, to $30.6
million at December 31, 2002, from $33.4 million at December 31, 2001.
22
Earning Assets (continued)
Consumer and other loans decreased $401,000, or 2.20%, to $17.8 million at
December 31, 2002, from $18.2 million at December 31, 2001.
Our loan portfolio reflects the diversity of our markets. Our thirteen 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. We do not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a source of
our liquidity. The following table sets forth our loans maturing within
specified intervals at December 31, 2002.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
Over
One Year
December 31, 2002 One Year Through Over Five
(Dollars in thousands) or Less Five Years Years Total
-------- ---------- --------- --------
Commercial and industrial $ 17,374 $ 13,445 $ 1,250 $ 32,069
Real estate 89,574 127,383 23,960 240,917
Consumer and other 5,215 10,253 388 15,856
-------- -------- ------- --------
$112,163 $151,081 $25,598 $288,842
======== ======== ======= ========
Loans maturing after one year with:
Fixed interest rates $176,213
Floating interest rates 466
--------
$176,679
========
The information presented in the above table is based on the cont ractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is s ubject to
review and credit approval as well as modification of terms upon their maturity.
Consequently, we believe 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 our total earning assets. Total securities averaged $57.2 million
in 2002, compared to $83.8 million in 2001 and $110.2 million in 2000. At
December 31, 2002, the total securities portfolio was $55.8 million. Securities
designated as available-for-sale totaled $50.1 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 $5.2 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 us at
the dates indicated.
23
Earning Assets (continued)
Book Value of Securities
December 31, 2002 2001
------- -------
(Dollars in thousands)
U.S. Government agencies and corporations $13,756 $13,148
State, county, and municipal securities 26,283 25,338
Other (trust preferred securities) 750 750
------- -------
40,789 39,236
Mortgage-backed securities 9,857 18,165
Nonmarketable equity securities 5,166 5,405
------- -------
Total securities $55,812 $62,806
======= =======
The following table sets forth the scheduled maturities a nd average yields of
securities held at December 31, 2002.
Investment Securities Maturity Distribution and Yields
After One But After Five But
December 31, 2002 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 $7,747 5.44% $6,009 3.65 $ -- -- $ -- --
Obligations of state and
local governments/(2)/ 999 6.57 447 6.69 7,196 7.09 18,391 6.85
------ ------ ------ -------
Total securities/(1)/ $8,746 5.57 $6,456 3.86 $7,196 7.09 $18,391 6.85
====== ====== ====== =======
/(1)/Excludes mortgage-backed securities totaling $9.9 million with a yield of
6.13% 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
$261,000 in 2002, compared to $2.1 million in 2001 and $87,000 in 2000. At
December 31, 2002, short-term investments totaled $39,000. These funds are a
source of our 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 $18.5 million, or 6.03%, to
$288.4 million in 2002, from $306.9 million in 2001. Average interest-bearing
deposits decreased $25.1 million, or 9.57%, to $237.1 million in 2002, from
$262.2 million in 2001.
Deposits. Average total deposits decreased $24.3 million, or 8.42%, to $264.1
million during 2001, from $288.4 million during 2001. At December 31, 2002,
total deposits were $276.6 million compared to $258.3 million a year earlier, an
increase of 7.06%.
The following table sets forth the deposits by category at the dates indicated.
24
Deposits and Other Interest-Bearing Liabilities (continued)
Deposits
December 31, 2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Dollars in of of of of of
thousands) Amount Deposits Amount Deposits Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Demand deposit
accounts $ 29,422 10.64% $ 25,083 9.70% $ 32,197 9.67% $ 27,422 10.66% $ 23,491 9.03%
NOW accounts 36,121 13.06 32,504 12.58 53,959 16.20 45,560 17.71 45,854 17.63
Money market
accounts 66,295 23.97 61,863 23.95 55,007 16.52 38,419 14.93 30,161 11.60
Savings accounts 27,948 10.11 26,653 10.32 30,543 9.17 26,642 10.36 25,202 9.69
Time deposits
less than
$100,000 74,763 27.03 72,636 28.12 114,454 34.38 91,671 35.64 104,491 40.17
Time deposits
of $100,000
or over 42,012 15.19 39,591 15.33 46,826 14.06 27,533 10.70 30,921 11.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total deposits $276,561 100.00% $258,330 100.00% $332,986 100.00% $257,247 100.00% $260,120 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for our loan portfolio and other
earning assets. Our core deposits increased $15.8 million to $234.5 million at
December 31, 2002.
Deposits, and particularly core deposits, have historically been our primary
source of funding and have enabled us to meet successfully both our short-term
and long-term liquidity needs. We anticipate that such deposits will continue to
be our primary source of funding in the future. Our loan-to-deposit ratio was
105.41% at December 31, 2002, and 97.53% at the end of 2001. The maturity
distribution of our time deposits of $100,000 or more at December 31, 2002 is
set forth in the following table.
Maturities of Certificates of Deposit of $100,000 or More
After Six
Within After Three Through After
Three Through Six Twelve Twelve
(Dollars in thousands) Months Months Months Months Total
------- ----------- --------- ------ -------
Certificates of deposit
of $100,000 or more $13,514 $8,049 $10,511 $9,938 $42,012
Approximately 32.2% of our time deposits of $100,000 or more had scheduled
maturities within three months and 51.3% 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, we do 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 $19.2 million in 2002, an increase of $9.1
million from 2001. Federal funds purchased from correspondent banks averaged
$13.9 million in 2002. At December 31, 2002, federal funds purchased totaled
$21.2 million. Securities sold under agreements to repurchase averaged $5.3
million in 2002. At December 31, 2002, securities sold under agreements to
repurchase totaled $4.61 million.
25
Deposits and Other Interest-Bearing Liabilities (continued)
Average Federal Home Loan Bank advances during 2002 were $31.2 million compared
to $31.4 million during 2001, a decrease of $200,000. Advances from the Federal
Home Loan Bank are collateralized by one-to-four family residential mortgage
loans and our investment in Federal Home Loan Bank stock. At December 31, 2002,
borrowings from the Federal Home Loan Bank were $31.1 million compared to $31.3
million a year earlier. Although we expect to continue using short-term
borrowing and Federal Home Loan B